Archive for October, 2011

Size of the prize

What should we be thinking about at this time?

(Apart from what we would like to do to all involved in the airline dispute.)

Obviously, if the federal government had its way, we should be focused on our “clean energy future.”

I was hugely amused this weekend to come across an academic presentation in which the question is posed: “80 per cent (abatement) by 2050 – aspirational or real?”

That’s the Gillard “clean energy future” pledge, as you know.

Aspirational or real: well, what do you think?

The world “political” might be better than “aspirational,” perhaps? Other, harsher ones might come to mind, too.

However, there is a helpful guide available just now to what, in the very broadest sense, we might be considering.

It raises some fascinating questions about what energy supply level might be involved with an economy achieving its potential.

It comes in the form of a paper published by the ANZ Bank in its “ANZ insight” series and is to be found on its website under this heading.

It is written by Angus Taylor, a director of consultants Port Jackson Partners, and has the title “Earth, Fire,Wind and Water: Economic Opportunities and the Australian Commodities Cycle.”

As a booklet – I found out about it through PJP sending me a hard copy – it runs to 54 pages and there is no way I can do the contents justice here.

These extracts, however, will give you some of the gist of it.

“Australia currently faces one of the greatest opportunities in its economic history,” writes Taylor.

“This is not the stuff of a routine commodities boom.

“If Australia expands capacity rapidly enough, commodity export revenues could reach $480 billion by 2030 in real terms.

“Direct and support sector employment could double, with at least 750,000 jobs created and likely many more.

“To achieve this, investment of around $1.8 trillion is required over the next 20 years.”

As the paper says, its analysis highlights that “the opportunities and benefits can accrue more broadly than is commonly understood.”

(In passing, the only mainstream media report I have seen on this paper said “almost $2 trillion needs to be invested.”

(Can anyone suggest why the report’s actual number would not be used? What’s $200 billion anyway?

(Forgive me for being an old grump, but this seems to encapsulate something that is inherently wrong with journalism these days – like the media reports of the Eraring Energy fire this week in which journalists could not get their heads around the difference between a transformer and generation, but I mustn’t let myself get distracted.)

The importance of the Port Jackson Partners’ paper is that it is the only effort I have seen that attempts to grapple with what we really have as a national opportunity.

It is as far above our day-to-day political debate as Mt Everest is above Mt Kosciuszko.

It engenders in me the desire to yell at the current herd of pollies from all sides – well at least at those in Labor and the Coalition; the Greens are a lost cause — “Look up!”

One of the key points of the paper is that Australia faces “ferocious competition” globally to win the rewards PJP canvasses.

The present federal government’s top leadership has demonstrated time and again how little it understands this.

The paper deals intelligently with the current themes of the public debate, and especially of media coverage: (1) All booms must end and the benefits are fleeting and do not justify structural adjustments; (2) the benefits from commodity export growth are narrowly based; (3) the risk of the “resource curse,” with the creation of a “two-speed economy” creates disproportionate benefits for capital rather than labor, and (4) enabling rapid growth in commodity exports takes Australia back to a “farm,dig and deliver economy.”

You have to read the paper in its entirety to appreciate the commentary. Today, I am merely pointing.

A central theme of the PJP paper is the need for a co-ordinated, whole-of-economy approach to address supply-side bottlenecks, one of which, I’d suggest, is the need to ensure that we don’t stuff up domestic energy supply efficiency over the next decade and thereby throw up hurdles to pursuing this considerable prize.

In the broadest context of global energy policy, Angus Taylor points out that close to 70 million people annually will be added to urban populations between now and 2050, or 2.8 billion people in total. “This process is enormously resource intensive because the infrastructure required uses copious amounts of steel and copper and involves heavy use of energy.”

China, he says, will have 200 cities with populations bigger than Adelaide (my metaphor) by 2025.

Taylor observes that low-cost sources of energy were critical to the development of OECD countries and “the developing world is not in a hurry to substantially increase the cost of its energy.”

The implications for a global approach to greenhouse gas abatement, and for the naïve approach of the federal political leaders to shaping our emissions-related energy policies, cry out for deeper thought.

Taylor argues, in his conclusions, that “focusing on the size of the prize is the framework needed to build common ground” in Australia for pursuing this under-estimated national opportunity.

Compare and contrast this paper with the comment, as it was being released, by the ACTU president Ged Kearney to the effect that structural change in the economy is like the collateral damage experienced by civilians in war.

She called on the Labor government to “moderate the mining boom.”

To me it says absolutely everything about the state of our national debate that so many involved in public comment are focused on the Kearney view of the world rather than the Taylor perspective.

Domestic energy supply is only one aspect of what needs to be managed well to grasp the prize held out by Port Jackson Partners, but it is an important factor – and we cannot pursue this “great opportunity in our economic history” without having a national energy strategy designed to support it.

I urge the 9,000 or so monthly readers of this website to take the time to locate and read the Taylor essay – and to draw it to the attention of as many others as you can.

Heavy lifting?

You get to see some damned fool headlines in newspapers.

Trawling through Google News to catch up on Australian stories about electricity, I came across one from mid-October – when the “clean energy future” legislation was being passed by the House of Representatives. It said: “Today, Australia starts the heavy lifting on climate change.”

Now, as it happens, I had only just downloaded the latest International Energy Agency report on global carbon dioxide emissions.

One of the points highlighted there is a list of the top 10 emitting countries.

Between them they account for two-thirds of the world’s man-made greenhouse gases or 19 billion tonnes of the 29 billion emitted in calendar 2009.

Guess what?

Australia isn’t on this list – it is topped by China and the US, responsible between them for 12 billion tonnes or 41 per cent of world emissions.

The other 7Bt of the top 10 are emitted (in order) by India, the Russian Federation, Japan, Germany, Iran, Canada, Korea and Britain.

The “heavy lifting” our federal government has in mind is a regime that will see domestic emissions actually rise between now and 2020, reaching about 620Mt at the decade’s end, with about 100Mt of abatement to be bought overseas that year.

