Archive for May, 2011

Climate of stupidity

Of course it is funny that the chattering classes are trying to sell Australians on a carbon price with advertisements featuring London’s long-closed Battersea power station as well as famous actors, but it is also a sideshow, a distraction from the serious main game of what the federal government is trying to achieve.

Far more interesting is the insight in to Prime Minister Gillard’s thoughts available from a commentary she has provided to Melbourne’s Herald-Sun newspaper today as the adverts were starting to appear.

Shorn of its rhetoric, Gillard’s views come down to this:

She wants to reduce the effects Australia is having on the climate. I note she will do this as a government that is simultaneously proposing a carbon price “south of $40” per tonne while working hard to support large-scale increases in fossil fuel exports (coal and LNG).

She is “confident” the government plan will deliver domestic abatement of 160 million tonnes a year by 2020 – but at the weekend on a television current affairs program Climate Change Minister Greg Combet was only prepared to say that the target “is another matter we are discussing.”

Is it understood in federal cabinet, I wonder, that the 160 million tonne figure is not what the target will be? Because of growth in energy consumption, most of it fossil-fuelled, this goal is more likely to be 200Mt by 2020.

I strongly support the energy export drive, but, in the context of the Prime Minister’s “save the planet” rhetoric, her stance is illogical.

Some would argue that it is even more illogical to simultaneously take her stance and to refuse to accept that nuclear power could provide long-term, large-scale carbon abatement in Australia – especially while running a country selling uranium to the world.

Gillard also promises in her commentary to “make up to 1,000 of our biggest polluters pay for every tonne of carbon pollution they generate – not households, not small businesses, just the top 1,000.”

She now promises that more than half the money raised from a carbon tax will be given back to households and the balance will be devoted to supporting jobs in existing industries and creating new jobs by investing in clean energy programs and technology.

Leaving aside the fact that the “1,000 biggest polluters” are also 1,000 of Australia’s biggest employers, this pledge is a departure from earlier one – made after she had broken her promise at the last election to not pursue a carbon tax – that millions of families will be better off under the policy.

When she and Combet announce the policy at the end of June or in early July, as currently scheduled, will the government also say how many of 8-9 million households will receive compensation? Or will those earning over $150,000 a year receive only part or none of the compensation package?

And will any of them be compensated for the flow-on effects of the tax on the “1,000 biggest polluters” in to the domestic economy apart from its direct impact on household power prices?

While all this has been going on in Australia, the International Energy Agency’s latest estimates of annual emissions, obtained by The Guardian newspaper in London, show that the world’s greenhouse gas output last year reached 30.6 billion tonnes, an increase of 1.6 billion tonnes over 2009.

Sustained over the decade, that annual rise would increase global emissions cumulatively by 16,000 million tonnes by 2020 compared with the 160Mt annual cut Australia is (perhaps) proposing.

The IEA claims that the world’s emissions need to be stabilised at 32 billion tonnes a year by 2020 to avert more damaging effects of global warming. On the latest report, this target will be overtaken this year.

Meanwhile, it is reported from Deauville, France, where the G8 has been meeting, that France, Russia and Canada have confirmed that they will not join a new Kyoto agreement when the current one expires at the end of 2012. It is also reported that US President Barack Obama told the G8 summit dinner that America would not sign up for a second Kyoto agreement.

Read this against the Prime Minister’s assertion that “We need to act now. Not in a couple of generations’ time or even a couple of years’ time but now.”

Overwhelmingly, she claimed in the Herald-Sun, “our nation wants us to act on climate change, but some worry it won’t be good for us if we get out in front of the world – but they don’t have to worry because the world is moving too.”

Yes, Prime Minister. (That’s what the television advert wants us to say.)

Lean reality

Energy prices have taken centre stage in Australia this year – as witness the national coverage this week of a tariff increase in South Australia. Three or four years ago this would have received barely any attention outside the State’s borders.

While this is worry enough for politicians, what is starting to emerge is that rising electricity costs are only the tip of the mountain – they come on top of a range of other more expensive charges for essential needs and the number of Australians stressed by the situation is reaching the point where it is politically highly sensitive.

The latest SA power price hike – which by itself represents an extra $1 to $2 per week for the bulk of residential customers in 2011-12 – is a factor in a bigger cost movement.

The Advertiser newspaper in Adelaide claims that a typical SA household can expect to pay $336 more for its utility bills (electricity, gas and water) in the new financial year and another $287 more in 2012-13, bringing these charges up to $2,812 annually compared with $2,189 in the current financial year.

Meanwhile in Queensland the State Council of Social Service is arguing that low income and single wage families “are doing it much tougher than politicians realise.”

QCOSS claims that the “lean reality” being experienced by many is obscured by national cost-of-living indicators which are distorted by falling prices for occasional or luxury purchases.

Yes, it says, the prices of televisions, computers and audio entertainment systems have dropped in the past five years and cars prices have stayed the same, but food prices in Queensland have risen 23 per cent, rent 35 per cent and utility bills 63 per cent. Public transport costs have risen 48 per cent and insurance costs 40 per cent.

In all, it says, more expensive essentials have had a 19 per cent impact on the CPI, but have been offset in the data by a 52 per cent drop in the costs of non-essential items.

Weeks when families must choose between buying food and paying the electricity bill may seem a flight of fancy to more comfortable Australians, but, according to QCOSS, are now reality for as much as a third of the State’s population, who “are living in poverty or dangerously close to it.”

Official data is based on the 2006 census and QCOSS argues that events since then have sharply increased the number of people living below the breadline or close to it.

