A few weeks ago the Australian Government’s economics research group (the Bureau of Resources and Energy Economics) released a hefty technical report called the Australian Energy Technology Assessment. Within a ten minute skim-read, I found a glaring deficiency.
I haven’t bothered to read it properly to learn anything from it, or pick up more inaccuracies. If I can find something patently wrong with a report within minutes, I’m not going to waste more time on it (even though I’m writing this article – but I’ll keep it short!).
The report is a 122-page behemoth, largely undertaken by Australia-listed engineering giant Worley Parons. It provides actual and forecast technology costs and cost of electricity production with all sorts of variables. No doubt, the contract involved $100,000, and all sorts of program managers and committee meetings over several months before issuance as evidenced by the acknowledgements.
Here’s my beef:
In summary, it is estimated that the total installed cost of fixed PV systems is now $3.38/W AC (i.e. $3380/kWnet) in 2012.
Fact: six months ago, installed costs including margin for 100 kW – 5 MW range projects was $2.5/W all-in. Now, prices are around $2/W. This is known from workign with several project developers.
Four observations follow:
- Commissioning large clunky engineering firms to do this sort of study will likely get inaccurate outcomes as they neglect real-time market innovations, and their own experience in projects in which they are involved means that those project costs are higher than best-practice due to the company’s own cost-base.
- Commissioning managers at BREE do not exist in the real world. They live in Canberra. There is very little industry or innovation based in Canberra, even if they were to have any interface with them.
- These reports, and BREE, are referenced by Government innovation policy managers. Inaccurate reports will negatively influence and distort innovation and renewable energy policy.
- These reports are referenced by non-specialists, and repeated to a broader audience, leading to an inaccurate understanding of the market context. This has important ramifactions for acceptance, uptake, and financing of particularly technologies.
With the range of stakeholders consulted for the generation of the report, I am actually baffled as to how a price above $3/W can be arrived at for mid-2012.
Who would think of demanding homework in the middle of the summer holidays? The UNFCCC, apparently. The international climate cops are apparently stroppy with the Ozzies being on the beach in the summer holidays, rather than delivering school work.
This week the UNFCCC published its review of Australia’s fifth national communication to the UN agency. The reports are a mandatory part of any signatory country’s obligations to the international climate pacts, and provides an update on national progress towards a spread of objectives.
The national communication report itsself is dull. The UNFCCC review report on the national communication is as full of bureacratic mumbo-jumbo speak as you could hope for from such a document.
It’s seriously dry. But thankfully there’s a moment of light entertainment:
Under ‘Introduction’, Section B, part 3 ‘Timeliness’ lies the following gem:
The NC5 was submitted on 12 February 2010, after the deadline of 1 January 2010 mandated by decision 10/CP.13. Australia informed the secretariat about its difficulties with the timeliness of its national communication submission on 24 December 2009 in accordance with paragraph 139 of decision 22/CMP.1. The ERT noted with concern the delay in the submission of the NC5.
Australia, being in the southern hemisphere, basically downs tools from anywhere between mid-December and mid-to late February. Australian’s have a pretty healthy approach to the work-life balance at the best of times: it’s the lucky country, after all. But in the summer? Forget about it!
The UNFCCC is based in Bonn. We can understand why a Modlovan and an Austrian (the lead reviewers) might not be able to share the relaxed approach to a UNFCCC deadline, arbitrarily prescribed to fall in the middle of BBQ and cold beer time.
They really should have had a clue about this though. They even helpfully state the following:
Australia is a large country situated in the southern hemisphere and is the driest inhabited continent on Earth, although the climate is highly diverse across the country. The climate is heavily influenced by the oceans and is temperate in the south, subtropical and tropical in the north, and hot and dry inland. Most of the population is concentrated along the coastal areas in the east and south-east and to some extent in the south-west; the rest of the country is sparsely populated.
It’s a lesson in reading between the lines, U-N-O-Crats: it’s hot and dry with lots of beaches, so in the summer you’ll likely find us planted on the sand sipping a cold one.
Oh – in summary the UNFCCC report basically just regurgitates everything that the original Australian report states. The review recognises that Australia’s greenhouse gas emissions growth derives from population and economic growth, and industrial and electricity generation structure.