When you appreciate that most newspaper readers are skimmers, taking in the headline and the first 2-3 paragraphs, you can appreciate how misleading this sort of thing can be.

Yes, yes, now come the green boosters chanting about emissions per capita – but it is the cumulative volume of emissions in the atmosphere that impacts on global temperatures and even taking on 160Mt of annual abatement (our proposed 2020 target, including overseas permit purchases) does not by any stretch of the imagination amount to “heavy lifting.”

Rather more salutary is the comment in the IEA report that, on present trends, the 12.5 billion tonnes emitted by burning coal around the world in 2008 and 2009 will climb to 14.4Bt in 2035 – and emissions from the use of oil will rise from 10.6Bt to around 12.6Bt at that point. As well, emissions from natural gas use will climb from 5.8Bt to 8.4Bt in 2035.

In other words, over the next quarter century, unless there is some humongous international policy development, the “clean energy future” towards which our federal government aspires will be reached in a world where the burning of fossil fuels has resulted in an annual increase of 6,500 million tonnes of greenhouse gases or ten times the Australian average,

What the fudge, as my trio of grandchildren have taken to saying, waiting with huge eagerness to be pulled up so that they can ask what I thought they said!

The one region where there has been a sustained fall in emissions from combustion of fossil fuels to produce electricity and heat has been western Europe – where annual power production since 1990 has risen 35 per cent and emissions (as at 2008, the latest hard numbers) have dropped 4.3 per cent.

Why is this so?

The bureaucracy in Brussels says, first, 2008 was a year where the global economic recession bit sharply in to demand for energy.

Then, the EU utilities have achieved an 18 per cent reduction in fossil fuels needed to produce a megawatt hour of electricity over two decades by closing old coal plants and shifting to new combined-cycle ones.

A big help has been the use of nuclear power.

And, driven by subsidies (some of them very large) and carbon prices, there has been a 54 per cent rise in the EU’s production of renewable energy.

Nonetheless, in the 27 nations of the union, fossil fuels now hold a 52.9 per cent share of gross electricity production (before power stations’ own use and network line losses are taken in to account) and nuclear power accounts for 27.3 per cent.

Back in 1990 fossil fuels accounted for 57 per cent and nuclear 31 per cent.

When you understand that annual EU generation has risen by 625,000 gigawatt hours (or about three times our total yearly output) over two decades, you appreciate that this is a large rise indeed in actual fossil-fuelled and nuclear output.

The EU renewables share has risen from 12 per cent (mainly large-scale hydro back then) in 1990 to 18 per cent now (with hydro still a major resource because of the big Scandinavian systems) – and the EU target of achieving 21 per cent of renewable supply by 2010 has been missed.

However, thanks to nuclear and renewable supply, the EU countries have a collective average carbon intensity of 400 grammes of carbon dioxide per kilowatt hour, about 60 per cent lower than Australia’s.

As a huge hydro-electric development is beyond our reach and even our starry-eyed political leaders won’t embrace a complete renewables take-over of power production by mid-century, the N-word might have to creep in to any discussions of local “heavy lifting.”

To round things off, here is a stat from the new Bureau of Resource & Energy Economics the federal government has set up: in 2009-10 fossil fuels accounted for 89.6 per cent of our gross electricity production.

Go back to 1990 and fossil fuels accounted for 87.6 per cent of production.

Go out to 2030, on the national energy resource assessment published last year, and the fossil-fuelled share is forecast to still be about 80 per cent – the big difference will be that the gas-based portion will have quadrupled from what it was in 1990.

But “heavy lifting” ? Hardly.

In the pipelines

About $4 billion has been invested in, or committed to, gas transmission pipeline development in Australia over the past decade – to which can be added $2.5 billion approved by the energy regulator for capital outlays by gas distributors in the current five-year determination.

While there tends to be a lot of talk about expenditures on electricity generation and networks, which are rather larger, the gas pipeline investment is not exactly small.

The numbers come from federal Resources & Energy Minister Martin Ferguson, who spoke to the Australian Pipeline Industry Association convention in Sydney at the start of the week.

Ferguson was keen to promote “an era of a golden age for gas” and he was helped by the APIA president Peter Cox telling the conference that the expansion of the east coast coal seam gas industry, including the LNG projects, could see $20 billion spent on new pipelines.

Ferguson pointed out that the industry has to date developed 25,000km of high-pressure gas pipelines and another 100,000km of distribution lines.

He highlighted the longer-term prospects as well, forecasting (as proposed in the national energy resource assessment he released in 2010) that gas will account for 37 per cent of electricity supply within 20 years.

(The bottom line here is that our “clean energy future” after almost two decades of government carbon policy, allowing it doesn’t get the axe from the Coalition, will have electricity 80 per cent fossil-fuelled, with coal still accounting for 43 per cent of supply and wind and hydro power making up most of the balance.)

The current political debate over the benefits of the boom ensured that Ferguson was careful to remind pipeliners that, in awarding contracts, they must provide “a fair opportunity for Australian manufacturers and suppliers of both products and services”.

The government intends to require major project developers to be more transparent about what is on offer, but Ferguson emphasized that it will not support mandated levels of local contents.

“Mandates,” he said, “risk making Australian projects more costly, less viable and less attractive.”

He pointed to the Gorgon LNG development in Western Australia buying $14 billion of goods and services so far from Australian businesses.

Picking up Verve Energy’s concerns about having adequate gas available for generation in WA mid-decade, Ferguson said the upcoming energy white paper “will have more to say on this.”

He promised a draft of the white paper before the year’s end and a final document “in 2012.”

Ferguson essentially steered clear of commentary about the “clean energy future” legislation – except to remind pipeliners that a substantial increase in the use of gas for power generation will be “driven in no small way by our carbon price reforms.”

However, he will have been mindful that the joint parliamentary committee scrutinising the legislation received a letter from APIA late last month warning that the gas transmission industry faces “significant contractual impediments” to passing through costs associated with the carbon price.

Contracts running well in to the 2020s in some cases, APIA pointed out, lack adequate provisions to pass on these costs to customers of pipelines and ultimately to gas users.