While this is an issue for national and State politicians in the eyes of many, perhaps most, in energy supply, the way the world works is that the immediate pressure falls on the suppliers – they are demonised as inefficient, gold-plating, profit-seeking etcetera and benefitting from “weak” regulation.

It is also in the interest of large consumers of energy – who themselves are struggling with higher input costs and the impact of a bloated Australian dollar – to piggyback on this sentiment and to reinforce the impression that the suppliers are to blame for the problems end-users are encountering.

Politicians being politicians, governments will grab for Bandaid responses, do what they can to suppress the flow-through of higher charges, slice and dice taxpayer-owned utility businesses to pursue efficiency gains and generally, over time, if they are not very careful, manage to create a different problem: a reduction in the quality of services and the need in the longer term for another prices break-out.

The current situation is exacerbated by the fact that the federal government is also seeking to impose a price on carbon to give the appearance of vigorously pursuing greenhouse gas abatement and it is in its self-interest for some leading ministers to join in the demonisation of electricity network operators (whose charges are the chief cause of today’s power price rises) while also promising compensation for the new tax to householders.

It is noticeable, however, that in recent weeks the federal government has shifted its rhetoric from promisng that “millions of households will be better off” under the carbon tax to a pledge that there will be “generous compensation” for the extra cost.

It will be late June or early July, according to Climate Change Minister Greg Combet, before the federal carbon price is announced, but it will be “well south” of $40 per tonne, which became the media scare story for mid-May as a result of journalists misreading a report on generation investment.

Estimates abound for what the tax will add to household power bills, but Treasury modelling two years ago for the abandoned CPRS indicated about $218 a year under a $30 per tonne charge. (Anything under $30 will do little to impact on high-emission generation, except perhaps in Victoria where it may became one straw too many for power plants with substantial debts.)

On one reading of this situation, the underlying and disturbing story for politicians is that the rising cost of electricity and its prominent inflation of household budget problems needs faster footwork to allay voter concern.

But beneath this lies the even more unpalatable truth: there is actually no way of stopping power price rises.

Yes, they can be suppressed to an extent here and there for a time, with eventual consequences for supply security and reliability, but ultimately the need to meet demand and to replace old assets will have to be met head-on.

The consequences of playing this game are on display in Western Australia at present.

The ALP State government, for populist reasons, held down power prices, except for the impact of the GST, for a decade.

Now its Coalition successor is battling to ease in cost rises – announcing a “modest” further five per cent rise in the State budget this month – and to manage a billion dollar debt problem for taxpayer-owned suppliers resulting from the previous tariff policy and which it claims could treble in a few years if the power prices are not increased.

Attacked for not caring for people struggling to make ends meet, WA Treasurer Christian Porter said the government has taken a “difficult and unpopular” decision to move electricity prices “at least within sight of the costs of generation and delivery.”

The London Economist magazine, in a 26 May commentary on Australia, observes that some politicians come to office determined to change everything and end up doing nothing. “A respectable case can be made,” it says, “for concentrating on good management and making only a few big changes, but making them well.”

Call me Cassandra, but it seems to me that there is not a great prospect of the current crop of politicians, at any level, living up to this dictum – and especially not with respect to electricity supply. It’s a worrying thought.

High wires act

Ugliness is in the eye of the beholder and the large business consumers, who use about a third of the electricity sold in Australia, are making no bones at present about what they don’t like in energy network service and its regulation..

Through their lobby group, the Energy Users Association of Australia, they have launched a new attack on network costs, on government-owned delivery businesses on the east coast and on perceived weaknesses in the activities of the Australian Energy Regulator, using an 88-page report prepared by consultant Bruce Mountain.

The EUAA seeks to build its case for a better deal for its constituency (as well as householders and smaller businesses) on the ongoing community concerns about rising power bills, the fears of politicians finding it hard to say or do anything meaningful in response to voter angst and the need at a federal level to keep pointing to large network charge increases to make light of proposed carbon charges.

Not surprisingly, the mainstream media are running hard with the EUAA claims and, in particular, with the argument that taxpayer-owned businesses are less efficient than those managed by the private sector.

Promoting the potential for efficiency gains north of the Murray (the largest demand area) is seen by large business as an essential element in arguing for the sale of three Queensland and four New South Wales network operations in order to separate government from needing to defend the service providers and to make it willing to give the watchdogs sharper teeth.

(Only a cynic would say that, should all networks be privatised, the big users will then attack large capex and opex outlays and increasing network charges as greedy profiteering.)

How effectively the grid companies can work together to counter the EUAA claims remains to be seen.

Equally, management by the federal and State governments of a review of the regulatory rules and approaches is still a work in (rather slow) progress.

Lost in translation so far as unhappy householders are concerned is the fact that any changes in regulatory approach could only impact on their prices after 2014, the end of the present period of determinations.

By then, on some modelling, end-user power bills may be double what they were in 2008, taking in to account a carbon price as well as other charges.

Politicians of all colours – except perhaps green – are only too aware that they need to make a better fist of managing community cost concerns than they have to date well before 2014, but their dilemma is how to do so. The blame game is often a good get-out-of-jail card in such circumstances, but it is not likely to be successful in this environment.

Meanwhile the largest east coast network business, NSW government-owned Ausgrid (EnergyAustralia before the Keneally government power sales) has set out to counter the EUAA/Mountain claims.

It is always are hard job to get the media to focus on explanations of complex issues when the pithier opportunities to communicate claims of inefficiency are being hand-fed to them, and when there are so many other demands on newspaper and television space, so here, in the interests of balance, are some of the retorts that Ausgrid CEO George Maltabarow has put forward. (The whole EUAA report is available on its website.)

