15 minute read
Richard McIndoe
Richard McIndoe
Energy market reform has stalled in Australia. As energy demands continue to rise, governments need to again maintain the reform agenda towards a competitive and efficient national energy market, says EnergyAustralia Managing Director, Richard McIndoe.
Richard McIndoe
Energy supply is of fundamental importance to every society and economy. It is technically complex, highly capital-intensive, and long-lasting. It’s also a topic that is very much in the public eye.
Energy is a fascinating area of public policy because of the many choices it presents. With the emergence of climate change as a key public issue, and rapidly rising energy prices (at least in part) coincidently, these choices have been brought into the realm of public debate more than ever before.
Reflecting on the history of the energy supply industry in Australia, and the choices that were made in its development, gives us a better understanding of the present, and therefore better informs the choices we need to make for the future.
The guiding principle in the development of our domestic energy markets has been that a sustainable energy supply is best achieved through a competitive market, supported by effective regulation.
This has transformed a supply system that was based on state-owned, fully vertically integrated monopolies into a sustainable supply system based on decentralised, commercially based decision-making.
We should be proud of these achievements.
The National Electricity Market (NEM) has delivered. It has met reliability standards. It has encouraged new investment. Wholesale prices (excluding carbon) are lower today than at market start. At the retail level, we have numerous retailers competing for customers with some of the highest churn rates and price discounting in the world.
But is the energy market fully efficient? Is it as productive as it could be? Have we reached the end of the reform journey? I would contend that the answer to these questions is: ‘clearly not’.
We can see this reality in measures of productivity across the industry. Low productivity today is a result of low and inefficient capital utilisation across the energy industry. We have an inefficient mix of plant, which is poorly placed to respond to changes in energy demand. This inefficiency is contributing to the rising energy prices that make for daily headlines in the national press.
So what’s gone wrong? What changes are we seeing in energy demand that drive this inefficiency? And what are the responses to ensure a functional and more efficient national energy market?
There are certainly a lot of external pressures on energy markets. While Australian policymakers have tended to prefer efficient markets and effective regulation for the energy sector, there have also been a series of choices by other external stakeholders that have affected how we supply and consume energy; choices that have put the energy system under a lot of pressure.
As a society – governments, industry, and consumers – we are asking more of the energy system than ever before. We want our energy greener and we want to use more of it at peak times, but then somehow we expect it to be cheaper.
Premium solar feed-in tariffs have provided a subset of households with access to low-cost, renewable energy, while making energy supply more expensive for every other consumer.
A price on carbon – a measure we support – also puts upward pressure on energy costs; however, fixed carbon prices at such globally high levels, together with restrictions on the use of low-cost abatement, only add unnecessarily to this cost.
It is also absolutely clear that rising peak demand is driving up energy prices, and that timeof-use price signals are needed to address this; however, governments, who claim to be worried about energy prices, continue to regulate prices to prevent these important price signals being passed through to consumers. As a result, customers are not encouraged to adapt their consumption patterns, and the industry needs to invest billions of dollars in plant and equipment that is used for less than 100 hours each year.
The energy market is resilient. It has survived a drought. It has survived the failure of a few retailers. It has survived incredible carbon policy uncertainty. It has survived the uneasy mix of public and private
Richard McIndoe
ownership in the competitive sector that continues to this day. And it has so far managed to survive the misalignment between good energy policy and good energy politics.
Over the past three years, the pursuit of broader political objectives has started to impact the policy stability of the energy sector, and has put the energy market under incredible pressure.
Since the 1980s, there has been a decline in the relative contribution to GDP from goods-producing industries, such as manufacturing, and a rise in the contribution from service industries.
More recently, the mining sector has grown as developing countries like China and India are using more and more of Australia’s abundant mineral resources.
This change in Australian industry has significant implications for energy use.
First, service-related industries are less energyintensive and therefore we have seen a decline in Australia’s overall energy intensity, even though energy production has increased.
Second, there is a change in the composition and location for industry demand.
Household demand for grid-connected energy has also declined in recent years, and the relationships that customers have with their retailers are also fundamentally changing.
Consumers are seeking a deeper relationship: they want advice and support on how they can better manage energy in their homes.
New technology, such as smart meters and software that lets customers take full advantage of them, will give customers a greater capacity to manage their demand.
Innovative products and tariffs will emerge on the back of that technology. This includes tariffs that empower consumers to better manage their energy usage, lower their carbon emissions and reduce their bills.
We are already seeing the introduction of products such as solar PV and solar hot water for consumers to install in their homes as a means of managing their energy use from the network; however, regulation will be a key barrier to these important changes.
Historically, Australia’s energy sector has been a source of considerable prosperity for all Australians by providing access to low-cost energy for businesses and households.
