Archive for August, 2011

Just another week

It’s been just another week in the Australian energy debate, one in which political sleaze and the economic squeeze have dominated the headlines..

A week in which Climate Change Minister Greg Combet told the National Press Club in Canberra that there needs to be a discussion between governments about the efficacy of a lot of their decarbonisation measures now in place as federal policy kicks in.

Consultants Energy Matters report that Combet’s “lumping in” of solar feed-in tariffs among the inefficient schemes is causing “jitters” in the PV industry.

It was a week in which West Australian Premier Colin Barnett retorted that Combet should start by scrapping the federal renewable energy target once the carbon tax is implemented.

“The ball,” said Barnett, “is in the Commonwealth’s court and it should abandon all of its renewable energy policies if it is going to bring in a tax.”

The Business Council of Australia chimed in to call on governments to wind up policies that “inflate the costs of achieving emissions reduction.”

It was a week in which the Australian Financial Review reported that WA’s government-owned Synergy energy retailer is likely to fall eight per cent short of the federal 20 per cent by 2020 RET target.

And it was a week in which Origin Energy chief executive Grant King, asked if he thought the 2020 RET is achievable given the current state of the market, suggested in a media interview that perhaps aiming for 25 per cent by 2025 might be a better option.

He pointed out that industry will need to build renewable generation between 2015 and 2020 at three times the rate it has achieved to date.

Asked his view, AGL Energy chief executive Michael Fraser said he thinks the 2020 target is achievable but “a hell of a lot will have to be built in a hurry.”

It was also a week in which NSW Premier Barry O’Farrell first said in a radio interview that his personal preference was for no more wind farms to be built in the State, then later in the day recommitted his government to pursuing a 20 per cent renewable energy target by 2020 (a pledge at the March election).

The Clean Energy Council retorted that wind power would need to play a major part in reaching the NSW target.

It was a week in which the Energy Supply Association told the federal government – in a submission about its “clean energy future” legislative package – that failure to offer compensation to black coal-fuelled generation, reserving it for brown coal plants in Victoria and South Australia, will require government and investor owners of power stations north of the Murray to seek more equity.

The National Generators Forum added that, under the legislation, power plant owners face the need to buy $35 billion worth of carbon permits between 2012 and 2020.

NSW government-owned Delta Electricity, echoing a warning from Macquarie Generation earlier in the month, said it will be unable to pay “hundreds of millions of dollars” in dividends to the State as a result of the legislation.

It was a week in which Fairfax newspapers reported that International Power may seek up to $3 billion in compensation to close its Hazelwood power station in the Latrobe Valley and Combet retorted that the federal government intends to drive “a hard bargain” to get value for taxpayers from its pay-to-close scheme.

It was a week in which the Queensland government released modelling showing that there will be a net, electricity-related cost to the State budget as a result of the carbon regime of $1.2 billion between its introduction next year and 2015-16.

(And a week in which the latest opinion polls indicate the Bligh government is on the same path as the Keneally government in NSW to catastrophic defeat.)

Not that the federal policy will bring about an immediate U-turn in Queensland emissions.

The State Treasury modelling shows that emissions from Queensland electricity generation, some of whose output is used in NSW and which stood at 46 million tonnes in 2009-10, will rise to almost 52Mt in 2019-20 after introduction of the federal carbon regime, a reduction of 4Mt from business-as-usual.

Total State emissions under the regime will remain at 151Mt a year in 2019-20, the study shows, 13Mt below BAU.

The Queensland modelling also shows that gas generation’s share of State power supply is expected to increase to more than 30 per cent by the decade’s end – rising from 20 per cent at present.

(However, this was also a week in which the Greens released an opinion poll claiming that 68 per cent of respondents support a moratorium on coal seam gas development.)

Using Federal Treasury’s claim that the policy will make retail electricity prices rise 10 per cent, the Queensland Treasury model estimates that the average State household (using 7,882 kilowatt hours a year and paying $1,900 in 2011-12) will face a carbon-created increase of $190 next year.

The carbon tax will also add $5 million to State passenger rail service costs in 2012-13.

It was a week in which the Minerals Council of Australia, in a submission on the federal legislation, said the impact of the carbon tax on fuel will be felt by 60,000 businesses nationally, not the 400-500 “big polluters” claimed by the government.

By 2020, the MCA said, the tax on fuel alone will have raised $16 billion cumulatively.

It was a week in which the Business Council told the federal government in its carbon legislation submission that a national commitment to 80 per cent abatement in 2050 should be deleted because there has been no community consultation or assessment of its impact,

The BCA called for the legislation to make it mandatory for a public review before any shift from the five per cent reduction target (for 2020).

Meanwhile, in their joint submission, ESAA and the Energy Retailers Association, with members including the major retailers, Origin Energy, AGL Energy and TRUenergy, have expressed concern that the retention of regulated price caps creates a “real risk” that retailers may be prevented from passing on in a timely way the higher wholesale energy costs and network charges as well as the increased prudential costs associated with a carbon price.

“This could force significant losses for retailers and make them unable to contract forwward with generators,” the associations warn. “Systemic failure or financial distress among major retailers would increase volatility and risks in the energy market, reduce competition and potentially undermine system reliability and security of supply.”

In shorthand, retail prices must reflect costs and retailers must be able to adjust prices quickly.

Previous commitments from Canberra to work with the States to move towards retail price regulation have failed – only Victoria has deregulated electricity prices.

