TiP

Having been a member of Martin Ferguson’s 25-member energy white paper reference group for a number of months, it was not the content of the long-awaited draft, published on Tuesday, that interested me so much as the reactions to it.

And I was not at all surprised by the responses of the environmental movement, led by Senator Christine Milne.

The Greens deputy leader is demanding that the white paper be “totally rewritten” because it will keep Australia on a “backward and risky business-as-usual path of coal, gas and uranium.”

More difficult for Prime Minister Julia Gillard is Milne’s claim that the draft white paper is on a “collision course” with the carbon package she and Bob Brown negotiated to enable the minority ALP government to exist.

Do we know all we should know about the Brown/Gillard pact?

Perhaps what infuriates Milne, the Greens and the greenies most of all is Ferguson’s frank acknowledgement after a Committee for the Economic Development of Australia breakfast – at which he publicly launched the white paper – that, while the government will not embrace the domestic use of nuclear power, it is “always there” as an alternative if the current drive towards cleaner energy for power generation doesn’t work out.

In a commentary in the Australian Financial Review on Wednesday, Stephen Martin, Ferguson’s former parliamentary colleague and a former Speaker of the House of Representatives, now the CEDA chief executive, admirably summed up the alternative view:

“Setting targets and spending billions on renewable energy research and programs may contribute to a cleaner, greener future,” he wrote, “but, as we move in to a carbon-constrained economy, nuclear must be recognised as a viable option. Tough decisions need to be made in the national interest. Nuclear energy provides a proven, low-emission, low-cost technological option at a time when there appears to be no others.”

From my perspective, one of the important features of the draft white paper is that it lays out for Australians the scale of investment needed to maintain electricity supply security over 20 years.

Just for new generation, this is forecast to be $80 billion (in today’s money values). By comparison, the power station outlay since 1998 has been $12 billion (in dollars of the day).

Today’s most sensitive issue for the community is the cost to them of electricity and both the white paper and Ferguson’s CEDA speech drive home the point that end-user bills will continue to rise.

Because network charges are half the final power bill, the foreshadowed $24 billion over 20 years on transmission capex and $120 billion on distribution infrastructure development is the most critical factor in the rise and rise of end-user costs.

(What the paper is saying is that, overall, we are considering outlaying $12 billion annually – in today’s values – every year for two decades, which sounds staggering until you understand that the sector has been investing $10 billion a year since 2007.

(We are already well and truly launched on this path – the paper could have easily commented that we are going to spend $300 billion over 25 years, starting five years ago.

(If the government and its modellers are under-estimating what demand will be in 2030-35, the outlays will be even higher.)

How efficiently this capital investment effort is pursued is a critical issue – and the problems poor planning and implementation can inflict are on display in Victoria this week where there is a new furore over the costs of installing smart meters, an exercise badly handled by the past Labor government.

This applies equally in the east coast market, home to nine-tenths of demand, and in the fast-growing south-west Western Australian system, riding the resources boom – and will depend strongly on how good the suppliers are at their work as well as on the impositions of politics and regulation.

Perhaps surprisingly, Ferguson has taken the government and the draft white paper out on a political limb by stating without equivocation that the task is best managed by the private sector.

The paper says: “Continued government ownership of energy businesses is impeding greater competition and efficiency and reduces market confidence by creating uncertainty and risk for private sector investors.”

In saying this, the federal government depth-charges the New South Wales ALP, which is campaigning along with the unions, against the O’Farrell proposal to sell the NSW generators – and it also rattles the bars of governments in Queensland (facing a March State election), Tasmania (where the ALP is in formal coalition with the Greens), NSW (where O’Farrell clings to ownership of the networks because of a foolish election pledge) and Western Australia.

Of course, the first casualty in a renewed debate on this issue is realism on costs.

Contrary to what is already being portrayed in the media, Ferguson is not asserting that handing the job to the private sector will lower costs, but that the absolutely inevitable rises in bills will be somewhat more constrained if doing the building and supplying is left to private investors.

I can see no way, other than very dangerous interventions by politicians or equally dangerous clamps on upgrades and refurbishment by regulators, that we can avoid end-use electricity bills being double in 2020 what they are today, especially when you factor in carbon charges and the costs of green energy subsidies.

Decoded, that’s what Ferguson means when he says the era of cheap energy is over.

The political difficulty involved in privatisation is demonstrated by the immediate kneejerk reactions at State level from conservative and ALP governments alike, but it is an issue that, like the nuclear option, will not go away.

One of the best early reactions to the white paper can be found on Business Spectator under the byline of Stephen Bartholomeusz (see ‘Averting an energy policy crisis” on their website).

It’s worth reading in full.

In context here, I note Bartholomeusz’s comments that: “(The paper) depicts in some detail the ad-hocery that characterises energy policy and the urgency to develop more coherent approaches to tackling energy costs and security.”

The incoherence is especially well illustrated in the reaction by the Greens and their camp followers to the role for carbon-based fuels that the draft white paper foreshadows.

The paper’s appearance has co-incided with publication by the Bureau of Resources & Energy Economics – part of Ferguson’s portfolio – of the generation outlook to 2035.

(I have written a commentary on this in Business Spectator, published on Tuesday under the heading “Australia’s clean energy dawdle,” which challenges Greg Combet to defend his post-Durban spin in the context of the BREE data.)

Far from “not concentrating enough on renewables,” as Milne charges, the white paper, looking out to 2050 and using the Treasury modelling, notes that some 260,000 gigawatt hours of new energy supply will be needed annually by mid-century, representing up to $225 billion (in today’s money values) of generation investment, almost half of which would be in renewable generation.

(The balance would be in gas-fired and coal-fired plant equipped with carbon capture and storage technology.)

In this scenario, geothermal power would deliver 50,000 to 80,000 GWh a year, wind farms 45,000 to 60,000 GWh and large-scale solar 10,000 GWh.

“To get a sense of the effort required to reach such levels,” says the white paper,”there is currently no significant Australian CCS, large-scale solar or geothermal capacity in operation today and wind power contributes 6,500 GWh a year.”

Elsewhere, I see another respected commentator putting words in to Ferguson’s mouth – what he is saying, he opined, is that government needs to get out of the way.

Well, only up to a point (re privatisation).

Reality for the electricity supply sector is that it is in a very political business.

The context in which it will work over the decades ahead will still be very political because of carbon policy and community and business attitudes to the reliability, security and cost of power.

As I have commented here and elsewhere, even the directions of electricity demand are now politicised and heavily influenced by subjective views on what a carbon price can achieve.

Like its predecessors in 1988 (the “Energy 2000” white paper of the Hawke government) and 2004 (“Securing Australia’s energy future” issued by the Howard government), the draft white paper is a snapshot (or rather a whole barrage of snapshots across energy sectors).

Its purpose is both to inform – and this week’s wide-ranging coverage in the media is a plus in this respect – and to signal the intent of the government of the day.

Christine Milne and the Greens want this intent to be much, much greener and hang the costs.

Martin Ferguson is pursuing balance in the national interest.

The biggest influences on what happens next are probably the forthcoming elections in Queensland (2012) and federally (2012-13).

One of the enduring things Ferguson is seeking to achieve is that, instead of ad hoc approaches in the future, there will be an energy review every four years, which supposes the next one will be in 2016.

Just thinking about how far that may differ from the paper now going in to its last stages highlights the uncertainties of the current environment.

It will be published, for example, the year after the deadline is reached for the brave new accord on global abatement with which Combet claims to have returned from Durban.

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