The core problem is that the government’s measure is not a tax, which contracts allow to be incorporated, but an emissions trading scheme with a fixed price for three years.

APIA sees the negotiations with customers being “protracted and antagonistic” and complains that the situation could have been avoided through better drafting of the legislation.

Of course, Julia Gillard and Wayne Swan have no intention of conceding that their pride and joy is a tax, not with Abbott looming over them

Lines in the sand

Amid the welter of political debate on the “clean energy future” legislation, it is good idea to remind ourselves where we will be in 2020 with or without the policy.

Essentially, we can expect on the east coast to have 85 per cent of electric energy coming from fossil fuels (and about 70 per cent from the two coals) at the end of the decade. A further six per cent will come from long-established hydro-electric projects.

When it comes to reliability of supply, the crucial issue is peak summer demand in the four mainland east coast States (and the ACT).

Broadly speaking, it is expected that NSW (and ACT) peak demand will be close to 17,000MW in 2020 (versus about 14,700MW this summer).

Queensland is expected to reach 14,000MW (versus 10,300MW this summer), Victoria 12,200MW (versus 10,550MW) and South Australia will be a couple of hundred megawatts above its 3,300MW current figure.

In short, the three main consumption States – NSW, Queensland and Victoria – will need about an extra 7,000MW of capacity at the end of the decade to sustain security of supply.

Most industry analysts agree that it will be surprising if this need is not met. Opinions differ on how it will be met.

Politically, it is agreed, the critical issue is going to continue to be the cost of supply.

One way of framing this question is to ask at what stage does the per-megawatt hour end-user cost cross the politically fraught lines in the sand of $300 and $400 per MWh, having only recently passed the $200 mark?

Factoring in the carbon price and related issues as well as whatever the energy regulator does to network charges, the answer appears to be that the $300 mark may be crossed about 2015 and the $400 mark reached before the end of the decade.

This may, in terms of householder average incomes, still not be a dominant factor, but, for politicians more than most, perception is reality and continuously-rising power bills are not vote-friendly.

To extrapolate from something Grant King said in the past week, it may be that the daily cost of all the benefits we accrue from electricity supply will rise to just the price of two cups of coffee a day – instead of one cup today – but that is not an argument likely to resonate with those paying the bills

Hastening the seemingly inexorable march to these price lines in the political sand is not something any sensible government would wish to see happen.

However, the number of uncertainties in the policy/supply mix is large, their complexity is not small and the potential for the Gillard government to shoot itself in the foot is never to be under-estimated.

In this context, it is worth reading a summary segment of the recent ACIL Tasman report to the Energy Supply Association on the impact of the “clean energy future” legislation.

It says: “The CEF will lead to significant increases in uncertainty for electricity generators and retailers.

“It is expected to place pressure on the operating cash flows of coal-fired generators and in some cases to force plant to close.

“It will make refinancing of existing debt of (these) generators more difficult and may cause compliance problems with financial services licences.

“It may result in non-essential plant maintenance being deferred.

“It will lead to a lowering of credit-worthiness of coal-fired generators compared with an environment in which a carbon price is not implemented.

“If the design of the future vintage (emissions) auctions does not allow for deferred payment, this will further stretch coal-fired generator operating flows and may lead to some generators limiting participation in auctions.

“ (There may be) periods in which generators are unwilling to contract or in which retailers may seek to avoid contracting with some entities.

“There is potential for contracting levels to fall for periods of time.”

As the consultants point out, the ability for market participants to manage risk and uncertainty – and hence the secondary markets in hedge contracts – is a critical element of supply.

Lower levels of contracts lead to higher and more volatile wholesale power prices.

For whatever reason, the federal government is being obdurate about requiring payment for forward-dated emissions permits.

The industry is warning that the outcome of just a five per cent reduction in market forward contracts could push up household electricity prices further than the government’s modelling shows – by 20 per cent instead of 10 per cent when the initial carbon tax is introduced.

The National Generators Forum says that annual variable costs of black coal operations may rise 200 to 250 per cent and closer to 400 per cent for brown coal plants without the deferred payment provision.

It will take more than a few cups of coffee to curb the potential hangover looming here.

Age of uncertainty

Origin Energy chief executive Grant King put his finger on one of the most important environmental aspects for the energy sector when he spoke at a Committee for the Economic Development of Australia forum in Sydney yesterday.

We have had a decade of uncertainty, he observed to some 230 attendees, and we can expect at least another five years.

“There will be exactly the same uncertainty the day after (the carbon legislation passess federal parliament) as the the day before. And we will get the (generation) mix that is the consequence of this uncertainty.”

The examples of this uncertainty in the marketplace are too numerous to catelogue here, but one example missed by the mainstream media in dealing with the information that floods out of the Senate estimates committees’ hearings, currently underway in Canberra, is that, as of Wednesday, there had been no bids to the federal government under its generation closure program.

The deadline for bids is today (Friday, 21 October).

As Department of Resources & Energy officers told senators, the government wants to have closure contracts finalised by 30 June next year.

Because the closure plan has been framed to exclude black coal generation, the big plants in New South Wales and Queensland, between them meeting half of national electricity supply, will need to go to the yet-to-be-established Energy Security Council to seek help if the carbon price lands them in the you-know-what.

Yesterday also saw the Energy Supply Association re-iterating its argument that the government’s insistence on forcing immediate carbon payments for the energy generators buy under forward contracts could lead to a big rise in power prices. ESAA notes that two years in a row of this impact could dwarf the other effects of the carbon price.

The government is obdurate on this point — not least, perhaps, because it can garner billions in revenue from this ploy and lotsa millions in interest before it has to pay the related compensation to householders.

One of the biggest uncertainties is what the price of carbon permits will be once the initial set price period is completed and emissions trading kicks in.

Senate estimates this week saw much ducking and weaving from Treasury officers, aided and abetted by Finance Minister Penny Wong, on this issue and the potential hole in the federal budget if the promised compensation gets way ahead of the incoming year-specific permit revenue.

(If you are sufficiently mad or lacking other things to do, you can find the Hansard report of the exchanges on the Senate website under estimates hearings.)