And it was a week in which CSIRO’s Perth-based Ecosystem Sciences division said a national survey of 530 people about federal climate change policy showed that 11 per cent thought the government is doing too much and 41 per cent thought “it is doing the wrong thing” while 21 per cent thought it is doing enough and 27 per cent not enough.

So there you have it: just another week in the energy and carbon debate.

Nothing to cause any concern, really.

A view to the horizon

There has been a significant shift in the long-term electricity environment during the winter recess of federal parliament.

In the course of promoting its proposed carbon policy – a short-term carbon tax and then an emissions trading scheme involving large-scale purchases of overseas credits – the leadership of the federal government (Gillard, Swan, Combet in this case) has diverged from conventional wisdom about power demand supply over the next two decades and opened a new horizon out to 2050.

Almost all the current debate is about the cost impacts of the policy this decade and the political focus is on whether the Abbott-led Coalition can smash the ALP at the next federal election and then smash the carbon tax/ETS through the parliamentary process and, if need be, a second, double dissolution election?

This situation creates a miasma of uncertainty for generation investment and almost nothing can now clear it in the short term.

As has been pointed out a number of times, the implication is not that the lights will go out, but that investment focus will be on open-cycle gas plant, leading to higher wholesale prices.

Current political uncertainty has longer-term effects because electricity supply infrastructure – both generation and networks – constructed between 2012 and 2015 normally would be judged to have a working life to, roughly, 2040.

With respect to much longer-range security of supply, the government perceptions of demand and how it will be met are no less important.

The official perspective of generation out to 2030 until the recent announcements was for a substantial reduction in the demand trend – a fall of about 40,000 gigawatt hours a year as a result of the carbon policies – and a substantial shift to gas-fired plant for new generation while building up wind power to deliver the renewable energy target (which is supposed to continue at 20 per cent until the end of the ‘Twenties).

Under this perspective, coal-fired generation would have 43 per cent of supply in 2030 (down about a quarter in terms of actual output from today), gas-fired supply would rise to 37 per cent, wind farms would provide 12 per cent and most of the balance would be met by the existing hydro-electric system.

(This represents a shift in the national supply mix from 70 per cent coal and 20 per cent gas – ie 90 per cent fossil fuels – to 80 per cent fossil fuels in 20 years’ time.)

The Gillard/Swan/Combet pronouncements open the horizon to 2050 and indicate major shifts in supply in the ‘Thirties and ‘Forties as well as a significant downward pressure of carbon policy on power demand.

(What has been least covered – ie virtually not at all – in the media is that they envisage fossil-fuelled electricity still meeting 60 per cent of demand in 2050, thus relying in a very big way on carbon capture and storage becoming commercially viable and sequestration sites being acceptable to the community.

(The “Strong growth, low pollution” propaganda paper issued by Swan and Combet in the parliamentary recess sees CCS as being commercially viable “by the mid-2030s”.)

Under the national energy resource assessment published in March 2010, demand would lead to sent-out generation reaching 366,000 GWh a year in 2030. This has been generally accepted in industry to lead to requirements of about 550,000 GWh annually by 2050.

(My own rule of thumb out to 2030 is based on keeping an eye on likely generation sent out in New South Wales, which accounts for about 31 per cent of the national market. On the basis of the modelling used by TransGrid for NSW, I see the 2020 national figure at 300,000 GWh – and a rise of 6,000 GWh a year out to 2030 is hardly unlikely, especially when you keep in mind population forecasts.

(It is worth pointing out that, if the number of households in 2030 is 13 million versus 10 million today, and average demand stays at 7.5 MWh a year, you are looking at annual consumption of about 98,000 GWh at the end of the ‘Twenties versus 60,000 GWh now. Consumption — not sent-out power from which needs to be deducted lines losses and plant use. And then you have to factor in the impact of higher population on commercial demand.)

If you look at the bar chart prepared for Federal Treasury by SKM, based on Treasury modelling of demand, you see that – for the “core policy” scenario, the one the government desires – energy sent out lies between 350,000 GWh and 400,000 GWh a year by mid-century.

This would be a major shift in the domestic energy environment.

Even this scenario requires substantial investment.

The Swan/Combet paper foresees $225 billion being spent between now and 2050 on new generation, involving up to $60 billion for gas plants, up to $65 billion for coal plants – with CCS – and $100 billion for renewables.

Some would argue that this is an under-estimate of capex outlays by a fair bit, but the issue then becomes perceptions of what various technologies will cost per megawatt in 2-3 decades’ time – and your view depends entirely where you are standing.

The very big missing link, of course, is the absence of nuclear power.

Perhaps the biggest perception leap of all by Gillard/Swan/Combet is that Australia will be able to continue to have high ambitions for reduced emissions and strong economic growth without recourse to reactors.

In nuclear’s absence, Swan/Combet and Treasury (and consultants) have seized on geothermal power as their get-out-of-jail card.

It is seen as providing up to a quarter of 2050 supply – in other words, using their modelling, as much as 100,000 GWh a year by mid-century.

As it is a safe-ish bet that the technology will be contributing next-to-nothing by 2020 and not a large amount by 2030 on the national energy resource assessment, the government (or at least Treasury and the coterie of ministers driving carbon policy) are punting on geothermal taking off big-time in the ‘Thirties and ‘Forties.

Which raises the question as to why the government today is pushing more than $1.5 billion towards kick-starting large-scale solar power at present and (relatively) very little in to driving geothermal?

Perhaps, however, it all raises a bigger question: is it really practical for a government to try to micro-design a 2050 electricity supply sector?

Is this several bridges too far?

Would it make more sense to focus on what we can realistically achieve by the early ‘Thirties and to let our heirs and successors shape what follows?