It is unclear as to whether an exponential increase in US oil and gas production will create negative as well as positive consequences, be they economic, geopolitical, or environmental. These divisions are evident from a televised debate between a number of leading analysts last week which can be viewed at the New America Foundation. Steve Levine nominates winners and losers from what he terms the ‘coming age of plenty’, but it seems that he misses out some key categories.
The ramifications of the production boom are termed variously as a “tipping point”, a new industrial and technological ”revolution”, a tectonic shift, a “big deal” – for the world as a whole. The changes come from the spread of alternative supply sources triggered by high prices: deepwater, shale and tight oil and oil tar sands.
The potential implications of these changes for Australia should be further considered from economic and environmental perspectives.
Broader global impacts of increased US production include a potential shift to oil and gas exports from the US; a resurgence in energy-intensive US manufacturing, power generation and road trucking; US current account deficit reduction and $US appreciation (thereby continuation of USD as reserve currency); supply choice for Asia customers and reduction in industrial process pollution-intensity; and a re-alignment of US foreign policy to compensate for reduced import dependence and re-aligment of energy industry production based on supply diversity. Some of these issues are covered in a presentation by Ed Morse, Head of Commodities Research at Citigroup (also a participant on the NAF panel).
A significant finding and point of convergence is that the growth in US production will result in profound consequences for other primary commodities producers. While the focus is inevitably on the implications for oil producers (OPEC), there are ramifications for exporters of other energy commodities, given the energy market and fuels interplay. Already, a domestic shift in the US between coal and gas is evident, with an oil/gas shift in heavy road transport also possible. This shift is also likely to be seen in other markets.
The main economic implication for Australia is the potential for US gas exports to create ruptures in the web of international gas contracts and prices and shift demand from coal to gas. These issues are explored in a Brookings paper on the prospects for US gas exports.
Already, reduced US gas imports have marginally loosened up Asia-Pacific gas markets through increasing options for spot price contracting and downward pressure on contracts. However, long-term oil-indexed contracts are likely to remain dominant, with LNG markets remaining tight after 2015. While existing Australian LNG projects are built on the premise of long-term contracts, price and term renegotiation are possibilities on increased market supply and downward price pressure. Any future US LNG exports are likely to continue to free up options for consumers to engage in spot markets, creating marginal downward pressure on prices, and reducing the capacity for new developments to negotiate amenable off-take contracts. Australia’s $100 Bn of approved LNG projects are already seeing significant pressure from supply competition and costs.
In turn, the gas market loosening created by new US supply and potential transfer and uptake of technology to expand alternative gas sources in other markets will increase a shift to gas from coal. Increased gas availability will enhance a shift to gas consumption thereby marginally reducing reliance on international coal contracting (irrespective of any sectoral structural shift in key markets – e.g. China) and suppressing those prices. New start and marginal production costs from regional mines will therefore continue to see pressure – increasingly important in light of input cost inflation for Australia resources projects. Further, a major market uncertainty is the timing for the huge potential for shale gas production in China to be realised on the back of technology transfer from the US.
The last – and possibly most under-assessed - implication of North America oil and gas expansion is the impact on global climate change science and policy. In aggregate, oil expansion in Canada and the US is deemed by environmentalists to be negative, particularly from tar sands. This issue has seen significant US domestic opposition (Keystone), as has the potential negative effects of upstream production (fracking, deepwater catastrophes) and methane releases. In Australia, some studies have shown that LNG production and use has a substantially lower greenhouse gas emissions profile than coal. The methodologies of these analyses will likely remain a source of contention.
However, the broader technology and market ramifications resulting from the US transformation have not seen detailed consideration in international climate debate. Transformative impacts on global upstream and downstream technological innovation and uptake, have been less appreciated.
As NAF panelists remark, the role of natural gas as an interim fuel with substantial greenhouse gas emissions benefits is not overly embraced in the European Union. While Brookings deems US LNG exports to have ‘negligible’ impacts on the global power generation mix, it is possible that the broader impacts on gas technology uptake and development in supply and use, as well as other energy sources, is of greater importance in the medium-to-long term. And it’s not just the displacement of coal as an energy source. The IEA notes that, through providing a near-term cost effective alternative to nuclear and renewables, there is the potential for gas to contribute an additional 320 Mt CO2e by 2035. Thus, gas supply enhancement is likely to be a double-edged sword.
