![The power crisis in South Australia has underlined the nation's energy policy woes.](/content/dam/images/g/q/k/7/2/g/image.related.afrArticleLead.620x350.gu99md.png/1486704849386.jpg)
Australians are looking across the Pacific, around our region and to the distant north in awed, self-reinforcing scorn at new world disorder that is percolating from Donald Trump's Washington, from Europe's brush with dismemberment, from Indonesia's unpredictable economic nationalism and from China's relatively imminent regime change.
But we risk making a dreadful error if we imagine ourselves as an isolated bastion of reliability in this world of discordance. Because, rest assured, Australia too has earned a place on global capital's list of the politically unpredictable and systemically unreliable.
Our energy-rich nation has managed its way into an electricity supply crisis that has seen South Australia endure four electricity blackouts of varying degrees since last September. That has seen Queensland power prices surge to ludicrous, job threatening peaks over recent weeks. That has seen BHP Billiton complain that future Australian investment is at risk and that threatens a legacy of mature, energy-heavy chemicals and metals processing projects up and down the east coast.
We have, through misplaced priorities, indifference and collective delusion, fostered an east coast gas crisis that has further challenged industry's desire to throw even sustaining capital at existing operations let alone ponder brown or greenfields growth.
We have states running disconcert renewable energy targets and, in some cases, punitive taxes, that actively work to undermine the economics of traditional coal power generation and that remove any incentive for the rehabilitation or replacement of capacity.
And let's be very clear on this issue: South Australia now boasts third world electricity reliability because it has pursued an experiment in renewable energy reliance without appreciating the effect that would have on the economics of the base load generators that make such an experiment viable.
The result is that South Australia is actively abusing and undermining the efficacy of the national power network and, if Wednesday is any guide, introducing structural systemic risk to its own state network.
The latest collapse, which was ordered by AEMO for fear the SA network would be damaged by an imbalance of demand and supply, has opened a Bermuda Triangle of blame shifting between the state government, the market operator and the generator whose capacity never makes it to market, Engie.
The causes of each of the four blackouts in SA have been technically different. But in each case there has been one persistent trigger of systemic instability โ the wind has stopped blowing. Wednesday was no different.
Through most of the day the state's wind generators were driving 1000 megawatt into the system. And then suddenly, late in the afternoon, the wind stopped pretty much everywhere and the contribution of the windmills collapsed to a mere 100MW.
The SA government has made much of the fact that a second 240MW unit at the state's Pelican Point generator was not ordered into service on Wednesday. It blames AEMO for this. And certainly, for whatever reason, AEMO did not call on the dormant unit as it could have.
But the government is asking itself the wrong question here. Surely it matters more why the second unit is not routinely in the system? Why is it that Engie can justify running one big gas turbine but not the other?
This conundrum is not addressed because its answer reveals the lack of good sense in the state's unfettered embrace of renewables. Engie cannot make money from that second unit because it cannot sell power at the right price often enough for long enough to make money. This bit of kit has not been fired up since last July. As a result it likely has no contracted source of gas supply to feed its machine or what is contracted is being on-sold because Engie can make more money trading the gas than it can burning it to make power.
It can take days to get these machines firing again once they have cooled down and getting this unit working again means tapping into the same spot markets that have made running the Torrens power station such an expensive proposition for AGL.
It is within the ken of AEMO and the state government, apparently, to order unit B back into service. But the fat controllers have to understand that ordering the second unit back into action will force financial loss on Engie unless someone is ready to buy its expensive power in volume big enough and periods long enough to cover the cost of keeping the beast working.
It has to be understood, also, that the national market, as uniquely effective as it is, is just not shaped to deliver this sort of positive discrimination. The market is designed to take the lowest cost unit of energy needed to fill demand.
It should be understood too, that the Australian fragilities increasingly identified by international capital don't end with uncertain and expensive electricity and gas supply.
We have a Federal government, for example, that has decided to review its petroleum rent tax just as a bank of very long-dated investments in liquid natural gas projects by some of the world's biggest investors start their 20-30 years production campaigns. Even if the rules of the Petroleum Resources Rent Tax are left alone โ and no one imagines stand-still is a likely outcome โ the damage will be done.
"They do not understand the reputation damage this causes," the chief executive of an international petroleum house told me last week. "I mean, do they understand that Icthys is the single biggest international gas investment Japan has ever made. And just as they reach the finish line, Australia starts talking about re-writing the tax rules."
Icthys is a $US34 billion project that is run by Chevron but owned in huge part by a collection of major Japanese LNG customers. Even in the good times, investments in LNG have an unusually long-dated payback period. And these are not the best of times. Icthys has cost more than it should because of issues around is construction, its gas will arrive at a higher cost than Australian offshore competitors because of the distance from gas wells to gas processors and LNG prices sit at or below the range that would have been used to justify a final investment decision.
As you might imagine, concerns over a retrospective PRRT redraft stretch from Woodside HQ in Perth to the homes of international petroleum in the US, Europe and north Asia.
The godfathers of the Australian iron ore industry are gripped by the same sort of policy retroactivity. The WA National Party wants to rewrite 50-year-old rules to solve WA's debt problems. The proposal aims to increase the rent paid on iron ore mining leases. Presently BHP and Rio Tinto pay rent set at 25ยข a tonne. The Nats want to lift that to $5 a tonne. The background here is not as simple as it might look. WA's iron ore miners already pay a material state royalty and Commonwealth income tax on profits.
The short-term gain would be about $3 billion in extra revenue. The long-term pain, promised by the miners, is an end to the sustainability of a Pilbara mining fleet that, in the future, will require Rio and BHP to build a new mine every five years just to keep production steady.
Rest assured the iron ore rent debate sat high among the issues that motivated Wednesday's amplification of global uncertainty by Rio boss, JS Jacques.
"Global businesses always face volatility, but in recent times the level of uncertainty has increased in a material way. These uncertainties could have an impact on growth, trade, currencies and, subsequently, our industry fundamentals. I firmly believe our industry is underpinned by free trade and a level playing field. Political transitions are occurring around the world, with more elections to come in 2017," Jacques opined after delivering Rio's interim earnings on Wednesday evening.
"In all jurisdictions, governments and committees are asking for a greater share of the wealth created by their natural resources. We're seeing this in Australia, Chile and, more recently, in Indonesia. Mining is a capital-intensive industry and we need transparency and certainty as a platform for investment.
"For us, partnering is about building long-term relationships to create value and reduce license to operate risk which are becoming more and more significant for our industry. We need strong partnerships and stable operating environments to grow our business for the benefit of all stakeholders.
"If the economic and geopolitical changes of the past year have told us anything, it is the importance of having a clear value-creation approach and the right strategy in place," he finished.