Maltabarow answers the claim that privately-owned networks are more reliable than the government-owned ones by pointing to an AER review of 2000-09 data showing, he says, for the average length of blackouts, that the NSW businesses have improved over the decade and are 10 per cent better performers now than the Victorians.

On the claim that network charges are more expensive in NSW than Victoria, he argues that the rates paid by a typical Ausgrid household for the delivery service are bettered only in the ACT.

From a simplistic media viewpoint, one killer argument is that the NSW distributors are outspending their Victorian counterparts by $14.4 billion in capital outlays to $4.7 billion for the five-year regulatory period.

Such a large differential surely points to inefficiency.

“There are 700,000 more customers in NSW than in Victoria,” retorts Maltabarow, “spread across an area three times as large.

“The NSW network area requires a million more power poles and 120,000km more wires. Consumption in NSW is 55 per cent higher than in Victoria. Peak demand is 40 per cent higher.”

Higher customer density in Victoria means the State will always have cheaper network costs than NSW or Queensland, he argues.

He points to a local example: if you compare Ausgrid opex data ($327 per customer) with that of Essential Energy (previously Country Energy, $516), “obviously” his mainly urban business is more efficient than the rural and regional network, but in fact the difference reflects the diversity in customer density between the two.

In addition, he says about 34 per cent of Ausgrid’s assets are beyond their design life versus three to five per cent of those in Victoria.

About half of his substations were built in the 1960s and 1970s and need to be replaced.

Other distributors with younger assets will face the same replacement needs in the years ahead as their equipment reaches the end of its working life.

Maltabarow complains that he invited EUAA to discuss more meaningful comparisons of data without success.

“This report has averaged so much data while ignoring external and environmental factors that its conclusions are at best irrelevant (and) at worst misleading,” he says.

Regulators have also warned against making such State-versus-State comparisons, he adds.

Of course, the two sides – networks and big users – will always argue their own book. Complex issues like the cost of capital look different depending on where you are standing.

There is no denying that higher input costs, including electricity prices, are a problem for many businesses, exacerbated for those competing with overseas rivals by the high Aussie dollar values.

Regrettably, the national regulator’s capacity to act as the independent umpire has been undermined to a certain extent by an egregious and widely-publicised attack on it for being “weak” by Ross Garnaut.

The issue of privatisation is an additional “bugger” factor in this debate.

From where I sit, the point is not the relative efficiency of public and private operators – both are constantly chasing better performance and it is the regulator’s job to ensure that they deliver – but whether governments still need to own such activities.

I don’t believe that they do in 2011. In NSW, Bob Carr and Michael Egan did not believe they did in the 1990s. But the unions, for their own selfish reasons, forced them to back off.

Selling the four NSW network firms today for $20-25 billion would enable a huge amount of other important infrastructure work to be pursued after a decade of neglect. Ditto Queensland.

However, I doubt that the issue is relevant to the present power price imbroglio – which challenges policymakers to bring together networks, consumer representatives and regulators to ensure a better understanding of what needs to be done and what it will cost.

As I have said before, the players here, including (and perhaps especially) politicians, are in a boxing ring – where they can run but they can’t hide.

The rest of us have a lot riding on them each punching their weight and none more so than the political leaders.

Of this, the leaders can be sure: the network cost argument is not going to go away. As I reported here recently, quoting Martin Ferguson, there is no quick fix.

Pandora’s power box

A series of major energy issues are running on parallel lines in Australia at present.

The dominant one is the price of power to end-users and that, like the Hydra of Greek mythology, has many heads – with politicians finding that it grows more every time they think they have cut one off.

Even higher profile in the media, although not necessarily as important to many householders, is the carbon price – which could be cast as a Laocoon, the Trojan priest of Greek legend, strangled with his sons by two serpents, who is the source via Virgil of the famous “Beware of Greeks bearing gifts.” Or here, beware of politicians promising you compensation for their carbon policy.

Stretching the metaphor, we could cast the electricity networks in the role of Sisyphus, the (rather unpleasant) king in Greek mythology doomed to roll a huge boulder uphill only to watch it roll back again.

The networks are caught endlessly between rising demand requiring that they spend more on capital works and politicians, the media and large end-users hoeing in to them because they are spending too much – until, as in Queensland last decade, they spend too little and get lambasted for ensuing brownouts and unrealibility of supply.

There is plenty more in the same vein, but one should beware of straining the friendship with readers – the number of whom on this website, I am pleased to report, rose again in April to more than 4,800 or double what it was about 12-15 months ago.

As Martin Ferguson has said (see my earlier post), there is no quick fix to power problems, which won’t stop end-users and the media demanding one and other politicians trying to deliver it.

New South Wales Premier Barry O’Farrell, for example, may well have been better off if he had simply allowed the Keneally government’s solar bonus scheme fiasco to roll through to taxpayers and to spend the next 5-6 years reminding them that the $2 billion “hit” they are taking is all Labor’s fault.

Instead, seeking to reduce the cost, he is proposing to introduce retrospective legislation to slash the feed-in gains to the original investors – and is in strife on multiple fronts, including within his own new government, for his trouble.

Some auditing at Port Macquarie of rooftop solar systems, installed during the 2010 “gold rush” sparked by the Keneally government’s grossly over-generous subsidy, meanwhile, has raised safety issues, throwing a question mark over installations across the country.

Nationally, Prime Minister Julia Gillard and Climate Change Minister Greg Combet, spooked by (inaccurate) media reports that the Deloitte review of uncertainty among generation investors had called for a $40 per tonne carbon price, has managed to wedge itself between promising a “south of $40” tax, “generous” compensation to householders, growing examples of businesses likely to be adversely affected and the Greens, calling for “a price as high as we can possibly get” to drive investment in renewable energy – while commentators point to the fact that a low tax will not facilitate meeting even the current 2020 abatement target.