It is imperative that the sector continues to meet the future economic, social and environmental challenges of the country. If it performs poorly, the international competitiveness of major Australian industries will be undermined, our economy will suffer and our standard of living will decline.
Therefore, any discussion on the requirements and pathways for a functional and efficient national energy market should begin with an assessment of how we transform energy supply to meet these structural challenges and changes in consumer demand.
Energy reform is a partnership. It takes a lot of stamina in a reform journey where governments, industry and consumers all need to work together.
I would like to talk about two key areas in which government and industry must work together to achieve sustainable, low-cost energy supply for consumers: retail price deregulation, and the Renewable Energy Target (RET).
First, retail price deregulation. The motivation behind the introduction of the NEM and other competition reforms was a desire to raise the efficiency and productivity of electricity supply in eastern Australia by taking advantage of potential cost savings from the interconnected state networks.
In essence, the NEM should have boosted productivity levels by allowing more efficient use of generation and network capacity. While we have
seen wholesale electricity prices decline in real terms, or stay stable in Victoria, there have been other factors in recent years that have outweighed the gains from the NEM structure. A major contributor to poor productivity performance in the sector has been the need for considerable investment in peaking generators and networks to match peak demand for a small number of days each year.
Ultimately, low productivity means low capital utilisation and higher energy prices.
As energy prices have gone up, we have seen increased community pressure on governments to respond. This has made retail prices a major political issue, with the natural reaction of most politicians to date being to seek to artificially manipulate the market for short-term political gain. Unfortunately, the market just can’t deliver on that populist electoral promise of lower electricity prices.
When governments owned and operated the power system, they could get away with setting retail prices below actual costs and/or crosssubsiding a particular class of users to satisfy social and community expectations. Ultimately, it was all taxpayers’ money. This is not the case today.
Victoria remains the only state that has introduced retail price deregulation.
As a result, Victoria is reaping the rewards of a highly competitive retail market in which standing offers are a substantially smaller part of the overall retail market, and households have the
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choice of more than a dozen retailers competing for their business.
Competition has broadened beyond price, and includes a variety of innovative product and service offerings. In fact, the St Vincent de Paul Society has observed that the deregulated, competitive retail market in Victoria does more for low-income households than retail price regulation in states like New South Wales and Queensland.
An example: the variety of offers available in the market means that households with high energy use can choose retailers that offer products with higher fixed costs and lower variable costs, while those households with lower energy use can choose a different retailer with the opposite product offering. These same households can then access a discount on these rates and a further discount if they pay on time.
Retail price regulation is a one-size-fits-all approach, and the discounts available in the competitive market are linked to this inflexible regulated product. This does not benefit many lowincome households.
Retail price regulation and the introduction of flexible (or what is often referred to as time-of-use) pricing structures is also critical if we are to help customers to manage their energy use throughout the day and get the most from their energy expenditure. Time-of-use pricing is also imperative if we are to begin to tackle peak demand and improve the productivity and cost structure of the energy industry.
Today, retail price deregulation is the single most important reform that is required for Australia’s energy markets if we are to deliver tomorrow’s opportunities.
What about the Renewable Energy Target? One policy area where we have the opportunity to stop and reflect on our objectives and the impact of their delivery is the RET. There is a lot to like about the RET. It is one of the few current policy settings that have bipartisan political support, and it has successfully encouraged new renewable generation investment. It uses a market price signal that encourages leastcost deployment.
However, a key question that faced the Climate Change Authority in its review of the RET was how to define the 20 per cent target. Rather than rush out and take a position, we commissioned some analysis from ACIL Tasman. This modelling found that, unchanged, the current 20 per cent Renewable Energy Target will actually deliver over 25 per cent renewable energy at a cost of nearly $54 billion from now until 2030.
In the context of falling demand, this target could be recalibrated to deliver the original policy intent of 20 per cent renewable energy, while reducing the overall cost of the $54 billion subsidy by $25 billion. Across the economy, $25 billion is a big saving to consumers – $840 each – in the context of rising energy prices.
The current design of the RET also puts incredible pressure on the wholesale electricity market. A policy that forces new capacity to be built in an already oversupplied market, with falling demand, calls into question the sustainability of the market itself.
While policy stability is very important, we need to balance this with a scheme design that can adjust to fluctuations in demand and not impose unnecessary costs on the economy and our customers.
In conclusion, Australia has shown that it has the capability to build a sustainable, world-class energy system that underpins economic, social and environmental performance.
Building on the existing energy supply infrastructure, we can work towards lower carbon emission levels and maintain high levels of supply reliability.
We can introduce smart grid technology, and we can deliver power more efficiently to customers, giving them more information and greater choice about the way they use energy.
