Archive for January, 2012

Heart of Texas

Late in the 1990s I found myself addressing a room full of international power sector chief executives in Stockholm on the topic of the Australian east coast’s new-fledged competitive electricity market.

The CEOs were drawn from the US, Canada, Europe, Britain, Japan and here.

When I was done,one of the Americans smiled at me benignly and drawled: “Tell me, how big is your electricity industry?”

I knew him and knew he was from Texas, so I replied: “About half the size of the one in Texas.”

“Quite,” he said.

However, the Texans went down the competitive market route not long thereafter and this month the US state is marking the 10th anniversary of deregulating retail supply in America’s largest power market ($US24 billion a year.)

Today about 85 per cent of Texan householders are free to choice their supplier and the state government (run by Rick Perry) doesn’t set the prices they pay.

(The rest of households are in areas where they can’t access competition or have opted to stick with a regulated local tariff – Texas isn’t interconnected with any other state and is embarking on a $US6 billion program over six years to upgrade the transmission system.)

About 85 per cent of Texan industrial and commercial customers have switched supplier at least once since 2002 and 40 per cent of householders in deregulated areas have followed suit.

One of the differences between here and America is that municipalities still play a substantial role in US electricity supply and there are also rural co-operatives in the power game.

Wanting snapshot of one aspect of what’s being going on in Texas, I looked at the supply in Austin, the state capital, where ratepayers have their own utility, Austin Energy, and prices are not deregulated.

Austin is popular with young Americans.

One newspaper lauds it for being a liberal college town – it is home to the main campus of the University of Texas, with 50,000 students, one of whom in the 1980s was Michael Dell, he of the eponymous computer company – that is marrying high tech developments with a hipster culture.

The unofficial city motto is “Keep Austin weird.”

(The city has a famous “South by Southwest” annual festival of film, music and interactive media.)

In 2008 Barack Obama picked up 68 per cent of the Austin vote in a state won relatively easily by John McCain.

Austin sees itself as a big rival to California’s Silicon Valley in competition for new clean-tech investment, with 15,000 people now working in the sector and the municipality pledging to get 35 per cent of its electricity from renewable sources by the end of the decade.

Large numbers move in every month and the state as a whole is predicting a five million rise in population (ie equal to Sydney’s inhabitants today) by 2020.

The city – cynics call it the green city in the red state (red for conservative) – has been active in promoting wind, biomass and solar as an alternative to coal-fired generation.

And guess what?

After 17 years of keeping a cap on power prices, Austin wants to raise electricity bills by 12 per cent overall (including business) and by 23 per cent (the locals are calling it budget-busting) for apartment and house dwellers.

With lots of young residents, the apartment aspect is important.

But Austin-ites don’t like the spikes in power bills,notwithstanding their leanings to the green side.

In response, the municipality is whimpering that it has managed to create a situation since 1994 where residential and small business customers are now paying 25 per cent less than the cost to serve them!

(This point won’t be lost on Western Australian readers where Labor pulled the same trick for a decade and left office with the state-owned utility sector $1 billion in debt.)

They are big per household power users in Texas — not surprising when you consider their summer and winter weather – so the higher rates are unwelcome, given its impact on disposable income in the middle of an economic crisis.

Eighty per cent of residential customers have an average consumption of 18MWh a year – compared with about 7MWh on average on the east coast here.

About a third of Austin’s power comes from a coal plant some 90 minutes out of town, jointly owned by the municipality and the Lower Colorado River regional council.

Last year it spent $US400 million on scrubbers to remove sulphur dioxide and mercury from its emissions, but it is always being hollered at by the media and the environmental movement over its carbon emissions.

The winner of 2011’s mayoral election in Austin is committed to closing down the coal plant.

Now he’s faced with a dilemma – this can only be achieved with still higher power bills and he is threatened with the Republican-dominated State legislature opening up the city to retail market competition.

Austin Energy somewhat oddly says it is running at an average $US50 million a year deficit, but it contributes nine per cent of its annual revenue (about $US100 million) to the municipality’s funds plus another $US50 million to local government efforts to woo greentech companies to the city.