In Queensland and NSW, the networks, all still in government hands, are under growing attack over their efficiency as price increases flow throught to end-users and the promise (threat) of the 2015-19 regulatory determination bringing more of the same creates political and big business demands for an end to “weak” regulation.

Premier O’Farrell, responding to calls for power asset privatisation after pledging at the State election that he would not sell the network businesses, has mumbled words to the effect that he will wait to see the outcome of the judicial inquiry he has launched, notionally in to the gentrader sales but increasingly, it seems, in to anything else on power supply that comes along. This leaves him wide open to ALP and union rants about broken promises and threats to jobs.

No-one seems to have whispered in O’Farrell’s ear that an iron rule of government is never to launch an inquiry without having a good idea of what it will tell you.

Keneally apparently hadn’t heard this one, either — or she wouldn’t have launched the Duffy/Parry inquiry, which turned in a report so damning she buried it until after the election.

Queensland, meanwhile, confronted by ever-rising peak demand, has taken the first tentative steps on the east coast towards time-of-use tariffs via a letter to the State’s price regulator, a path that may deliver the body politic to a new vale of tears when householders can’t or won’t change their usage patterns and start receiving ever-higher bills.

For politicians wondering how the environment could be worse, Sunday’s ABC Television “Inside Business” program, compered by Alan Kohler, did not bring relief.

First Kohler interviewed TRUenergy managing director Richard McIndoe, who warned that the uncertainty over carbon policy, and the impact this is having on investor sentiment, could see shortages in power supply over peak times in the next five years.

Then he interviewed David Leitch, utilities analyst at UBS, who warned that, at a carbon price of $30 to $40 per tonne, the brown coal generators in Victoria will become unprofitable and cease to produce – and raised a question over whether there is an adequate gas supply for replacement CCGT generation?

“If the carbon price is introduced in 2013,” said Leitch, “and then goes upwards towards a price that causes the brown coal guys stress after only a few years and it takes five to seven years to get the (replacement) gas plant planned and built……. it means someone needs to get on with the detailed planning fairly fast.”

I suppose a quick closing reference to Pandora’s box would be stretching your patience…………

No quick fix

Federal Energy Minister Martin Ferguson has used an electricity networks forum to remind other policymakers and stakeholders that critical economic infrastructure needs to be paid for and there is no quick fix for rising power bills.

“We need to be honest about that,” he said. “We cannot let the community lose sight of the huge investment task in network and generation infrastructure.”

Earlier this month he told a Committee for the Economic Development of Australia forum that total capital outlays on electricity supply infrastructure from now to 2030 could cost $220 billion.

Ferguson acknowledged this week that the right balance has to be achieved in regulating networks between reliability and user costs, but warned “we can’t have continued reliability without meeting the costs.”

Media coverage focuses on higher bills, he said, but what is less mentioned is what it would cost householders and business if under-investment in supply assets leads to lower reliability. “Lack of reliability will threaten jobs and businesses and undermine economic prosperity.”

He issued a reminder that a 2004 independent inquiry in Queensland following a run of blackouts during storms and hot weather had attributed poor reliability to inadequate capital and maintenance expenditure and called for a significant increase in capital outlays. “This, of course, is contrary to some recent suggestions of over-investment in distribution networks.”

Looking at experiences in New South Wales, Queensland and Victoria, Ferguson also acknowledged that comparisons “certainly raise questions of efficiency around publicly versus privately owned networks” but said definitive answers will depend on productivity benchmarking by the Australian Energy Regulator.

Ferguson lauded the technical achievements of the network operators in delivering reliable supply over large systems serving areas with a small population density compared with Britain or the US.

(The transmission network is the world’s longest interconnected high voltage system, covering more than 5,000 kilometres from Port Douglas to Port Lincoln and containing in aggregate 50,000km of cables. The distribution network has 750,000km of lines.)

He pointed out that there had been a major period of network investment between 1950 and 1970 and Australia is now entering a stage when the bulk of these assets must be replaced. “The next 15 years will be critical.”

Maintaining the systems’ status quo is not enough, he added, because of demand growth. “Our nation is wealthier than ever, our standard of living the highest at any point in our history and this manifests itself in the accumulation of more and more electrical gadgets and increased demand.”

Ferguson said the use of air-conditioning has created a situation where 25 per cent of retail power costs are derived from serving peak events that occur over less than 40 hours a year. “A smarter network that can help us reduce peak demand is an important aspiration.”

He noted that, after household power price rises of about 40 per cent over the past three years, residential customers could expect to see a further increase of 30 per cent in the next three years.

He said he believes Australia can better manage the drivers of increased network costs and pointed out that the national regulator is already working on improving distribution determinations by reviewing the rules under which they are made.

Consideration of the framework for setting distribution reliability standards is already on the Australian Energy Market Commission’s agenda. “The Ministerial Council on Energy is accelerating delivery of this work.”

The council is merging next month with the Ministerial Council on Minerals and Petroleum Resources to become the CoAG Standing Council on Energy and Resources. “Energy networks and market frameworks will be high on the (new) council’s agenda.”

Ferguson said the AEMC is also considering rule changes that will affect distribution network planning, including the use of demand management.

Deloitte bells carbon cat

The survey of electricity industry stakeholders undertaken for the federal government by consultants Deloitte has found that the break-even carbon price for baseload gas generation to become economic on the east coast is $20 to $40 per tonne.

In Western Australia, because of the much higher price of gas, it will take a carbon price of $70 per tonne for gas to be competitive with coal.