Independent Senator Nick Xenephon pushed for a response on the recent Bloomberg New Energy Finance prediction that the international price of carbon in 2015 will be $16 a tonne, not $29 as forecast by the Treasury, and that this will leave a $4 billion hole in the federal budget.

The nearest he, or other senators, got to an answer was a concession from Treasury Secretary Martin Parkinson that: “If the carbon price is dramatically different from what is assumed, and people purchase the permits from overseas, there will be an impact on revenue collection.”

The political hassle in this issue was summed up in an exchange between Xenephon and Parkinson in which the bureaucrat acknowledged that the compensation for households is fixed.

However, Wong and her cabinet colleagues would be less than human if they did not privately think, given the opinion polls,that a big fiscal hole in 2015 is not something they need be too worried about.

On that score, the age of uncertainty is all the more uncertain because of the tottering state of the Gillard regime.

A thousand dollars for each of the rumours I have heard would make a tidy contribution to my retirement fund.

The current suggestion doing the rounds goes like this: (1) the ALP fixers will move to oust Gillard around next Easter, (2) her replacement has to be Rudd because he would remain a huge problem for any other choice, (3) an even bigger problem than carbon tax north of the Murray is the pokies issue and Rudd will tell Andrew Wilke to get stuffed asap, (4) the ensuing instability will enable Rudd to ask the Governor-General for a winter election, and (5) although the ALP will still be odds on to lose, it will be a defeat not a train wreck.

A victorious Abbott, of course, will insist that he has a mandate to junk the “clean energy future” legislation – and whether it goes will depend on who is then leader of the opposition and how he (the alternatives are all hes) and the new shadow cabinet will view their options.

So the conventional wisdom in the industry at the moment that the carbon regime will be well in place by the time a scheduled election rolls round in late-ish 2013 may turn out to be a chimera.

If you are an investor in electricity generation, how do you plan for this situation?

The potential responses are made the more complicated by what else is going on.

The second-largest regional market, Queensland, will go to the polls in early 2012, with Bligh facing defeat, so there will be lots of issues there.

The third-larget market, Victoria, needs to know whether and when any of the brown coal generation will close. New gas-fired projects must wait on that outcome – and the Baillieu government, meanwhile, is in a stand-off with the wind sector.

The largest market, New South Wales, will move to a new environment once the Tamberlin report is handed down on 31 October.

It is widely anticipated that the judge will tell Barry O’Farrell that (a) the Keneally gentrader deals can’t be undone and (b) the best trick is to sell its generation portfolio.

A lot of the current media fuss over O’Farrell selling the networks businesses misses the point that his first need there is to take action to cut about $400 million from their costs so he can keep some election promises.

Post-Tamberlin, the sales focus can be expected to be on generation.

Immediately, the fate of Snowy Hydro is an issue that can only be resolved by agreement with two other governments – the other shareholders are the federal and Victorian governments.

As well, the ACCC, in new, feisty mode under Rod Sims, can be expected to have a thing or three to say about giving large slabs of generation to the private sector because of market dominance issues.

A carve-up of Macquarie Generation and Delta Electricity would be the ACCC’s bottom line.

The core market situation in NSW these days is the rivalry between Origin, TRUenergy and AGL Energy, so a new round of genco sales in the State would re-ignite this issue in no small way.

Meanwhile, as the months pass, we move towards another July round of substantial consumer price increases, mostly because of the higher network charges already in the pipeline.

Grant King, in a carefully-scripted CEDA talk in which his main purpose was to give some curry to those attacking the coal seam gas industry – “much of the discussion is not troubled by the facts” – and en passant to the media for their coverage of the issue, said he and Origin did not believe that the cost of energy “will become more burdensome.”

Personally, I can’t see the heat going out of the power prices issue any time soon – and it is how governments, notably those in Queensland and NSW, react to public and media angst about these costs that is likely to keep the pot boiling, a situation to be exacerbated by the inevitably acrimonious debate over network regulatory rules (see my previous posts).

Please keep your seatbelts firmly fastened.

Raging against RET

There is a one-liner in the latest polemic against the green power movement that sums up the more general antagonistic perspective to these forms of energy in some quarters: “Australia’s renewables subsidy policies have been costly and at users’ expense.”

The second half of this accusation, frankly, is a statement of the bleeding obvious: at who else’s expense would any subsidies of any form be provided?

The call for government to meet a larger part of the subsidy cost for renewables is simply another way of saying that the expense should be loaded on householders/individual taxpayers – who use 28 per cent of electricity – and not also on to large energy-intensive industry, which uses about a third of the power supply or commerce, which accounts for 24 per cent.

Politically, this won’t wash – and it is one of the reasons the Coalition is running so hard against the proposed Clean Energy Finance Corporation, which will obtain its $10 billion in hand-out money from the federal budget.

Also, politically there is no chance of the Renewable Energy Target being ditched. Tony Abbott has made it clear the Coalition will keep the RET while seeking to kill the carbon tax.

All that said, the large energy users’ angst about the strong upward direction of Australian power bills is not hard to understand.

It is a substantial input cost going in the wrong direction at a time when global economics are pear-shaped and the value of the Aussie dollar is not working in their favour while productivity is nowhere near as good as it could/should be.

However, it is necessary to get the cost perspective right.

The outlook can be paraphrased like this (the numbers are taken from the Port Jackson Partners presentation to a recent conference, previously reported on this site): the current east coast cost of electricity is on average $204 per megawatt hour and it likely to rise to $363 in 2017.

The key factors in the increase are ongoing network charge rises – up from $97 per MWh to $169 in the PJP figuring – and wholesale energy rises (up from $74 to $149) as a result of changes in fuel costs and the introduction of the carbon price.

The RET cost factor is relatively small: $8 per MWh now and $9 in 2017.

The projected rise in retail costs and margins (seen to be going up from $25 per MWh to $36) is higher than the total RET cost.

Even if you assume that the efforts being pursued by the ACCC and the Australian Energy Regulator to curb network outlays succeed in reducing the rise in these charges by a third and Abbott succeeds in killing the carbon tax, the overall outcome, by my calculations, will still be an increase in power costs of about $110 per MWh over the next six years.

