Since the announcement of the NEG (National Energy Guarantee) many commentators have analysed its intent and impact on Australia’s ‘Energy Only Market’. Few have bothered to explain this clever pre-election marketing phrase in terms of Mr. Turnbull’s declared engineering and economics objectives. This might very well be because details of what this fossil fuel power generation asset revaluation scheme actually is are yet to be announced in greater detail. Despite this, the federal government has not been averse to making a series of unsubstantiated claims about the efficacy of the scheme to Australia’s long suffering consumers. This ‘elegant solution’ to a tricky political problem will by some accounts reduce energy bills and ensure that customers will be spared from future brown outs and black outs.
Preliminary modelling by a carefully selected and cartel approved consultancy firm reveals that Australia’s coal fired power station operators have been declared National Treasures. Indications are that in addition to an asset revaluation they are to receive a discrete reserve margin administrative allowance. Most of us capable of reading the tea leaves have a fair idea where this subsidy train is going. So far the modelling has not defined ‘dispatchable capacity’, nor bothered with recent data on wind and solar CONE ( Cost of New Entry ) value with integrated storage costs. The preliminary modelling ignores all industry storage and hybrid self-generation and self-storage projects currently in the pipeline. Any idea that this will be an authoritative or independent modelling exercise was never on the Turnbull government agenda. What we do know already is that the veracity of the governments claims on reliability and affordability rest somewhere between economic ‘La La Land’ and the highway to paradise.
There has been none of the regular trolling out of academics prepared to eulogize a scheme designed to underwrite energy cartel balance sheets and executive bonuses. The poignant poetry of Jim Morrison reverberates in Australia’s sacred chambers as the ATO shakes it’s booty to the allure of the back door man. We are assured that our national energy experts appointed to the new ‘ESB’ (National Energy Security Board) will eventually come up with a policy somewhere in the range of a forward capacity multi-tranche bidding market with perhaps a day ahead bidding process and a bi-annual capacity reserve auction. The battle front will be the aggregated demand side policy measures as the 5 minute settling period is pounded out over the next two or three years. Modelling this mess will demonstrate the financial and engineering sanity of a proposal that kicks the prospect of stranded asset write downs a little further down the road. The NEG carrot has always been about fixing the debt to asset ratio for the large energy cartels first. What will remain in the coming years will be an unconvincing taxpayer subsidy scheme to soften the battle ground over market rules whilst addressing the market dominance of vertically integrated large generators. For now the large cartel owners know that their status as a preferred taxpayer dependent is guaranteed. Even the Bankers are breathing easier as the executive piss ups on the Rutherglen Red begin in earnest. Since no one has any clear understanding about the actual policy design of the NEG, we can assume that any future ‘ESB’ /AEMO modelling will remain firmly within the confines of magic pudding economics.
The elegant accounting of the energy magic pudding
There is little doubt that the NEG is an elegant solution for those who are benefiting from it. Few believe that the NEG will in fact reduce energy bills and even fewer agree that the NEG will spare retail customers from electricity brown outs and black outs in the future. As usual, the devil is in the detail. With the LRET (Large Renewable Energy Target) quotas almost filled for the year, the prospect of no new wind and solar farm approvals elicit a collective sigh of relieve for the owners of inflexible coal generators. Not that this actually matters much since administrative payments from retail outlets in the form of daily charges keep ticking over in excess of $3.6 billion very nicely every year. What is clearly more valuable to the large vertically integrated cartel owners is the implied guarantee that enables a discrete default reserve margin for balancing / ancillary services to be implemented at the ESB/AEMO/ AEMC market management level. Under the NEG proposal this would require a RES (Renewable Energy Supply) curtailment of typically 5%. The net effect of this is the systemic undermining of decarbonisation and state renewable targets at higher consumer energy prices. This will be true even if wind and solar farm operators integrate their operations with grid embedded storage and localized community / large consumer owned demand side response smart-grid operations, managed under a third party behind the meter Blockchain.