Deloitte says that a switch from a brown coal plant with an emissions intensity of 1.5 tonnes per MWh and a short-run marginal cost below $5 per MWh to combined cycle gas generation with an SRMC of $30 to $35 per MWh will require a carbon price below $30 per tonne – while a switch from a lower efficiency black coal power station with an SRMC in the range of $14 to $20 per MWh to baseload gas also requires a carbon price below $30 and it could be below $20 in some cases.

The review has also found that coal-burning generators do not expect to see most existing plant retired in the short term, or even the medium term, under a carbon price regime.

It reports a market participant saying that, with the exception of Hazelwood (brown coal, Victoria), Wallerawang (black coal, New South Wales) and Northern (brown coal, South Australia), it will take a long time to drive coal-fired generators out of the market mix.

“None of the coal generators state any intention to retire plants, with the exception of Hazelwood, who are willing to shut down if the government effectively buys them out of the market,” the report says. It adds that affected generators see their assets continuing in a baseload role “or in some sort of mid-merit role” for their remaining life.

However, it notes, maintenance and upgrades of plant are being delayed. “Decisions on spending capital to improve operational efficiency are being deferred. This is currently resulting in less efficient plant operating than would have been possible if policy had been certain.”

It quotes one east coast generator as saying that its highest priority is to maintain asset value,” which is steadily diminishing as a result of policy uncertainties.”

Deloitte also reports the view of baseload generators that the enlarged renewable energy target program has caused “great uncertainty” by taking away 30,000 gigawatt hours of production permanently. The RET will cost consumers up to $100 per MWh more than the use of conventional baseload generation, it says.

Deloitte says that investors in the east coast power market are not considering coal as an investment option because of the uncertainty surrounding carbon policy. “Raising debt for new coal plant is almost impossible in the current environment. Additionally, it is becoming increasingly difficult to refinance existing coal assets.”

It reports that one of the coal-fired generation companies has abandoned all plans to invest in Australia and now has advanced projects under consideration in developing countries.

Banks have told Deloitte that the days of financing fully merchant stand-alone baseload projects such as Pelican Point in South Australia and Callide and Millmerran in Queensland are over. “Only those generators who have the ability to inject significant equity and can absorb the risk through their retail position are in a position to invest in Australia.

“The Australian energy sector is increasingly being viewed as a risky investment given current uncertainty surrounding carbon policy,” Deloitte says, while noting that this is due to more factors than carbon policy. They include low east coast pool prices, uncertainties about gas prices and the impact of the RET.

“Gas projects are the investment of choice,” Deloitte adds, but it points out that the majority of proponents of gas projects also have substantial retail or upstream gas positions. “Other players still consider gas investment risky and prefer to consider investments in other countries.”

Ownership of gas resources is seen as critical because benefits from lower-emission generation will flow through to the developer via higher gas prices.

Most market participants with interests in overseas projects, especially in Asia, say they can get better financing terms there than in Australia, it reports.

Deloitte says three major Australian gentailers with substantial gas generation portfolios have large gas-fired generation projects in planning and development stages.

It records that 3,900MW of coal-fired generation capacity has been added in Australia from 1999 to last year – compared with 25,000MW developed prior to 1999,

Gas-based capacity is projected to dominate new investments, with 4,850MW of new gas-fuelled plants scheduled to enter the national supply chain over the next 3-4 years.

Not amused in Victoria

Victoria had its chance to pursue large-scale, zero-emission electricity generation in the 1980s and the then Labor government rejected it.

The concept was to develop a 2,400MW nuclear power station at Portland in western Victoria at a cost of $3 billion. It was the last major consideration of a nuclear power option in Australia.

The dominant electricity utility at the time was the government-owned State Electricity Commission, which preferred in any event to stick to burning brown coal in the Latrobe Valley, having initiated the study by British consultants, but the newly-elected Cain government made sure the debate was over by legislating to prohibit the construction and operation of nuclear power plants, a law that still prevails today.

As things stand, replacing the 11,000 gigawatt hour annual output of Hazelwood power station, the object of environmentalists’ deepest ire, with zero emissions generation would require some 2,000MW of wind farms – and back-up open-cycle gas plant, fossil-fuelled of course.

If the Portland nuclear plant had been built, Hazelwood, and perhaps Yallourn, would long since have been history along with about 40 per cent of Victoria’s electricity-related emissions.

In fact, Victoria’s reliance on brown coal power has risen about nine per cent since 2000 and by some 14,000 GWh a year since the late 1980s.

Hazelwood is back in the news this month because the recently-elected Baillieu government , under cover of federal budget day, has walked away from talks initiated by the Brumby administration with International Power Australia on closure of two units at Hazelwood power station on the grounds that even a portion of the shutdown costs would be too expensive for State taxpayers.

Energy Minister Michael O’Brien claims the previous government had no plan for baseload replacement of the Hazelwood units and supply “would likely have come from electricity imported from other States and generated from black coal.”

The Baillieu government has also signalled that it will cap the current State’s solar bonus scheme, introduced by Labor, at 100MW.

The choler of the environmentalists has been heightened this weekend by Loy Yang Power, in the course of supporting the Latrobe Valley generators’ needs for compensation under the Gillard government carbon scheme, saying that it expects to operate its brown coal plant until 2048 providing it is not brought undone by the tax.

Why the green movement should splutter and fume over the 2048 date when the current federal Department of Climate Change stationary energy emissions review points out that greenhouse gas output of Australian power stations will rise from 203Mt today to 259Mt in 2030 under present and proposed policies is an interesting point.

The DCC forecast is also directionally in line with the federal government’s energy assessment that fossil fuels will still be responsible for 80 per cent of Australian electricity supply in 2030.