So far the municipality has sought to deal with its finance issues by severely scaling back a plan to subsidise charging stations for electric vehicles and it is now looking at restricting a plan to add 200MW of rooftop solar capacity by 2020 – the scheme has attracted just 7MW of PV take-up by householders and commercial firms since 2004.

For at least 10 years Austin has had a program called GreenChoice encouraging residents to buy energy from wind farms in West Texas.

The wind energy costs 30 per cent more than the regular mix of coal, nuclear and gas-sourced generation that dominates supply, so the public aren’t takers – and Austin municipality has ended up spending $US8.5 million annually buying the wind energy for its own departments because it is contracted to take the output.

(Showing that spin is universal, the municipality makes a virtue out of boasting that all its electricity comes from renewable sources.)

The previous mayor committed Austin to a 20-year deal to buy electricity from a biomass power station in East Texas. Trouble is the energy has turned out to cost twice as much as coal-fired power.

The city also boasts a 30MW solar farm, finally commissioned in late 2011 after extended development delays. It is offering energy at 16.5 US cents per kilowatt hour, double the average wholesale cost.

The obvious way to go to eliminate the old coal plant from the mix is to opt for gas-fired power – Texas meets 38 per cent of its electricity from gas plants – but this would require recourse to shale gas operations and the environmentalist there, as here, are having hissy fits about fracking.

The greenies are trying to hit back at the moment, arguing that tariffs for investor-supplied, deregulated customers have gone up over a decade not down (there’s a surprise) – claiming that an average household open to competition has spent $US3,000 more since 2002 than those in places like Austin.

Their mantra is that, with its mix of high tech and clean tech, Austin is well positioned to take advantage of the next major phase in green development.

Meanwhile, the locals can stop whinging and pay the higher power bills

Gonged

The Australia Day honours list issued by the Governor-General is a litany of achievement, much of it by people know only to their own community, whether geographical or professional, and led, of course, by others who have contributed substantially to the interests of the nation.

This year the list contains 438 people who, as noted by “The Australian” newspaper today, “have achieved extra-ordinary things in their lives and their fields.”

From an energy sector perspective, four names stand out in this year’s honours list, all of them made Members of the Order of Australia (AM).

In alphabetical order they are:

(1) Powerlink Queensland’s chief operating officer,Simon Bartlett, for service to engineering and particularly to the State’s electricity supply industry – and also to professional organisations. Bartlett was Australia’s Professional Engineer of the Year in 2009. He has been a key figure in network management at Powerlink since the 1990s and acted as CEO in 2004-05. He is also a director of South Australia’s ElectraNet and has been chairman of the Australian Power Institute since 2006.

(2) Bob Bryan, one of the veterans of the Queensland resources and energy industry and who has held a large number of executive positions since the late 1970s, most notably perhaps his chairmanship of Queensland Gas Company, which was in the forefront in the past decade of launching Australia’s coal seam gas business.

(3) Michael Dureau, one of the power industry’s best-known figures, currently executive director and chairman of the Warren Centre for Advanced Engineering and a professor at the University of Sydney. His past chief executive roles include ABB Power Generation and Alstom Power. He is made an AM for service to engineering and to professional education and research as well as for community service, particularly through the RedR disaster relief organisation.

(4) Martin Green, who has been a prominent figure in Australia’s solar photovoltaic research since the early 1990s and is recognised internationally for his ground-breaking work on making PVs more efficient. He is executive research director of the ARC Photovoltaics Centre of Excellence at the University of New South Wales, where he is a professor.

Both Dureau and Green were recipients of Australia’s Centenary Medal in 2001.

Also “gonged” on Australia Day is Blair Comley, head of the federal Department of Climate Change and Energy Efficiency, who receives the Public Service Medal, with the citation hailing his work on developing carbon pricing and emissions trading as well as noting that he is one of this country’s pre-eminent tax policy practitioners.

Look, there’s another review

I saw a promo for an American webcast forum this past weekend that neatly summed up the investors’ dilemma here as well as there – well, probably everywhere in the developed world, actually.