What will be of particular interest to all is whether the state ministers at the upcoming 2017 November COAG Energy summit will point out to Josh, Mal, ScoMo and the Belgian waffle, that any NEG without substantial market rule reform is worthless. A dud NEG not only limits, but actively prevents participation of demand side resources and response aggregators ( third party service providers ) in the NEM ( National Energy Market). Large pools of aggregated response resources arranged in smart-grids and Blockchain systems combined with energy storage provide low cost bi-directional flexibility that is invaluable when it is integrated with wind and solar energy. The 2014-15 US figures for the Pennsylvania –New Jersey –Maryland Interconnection demonstrate that demand side market participation saved customers 10%-20% in reliability costs and 30% in constrained power zones culminating in total consumer savings of $1.2 billion. In a market growing only at 2% per annum owning customer data and controlling rooftop solar and customer storage assets remains the cheapest way for larger energy cartels to earn a dollar.
I am certain that state energy ministers will have been briefed about this before the November meeting. They will also know that any talk of demand side aggregated response and integrated bi-directional flexibility will raise the meeting temperature. The cartel will fight tooth and nail against third party demand response and reject any foray into behind the meter technology. They know full well that any third party competition not owned or controlled by them is simply not in their interest. That’s because not one of these dummies has done the math on the profit margins that can be achieved under avoided cost conditions. What will be of serious interest to all of us is whether the state energy ministers will agree to buy into a federal money deal for new state interconnectors in return for ‘X’. Ignoring an uncompetitive and dysfunctional market owned and controlled by a handful of large energy companies, knowingly and deliberately stealing from the Australian taxpayer, will never be forgotten by the Australian people. Any COAG energy deal between states and the federal government will need to pass a stringent pub test.
We all love a deceptive and meaningless marketing phrase
If you look at the official peak demand data for each state you will notice that projected electricity shortages for the NEM member states amount to less than 20 days per year from 2018 to 2025. Projected shortages in a market averaging a 2% annual demand increase are likely to occur in New South Wales and Victoria until new wind, solar and grid embedded storage solutions are completed. This does not include the installation of any state or industry commissioned demand aggregate response resources. It must be remembered that AEMO predictions have never been reliable and have generally trended towards the alarmist. Some would argue that it is normal for energy market authorities to remain on the conservative side of any prediction. Australia’s energy Quango’s have always been the patsies of the large generators. The dominance of AGL in the South Australian market stands as a clear warning to anyone thinking about creating a privatized taxpayer dependency. Finding a way around a 200 year contract using corporate anti-cartel and competition laws is likely to be a protracted legal smorgasbord.
South Australia, Tasmania and Queensland are likely to be net energy exporters for the 2018-2025 forecast periods. South Australian wind contributions to the NEM will continue to drive energy wholesale prices into negative territory for an average of 3 weeks every year if the interconnector doesn’t melt down again. This benefit is unlikely to be passed onto consumers as energy cartels leverage profits across generation platforms as well as transmission, distribution and retail assets beyond state borders. Within their elaborate matrix of parent and child companies a fair share of profits will continue to be siphoned into tax heavens via offshore marketing companies and overseas loan arrangements. These arrangements have matured during the last ten years with the willing assistance of the ATO (Australian Taxation Office). Why the Australian treasurer continues to prosecute the case for an untargeted corporate tax reform agenda given that the last effort produced zero results, continues to stun the punters. Surely, a smart tax package with a targeted micro-economic reform agenda would make a lot more sense.
South Australia, the ACT and Tasmania are well on the way to becoming 100% renewable by 2050. Significant wholesale price stabilization will come into effect with new grid embedded storage construction leveraging lower retail electricity prices by 2030. New South Wales and Victorian state energy policy settings appear to be marching towards a substantial renewable energy transformation with some grid embedded storage. Advice on coherent demand side policy options that would drastically reduce retail energy prices and infuse much needed wholesale market competition are blowing in the wind.