Of this, the projected RET increase will be one dollar.

The overall projected cost rise is undoubtedly a very important issue for large energy users (as well as the rest of us).

Focussing on the RET and network charges is only part of the picture.

Focussing so much on the RET smacks of ideology rather than anything else.

Factored in to all this needs to be the thought that the emissions abatement the government estimates will be met through the 2020 RET will be about 29 million tonnes annually, half what it expects its policies to deliver in domestic abatement, which in turn is about 40 per cent of the overall national emissions “budget” proposed for 2020 – and failure to deliver the RET will require still more permits to be bought overseas under the emissions trading scheme.

(Lost? The government’s 2020 emissions target of five per cent below 2000 levels requires, it says, a 160Mt annual cut of which, it says, 59Mt will be sourced here and the balance bought overseas in permits. The RET is supposed to deliver 29Mt of the 59Mt.)

One cannot set aside – unless you are a Labor or Green political leader – the argument from the nuclear lobby that there is a better way to deliver zero-emission generation, but it is not going to contribute at all between now and at least 2025.

And it would need a not insubstantial carbon price to be viable.

One burdensome current thought for business and householders is that, because of the messing about with the RET scheme through the federal government’s ill-considered small-scale solar arrangements, this 2020 target may well not be met and the penalty rates that kick in will be expensive.

(And the small-scale RET continues to be a sneak thief, too, with no-one at all sure what its costs will really be this decade, but many worried that they will be quite large and come at a silly cost per tonne of abatement.)

The report on renewables from consultants Carbon Market Economics, commissioned by the Energy Users Association, that is getting publicity this week calculates that large-scale renewable generation (ie mainly wind farms) will need to deliver 607,000 gigawatt hours of power cumulatively between 2011 and 2030 – this is roughly equal to three years of annual electricity consumption today.

EUAA points out that satisfying this requirement will need to see an additional 9,500MW of wind capacity constructed over the next 10 years at a capital cost of $30 billion.

(By itself, this is two-thirds the capex cost of the controversial national broadband network and it can’t be a stand-alone expense because of the need for open-cycle gas plant and extra transmission links to make the wind farms viable in the east coast market.)

The resource seems to be available.

The consultants say there are 19,000MW of possible wind farm developments under corporate consideration – with six companies accounting for about half of the projects. (They are Infigen, Epuron, Transfield, AGL, Pacific Hydro and Union Fenosa.)

Carbon Market Economics adds: “However, the majority of (the 19,000MW list) are highly speculative projects from under-capitalised, opportunistic developers, many of whom intend to on-sell developments or act as contractors, service providers or suppliers to others.”

“Furthermore,” it says, “the economics of wind development has yet to become attractive. Average spot prices in the electricity market are currently around $40 per MWh. Even after adjusting for the higher spot prices a $25 per tonne emission price may bring, (REC) prices would need to rise to at least $53 and be sustained at this level in real terms for the next 20 years to make investment in wind generation financially attractive.

“With spot REC prices currently around $40, there is likely to be a reasonable gap to be bridged for many wind farms.”

The EUAA is keen to hammer home the point that the carbon abatement cost of the RET is about $76 per tonne, a lot higher than the formal carbon price. But this includes the disproportionately large cost of the small-scale (solar) RET – accounting for 30 per cent of the total burden.

However, the claim – it’s in the heading on the association’s media release – that electricity users are “paying big costs to support renewable energy” is somewhat misleading when you look at the numbers I have set out above

Rudd on energy

Given how much media interest there is in Kevin Rudd, it is notable that a recent speech on energy more or less has been ignored.

Speaking in Brisbane on 14 October, Rudd noted that we can expect other economies around the world to continue to demand vast quantities of energy from reliable suppliers like Australia.

Large companies, he noted, continue to invest big sums here in resource development. “With coal, LNG and uranium, we will still be an energy super-power in 2020 and 2030.”

He pointed out that the value of our energy exports has increased by an average of 10 per cent a year since 1988-89 – and could have added that this economic river of gold is fed by the energy sources the Greens love to hate: coal, gas, uranium and (often forgotten) condensate found in association with natural gas offshore.

As he said, we are the world’s largest exporter of coal, third largest exporter of uranium and fourth-largest exporter of LNG.

What he didn’t discuss, although Martin Ferguson often does, is our rising reliance on importing liqued transport fuels – nor, of course, the carbon price issue of whether local refineries can stay viable.

In raising the issue that the ability of economies to access the supplies they need (at the costs they can afford, I’d add) on the global markets is a critical issue, he might have considered that the coal seam gas-based exports from his home State that the Greens and others are trying to trip up are vital to us, along with other energy exports, in helping to defray the costs of transport fuels we import.

Of course, he sang the modern version of the ALP’s domestic anti-nuclear theme — we do not need nuclear power here as we have “a full range of other energy options” – but he was happy to observe that Australia is well-positioned to continue selling uranium to other countries, pointing out that 65 new reactors are under construction even as Germany and Switzerland move away from nuclear generation.

He acknowledged that the non-nuclear, clean energy sector still faces technologoical challenges, notably storage to support solar power, and argued that Australia needs to be at the forefront of pursuing innovation.

“We must be at the forefront of clean energy research so we can capitalise on future market opportunities in a carbon-constrained world.”

Fair enough to say, but he and the government would be hard-pressed to demonstrate how we move from where we are today to the “forefront” – our efforts are modest, to put it mildly, and the schemes in place, as I keep pointing out, are not going to deliver a “clean energy future” in 2030 or 2050.

The elephant in the room for Labor remains its inability to square its “clean energy future” stance with its stubbornly weak position on local nuclear energy.

But, in a point that should have some resonance with the boosters of command development of technologies here – if they were listening, which they aren’t – Rudd also emphasized that energy security is “best advanced through open and efficient trade and investment, driven by the market and underpinned by effective competition.”

It is not a speech to get the political commentariat in a lather, but it is worth reading by serious observers of energy issues – it is up on Rudd’s portfolio website – and it contains a couple of decent quotes.