How this outlook fits with the promises by Gillard, Combet and other federal ministers to “do something about climate change” is for them to explain, although they show no signs of being willing to do so and are under no Opposition or media pressure to do it.

It is clear, however, that, unless the Gillard government can come up with a plan to close the Hazelwood and Yallourn power stations in Victoria without hurt to the State community, it has Buckley’s chance of reaching its 2020 abatement target – about which Gillard recently wrote to the Business Council demanding its support.

Meanwhile the federal and Victorian governments have to wrestle with the fact that demand in the State, the third largest consumption region in the country, is growing at 1.2 per cent a year (and peak demand at 2.2 per cent).

Victoria’s population is expected to rise by about 600,000 people this decade. The State has had 63,600 new homes approved since January 2009.

Electricity industry load forecasts see consumption in the State rising by about 10.5 per cent between 2010-11 and 2018-19, with summer maximum capacity needs going up almost 17 per cent.

As Engineers Australia has pointed out, Victoria has about 9,600MW of capacity, of which 80 per cent is brown coal-fuelled, and its summer peak demand now reaches 10,500MW.

In other words, the State is relying increasingly on importing power. “A deficit, with continually increasing population,” it says, “means that power will become very expensive if buying electricity from interestate or, in the extreme, brownouts in suburbs could occur.”

Building peaking gas plants in western Victoria will help address this issue, but most of the proposed capacity is on hold until the policy environment is settled.

The federal government has been warned repeatedly by the Victoria’s privately-owned generators that premature closure of plant in the State and neighbouring South Australia, which also relies on brown coal for substantial supply, could create an acute security situation in the southern market and potentially cascade in to problems for retailers across the east coast.

The fragility of the situation was underlined by a report in Melbourne “Herald Sun” newspaper in April, claiming that the China Light & Power-owned TRUenergy, which includes the Yallourn power station in its portfolio, may be floated. The paper quotes Hong Kong analysts as complaining that more than a quarter of CLP debt is tied up in assets in Australia, but they are not returning a quarter of the company’s revenue.

The point is that there are forces at work here operating beyond Australia’s borders and they will be making hard-headed decisions about investment in this country once the full nature of the Gillard carbon plan is revealed.

Gillard’s problems with regard to Victorian supply are underlined by the federal government’s decision in early May to commission a study by KPMG, Lazard and lawyers Mallesons Stephen Jaques of the impact of a carbon price on generation.

This is in addition to the study already commissioned by Martin Ferguson from Deloitte to investigate generation investment uncertainty nationally.

Put politicially,as the opinion polls show, the Prime Minister, clinging to minority government, is already in enough trouble north of the Murray without upsetting supporters in her home State by casting doubts over actual supply of power as well as adding to their electricity bills.

The fact that studies about impacts on generation are still needed just weeks before the carbon price is to be announced and years after the government’s planning began says volumes about the competence of the federal Labor regime’s processes.

Losing its shine

As the saying goes, when you’re hot, you’re hot and when you’re not……………

The solar power sector in Australia’s largest regional market, New South Wales, will understand this sentiment very well.

A little over 12 months ago solar businesses and environmentalists were all aglow.

Kristina Keneally had delivered legislation to impose a “solar bonus scheme” in the State with a 60 cents per kilowatt hour gross feed-in tariff, the most generous program in Australia.

The measure, Keneally said after the scheme gained 100 megawatts of take-up in the first six months versus a 2016 target of 50MW, was “wildly popular.”

When the government got consultants AECOM to review the situation, it was told that, on the current trend, the scheme would deliver 250MW of take-up by June this year and 1,000MW by its closing date of December 2016.

Annual generation could grow from 100 gigawatt hours a year in 2010 to 1,650 GWh in 2016.

Because the feed-in system is funded by the whole household sector meeting the costs, NSW residential consumers were up for a $2.7 billion cumulative bill over six years.

In a panic, the Keneally government rushed in amending legislation seeking to cut off the stampede by slashing the tariff by two-thirds and capping the scheme at 300MW.

It got this step wrong, too, leaving a loophole that saw the scheme rushed in its final hours, with applications now thought to bring total capacity to 350MW and the cumulative bill standing at $1.9 billion.

Politics dictate that both the doomed government and the Coalition went to the polls in March promising to pay the cost from the State budget rather than adding to unpopular increases in residential bills.

The O’Farrell government has now suspended acceptance of outstanding applications while it reviews the situation again, reportedly leaving solar installers with $200 million in stock and customers waiting for installation of rooftop arrays with $20 million in trapped up-front payments.

While the NSW problem is attracting attention, there is a broader issue that just doesn’t get debated: pursuing rooftop solar systems on houses is a daft way to cut electricity-based emissions.

As the federal Department of Climate Change has pointed out repeatedly, putting a 1.5kW array on every household rooftop in the country, even if the capital costs are halved from where they were in 2009-10, would cost $100 billion and deliver about 16 million tonnes a year of emissions cuts, an enormously expensive form of abatement.

A smaller vignette of the absurdity of it all was thrown up in the Sydney suburb of Rooty Hill in early May when federal Climate Change Minister Greg Combet returned to where he lived as a schoolboy to launch a $540,000 solar system at the Blacktown Council’s depot.

Good PR stuff, so long as you ignore the arithmetic. The Blacktown Council solar system will save 70 tonnes of carbon dioxide emissions annually for 20 years – at a cost per tonne of $385.

Set that against electricity industry estimates that it will cost $50 to $70 a tonne to drive existing coal-fired generators out of the east coast market, delivering far more abatement by replacing the power stations with gas-fuelled plant.