To those who would cry, in response, about a lamentable lack of ambition, the answer may be that the challenges out to 2030 are not exactly minor.

They include decisions that will need to be made about carbon policy if there is no global emissions trading scheme by mid-decade or even the end of this decade, the setting of an abatement target for 2030 after coming nowhere near meeting the 2020 target from domestic action, the collective will to drive CCS further and faster, how to better support geothermal and solar thermal development, the development of a multi-billion plan to eliminate transmission congestion on the east coast and to ease renewables delivery, the introduction of smart meters and time-of-use charges in an effort to curb peak demand, the future for not only rooftop solar PVs but also gas-fired fuel cells (which offer better abatement, are Australian-designed and are still being given a mostly cold shoulder at home) in the residential sector and the rolling-out of an effective end-use energy efficiency program as well as the development of a program to close down the least emissions-efficient coal fired power stations and to replace them with gas plants.

And, of course, revisiting the ban on nuclear power and, should we change our minds, how to actually introduce reactors to the generation mix.

It goes without saying that we need to keep reviewing electricity’s forward strategy.

It is intended at present that Labor will deliver a new energy white paper next year (instead of 2009 as originally planned). The last one appeared in 2004 and the only one before that in 1988.

There should be, I think, a process laid down where we revisit national electricity strategies in particular every five years.

If, for example, we set out to do this in 2017, 2022, 2027 and 2031 on a rolling 10-year basis, we would have a far more ordered approach enabling a much less murky view to the horizon of 2050.

Investors might even like it!

Gillard’s carbon conundrum

What Julia Gillard wants you to take home from her “clean energy future” spiel is the images of geothermal energy, wind power and solar generation.

However her message, shorn of all the hyperbole, is that we are stuffed in pursuing a 2050 target driving emissions 80 per cent below 2000 levels without two critical developments: a global emissions trading scheme and large-scale domestic development of carbon capture and storage.

It is an indictment of the way the media commentariat deals with political announcements that no one, except for economic analysts like Henry Ergas and News Limited’s Terry McCrann, as well as her former political colleague, Gary Johns, once a Labor minister and now a very critical commentator in The Australian, has tackled Gillard on two of the three issues central to making her carbon pledge work.

The first is her claim that renewable generation will provide 40 per cent of supply in 2050 – and I seem to be alone in pointing out that this requires investment in non-nuclear, zero emission power to treble between 2030 and 2050.

McCrann and Ergas have been hammering Gillard on the fact that her entire pitch to the nation rests on there being a global emissions trading scheme – and, as McCrann has been pointing out over the weekend, if there is, Australia, on Treasury modelling, will be giving $57 billion a year to overseas peddlers of credits in 2050 without compensatory material gain on the ground at home.

The big third issue is the government’s reliance on carbon capture and storage in this new scenario.

As I have pointed out in posts, Gillard’s 40 per cent renewables by 2050 pledge is actually a 60 per cent reliance on fossil fuels mid-century because she refuses to countenance nuclear energy. This supply, mainly gas-fired, must incorporate CCS.

So great a reliance on carbon capture is a huge punt even for a nation that loves a bet.

Whether or not it is an irrational bet is one of the biggest issues of this debate, not that you would ever know this from reading the local media commentaries.

Paraphrased, the Wall Street Journal last week summed up the negative situation like this: carbon capture and storage will take too long to expand on a large scale, solar power is “comically expensive” and onshore wind energy faces both geographical limitations and community resistance.

Leaving the renewables situation aside, and also the debate about how nuclear power could address the zero emission ambition efficiently, the Gillard government, in effect, now says it expects something like 240,000 gigawatt hours a year of electricity supply – a bit more than is currently being produced – to be sourced from fossil fuelled plants using CCS by mid-century.

This is based on the Treasury’s new and low estimate of demand.

If my view that consumption in 2050 is more likely to be about 550,000 gigawatt hours a year on current trends is right, then the government’s fossil-fuelled target will be about 330,000 GWh annually, 50 per cent higher than production today.

All of it must incorporate carbon capture.

Despite this, there is no additional funding in the recent policy for further pursuit of CCS.

The government’s $12 million advertising campaign doesn’t highlight any of this, but it is critical to Gillard’s energy strategy – and goes way beyond the official (until now) government position about 2030 electricity supply, as expressed by the national energy resource assessment, that sees generation in 19 years’ time being 43 per cent conventional coal, 37 per cent conventional gas, 12 per cent wind and the balance mainly hydro-electric supply that has been available for years and years.

A critical issue for successful CCS implementation is scale.

While there are demonstration carbon dioxide capture technologies being used at present to catch tens to hundreds of tonnes of CO2 a day, the major baseload suppliers (here and overseas) are emitting 20,000 to 50,000 tonnes daily.

Another big issue is dealing efficiently with the impurities found in emissions from coal-based generation.

The next obviously is cost, which is an especially large issue for coal-burning generators with narrow commercial margins – all of our plants, in other words.

Here it is important to understand that carbon dioxide after capture must be compressed for transport and injection underground – and this effort, on the basis of overseas studies, can increase the cost of electricity from coal generators by as much as 50 to 80 per cent.

There is also another local factor: community acceptance of CO2 transport, not least in New South Wales, the biggest black coal burning State in the largest electricity consumption region, using 30 million tonnes a year, with no obvious destination for sequestration at this time.

In a nutshell, for Gillard’s grand plan to be realised, Australia needs to achieve CCS on a large scale at commercially acceptable costs and win public support for its use.