“Billions of dollars of investments must be made today,” it said, “while government policies shaping those investments may be accelerated, revised or even reversed.

“This affects the building of generation and networks as well as hedging risks.”

The webcast organisers’ thrust is that power utility strategic and financial planning is ever so complicated and getting more so.

In this context, I thought our Energy Networks Association summed things up quite well in one of its most recent submissions to the Australian Energy Markets Commission: “Electricity businesses around the world are facing a challenge to supply increasing amounts of power while meeting community and government expectations for more reliable, environmentally sustainable and affordable supplies.”

I also saw one US energy business manager growling last week that “we have reached the stage where I need a subsidy to be competitive with your subsidised alternative.”

His argument, in essence, is that the public interest will be better served by putting less money in to subsidies for renewables and so on and using the savings to fund research aimed at reducing costs and improving performance in an environment where consumers should face the true cost of being delivered energy.

On the other hand, an observer of politics, whether in North America, Europe or here, might add that making (or remaking or unmaking) policies to deal with today’s environment is just as complicated as investment decision-making and getting more so, too.

Locally, one only has to look at the shenanigans over incentive schemes to promote use of rooftop solar power.

One political answer is to hold more and more reviews – to commission more and more reports.

Locally, we are drowning in reviews and reports just now.

What we need, according to one of my more cynical acquaintances, is a Productivity Commission review of the efficiency of government-instigated reviews!

It’s mildly unnerving if you fancy yourself as an informed observer of the energy scene to find you have missed one.

I am in that situation because it has taken me until now, thanks to a client alert from a law firm, to realise that the National Energy Savings Initiative working group, initiated by Greg Combet and Martin Ferguson, had released an issues paper on 20 December and is expecting submissions by 27 February.

This is actually a follow-up on a commitment (made when Kevin Rudd was running the show) to investigate setting up a national energy savings initiative (or “white certificate scheme”) to complement the renewable energy target and the carbon pricing regime.

The begetters of this idea want a scheme that will support the deployment of “a broad spectrum of technologies” and deliver energy efficiency across industrial, commercial and residential sectors.

We already have State-based schemes of this ilk running in New South Wales, Victoria and South Australia

The NESI working group itself makes a cogent point in the issues paper: “While a carbon price will provide – in my view, they can say “should” or even “could” but not “will” – the incentive for energy users to improve energy efficiency, for some there remain significant barriers to improvement that will not be overcome even as energy costs rise.”

The group, by the way, has included in the paper a bar chart, using data taken from the AEMC report to CoAG on electricity prices (also delivered in December), that is the stuff of political nightmares.

It comes with a little piece of government propaganda that “the Treasury estimates that the impact of the carbon price on average household weekly expenditure on electricity will be $3.30 per week,” but what it shows, when you add up each little cost segment, is this:

(1) Residential retail power bills on the east coast were based on $224 per megawatt hour in 2010-11, rising to $247.60 in the current financial year and to $308.10 in the year beginning 1 July – and are forecast to reach $324.90 in 2013-14.

(2) For the average household using eight megawatt hours a year, this means that bills around $1,800 annually in 2010-11 will be about $2,600 in 2013-14.

The paper points out that household energy expenditure (not including transport fuels) increased 38 per cent between 2003-04 and 2009-10 (and thus by more than half if you come up to date and, on these numbers, will rise another 40 per cent by 2013-14) and “moreover, while electricity prices have traditionally risen by less than household income, the opposite is now the case.”

The issues paper also points out that there are two ways a NESI can tackle the pressure of rising energy costs – one is “to target the price charges per unit of energy” and the other to target the efficiency of appliances, equipment, processes and buildings.

The former of course is just a convoluted way of saying let’s introduce time-of-use charges to drive down peak demand – and comes with the “interesting” challenge of rolling out interval meters across everywhere except Victoria (where it is happening amid much cost, cursing and controversy).

Other State governments so far have much the same attitude to following Victoria down this path as Barack Obama displayed to Vegemite on his recent, and already forgotten, visit to Australia.