The opportunity, but also the obligation, for Australian governments, is to maintain the reform agenda towards achieving a functional, competitive and efficient national energy market.
This market works, but we need to be careful that we don’t ask too much of it, as it could begin to break down.
Australia’s energy markets have served us well. We should protect and develop them.
We need to get out of regulating prices and get on top of peak demand to ensure the sustainability of the energy sector.
We need to tidy up the raft of climate change schemes – including the RET – and move to a leastcost approach to emissions reduction and renewable deployment at sustainable levels.
We need to support gas development and gas markets to the benefit of industry, consumers and the community. But, most importantly, we need to get the politics out of energy supply.
Richard McIndoe
RICHARD MCINDOE Managing Director – EnergyAustralia (formerly TRUenergy)
Richard Mclndoe has been Managing Director of TRUenergy (now EnergyAustralia) since early 2006. He is also a member of CLP Holdings’ Finance and General Committee.
EnergyAustralia is one of the three largest energy companies in Australia. The company has over A$8 billion worth of assets located across the eastern states of Australia, and employs close to 1800 people on a direct or contract basis.
Until mid-2006, Mr McIndoe was responsible for the development and management of the CLP Group’s international electricity business in the Asia Pacific region. Under his management, CLP has become the largest international investor in the Australian, Chinese and Indian energy sectors, and is currently one of the largest international IPP companies in the Asia Pacific region.
Mr McIndoe is Director of the Energy Supply Association of Australia Board. He was previously a Director of Electricity Generating Company of Thailand (EGCO) – a Bangkok-listed energy company – and was Chairman of Roaring 40s Renewable Energy – CLP’s 50:50 joint venture. Mr McIndoe was based in Asia from
1993 to 2007. Prior to joining the CLP Group, Mr McIndoe worked for a major international power station developer, and for the investment bank SG Warburg, based in Hong Kong and Jakarta.
CONSTRUCTING A VALUABLE EDUCATION
In a booming world economy with an increasing population, developing the buildings and infrastructure that will support an improved standard of living throughout the 21st Century and beyond is critical.
Australia’s resources and infrastructure industry continues to expand. With it, so does the need for skilled workers.
The University of Southern Queensland (USQ) offers two undergraduate qualifications in the construction field: the Associate Degree in Construction and the Bachelor of Construction. With both of these programs, a student can major in either Civil or Management.
Construction students develop skills to plan, construct, operate and maintain buildings and infrastructure works. Students learn about construction materials, scheduling of works, estimating costs for projects, management of site works, monitoring construction expenditure, foundation construction, utilising building technologies, structural methods and the provision of building services. Construction professionals work closely with a wide range of people so project management skills are an important part of the program at USQ. We aim to make you a creative and professional part of the construction team, an effective communicator and a skilled manager.
USQ’s construction programs prepare you to solve problems related to the design and construction of buildings and infrastructure and provides you with the opportunity to benefit the community in many ways. You are able to specialise in either the civil engineering or management aspects of the profession. As a construction professional, you could be responsible for the planning or construction of: • commercial buildings for offices, banks and shops • residential buildings, including highrise apartment blocks • industrial buildings for production, storage and distribution • industrial complexes such as petrochemical plants • public service buildings such as hospitals and schools • major civil infrastructure works such as railways, urban and country roads, freeways, bridges, tunnels, airports, docks and harbours.
When you have significant buildings and infrastructure to be planned and constructed, professional constructors need to be part of the building team.
Construction offers a wide range of career opportunities. As a construction professional you can work in an office, or on-site in the middle of a city, or in the countryside, or even offshore. You can work for yourself in a private capacity or you could work for either a multinational construction firm or the public sector. As well as the many exciting opportunities in Australia, there are great opportunities overseas, in a wide range of building and development projects, including infrastructure.
Choose from full-time, part-time while you work, or any combination that works for you or your staff. If you study online (distance education) you have the flexibility to study when and where you choose. Online study is fully supported as you are sent all your study materials
Throughout your study, you will find that as well as academic learning, we place a strong emphasis on practical work. Students do their practical work together in small groups, and learn from others. Class sizes are generally smaller, so you get to speak to the lecturer directly. Construction, Engineering and Spatial Science programs offered by distance education do have Residential Schools that you need to attend. Residential Schools provide invaluable opportunity to engage with Academic staff in the Faculty of Engineering and Surveying and provide the opportunity to gain practical hands-on experience. The residential school commitment is usually one week per year on campus.
Construction research has taken off at USQ in construction project and production management, particularly in relation to construction procurement, lean construction, and quality management. USQ has a number of doctoral students currently pursuing research on monetary retentions, performance security, quality management of repetitive construction work, and construction innovation.