Now she isn’t the first prime minister to talk up the technology (not that she is doing so overtly). John Howard was arguing in 2006 that Australia should aspire to be a world leader in CCS development.

Nonetheless, the federal government has so far committed little more than 10 per cent of its original CCS flagship program budget. In turn, it believes that the coal industry is not doing enough to drive the technology’s development.

This is not just a local issue, of course.

Alstom’s global director of carbon dioxide business development puts things in perspective world-wide by saying: “Even with the most optimistic projections of renewable and nuclear energy use, we will still have 60 per cent fossil fuels in 2030 with massive emissions. If CCS technology is not accepted by the public, we will not be able to arrive at the necessary levels of emission reductions by 2050.”

The Alstom view underscores a key point: international focus on CCS research and development is a very important factor in our domestic chances of success with this technology.

The most recent estimate by Pike Research, an American market research firm that focuses on clean energy technology, is that CCS, if commercially viable, could represent a world-wide market of $128 billion to $220 billion annually by 2030.

Faced with revenue prospects of this size, major technology companies pull out the stops.

This doesn’t excuse us from making a substantial contribution, given our domestic needs and our large-scale role in the global coal trade.

For governments, the situation was perhaps best summed up by Ed Miliband, then energy minister in Britain and now leader of the opposition: “There is no alternative to CCS if we are serious about fighting climate change and retaining a diverse mix of energy sources for the economy,” he told the House of Commons in 2009. “With a solution to the problem of coal, we greatly increase our chances of stopping dangerous climate change. Without it, we will not succeed.”

Is it possible for Gillard, hag-ridden by the Greens, to say the same today?

Do she and her advisers actually understand what she has pledged or are they deafened and blinded by the “clean energy future” rhetoric?

Mining a new green seam

For one of the senior members of the upstream petroleum industry, an alarming aspect of the current row over coal seam methane exploration and development on farmland is the repeated emphasis on “mining” to describe the process.

In a conversation in Canberra, he fretted that just this one word, repeated often enough, will cause the gas suppliers a world of trouble in warding off negative views in the urban areas, where most voters live.

The conflation of petroleum exploration and production and mining is a deliberate Greens ploy.

Its propaganda in New South Wales says: “Gas mining is on the rise. Traditional coal communities are undergoing gas mining expansion and communities who have never imagined being impacted by mining are now faced with the dangers associated with gas mining exploration.”

Get the message?

True to form, the ABC has taken to talking about “coal seam mining” in reports and interviews.

And, returning home, I found a short rant in the Sydney Morning Herald that takes up the mantra.

“Our food bowls should not be sacrificed to mining,” said the headline over a commentary by a Liverpool Plains activist.

The Liverpool Plains are 1.2 million hectares of prime agricultural land in the north-west of New South Wales, lying around the Namoi River (where Captain Thunderbolt plyed his bushranger trade in the 1860s).

BHP Billiton would like to develop an underground coal mine in the area and Santos is pursuing coal seam methane prospects there.

But the battleground for this issue is a lot wider than one corner of NSW, as the National Farmers Federation has pointed out to a Senate committee – it has members with concerns about CSG activity in Queensland, Victoria, Western Australia and the Northern Territory, too.

The campaigners have got some traction in NSW by winning a Legislative Council inquiry in to “the environmental, economic and social impacts of coal seam gas activities” on the back of an argument that the regulatory framework has not kept pace with the industry’s development. The MLCs committee will report next April.

The recent Senate inquiry in to the impact of wind farming on rural communities drew nearly 900 submissions, a curious melange of antagonism from country communities and vehement defence from the renewable energy sector.

The NSW parliamentary inquiry is sure to attract hundreds of submissions in similar vein. And lots of media coverage.

There are two different agendas at work here.

Clearly, the Greens and their followers see an opportunity to open a new front in their war on fossil fuels.

This is not what the farmers, by and large, are on about.

I note that the head of the Queensland government’s “LNG Enforcement Unit,” set up to assess claims about the gas sector not complying with environmental regulations, is saying that his biggest concern is that interests other than landholders are drowning out the voices of the people actually affected.

The NFF says that it is not out to stifle CSG exploration and production, but to ensure that farmers and resource developers can co-exist.

“This may require a more considered approach,” it says, “rather than a mad rush towards extraction.”

Listening to ABC Radio’s “The World Today” as I drove back from Canberra, I heard James Baulderstone, the Santos executive overseeing its eastern Australian activity, arguing the case for rural and regional community benefits from CSG development and pointing out that farmers aren’t anti-development.

“What they are concerned about,” he said, “is that developments are done safely and sustainably and they beneficially co-exist with agriculture.”

Quite why the NFF and the upstream petroleum industry have not got together to resolve the difficulties well before now is a good question.

Why State governments in Brisbane and Sydney did not appreciate the potential problem and ensure this happened is an equally good question.

The petroleum industry is starting to concede it could have done better in explaining CSG activities in recent years.

Speaking to a business lunch in Perth this month, the head of the ConocoPhillips’ Australian activities, Todd Creeger, said: “We haven’t done a good enough job in getting out and explaining the science (of hydraulic fracturing – or fraccing).”

This lapse is part of a lack of effective communication that has enabled environmentalists to seize an opportunity to throw fuel on the fire of farming community discontent. Of course, they have found willing allies in the media, which likes nothing better than a stoush, especially where stunts make good TV footage.

We are now, yet again, at the stage where the resources sector and the environmental movement are throwing information at each other, arts arena luvvies like Olivia Newton-John are being used to present scare commentaries for the media – “The cold hard fracks” was The Age’s headline over her Op-Ed piece, which fretted about the threat to Australia’s “pure water sources” – and populist pollies from Barnaby Joyce to Bob Brown are dancing around the fires that have been lit.