One is “We live in a world that is changing before our eyes and energy is its lifeblood.”

Now, in ending, I need to correct something I wrote in the last This is Power post on nuclear energy. I misinterpreted some numbers presented by Martin Nicholson.

The $82 billion price tag I had him placing on building 25,000MW of nuclear reactors here should have been $147 billion – the lower figure is reached by factoring in the $65 billion not spent on building coal and gas generators with carbon capture and storage.

Little nuke game-changer

I have written more than once before that the law of unintended consequences has a way of tripping up politicians and it is intriguing to contemplate that the current “clean energy future” moves may yet have an outcome that is anathema to the Greens and the left wing of the Labor Party.

Their demonisation of coal, and current obsession with opposing coal seam gas, pales by comparison with their aversion to nuclear energy, but policy they have unleashed may conspire to quicken the prospects for their ultimate betre noire.

Whatever else the past five years’ debate about carbon policy has achieved, it has cemented a mainstream political commitment to reduce national greenhouse gas emissions – the much-quoted 2020 target of being five per cent below 2000 levels at that point, which is less than 3,000 days from now.

The “clean energy future” policy of the Gillard government, of course, as is now revealed, will not come anywhere near achieving this level of domestic abatement; so almost two-thirds of the target will need to be sourced overseas.

I can’t get my head around how the Coalition plan to deliver on any such target either, although the RET (to which they are committed) and their “direct action” intent would, I think, deliver pretty well the actual level of abatement flowing from the government’s plans.

Put this another way, I think we can say that both main political groups have plans that will deliver about 50-60 million tonnes of abatement around 2020 – but that’s nowhere near the target number.

Looming large behind the near-term goal is Gillard’s recent commitment to reduce emissions by 80 per cent by mid-century and the slowly emerging realisation that this, as proposed, will come at an enormous economic cost.

Martin Nicholson has sent me some analysis he has undertaken of the long-term permit purchase costs. His full commentary is now published on Professor Barry Brook’s “Brave New Climate” blog.

(Brook holds the Sir Hubert Wilkins chair of climate change at Adelaide University and, speaking at the “Powering Australia” conference in Melbourne late last month, suggested the debate in Australia will shift towards embracing nuclear power by 2020, leading to the first reactors being commissioned here in the second half of the next decade.)

Nicholson’s estimate, based on the Federal Treasury modelling, is that (in today’s money values) the Gillard + Greens policy requires Australia to buy 9,100 million tonnes of overseas emissions credits at a cost of $716 billion over four decades.

This is an enormous deadweight loss to the national economy.

(As Nicholson reminds us in his paper, the “clean energy future” policy still has 45 per cent of national electricity generation coming from coal-fired generators in 2030 – and, I add, nearer 80 per cent from fossil fuels when you include gas-fired generation – and 26 per cent in 2050.

(Remember these are percentages of much higher supply numbers than today, although I take leave to doubt, as I have written here before, that the Treasury’s – lowered – demand levels are practical.

(The modelling envisages 11,000MW of coal plant and 10,000MW of gas plant, all fitted with carbon capture technology, in operation in 2050.

(The government claims the level of renewable energy in the generation mix will more than quadruple to 47 per cent over four decades – which, of course, leaves 53 per cent not renewable in our “clean energy future.”)

In this environment, nuclear is worth further consideration – and is a topic on which the Committee for the Economic Development of Australia plans to issue a commentary early next month as part of its 2011-12 review of energy options.

One can come up with all sorts of capital costs for nuclear developments at present.

Nicholson canvasses the range and, using South Korean reactors, points out that 25,000MW of nuclear plant could be built here for up to about $82 billion.

For this outlay, he asserts, Australia could save up to $185 bill in overseas abatement permit purchases by 2050.

Shift focus now to the United States where Senator Dianne Feinstein – a sort of Democrat version of Bob Brown representing (where else) California and important in American politics because she chairs the US Senate panel that oversees government spending on energy technology – is high on her horse over a proposal by Barack Obama to support a program to promote small, modular nuclear reactors.

Her panel has rejected the idea.

Feinstein, like Brown and his crew, prefers throwing money at renewable energy.

Awkwardly for Obama and the Democrats, one of the beneficiaries of subsidies, a Californa-based solar panel manufacturer, has just gone belly-up, taking with it $US535 million in government loan funds.

Small modular reactors – SMRs in the industry’s jargon – actually have a slight Australian connection in the US at present.

One of their leading proponents is Paul Lorenzini, chief executive of Oregon-based NuScale Power and for a time in the 1990s CEO of Victoria’s Powercor Australia when it was under American ownership.

Lorenzini, a nuclear engineer, gave evidence to Feinstein’s committee in mid-year about the 45MW SMRs his firm is promoting.

He has 10 large American utilities interested in the technology at present, attracted by the relatively low capital costs, strong safety features and its ability to allow capacity to be added to the power grid incrementally to match load growth.

Lorenzini’s argument is that SMRs can serve the (American) national goal of bringing to market a non-carbon source of baseload electricity with a moderate cost with the bonus of being suitable for regions not accessible to larger reactors – while taking nuclear safety to the new levels demanded by a post-Fukushima world.

(The same words could apply here.)

Units this size are able to supply enough power to support about 70,000 homes – for context, Darwin has roughly 45,000 homes.

The technology has a feature of particular Australian interest.

It is air-cooled.

SMRs do not have to be located on the ocean front, near lakes or on river banks.

France, China, Japan and Korea are all considering the potential of SMRs and looking at developing designs for a world market.

Here in Australia, a project is under way to evaluate SMRs for local use. It involves the Warren Centre for Advanced Engineering, WorleyParsons and ANSTO.

“SMRs can change the game,” a US Department of Energy scientist said before Senator Feinstein put the kibosh on American funding proposals at least for the next year.

They could here, too, with a lot of unintended help from Gillard and the Greens.

So what’s next?

The need for the 24/7 mainstream media to live in the moment means that we are now seeing a lot of color and movement politically over the carbon price, but not a great deal of sense of direction.