This leaves the rouge state of Queensland. No one is certain whether there is something in the northern waters that consistently drives state energy policy to excessive and unrepentant consumer filching and unrealistic fossil fuel mania. Perhaps this irrational behaviour is a hangover from the Joh Bjelke-Pertsen’s era. Those who have had dealings with some of the senior public servants doubt that the peculiarities of the state bureaucracy demonstrate any capacity for lateral thinking. Then again, I seem to have experienced the same myopic and self-serving stupidity in most Australian state public service venues during the last ten years. Perhaps it is my passionate approach to German demand side energy diplomacy! Perhaps it is my low tolerance for corruption, bullshit and the self-serving sycophants who run these government departments! It makes no difference to the basic premise that the NEG will have absolutely no impact on the reliability of flexible energy generation, or the capacity of transmission and distribution assets to withstand maintenance outages, bush fires and storm damage. All we have is Mr. Turnbull’s silky smooth assurance that the ‘ESB’; our smartest energy experts, are on the job and working on the best solution the federal government can hope for. For me, trust needs to be earned. To be honest with you, I don’t trust any of these dodgy buggers.
Is the ESB some type of Stalinist command economy joke?
The ESB! Wow! Sounds like something from a 007 movie! Do these super smart beings come with their own uniforms? Maybe the Dutton plan can include something chic. I like the red Star Trek jumpsuits.
Irrespective of Mr. Turnbull’s glittering report card for the incompetent lot that has been running Australia’s energy Quango’s on behalf of the cartel, the political reality is far more basic. In times of policy confusion and political chaos the practice of every Australian state and federal government has always been to create another semi-autonomous department and charge the unelected grey ghosts with the responsibility of burying uncomfortable truths deep under a public service rug of colourful marketing hype and bullshit. We have a public service code of conduct. We don’t have a specific public charter for the energy Quango’s that requires adherence to the highest standards of social and corporate responsibility. Consumed by process and itemized tasks these people have no obligations for the welfare of the Australian community and the overall health of the economy. This also includes the individual decisions and choices these people make during the course of their work and the downstream consequences that may result. There is no charter for any of the energy Quango’s to serve the national energy security interest and make decisions for the economic benefit of the nation. We just assume that these people come with the moral and ethical stuff to do the right thing by the rest of us. That’s probably why we are all so bitterly disappointed and disillusioned with the Australian political process.
Without any accountability to the Australian people these bureaucrats come fully operational without a public charter that defines their responsibilities to the community. Well, not quite! In the case of the ‘ESB’ we are fully aware that its responsibilities are to the energy cartel it is charged with managing under an as yet undisclosed service agreement. Do you trust them? We are already witnessing a raft of stupid ideas dribbling out of the mouths of these ‘ESB’ members. You might remember the recommendation to increase administrative charges by a 10% annual minimum in order to cover expenditure for poles and wires. How about the need for a half hourly $0.001 smart meter service charge buried deep in your daily electricity network connection fee? Yep! You probably didn’t know that smart meters are four times more expensive to run and manage then the old guy who used to come around and read your meter every 3 month. Here are a couple of new ideas from these super brain energy heroes running around in their new ‘ESB’ Star Trek uniforms.
- Let’s vary the voltage by 3% so the energy companies can save money.
I don’t know whether you have read the warranty agreement on some of the electrical devices you have bought. Every one of them includes words to the effect: ‘Frequent voltage variation due to unreliable electricity supplies /electricity supply faults, may result in your device operating unpredictably. Unreliable electricity supplies may reduce the normal operating life of your device by half. In severe circumstances your device or some of its constituent parts may fail. The company takes no responsibility etc…..’ In short, the electricity distribution companies who have been experimenting with a voltage reduction strategy for the last 12 – 18 month have effectively voided every warranty for every electrical device you own. Can anyone tell me what happens when your house burns down because of a faulty device caused by the distributor stuffing around with the voltage to your property?
- How about the other great idea of paying people to turn off their appliances?