This is not just an issue about LNG exports and “Big Gas” making lotsa money.

Because of the need for gas to be a large-scale transition fuel in east Australian electricity supply – and dominantly in Queensland and NSW, representing more than 60 per cent of demand – yet another political log-jam over development is highly undesirable.

Looking out to just 2030, there is a need for perhaps 12,000MW of gas-fired electricity generation to be built, a lot of it north of the Murray and a lot of the rest in Victoria. This is not going to happen without security of gas supply.

The Queensland and NSW governments have a lot at stake in this situation.

Running battles over access to farmland are unlikely to bring down a government, but a substantial energy security problem – bearing in mind that energy security for consumers encompasses cost as well as the lights staying on – is another matter.

Constitutionally, resource development on land is a State issue, as federal Energy Minister Martin Ferguson has been pointing out. Attempts via the Senate to introduce legislation to interfere with this for political gain is unhelpful.

In any of these situations, there are always corporate cowboys.

Ferguson grumped in a radio interview that industry engagement with farmers has been “mixed.” There has been “some negligence” in some CSG activity, he said.

Looking at the situation from the sidelines, it seems to me that the farmers (through the NFF) and the gas suppliers need to get their acts together and negotiate an understanding that sorts this mess out as soon as possible.

This needs to include some clear “terms of engagement” for the farmers and the suppliers.

Meanwhile, both Bob Brown and his team and the media have found a new green seam to mine – and they are not going to waste the opportunity.

Political bafflegab

Plagiarism is what I am really good at! See a good phrase – pinch it!

One I spotted this week on an American website (while I was visiting Canberra as it happens) is just right for use in Australia.

The blogger was complaining of “political bafflegab.”

Doesn’t that just sum up so much of what we are hearing in the local carbon debate?

As an example, the Prime Minister and senior colleagues have made much during the parliamentary winter recess of the government’s political pledge
that Australia will cut emissions by 80 per cent from 2000 levels by 2050.

As I turn 69 next month, I have no expectation of being around to keep tabs on this, but I have a lively interest in the issue because my three little grandsons will be 50, 47 and 44 respectively at that point and it is not unreasonable to expect that there will be a small tribe of Orchison great-grandchildren on the ground, too.

Looking during the recess at the Treasury papers released on carbon policy – and why, why won’t the Prime Minister or the Treasurer authorise release of all the modelling assumptions? – I have come to appreciate a couple of things.

The first is that the recent pledge is actually to reduce Australian emissions by two per cent in 2050 not 80 per cent.

Treasury’s “core policy” modelling says national emissions will be 545 million tonnes in mid-century after peaking at 621Mt in 2020. It was 556Mt in 2000.

The balance of abatement is to be bought in from the presumed global trading scheme.

Inherent in this mindset also is the belief that energy technology will have advanced to the point where these credits are relatively cheap.

I say “relatively” because the Treasury modelling assumes that the 2050 cost will be about six times the initial carbon price the government announced.

Whether or not there will be a global trading scheme is the far-distant future is one thing – the likelihood of there being one in 2015, when the carbon tax is supposed to switch over, is another entirely.

Sans an ETS, the carbon price,of course, would be kept in place and, on ACIL Tasman figures of modelling by Treasury last year that I hung on to, it would be $40 in 2020 and $55 in 2029, starting from $23 in 2011 as had been planned – and these are inflation-adjusted numbers using real 2009-10 dollars.

What the price may be in 2050 won’t interest many members of today’s community. What it will be in 2020 certainly will.

Any chance of the government talking about this?


“Political bafflegab” isn’t going to let that happen.

Also central to the current Treasury modelling is the claim, talked up by Julia Gillard, that 40 per cent of our electricity supply in 2050 will be from renewable sources – weighted heavily towards as-yet commercially unproven geothermal energy – and that the demand trend over four decades will be significantly flattened from what it is today, making the zero-emission supply task that much easier.

Solar power and wind, which is doing the RET heavy lifting today, are effectively given something of a brush-off.

(Bear in mind here that, on the low demand levels predicted by the Treasury, renewable supply would still need to double between 2030 – when the RET expires – and 2050. On what I consider more realistic long-term consumption numbers, it would need to treble.)

Sixty per cent of supply in the “clean energy future” is, in fact, fossil-fuelled, but “political bafflegab” keeps that well hidden. The non-renewable balance is envisaged as being provided by gas and coal plants equipped with carbon capture and storage systems – but this week we have Gillard’s political partner, Senator Bob Brown, giving gas, and especially coal seam methane, the evil eye.

As The Australian today quoted me saying, the Prime Minister is standing on Brown’s shoulders for this 2050 renewables and gas-fuelled approach – and he is wobbling.

But the government will not have a bar of a proven zero-emission technology (nuclear) and it will not support a newly-emerged Australian technology, gas-fired fuel cells, that could materially change power supply to households (and substantially impact on network capital outlays).

(It is ironic, I think, that the Prime Minister, Wayne Swan and Greg Combet make much of China’s renewable energy investments but they ignore the fact that the Chinese are going to build 50 reactors this decade.

(Has it ever occurred to them to ask Treasury to model how much we would need to invest in buying emissions credits from overseas in 2050 if, starting around 2020, we built, say, 1,500MW of nuclear power each year?

(Aren’t we in the community at least entitled to know the answer to this before they launch us down the current path, which I am afraid I see as a marriage of political desperation with out-of-date ideology?)