Assuming that the Senate passes the “clean energy future” legislation – a misnomer that I suspect will come to haunt the ALP, down there with Hawke’s notorious “no child will live in poverty” pledge – what happens thereafter?

Well, initially not much, except for the gloating of the environmentalists for a time.

The first egregious effort in this regard can be found on the ABC’s “The Drum Opinion” website in the form of a weekend commentary by green writer Ben Eltham. Its heading says it all: “Sniff this, business lobby: the ordourless whiff of defeat.”

The Gillard government will need next to move legislation through the parliament to set up its $10 billion slush fund, the Clean Energy Investment Corporation, the Greens’ price for passing the carbon regime the second time around.

This will open the way away to another loud debate about cost impacts on consumers and use of taxpayers’ funds. For energy retailers, the serious issue will be whether the beneficiaries of the CEFC subsidies will also be able to obtain RECs under the Renewable Energy Target, further depressing their value?

If they can, the perverse outcome may be that the 2020 RET goal proves almost impossible to attain as the REC prices fall again.

From a government perspective, the next big deal is to be able to go to the UN climate change conference in Durban, South Africa, and strut its stuff, imitating Rudd’s “triumph” at Bali. The fact that Durban will not deliver any more genuine developments than Copenhagen (in a sense Rudd’s Waterloo on this issue) – something that will be heavily disguised by the interested parties in December no doubt– will be glossed over.

Part of 2012 will be taken up with the first biennial review of the RET, with the Greens likely to be pushing for a higher target and large end-users, economic rationalists and others demanding that it be phased out with the introduction of emissions trading. (This isn’t going to happen, not least because Abbott has declared the Coalition’s support for the existing RET, which runs to 2030 by the way).

Early in 2012 we will see the Queensland State election, with a high likelihood of the Bligh government being defeated. The size of that defeat will matter a lot federally – personally, I am unconvinced that Bligh has performed so badly that Queenslanders will want to do to her what we in New South Wales did to Keneally, but who knows?

The federal Coalition will paint the loss as being at least partly attributable to the carbon price in a State where it is claimed to hit hardest.

A large, new distraction in the energy arena before long may be a decision by the NSW government to privatise the electricity generating sector and even the networks.

The Tamberlin report (due at the end of the October) is the first stepping stone here.

If the O’Farrell government decides on a sale, we can expect privatisation to emerge as a debating point north of the Tweed ahead of the Queensland election, too.

In both States, the large impact of the carbon regime on tax transfers and dividends from the government-owned black coal generators, thereby cutting in to funds for use in other areas, will not be allowed to pass unnoticed.

A federal government decision on a national energy efficiency scheme is a 2012 possibility – it must add more cost to householders’ bills – and a decision on demand-side participation (being considered by the Australian Energy Market Commission before its recommendations go to the CoAG energy ministers) is also in the offing.

Looming over all this is the issue of rising electricity prices.

July 2012 and July 2013 will see ongoing increases, flowing to a large extent from the existing network regulatory determinations, but there will be other factors, including the impact of green power schemes.

By 2013 the first of the new determinations (for 2014 to 2019) will be emerging from the Australian Energy Regulator, based on whatever rule changes it and its big brother, the ACCC, can push through.

The absolute certainty about this is that there will need to be many billions of dollars outlayed on new capex and further power bill increases will result.

We can expect a whole lot of hopping up and down by all concerned between now and this time next year over the network rules changes, complete with misleading media interpretations of steps to “slash” prices.

Expect someone to drag in the “perfect storm” metaphor for July 2013 when the carbon price arrives along with the next tranche of network charges (from the current determinations) and higher RET costs and so forth – at a time when you would assume that the Labor federal government is heading to an election.

I carefully did not say the Gillard government.

The likelihood of the government hanging on till 2013 is reasonable so long as no-one in their ranks dies, is arraigned by the police or spits the dummy and walks – and so long as Andrew Wilke does not ditch them over the pokies issue.

To this veteran political reporter Michaell Grattan has added in The Age newspaper this weekend the thought that a return of Kevin Rudd could see a snap election – which he could be expected to lose – and perhaps a move before mid-2013 by a victorious Coalition not to introduce the carbon regime.

(So much for the current parliamentary decisions delivering certainty for business.)

Gillard’s chances of survival as PM certainly seem flimsy.

Whatever, as my eldest grandson is now wont to say, this is all in the realm of speculation – the energy developments are more clear.

To what I have listed above, of course, you can add some move by the federal government to purchase closure of a brown coal-fired power plant or two in Victoria and South Australia, something that will have all numbers of people jumping up and down for differing reasons.

By 2013, too, there had better be some resolution of construction of a new power station in NSW or there will be a new set of horror stories about impending supply problems. Just bear in mind that $23 per tonne carbon price is not enough to underpin a substantial gas-fired baseload plant and that there are issues with ongoing coal supply and with contract prices.

We can also expect continuing ranting about coal seam gas to have reached a higher pitch in the next 12 and 24 months.

This issue brings together a somewhat odd combination of deep greens, agrarian socialists, investment xenophobes, NIMBYs who are not necessarily green and media personalities.

It will run and run.

Given that not building new coal plants means that we are heading, as Martin Ferguson has pointed out, towards gas providing about a third of generation (more than double its present level) by the decade’s end, this is not a trivial issue.

As well, a “known unknown” in all this is the decisions energy-intensive companies are going to make about investment here in the light not only of the carbon price but also issues like the dollar value, the growing intransigence of the union movement (don’t under-estimate how this is playing in board rooms overseas – we have been here before, not least under Whitlam, and the effect is real and hurtful), the difficulty and the cost of finding skilled workers and by no means least the expectation now that power prices will double between 2011 and 2017.

This will become a bit more clear over the next two years as we approach the carbon price introduction date – and every corporate decision will be the subject of fevered political and media attention.

The government will not be helped in this regard by the Business Council’s (correct) catchcry that the new laws impose “one of the highest costs of carbon on the planet.”

The European emissions permit price is down around $10 at the moment, having been at under $20 during the two years of the global financial crisis.