Given the salience of Australian LNG future exports in transforming regional energy markets, it is surprising that these implications have not been more overtly explored and discussed within the framework of international climate policy positions, as coal production and use has been in Australia, and oil production and export has been in OPEC. One-sided initiatives proposed by Quatar at the margins of international discussions have been the only efforts to put gas on the agenda to date.
While Australian gas and coal projects and prices will (and already do) suffer through increased gas supply competition, it will benefit through induced demand and may take advantage of geopolitical benefits.
A final point made by the NAF panelists is that downward price pressures may create a positive consequences for commodity producers: they will have to undergo economic structural reforms to compensate for countervailing forces – a salient issue in Australia’s commodity-warped economy, but perhaps less pronounced than for oil-exporting countries.
Australia’s renewable energy Commercialisation program – ACRE’s Emerging Renewables – this week announced funding for two further projects: a wave energy project by Carnegie, and bio design hydropower by Waratah Power.
The Carnegie project consists of almost $10m for project development of its technology to harness wave-pressurized water in Western Australia.
The Waratah Power project is aimed at defining turbine design for small hydro turbines based on aquatic fauna vulnerability to hydraulic stresses.
More detail can be found in the speech by Federal Minister Martin Ferguson.
This week has seen a flurry of articles exploring the shifts in the balance of the oil market, and the economic implications and response options. Over the last few years there has been a growing mainstreaming of the proposition that elevated and volatile prices are here to stay. Economic weakness in the OECD has not translated into an oil price slump, as before. The issue is receiving increased scrutiny by commentators at present due to the current high pump prices, and the political ramifications in an election year…. not to mention possible impacts of market disruption due to events in the gulf.
In one, Daniel Ahn at the Council on Foreign Relations looks at the rationale for another intervention by the Strategic Petroleum Reserve, in conjunction with other OECD nations. The prospect for this was first raised on the back of David Cameron’s visit to Washington. Ahn convincingly argues the reason for which such an intervention might be made, (a tactical response to a short-term spike) and the rationale for holding inventory, but outlines why the direction of the market at present is not particularly clear. Diminishing inventories point to an interpretation of future weakness, as does a softening in Asian demand. Data deficiencies and market opacity make it difficult to properly identify and interpret signals.
In another, Martin Wolf at the FT also decries short-term policy shifts in the US in response to high prices, but he cautions against the macro-economic implications of sustained and volatile prices, and argues for pushing increased energy efficiency to improve resilience. He blames existing and persistent stagnant supply, buoyant demand, and unrest for sustained high prices. He recommends an increased level of taxation on oil imports for the US in order to shift the benefits of US oil consumption towards US Treasury and away from OPEC.
This latter argument of the need to increase resilience is perhaps the core remaining argument in favour of continuing to support clean tech. Energy efficiency and renewable energy technology and systems will marginally reduce aggregate exposure to oil markets. Steve Levine at the Oil and the Glory at Foreign Policy magazine explores the theme of the implications of an abundance of US oil and gas – a situation which some are now describing as a result of oil and gas shale and Canadian tar sands. In one, he cites the potential for a reduction in petro-state power yet a re-calibration of the US economy towards less value-add activity. In another, he reflects on whether clean-tech will receive less interest. There is the prospect that increased production may not necessarily translate into reduced prices, but that increased supply is in any event moving the focus of clean-tech companies towards near-term price parity.
Coal Seam Gas development and regulation was a key electoral issue in the election which the LNP won handsomely. A core electoral tenet was that the outgoing Labor Government failed to provide efficiency and clarity in the development process for CSG. A promise of the incoming Government is to fix this, providing greater benefit to communities, and support industry expansion.
They might find it a hard task.
The Queensland resources sector has grown at phenomenal rates in recent years, badly stretching the capacity of officials to keep abreast. Queensland accounts for over half of Australia’s black coal, and is an important player in an emerging seaborne global market in Liquefied Natural Gas. Federal and State Governments struggle to juggle responsibilities and jurisdictional authority over development.