The second key issue arising from the recess papers is that Julia Gillard’s 2050 pledge is based on the promises at Cancun by 89 countries (90 per cent of the world’s economy) to deliver carbon action.

Leaving aside what such pledges are worth in reality, a bigger problem is that independent modelling overseas indicates, even if these promises are met, that the resulting abatement will not deliver a reduction in global temperatures to just two degrees above pre-industrial levels, as desired. Or even get close.

All of this reminds me of that old saying from the days of sailing ships that, if you don’t know where you are going, any port will do.

During the recess the government has spent $12 million of taxpayers’ money trying to persuade us to buy its policy.

The outcome, as reflected by the most recent Galaxy polling, is that 55 per cent of us are still opposed to what is proposed to be done and 69 per cent of us still think the country will be worse off when Gillard and the Greens have pushed the legislation through parliament.

(I am afraid I also suspect the Prime Minister of seeking to rush the carbon legislation through parliament so that she can posture at the Durban UN conference for domestic political gain in the way the Prime Minister she deposed did at Bali, so what else might she cede to the Greens to get the timing right?)

I really don’t care that Gillard may live to politically regret her approach to carbon policy – or that a continuing slump in the ALP primary vote may spook her colleagues in to cutting her down before the voters can get to her –but I do care that the grandkids may live with the legacy of policy that owes far more to “political bafflegab” than it does to good process.

Remember this: because electricity supply assets have long lives, poor decision made this decade may well still be hung around Australians’ necks in 25 and 30 years time.

Pressure on the backbone

The first of February this year was a red-letter day for the State government-owned high voltage business, TransGrid.

This was when the intricate planning that holds together the backbone of power supply in the largest demand region met reality head-on.

On the hottest day of the summer, peak demand at 4pm required delivery of a 14,820MW load.

Ensuring the supply chain functioned required input from 8,300MW of available coal-fired power stations, 3,300MW of hydro-electricity, 1,600MW of of gas-fired plant and the variable contribution of 120MW of wind power.

Delivery included use of 1,300MW of supply located in Victoria and Queensland – and had to take in to account overall line losses (exacerbated in high temperatures) of 680MW.

“The system operated within its capability,” says TransGrid primly in its annual review of its operations.

If it hadn’t, on the eve of a State election, you would still be hearing the howls of unhappiness from customers and politicians today.

In particular, hanging on this reliable delivery are consumers in the coastal corridor from Wollongong to Newcastle, whose requirements account for 75 per cent of the State’s demand and a third of the whole supply on the east coast.

Dominating this load is Sydney itself, with a peak requirement of 7,100MW, followed by Newcastle with 2,200MW.

The TransGrid system involves 91 sub-stations and 12,600 kilometres of high voltage cables. It transports more than 75,000 gigawatt hours of energy each year.

Maintaining it and expanding it to meet this decade’s supply is one of the highest priority infrastructure requirements in Australia.

The regulator-approved capital works outlay on this task for 2009 to 2014 is $2.6 billion

Obviously engineering skills are a major issue, but so too is the science of estimating where demand is going and getting out ahead of it – which requires finding a way through the thicket of regulators, permanently out-of-countenance industrial consumers, the media in continuous heat over power prices and, of course, the politicians.

To which can now be added a bit more uncertainty about what demand will be.

The latest annual planning report from the network, released in August, shows some of the challenges involved in coping with an environment over the next decade in which the impact of rising power prices and of decarbonisation policies creates new uncertainties.

From modelling undertaken for TransGrid by KPMG, it can be seen that two key factors in planning ahead are just how big the NSW population will be and how far and how fast the State economy will grow under a new government.

The population in 2010-11 is calculated at 7.6 million and gross State product at $438 billion. Population scenarios for 2020-21 all exceed 8 million, but vary by 500,000. GSP projections all exceed a half trillion dollars but vary by $90 billion.

For the first time, also, the actual generation mix for the State is open to question. What will carbon policies deliver in power station construction? When will new plant be built? Will any existing plant be forced to close?

TransGrid CEO Peter McIntyre told a forum held this month to discuss the network’s 2011 planning report that a more moderate increase in average electricity consumption in NSW is now being forecast.

“The growth shows signs of slowing down,” he said.

But the big, big issue, of course, is whether this reflects the current global economic uncertainty, a slower economy – the boom times are elsewhere in Australia – and/or changing consumer behaviour in reaction to rising power bills.

NSW power supply has risen from just on 10,000 GWh a year in 1961 to 75,000 GWh now – and annual demand has increased by 15,000 GWh since 1991. On current modelling, it could exceed 84,000 GWh by 2020-21.

On present trends, demand in 2021 could be five per cent below the forecast that was being put forward even a couple of years ago – or it might be higher.

The summer peak is always the wolf prowling the paddocks.

The variation in the TransGrid modelling for the summer of 2020-21 is as much as 3,600MW, with a high likelihood that the peak will have risen to about 16,300MW and the potential for it to go as far as almost 19,000MW.

This poses challenges for both the generators and the overall network system, including distribution – and always for the politicians. Bear in mind that the Coalition government recently elected in a landslide will be at the polls in March in 2015 and 2019.

What end-user prices will be and what NSW energy security will be at the decade’s end unquestionably are as big a challenge for the politicians as the power suppliers.

There is at least no lack of investment interest in building new generation in the State, although whether or not interest can be translated in to action, and when, is another matter.

TransGrid says it has on hand inquiries about transmission links for wind farms with a capacity exceeding 4,700MW – and another 5,120MW of possible gas generation.