This demand management idea is straight out of the US. I presume that people with medical conditions are excluded from this brain wave for now. As a demand response management tool this silly idea will only work if consumers actually adhere to their voluntary decision to curb demand during peak periods. This makes voluntary demand reduction not only unreliable but an utterly useless management tool because supply will still have to be forward contracted from some kind of capacity reserve. A far more useful tool for consumer participation in the market is a system where consumers can actually see the real price of energy at any given moment in time. I am not suggesting that consumers sit in front of their computers and monitor the energy market. I am suggesting that large pools of aggregated response resources are arranged in smart-grids and Blockchain systems combined with energy storage to provide low cost bi-directional flexibility. Let the smart-grid manage localized energy generation and storage distribution as well as excess energy sales into the wider grid automatically. This will eliminate forecasting uncertainty and deliver an integrated grid management response solution for wind and solar farm resources at significantly lower cost with greater network reliability. You definitely won’t need ‘Hele’ coal technology some of the LNP nutbags want the taxpayer to fund. You also won’t need a fair chunk of these ‘ESB’ people as we replace them with intelligent energy demand management software over time.
Transitioning the Cartel
In a mature energy market controlled by a small number of vertically integrated cartel players competition policy is a tuff ask. This is especially true in Australia where everything always seems to happen backwards. There are a few reasons for this. Much of the historically and culturally embedded stupidity is related to a British convict legacy. Let’s not talk about Brexit for now. British deaf dumb and blind is a story for another day.
Large vertically integrated generators with their own transmission, distribution and retail assets will always favour minimum market rule intrusion and a traditional forward capacity mechanism. It is only in this sense that we can interpret the NEG coal fired generation asset elevation to the status of priceless National Treasures. This is no doubt an elegant accounting solution to a tricky investment problem. In truth, there has never been a problem with investment in new renewable energy capacity when the states have tendered for projects. What has always been the problem is the lack of policy direction that will facilitate decarbonisation and a responsible renewable energy transition whilst maintaining a reliable, affordable and flexible national energy network. Knowing what to invest in has been the problem during the last ten years of political paralysis. Allowing the large generators and vertically integrated cartel interests to run the energy market at their leisure has been a bigger problem for the last ten years. This is the negligence and utter stupidity we are confronting today.
No ETS, CET, ARENA, CEFC or fixed carbon price transition mechanism can resolve a fundamental lack of clear bi-partisan political leadership in this regard. It doesn’t matter that we have argued for a responsible grid embedded energy storage plan for the last ten years. I think this message has finally been received by the political elite. It doesn’t matter that we advised against the ETS and a temporary fixed carbon price because Australia was not ready for it. Australia has always needed clear wholesale and retail market rules that would protect consumers and infuse much needed market competition first. Australia has always needed a demand side aggregate resource response policy to balance centralized capacity supply market manipulation, gaming and ring fencing by the large generators. I don’t know if that message has finally been understood by everyone in the political and bureaucratic elite. If the next COAG energy summit doesn’t demonstrate that this understanding Australia will most certainly deserve its status as a banana republic.
If the NEG is a political re-boot designed to buy time for a government in disarray and haemorrhaging in electoral crisis, then we still have to ask ourselves, where is the policy? Where is the 5 minute settlement rule? Where is the multi-tranche bidding process? Where is the demand management aggregated response resource policy? We are still waiting Mr. Turnbull. Your time is running out. Perhaps we should consider a policy reboot that would suit our federal treasurer Mr. Morrison before we tackle the more thorny issues of market regulation and competition rules?
How about a Company Tax cut with an Energy Policy twist?
Let’s assume that the Turnbull government will want to take a corporate tax cut to the next election. Let’s assume that Mr. Morrison wants a highly targeted and effective tax policy that will deliver real jobs and real growth. Mr Morrison has plenty of experience with tailored tax reform. He also knows from the last round of company tax cuts that a dumb sledge hammer approach delivers no measurable economic benefit.
For this reason I will assume that the Turnbull government will commit to a policy that will reduce unemployment to 3% and increase economic growth above 3% by 2020. The genius behind aligning a surgically targeted company tax cut with an anti-pollution and decarbonisation policy will make Mr. Morrison the envy of every economist in the Asia Pacific, Africa and throughout Latin America.