To get an idea of the pace of industry expansion in Queensland see the telling graphs below:
CSG industry development has experienced strong and determined regional community and agricultural opposition. As a consequence, the Government will seek to balance industry development, regional, and agricultural concerns:
our LNP Agriculture Strategy, with the aim to double agiricultural production by 2040, confirms that we are committed to protecting strategic cropping land in Queensland by clearly identifying it under an improved system of Statutory Regional Planning. We have made it clear that we will not allow any open cut mining, and that we won’t allow underground mining, CSG activity or other development on strategic cropping land if it is likely to have a significant, adverse impact on the productive capacity of that land to produce food and fibre in the future.
The LNP is targeting compensation to landowners and communities, and stringent consent conditions and monitoring. They are also proposing to establish a ‘Gasfields Land and Water Commission’ to try to iron out conflicts. How it will do this is unclear.
The LNP strategy goes into quite a bit of detail concerning the particularities of land access, individual and community definitions and mechanics for compensation, and determination of both underground and surface water management practice related both to water quality and quantity.
The specified water impacts reports which are at the heart of how the Government would try to generate robust environmental outcomes would seem to say much about predictions and monitoring, but not about the basis for regional or local standards and conditions – those irksome details are kicked down the road.
This is one indication of many that the sweeping intent displayed within the document concerning development and operation consent processes may be much less easy to implement in practice.
Realities of governing will see to it that one side or the other will end up unhappy.
The scale and pace of CSG expansion urged by the industry leads to a relationship between developers, communities and land-owners which is as corrosive as a CSG-tapped saline acquifer.
Be that as it may, it’s now pretty clear that CSG will benefit from overt Government support for their industry. However, the transition from policy support to regulatory clarity may not be quick and easy, nor devoid of legal challenge.
In Australia, the resource-rich state of Queensland has a new Government which won by a landslide over the weekend and has a mandate and ambition to shake up energy and resources regulation with a view to reducing costs to industry – particularly an opposition to the federally-introduced resource rent and carbon taxes.
Within the Queensland Liberal policy position on resources and energy, this theme is clear. The party also commits to clean energy and alternative technology and fuels. This terminology includes underground coal gasification (a major proponent of which was a donor to the Liberals) and perhaps also be broadened to include natural gas (and the range that that encompasses – coal seam gas, natural gas, and shale gas). The strategy sets out ways in which the new Government may seek to enhance Coal Seam Gas exploration and production. The six identified alternative energy technologies of focus are: solar, geothermal, unconventional liquid fuels, bio-energy/fuel cells, wind, and marine/tidal.
The ABC reports the position of the QRC regarding the incoming Government:
Michael Roche is the chief executive of the Queensland Resources Council and says they want to see changes that have been promised.
“That includes a separate department for mining and energy, a stronger role for the coordinator general and the restructure of environmental regulator to make sure that it focussed on delivering environmental outcomes.”
The LNP strategy for the mining and energy sector specifies a goal of stablity and efficiency in environmental regulation.
In a news release, the QRC stipulates their commmitment to the sector delivering ‘the world’s best environmental and social outcomes‘.
Environmental regulators typically operate to provide positive environmental outcomes. They’re staffed by environmentalists. It is strange that the Liberal position seems to indicate that, at present, environmental regulation is directed towards something other than environmental outcomes. In the Strategy document, it seems that they wish to depose perceived idealogy and politics within officialdom.
One major change will be a shake-up of Government departments through an election commitment to establish stand-alone agencies for each of mining and energy, and agriculture. Both DME and DEEDI have important functions in relation to mining and energy.
We think that, when used by Queensland LNP, the words ‘World’s best environmental and social outcomes‘ imply a euphemism, or an omission. It actually means that environmental and social outcomes will be of secondary importance to providing a process that easily enables project approvals and development.
Certainly, it seems that the new LNP Government aims to be much friendlier to the range of resource and energy companies. However, much of the regulatory and fiscal infrastructure at which the Government aims is determined by Federal law. Resource Rent and Carbon taxes are unassailable by the States. In Australia, while much of the implementation of environmental regulation is deferred to the States, it will take some time for a new State Government to understand, address and change the nuances of the approaches by which Federal legislation is interpreted and applied by officials, if that that is indeed the object.