The system at the moment contains 12,000MW of coal-based capacity, 1,900MW of gas plant, 210MW of wind generation and access to 4,200MW of hydro-electric power, mostly the Snowy system.

Notwithstanding the continuing fast rise of demand in Queensland, NSW is where the major supply action is – and can be expected to still be so in 2020.

Counting the costs

One of the big challenges that the Gillard carbon policy represents for the two black coal-burning eastern States (one governed by Labor and the other by the Coalition) has been highlighted in a hearing of the Senate select committee scrutinising new taxes.

The issue received some media coverage in late July, at least with respect to New South Wales and the Hansard of the hearing has now become available (and can be found on the Senate website).

As a table published by Sydney’s Daily Telegraph newspaper has shown, the government-owned generators north of the Murray face an initial annual bill for carbon dioxide emissions of $1.47 billion.

In the case of NSW, this sum does not include the carbon costs for Delta and Eraring production that was sold to TRUenergy and Origin Energy under the Keneally government’s “gen-trader” arrangements – which the O’Farrell government now has under review by a judge, whose initial report is due at the end of August.

The “gen-trader” carbon costs are another $560 million.

As new Senator John Madigan put to Macquarie Generation CEO Russell Skelton, the first year costs – starting at $580 million for MacGen – will flow through eventually, via lost dividends and taxes paid to the State government, to less money being spent in NSW on hospitals, roads, schools and other taxpayer-funded infrastructure.

Skelton explained to the committee that, because MacGen does not expect to be able to pass on all the carbon costs and will have to absorb between $115 million and $230 million of the initial hit, the generator’s ability to pay dividends to the State government will be eliminated.

Since 1996, when MacGen was created out of the break-up of the utility giant Pacific Power, the generator has paid $2.2 billion in dividends, taxes and guarantee fees to the NSW government.

The generator is the largest single emitter of carbon dioxide in the country, with 23.4 million tonnes a year, and Skelton was subjected to a barrage at the hearing from left-wing Labor Senator Doug Cameron, who insisted on the labelling the business “biggest polluter” rather than emitter.

The need that witnesses feel to be uber-polite to senators is a strong constraint on what they say in response to the likes of Cameron.

It is not, however, a breach of Senate etiquette to respond: “If you wish for political propaganda purposes to say ‘polluter,’ feel free – so long as you acknowledge that you and everyone else living in NSW are co-polluters as nearly a third of the power we produce is used by you and the rest of the State population.”

And, one might add, so long as you acknowledge that your party governed NSW during a period in which the State-owned power stations increased their burning of coal from 22 million tonnes a year to more than 30Mt.

Rather more to the point is the endless propaganda by Gillard, Swan and Combet that it is the “big polluters” footing the carbon bill, although they have quietly amended this in their $12 million advertising campaign to say that “a carbon price isn’t a tax paid directly by householders or small business – it’s a charge paid by only about 500 companies.”

What Skelton’s evidence demonstrates is another facet of the political Big Lie: that the cost for ordinary Australians of the carbon policy can be magicked away.

Another aspect of what he told senators is worth a mention.

In order to receive compensation in the form of free permits your power station has to have a carbon intensity greater than one. (Macquarie Generation’s plants and most other black coal plants have about 0.9 versus 1.3 or more for brown coal.)

As well, the threshold trigger for being allowed to participate in the assisted closure process, which is due to open next month, I gather, is a carbon intensity of 1.3 – so that rules out black coal generators, too.

Which raises the interesting question of what exactly is Gillard’s plan to deal with the 95+ million tonnes of annual emissions from east coal black coal power stations, most of whom have a likely working life of another 20 to 30 years?

Cumulatively this represents between two billion and three billions tonnes of emissions over the plants’ normal life time.

The Treasury report (“Strong growth, low pollution”) issued jointly by Swan and Combet has carbon capture and sequestration kicking in somewhere in the ‘Twenties to cope with fossil-fuelled power. (The modelling sees 60 per cent of Australian electricity still coming from fossil fuels in 2050.)

Given that Labor, the Greens and the environmental movement have seized on every attempt to promote nuclear power by chanting “Where will the reactors be sited,” it is not unreasonable to ask where does the federal government propose that the 56 million tonnes of carbon dioxide to be emitted annually by the State-owned power stations in NSW be buried?

(If the answer is that they will charge so much for carbon that the emissions will fall away, that raises a whole different set of questions, doesn’t it?)

Unlike nuclear power, where the waste is stored on site awaiting provision of a permanent storage facility, captured carbon dioxide will need pipelines to carry it away to burial.

The costs of CCS will ultimately fall to the taxpayers of NSW as the owners of these plants – and would certainly be an important factor in their selling value if the O’Farrell governments opts for privatisation.

With a third of the country’s households and taxpayers in NSW, what happens here is a key question for the federal government – and one that can’t be escaped on the road down which it is embarking.

The black coal burning generators in NSW and Queensland (mostly owned by taxpayers,aka voters) account for 49 per cent of current national power supply.

Under the federal government’s plans, they are (1) not eligible for any free permits, (2) not eligible for the closure bidding process, (3) faced with up to $20 billion in cumulative carbon charges (depending on how you estimate the average carbon price) over this decade and (4) faced with a massive CCS capital cost when (if) this process is available.

As if this is not enough, consider this statement in the paper released by Swan and Combet (to be found on page 119): “The outlook for gas generation (the government policy is strongly focused on gas-fired power over the next three decades) depends heavily on the combined effect of lower electricity demand, rising gas prices and the carbon price.