Don’t get hung up on the cost and small level of abatement, Combet told his Blacktown audience. “Initiatives like this are providing information on the benefits and barriers to renewable energy and energy efficiency in the Australian community. Projects like this are needed to meet the 2020 abatement target.”

Really?

The target, as presently calculated, requires abatement of 160 million tonnes a year by 2020.

Saturation application of solar PV systems on residential rooftops would deliver a tenth of the target at about five times the roll-out cost for the national broadband system.

At the time that Combet was doing his Blacktown PR thing, Bloomberg New Energy Finance was predicting that $8 billion will be spent this decade rolling out rooftop solar projects on homes and businesses in Australia.

The question that has to be asked is to what end?

And how will this happen if NSW kicks the “solar bonus scheme” in to touch? (That’s a rugby term.)

Bloomberg is also offering a higher capex figure for wind farm development in Australia under the RET than has been used by others – claiming that it will reach $28 billion by 2020.

Others, including the Clean Energy Council, have suggested $20 billion.

The Department of Climate Change says wind farms and other large renewable generation developments under the RET will deliver 26 million tonnes of annual abatement in 2020.

What would we get in national emissions abatement by lashing out $8 billion, to be paid for either by taxpayers or electricity consumers, on rooftop solar?

When we start talking about multi-billion dollar outlays on photovoltaics and multi-billion additions to residential power bills cumulatively over a decade, it is time surely for the Council of Australian Governments to agree that there needs to be an independent national inquiry in to the costs and benefits of rooftop solar power.

CoAG now has three Liberal premiers.

It is in their own interests for this situation to be investigated and, given the impact on taxpayers in NSW, how could Julia Gillard resist a push for an inquiry without invoking further voter ire?

Pointing the way

Amid the furious debate about a carbon price, which the latest Newspoll suggests the federal government is losing in the public arena, the need to address the long-term environment for power investment remains the biggest issue of all.

On Wednesday (4 May) the Resources & Energy Minister Martin Ferguson used a Committee for the Economic Development of Australia forum in Sydney to outline the government’s steps towards producing an over-arching strategy in electricity supply.

The talk again underlined Ferguson’s determination to deliver on the government promise to produce an energy white paper, a hangover from the early days of the Rudd regime, thwarted by last year’s extra-ordinary events.

The most important point Ferguson made from the perspective of the investment community – his speech is now up on his ministerial website – is the announcement that the government will publish a second edition of the national energy resource assessment later this year, following by a draft of the long-promised white paper by the end of the year and a final version in 2012.

While the government is vulnerable to the argument that it is putting the cart before the horse in pursuing introduction of a carbon tax before production of the long-term approach, Ferguson argues the reverse: settling the carbon price is necessary before settling the long-term policy.

In a carefully-crafted speech,he also took the opportunity to remind the CEDA audience that there is no quick fix for rising electricity prices, an issue that is growing in political importance, nowhere more so than in New South Wales where the State’s Independent Pricing & Regulatory Tribunal (IPART) has now published a report that drives home not only the fact that retail prices have risen 43 per cent in three years, but that they can be expected to rise by this much again over the next three years.

“In an environment where we are at near full employment, (with) our population and our energy exports growing, there is no (means of) artificially holding prices below where they need to be to maintain reliability,” Ferguson said. “Tempting though it may be, suppressing prices through regulation or market barriers (will) create even more pain in the longer term by delivering inefficient investment, which will either mean higher bills for consumers or reduced reliability.”

The era of cheap energy is over, he said, a point that rivals the American slogan “It’s the economy, stupid” for writing on the walls of politicians.

An incidental victim of the current angst over power prices is renewable energy, especially in NSW, where the now-departed Keneally government botched subsidies for rooftop solar power. But renewables are not the main cause of power price rises.

Ferguson pointed out to the CEDA audience that, although measures such as the federal renewable energy target come at an extra cost, they are not the principal driver of higher prices.

“We must recognise that our appetite for multiple televisions, air conditioners, computers and a range of electrical appliances are also driving demand growth and the need for new infrastructure,” he said, noting that household requirements for electricity have jumped from an average of two megawatt hours a year in the 1950s to four megawatt hours in the 1970s to 7.9MWh in 2008 – and, he could have added, are now heading towards 10MWh, especially in places of heat and humidity like Sydney’s western suburbs and south-east Queensland, two of the fastest-expanding urban areas in the country.

At a time when network service providers are under pressure, Ferguson reminded CEDA that the east coast power market “leads the world in terms of efficiency, reliability and in facilitating competition” in the eyes of the International Energy Agency.

Looking at the longer-term picture, he said a period of major reform lies ahead of the Australian energy industry. “Peak demand is growing quickly and total demand is increasing while much of our infrastructure was built decades ago. We need upgrades, expansions and new capacity.”

The capex picture for the power business seems to ratchet up every time someone gives it a close look. I told a CEDA forum in Melbourne a week ago that my estimate was that the likely outlay for this decade was of the order of $130 billion. Now Ferguson has told the Sydney meeting that he sees as much as $220 billion being spent on new generation, transmission, distribution networks, gas pipelines and associated infrastructure over two decades, with between $72 billion and $82 billion needed for power plants and high voltage links.

“The investment challenge is enormous – and the clock is ticking,” he warned.

In a period when every month seems to bring new flights of fancy on low (or no) emission power supply, Ferguson said the government wants to reduce greenhouse gas emissions, but needs to do so in a way “that stacks up commercially” and is determined by the market.

The RET and the proposed carbon price fit the market-based approach, he argued.

Looking ahead, he sees an electricity sector in which the technology base and fuel mix are more diverse than today’s largely coal-fuelled system, “smart” technology is helping consumers better manage energy use and electric cars have come in to use.

