TiP

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!

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