“Gas remains an important component of Australia’s generation, remaining at current levels over the next 15 years. However, in the core policy scenario it increases over 200 per cent by 2050.

“The modelling suggests a carbon price of around $60 per tonne is sufficient to drive significant increases in gas generation in the near term.

“Increased gas-fired generation is projected despite domestic gas prices more than doubling by 2050. This is partly because gas generation plays an important role as a back-up for renewable generation.”

There are more than a few points to provoke thought in just these comments. Unfortunately, it all passes straight over the heads of the day-to-day media and, therefore, of the community, who are at the pointy end of the policies.

It must, however, all be factored in to the energy white paper, on which the government is working, if that document is to be a worthwhile roadmap to our energy future.

At $60 per tonne,as mooted in the Swan/Combet paper, the taxpayer-owned NSW coal-burning generators would face an annual cost burden of $3.3 billion – which could only be recovered through much higher wholesale prices for electricity.

If such prices forced them out of the east coast market, as they probably would, what is cost to taxpayers, including the cost of rehabilitation of the sites at Mt Piper, Bayswater, Liddell and Eraring alone?

But, then, why worry? Only the “big polluters” will be paying………….

(In passing, the Nationals’ Senator John Williams raised an interesting point at this hearing. Under Section 114 of the Constitution, the federal government is precluded from “imposing any tax on property of any kind belonging to a State.”)

CEF’s Nirvana mindset

Burrowing in to the “clean energy future” (CEF) spin from the federal government, something is becoming clear: it has adopted a view of future electricity demand that is at variance with conventional wisdom.

The government’s 2050 boasts rely on (a) world action to achieve a 550ppm atmospheric target, (b) carbon price-based policy domestically, starting with a $23 charge, but what it would be under emissions trading anyone’s guess, (c) local renewable energy development, notably in geothermal power, to deliver 40 per cent of generation and (d) reliance for 60 per cent of mid-century power delivery on carbon capture and storage for (mostly) gas and coal plants because it eschews nuclear power.

Most of our fellow citizens suffer an attack of MEGO – my eyes glaze over – three minutes in to the debate among policy wonks, engineering types and green goblins as to how to bring about this brave new world, but the issue is important.

Lower the horizon from 2050 to 2030 – not that this will cure Australia-wide MEGO – and one can still see many elephants crowding in to the CEF room.

Opinions of which technologies will make a significant contribution to electricity generation in 2050 are just that – opinions – unless, of course, you are a government set on mandating handcuffs for the market to ensure that your guesses are made reality. And which future governments can overturn.

On the other hand, a mindset that the long-term trend for our society to need more electricity will be, more or less, reversed is a crucial perspective that needs to be challenged. It could lead to really serious errors of judgement.

This outlook relies on carbon policy to drive down electricity consumption by mid-century so that it is no higher than present trends indicate for 2030, the medium term in this context.

How this would work with a low emission trading price is for government economists to explain.

To understand where domestic power consumption may go, you need to understand demand today.

Currently 52 per cent of the electricity consumed in Australia is used by households (28 per cent) and commerce (which includes hospitals, education institutions, shopping malls and other retail outlets and office blocks).

The logical starting point is the hard work ABARES and Geoscience Australia put in to producing the current national energy resource assessment, published 15 months ago, and essentially being ignored by the Prime Minister as she pursues her CEF propaganda.

The assessment (NERA) picked 366,000 gigawatt hours as the likely level of 2030 national electricity demand.

To appreciate this number, you have to know that the current level is 220,000 GWh a year and, until the enlarged renewable energy target and Kevin Rudd’s CPRS came along, ABARES was forecasting that demand would rise to 406,000 GWh by 2030.

In other words, under NERA terms, the Rudd policies would deliver a reduction in demand roughly equal to removing today’s consumption in Victoria from the mix. A big assumption in itself.

Via the modelling issued by Federal Treasury in early August, it now appears that the Prime Minister and some others in government believe 2030 electricity demand will be around the 280,000 GWh level – and this will lead to mid-century demand around 400,000 GWh a year instead of the 550,000 GWh that is conventional wisdom.

This ignores the industry projection that we are likely to be at 275,000 GWh in 2020. In effect, the Gillard approach assumes a reduction in 2030 demand amounting to scrubbing New South Wales (at today’s demand levels) from the generation mix.

To demonstrate how ambitious this is let me assume that we will have 12 million householders in 2030 instead of 10 million today and their power use stays at 8MWh a year on average – which it won’t if we all driving electric cars by then and if we have all air-conditioned our homes to deal with the warming trend.

Sticking to the current residential average would give us a 2030 household demand of 96,000 GWh a year compared with 60,000 GWh today.

As we are assured by the government that we have nothing to fear about the economic impact of its carbon policies, if we assume this 2030 residential demand level still represents 28 per cent of the total, residential plus commercial plus industrial consumption could be around 342,000 GWh.

This is not much different to what the NERA says – but well north of the Nirvana scenario in the new Treasury modelling.

The government’s present policy is to have the RET deliver 20 per cent of consumption in 2030, so it follows that, even under the official, much-reduced outlook to 2050, green energy output under CEF will have to more than double in the Thirties and Forties. Under a higher demand outcome, it would have to treble.

Bear in mind that the RET should have vanished from the scene by 2030 because of an ever-growing carbon price. It won’t. Vested interests will see to that. But it should, the economists say.

The long and the short of all this is that the government is playing with a set of consumption numbers that are “courageous.” As in “Yes Prime Minister.”

The opinion polls show that most Australians are not buying the policy that flows from such assumptions – but that doesn’t mean we won’t get it.