The ABARES energy projections for the government suggest total energy consumption will grow by about 35 per cent over two decades.

Ferguson said he does not intend the energy white paper to predict or mandate future outcomes. He is looking for “sensible interaction” between market forces, social choices and sound policy and regulation. The target is for “accessible, reliable and competitively priced” energy.

The white paper, he told CEDA, will have six core elements – maintaining energy security and reliability, maximising opportunities to develop energy resources, dealing with infrastructure and skills constraints on the sector, building efficient and resilient energy markets and networks, transforming to a “clean energy economy” and driving greater energy efficiency.

However, it won’t come with costly new proposals.

“I want to make one thing absolutely clear,” Ferguson said. “The white paper will not spawn a raft of new spending.”

On with the spin

Just how dumb do politicians think we are?

I ask, having read tabloid media reporting this weekend that the new O’Farrell government in New South Wales is pursuing a reduction in power prices by vetoing network company sponsorships for entities such as the Sydney Symphony Orchestra, on which Ausgrid (previously EnergyAustralia) has spent $522,000 in a year.

“Wasteful spending on everything from sponsorships to unnecessary substation upgrades,” says the newspaper report, will be in the sights of a new task force.

Chris Hartcher, the new NSW Energy Minister, says his government will “force” improvements in network accountability and regulation.

To put all this in perspective, using cost numbers taken from a Port Jackson Partners’ paper, the current network charges are about $40 per megawatt hour, or around 40 per cent of the typical electricity bill. This could double to $80 by 2015.

An average household uses between eight and 10 megawatt hours a year of electricity – so today’s $320 to $400 network charge could become $640 to $800 by mid-decade.

The sponsorships that the State government can order the networks not to hand out need to be measured against the $14 billion worth of capex spending on higher reliability and other service requirements approved for the State by the Australian Energy Regulator.

And, in passing, please note that any changes to network charges would take effect after 2014, the end of the present regulatory determination period.

Slashing the orchestra subsidy equates to a saving per customer of 25 cents a year.

The over-arching regulatory framework for the networks is provided through the National Electricity Rules made under the National Electricity Law, enacted in NSW by a 1997 State law.

The national rules provide detailed standards that govern participation in, and operation of, the east coast power market.

They specify technical performance criteria for network service providers. In recent years this has included standards requiring network providers to build additional redundancy in to their systems to reduce the failure risks in supply operations.

If the O’Farrell government wants to change the reliability arrangements, it will need to persuade the CoAG ministerial council on energy to agree to a review and a coast-wide revision.

Ross Garnaut has raised the prospect of a market-wide inquiry to establish whether “there is excessive investment in infrastructure (gold plating) under the guise of reliability”?

In fact, there are reviews of the regulatory rules planned by the AER – is the O’Farrell government signalling that it plans to run its own review in addition to the market processes? If so, why?

Reliability also encompasses replacing assets that have reached the end of their “technical life.” The average for most assets is between 45 and 60 years. Many in NSW were installed in the 1950s, the 1960s and the early 1980s.

About a third of sub-stations were built in or before the 1970s.

Half the overhead powerlines in the franchise area of Essential Energy (the former Country Energy) in rural NSW are more than 50 years old.

The AER has approved a capex outlay of $4 billion between 2009 and 2014 for this area, which serves three-quarters of a million households and businesses, up from $2.1 billion for the previous five-year period.

What lower level of reliability does the O’Farrell government have in mind for its rural and regional voters?

Or for those living in the outer suburbs of Sydney or on the Central Coast?

The AER’s determination for Ausgrid’s current $8.5 billion capex program includes approval to build 42 new zone substations by 2014 and to connect an average of 17,300 new customers to the electricity system each year.

Which suburbs can look forward to being the beneficiaries of Hartcher’s slimming program?

Over the past decade the distribution networks have reduced the frequency of power interruptions across the State by 28 per cent and the length of outages by 35 per cent – what change does the O’Farrell government think is likely to be acceptable to the community?

Engineers Australia, its its review of NSW infrastructure last year, which gave the electricity assets a “C-minus” rating, down from “B” in 2003, pointed out that power supply in the State has to cope with a significant growth in demand and an increase in asset utilisation to the point where further increases are difficult without the construction of new infrastructure, as well as the need to renew aged assets.

The State’s electricity demand has increased by an average of 1.9 per cent a year over the past decade and the summer peak, driven by air-conditioning use, has risen by 3.3 per cent a year.

In Endeavour Energy’s area (the former Integral Energy), 70 per cent of homes now have air-conditioning compared with 25 per cent at the turn of the century. With the highest population growth in NSW, this region expects to see maximum demand for electricity a third higher in 2014 than it is today.

A State government move to prevent the sale of cheap, inefficient air-conditioners and to lead a charge to impose this nationally (without which householders will order the poor ones from across the border) would be a useful idea, but, of course, it would impose a cost on purchasers.

A major cause of voltage fluctuations, one of the reliability problems the networks battle, is believed to be caused by air-conditioners installed with poor start characteristics.

A range of moves the O’Farrell government proposes are to be welcomed. They include an inquiry in to the gen-trader sale fiasco and a review of the structure of the State-owned network system as well as another of the shambolic Keneally government rooftop solar scheme.

Soberly getting on with this work is to be strongly encouraged.

However, what we have seen in the past week is a government in search of a cheap headline, employing the Labor tactics that Lindsay Tanner has just memorably described as “focus groups, spin, look like you are doing something, announceables nonsense.”

We desperately needed a change of government in NSW, but it is not a little worrying to see the new incumbents embarking on spin within their first 100 days in office.