Origin Energy is one of Australia’s largest integrated energy companies. With underlying earnings of $1.16 billion in the six months to the end of 2011, the Sydney-based company is not in the same league as overseas behemoths such as British Gas or Exxon. But it’s pretty big. With 4.4 million customers, Origin is the largest energy retailer in the country.
The company is what’s known in the trade as "gentailer". That means it both generates electricity and retails it to consumers. As well as the retail side of the business, the company is deeply involved in coal seam gas production, developing a huge project with offshore majors ConocoPhillips and Sinopec to pipe coal seam gas to Gladstone harbour, where it will be turned into LNG and exported.
So when Origin throws its weight around on matters of public policy, politicians and the media tend to listen. That’s what Origin boss Grant King has been doing this week, taking aim at the government’s Renewable Energy Target in a series of media interviews.
What is Grant King upset about? Believe it or not, he says he’s worried about electricity price rises. As the Australian Financial Review’s Marcus Priest and Angela Macdonald-Smith reported yesterday, King says the 20 per cent Renewable Energy Target should be wound back, because it will lead to rising electricity prices.
"Given current forecasts for energy demand in 2020, the RET scheme in its current hard-wired form will deliver a lot more than 20 per cent," King told Priest and Macdonald-Smith. "The community signed on for 20 per cent by 2020. If it is 25 or 30 per cent then it will mean more costs."
The irony of an energy boss complaining about power prices aside, the substance of King’s comments relate to the Renewable Energy Target. If you’re not familiar with the RET, you should be. It’s one of the major planks of Australia’s renewable energy policy. Passed into law with support from all sides of politics — yes, even the Coalition — the RET commits Australia to generating 20 per cent of our electricity from renewable sources by 2020.
The inner workings of the RET are complex, so here’s a simple version. The target is set by the legislation and regulated by the federal government through the Clean Energy Regulator, which uses a system of certificates that energy generators must "retire" (that is, surrender to the regulator as proof they’ve generated renewable power).
This target is not really a 20 per cent quota of whatever Australian electricity will be in 2020. It’s actually a hard figure: 16,763 gigawatt hours this year, rising by a set figure each year to 41,850 gigawatt hours in 2020. These figures are for the so-called "large-scale" target; there are also "small-scale" quotas for things like household solar systems that operate separately to this.
And here’s where things get interesting, because Australian electricity consumption is falling. This decline, which has surprised everyone from the big energy companies to the Australian Energy Market Operator, marks a sea-change in the Australian energy industry. Put simply, the grid will require less electricity than we previously thought.
But, as we’ve seen, the RET is legislatively mandated to provide 41,850 gigawatt hours eight years from now. As a result, the RET will actually represent a bigger share of Australia’s 2020 energy mix than 20 per cent. It might be 25 or 26 per cent. It might be more. Nobody can say for sure.
This is what King is hinting at when he talks about the RET being "hard-wired". But so what? More renewable energy is a good thing, right?
Not for big energy companies like Origin which are heavily invested in coal and gas. Origin has mortgaged its future to a huge LNG play, and has largely neglected its renewables portfolio. Its main competitor, AGL, also has plenty of gas. But it has worked harder on renewables projects. As a result, it is well positioned to out-compete Origin as more electricity is required to provided from renewable sources.
The effect of Origin’s proposal would be to lower the target, which makes no sense if Australia is serious about decarbonising our economy. Of course, for many politicians, angry voters freaking out about their power bills will trump sensible renewable energy policy every time. And indeed, it appears that Prime Minster Julia Gillard has told the Climate Change Authority to review the RET by the end of the year. "We always committed to reviewing the renewable energy target and that will be undertaken by the Climate Change Authority," she told reporters in Ipswich on Tuesday.
If you haven’t heard of the Climate Change Authority, don’t worry. It doesn’t really exist yet. The new body is in the process of being set up, and its board has not yet met. Chaired by former Reserver Bank Governor Bernie Fraser, the Authority has been set up to try and take some of the heat out of the climate policy debate. It will act as an arms-length body advising the government on issues such as the RET and the evolution of the carbon price.
But you can hardly blame Origin for trying it on. The campaign to lower the RET is not surprising, given the dismal record of Australian legislators when faced with robust lobbying on climate and energy policy. But Grant King’s intervention has not gone unnoticed. The Greens and many environment groups have come out swinging. The Greens, rather predictably, have argued that the target should be increased. So does the Australian Conservation Foundation, which points out that taking King’s advice will be a huge step backwards for renewable energy in this country.
"If we follow Origin’s advice and lower the target, Australia could miss out on the equivalent of eight large-scale solar plants that will help provide us with clean, renewable energy," the ACF’s Claire Maries said in a statement.
The real reason energy is such a hot topic politically is of course electricity bills. Rising power prices for households are starting to really bite in some sections of the electorate. (I know I get a shock every month, even if I do pay extra for my 100 per cent green power.) Many voters don’t understand that the carbon tax and the RET have little to do with their bill shock. The real reason electricity bills are going up is the National Electricity Market, which is rigged in favour of generators and retailers, and against consumers — as we pointed out here in 2011.
In a system where energy companies can raise prices even when demand is falling, you know there’s something wrong with the "market". That’s because the NEM is not really a market at all, but is instead a complex regulatory price-setting mechanism with a price floor and a price cap. Funny how you never hear anyone complaining about this, despite all the moaning about the cap and floor on the carbon price.
But that’s the energy industry for you, where the government will buy you out if your coal plant is dirty enough, and where the only people who ever miss out are the consumers. Fairfax’s Michael West recently filed a compelling investigation into a $271 million grid upgrade in Melbourne, which could have been completed for as little as $107 million.
As West discovered, the current system effectively allows generation and distribution companies to gold-plate their infrastructure and get consumers to pick up the cost.
So if you’re worried about rising power prices, don’t blame the carbon tax or the renewable energy target. Blame the National Electricity Market and its regulator, the Australian Energy Market Operator. The AEMO is a public-private partnership between the government and — you guessed it — the energy industry.
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