As a Deloitte study for the Business Council has pointed out there are significant consequences for the government’s budget if the emissions price – when trading arrives in July 2015 – is way below the value on which compensation is based.

Plenty of room for political mischief-making in this.

My Irish grandmother used to warn me 60 years ago to be careful what I wished for – I might get it!

It seems to me that Julia Gillard and her government finds themselves in that position.

EVs, DSP and us

Needing a nice, quiet distraction after watching the nerve-wracking Wallabies/Springboks rugby world cup quarter-final on Sunday afternoon, I took myself on to the Australian Energy Market Commission’s website to read the replies to its consultation on “Power of consumer choice,” something I had been meaning to do for a while.

Far from falling asleep over the the twists and turns of the demand-side participation debate, I found a really interesting set of commentaries – 45 submissions in all (nearly half of them late, the commission grumpily observes).

The next step in the review is for the AEMC to produce a “directions” paper in November, arguably one of the more important steps in this year of shouting about electricity and carbon.

What’s at stake in this part of the debate is set out bluntly by the Australian Energy Management Operator.

“Energy efficiency and demand-side response are considered some of the most efficient means to address the growing problems of energy consumption and carbon emissions,” it says. “A number of large international companies are spending huge sums (on the issue).

“AEMO believes it would be dangerous for the AEMC to set the national (that’s east coast, of course) energy market on a path that assumes a particular range of technologies or delivery mechanisms. (The commission) should concentrate on the framework and not specific solutions.

“Any approach that attempts to only consider the current views of technologies and responses runs the risk of either blocking new and more efficient solutions or building an expensive solution that could be left stranded.”

Belting off down such paths, of course, is exactly what governments in Australia have done with rooftop solar power, leaving a strong alternative Australian technology on the sidelines.

Ceramic Fuel Cells Limited’s gas-fired BlueGen technology, according to CSIRO, can save 14 tonnes of carbon a year when replacing a gas hot water unit in Victoria (and more if replacing an electric system) versus 3.2 tonnes for a two kilowatt solar PV array.

In Sydney, the unit has been installed in Ausgrid’s “Smart Home” showcase – in its first year of operation it delivered 10,735 kWh of electricity and saved 5.7 tonnes of carbon dioxide compared to grid power.

CFCL argues in its submission that a review of consumer choice must extend beyond using electricity to generating it. And not, one would add, having politicians lunge for popularity by embracing just one technology, solar, a move that has amply demonstrated how poorly policymakers can address issues when chasing votes.

The submissions add up to well over 1,200 pages, so there is no way I can do the contributions justice here.

The following are just a few points cherry-picked from the input.

After a big complaint about the lack of competition in the east coast market, the Major Energy Users lobby group tells the AEMC that its big challenge in attempting to improve the active participation of consumers is to make it attractive and rewarding to do so.

Market designers, it says, have sought to encourage behavioural change in suppliers but have failed to recognise that incentives are just as necessary for users.

On this point, the National Generators Forum observes that customers value their consumption of electricity at present more than the revenue from a DSP contract. “But don’t,” the generators warn, “try to artificially bias DSP over other supply options.”

Malcolm Roberts, the NGF executive director at the time of writing its submission and now en route to the Energy Networks Association to become its chief executive, proposes that the critical question for regulators is to accurately assess the willingness of consumers to change their behaviour before changing the rules.

The carbon price, he points out, is going to provide a strong price signal and it is anticipated (by the NGF) that this may elicit – not “illicit,” Malcolm, in what may be a Freudian slip – significant changes in consumption.

(That’s what the Federal Treasury thinks too, one assumes, given that its demand assumptions for 2030, as illustrated by fresh modelling information released late in September, claim consumption way below the level set out in the federal government’s national energy resource assessment published in March 2010.)

The market, says Roberts, needs a stable period after the new tax comes in – next year – to see how it affects behaviour.

Jim Gallaugher, a Victorian electricity industry veteran, highly regarded as both a supplier manager and a consultant over more than two decades, is on a similar track. “The starting point must be learning about what drives consumer behaviour,” he urges the AEMC.

In terms of market structure, Gallaugher also points out that one of the most important aspects for future DSP success is the issue of commercial separability from energy purchasing in the retail sector. Remember, he says in effect, in the brave new world of competitive markets, the roles of retailers and networks have moved apart and each now has its own agenda.

SP AusNet from its corner claims that networks are potentially best placed to assess, optimise and manage the risks and opportunities of technology change in this area.

“It is imperative,” it urges, “that networks are not restricted from active participation in the DSP market if long-term benefit to consumers is to be maximised.”

Both Ergon Energy in Queensland and Ausgrid in NSW – each government-owned — think that disaggregation in the east coast market has contributed to lower than expected levels of DSP.

Vertically-integrated utilities overseas appear to undertake more demand-side initiatives.

Only about 3.5 per cent of installed generation capacity on the east coast represents registered demand response.

Given that re-integration here is not likely, Ausgrid wants to see new regulations focussing on “a suitable party to act on behalf of consumers and the supply chain” to pursue reductions in peak demand.

The current push to introduce “smart meters” comes in for a towelling from International Power Australia – GDF Suez.

“Technology is needed to enable DSP,” it says, “but currently smart meters are being implemented in a dumb way and do not provide price information to consumers nor are they able to control appliances on the customers’ behalf.”

It wants to see consideration of expansion of the system to allow customers’ loads to be limited to an agreed maximum demand – but it doesn’t want the role exclusively assigned to networks.

There lots and lots more in the submissions, well worth reading.

One of the most interesting is a contribution from Better Place arguing that electric cars could be one of the best sources of DSP in Australia and that aggregators like it could provide large-scale, fast and geographically targeted demand responses.

It warns, too, that without regulatory intervention to bring this about, electric car charging will worsen load shape and increase the burdens of investment in networks and generation as there is rapid growth in take-up of EVs over the decade ahead.

“The arrival of mass-market electric cars is a big new challenge for the Australian electricity sector,” Better Place says. “The question for the AEMC is how demand from EV charging will be integrated in to the market.”