Let’s call this policy a targeted Green Bond sliding scale tax dividend investment initiative, ‘GBSDI’. We can also call it Power UP Australia, ‘PUA’ or anything else you like.
Let us assume:
Four types of Green Investment Bonds:
- A built environment infrastructure bond for Urban and Regional cities and towns;
- A managed environment bond for farming, land, water, forestry and oceans;
- A transport and communications infrastructure bond and;
- An industry bond that includes all mining and heavy industry;
A 20% pollution reduction target covering decarbonisation, waste management and all types of human activity caused environmental degradation. This 20% reduction target is set in line with:
- Australia’s international emission obligations;
- The overall 100% reduction target agreed to by all stakeholders by ‘Year X’ (e.g. 2050);
- The 20% pollution/ carbon reduction target is a one fifth increment of the agreed final ‘Year X’ carbon/ pollution reduction plan and equal to the Green Bond maturation period for each 20% increment;
- The fixed bond maturation period for each 20% pollution / carbon reduction increment is approved by the Australian Tax Office and ARENA for project implementation.
How does it work?
Tax dividends are assigned to each project on the basis of a sliding scale. The sliding points scale is defined by a set of project criteria that score the intrinsic net worth of the project to the community and the economy as a whole. In the energy sector ‘Avoided’ cost of transmission and distribution as well as grid embedded storage and renewable energy generation attract a high score. E.g. A flat 15% corporate tax rate for the duration of the project. If the project integrates localized pooled smart-grid Blockchain operations with rooftop solar and customer storage the same project might attract a flat 12% corporate tax rate for the duration of the project. ( Please note: These examples are for demonstration purpose only)
A demand management aggregated response resource demonstrating localized community self-generation with localized energy storage fully integrated with wind and solar farms would attract a very high tax dividend. (E.g. 12 cents in the dollar) Why? The localized integrated smart-grid and Blockchain solution delivers substantial transmission and centralized coal fired power generation cost savings to the consumer and the taxpayer. It also delivers community health benefits whilst providing essential energy market competition. For this reason a tax rate of e.g. 12 cents in the dollar may not be unreasonable.
This example follows our campaign in India. I am glad to see that an Indian steel mill owner has brought it back home to Australia. Let’s ScoMo-nize it with a tax dividend add on.
A steel manufacturing company proposing to reduce its reliance on external electricity supply provides its own localized self-generation and storage capacity. Grid integration service addition and seaweed growth tanks feeding on steel furnace carbon fumes would also qualify for the lowest tax threshold under this scheme.
In both cases the low tax threshold is available for the approved project to attract large institutional investors.
All Green Bonds are assigned to the approved project and are not transferable between projects even if a company decides to apply for a 40% reduction in the same time frame. There is no reason to disallow greater investment and faster decarbonisation as long as the ATO approves the low tax rate for both project components and any combination of leveraging projects for the maturation period of the Bond.
A centralized coal, nuclear, gas power station without storage or a wind or solar farm without storage may only qualify for a tax rate of e.g. 25 cents in the dollar because the project does not avoid transmission costs nor leverage grid embedded storage or localized customer based storage options in the project design. In short, poorly integrated and dumb design will not attract maximum tax advantages.
A smart corporate tax plan can easily integrate into a responsible decarbonisation and renewable energy transition policy. It can operate independently of any wholesale and retail energy market reform whilst turbo charging both the Australian economy and the decarbonisation of it. This proposal addresses Australia’s low growth and high unemployment issues. It also addresses the problem of Australia’s uneven economic development by delivering targeted corporate tax relief where it can make a measurable difference. This tax dividend and Green Bond development option can easily be applied to any emerging economy in the Asia Pacific.
If lower corporate taxes are on your horizon Mr. Morrison, then why not make your tax package a surgical micro-economic reform instrument that delivers real benefits to the Australian economy. The design of a responsible, resilient and affordable energy system can begin with a Green Bond tax dividend mechanism that lowers corporate taxes in a targeted manner. You might find that a good tax design can eliminate a lot of really stupid ideas later.