The latter target aiming at appliances etcetera will do precisely nothing to charge the trajectory of prices in any viable (for politicians) time horizon – ie the next election.

And it isn’t going to address the peak demand problem, which accounts for about a quarter of network costs.

(In passing, I was mildly amused by the issues paper’s observation that consumers – that’s us – have “historically tended to be passive parties in the electricity market.” Readers know what is meant, of course, but I doubt if there is a mainstream politician in the land who views the “mad-as-hell-and-won’t-take-it-anymore” householders as “passive parties” at this point in time.)

At core, the issue here is that adding a NESI to the policy/regulatory mix means adding another cost for the suppliers, who will smear it across everyone’s bills.

The Energy Networks Association rightly observes: “There will continue to be upward pressures on electricity prices. Some of these are networks related (and others include) government schemes to promote renewables, energy efficiency and reductions in emissions (as well as) the general economic conditions, which can impact on input costs such as fuel and wages.”

The pollies can hold as many reviews as they like, but this won’t change.

I can even suggest another topic: I see a debate going on in one corner of the American blogosphere (have I got that right?) about whether electricity is an economic good or a public good?

Drive with care

The reasons that policymakers cannot afford to be asleep at the wheel in managing the introduction of electric vehicles is being spelled out in yet another Australian Energy Market Commission review.

It is not a flashing red light situation, which is the impression one newspaper’s readers may have gained from a story this weekend headlined “Electric cars to deliver cost shocks,” but one where driving policy with care and attention is to be highly recommended.

In an issues paper released as a step towards a report due next May, the AEMC says “a range of credible scenarios” indicates that electric vehicles will account for a substantial share of the new car market in the long term.

While market penetration is seen to be gradual this decade, it is likely that EVs will lead to a sizeable increase in power consumption and whether this results in substantial electricity infrastructure costs depends on the arrangements for charging the vehicles.

The obvious challenge is the impact of EVs on peak demand.

The actual east coast 2010-11 peak was 36,081 megawatts and the Australian Energy Market Operator is forecasting this will rise by more than 10,000MW by the decade’s end and by almost 24,000MW by 2030 before a new factor such as EVs is taken in to account.

If charging EVs is unmanaged and 80 per cent of owners come home and charge at peak periods, peak demand could increase by about 740MW in 2020 and 1,900MW in 2030.

An average-sized car charger would take the average household’s peak capacity, according to one submission to the AEMC, from three kilowatts to 6.6kW.

In a submission to the review, Brisbane-based ENERGEX makes the point that, without changes to market and regulatory arrangements, there is a material risk of big network investment being needed to overcome capacity and power quality issues.

“High-powered charging equipment that could more than double the peak demand in low voltage networks is of particular concern.”

TRUenergy in its submission to the AEMC raises a concern about the roll-out of quick-charging stations for EVs.

“The high level of current drawn from the network (by them) over a short period of time has the potential to degrade network performance,” it warns, urging a combined industry effort to ensure suitable standards and network connection arrangements for these stations.

Consultants AECOM, commissioned by the AEMC, have provided a handy chart that, in effect, says the extra overall power system cost in 2020 of un-managed charging could be $3.4 billion, rising to $8.9 billion in 2030.

However, imposing time-of-use charging tariffs would drag the extra costs down to $90 million at the end of this decade and $550 million in 2030, something the newspaper report didn’t think was worth a mention.

The real message coming out of the commission papers and the submissions it has received is that we need to learn from the network problems caused by rapid air-conditioning and rooftop PV solar development and to ensure accurate price signals and simple, reliable consumer information on costs are available from the get-go for the roll-out of electric vehicles.

AGL Energy, one of the big three retailers, argues that, with the appropriate policy settings (including electricity price deregulation, the roll-out of smart meters and the introduction of time-of-use charging), EVs can contribute to pursuit of three key national energy policy objectives: (1) reduction in transportation costs, (2) reductions to urban smog and greenhouse gas emissions, and (3) reduction in the unit price of power flowing from a better utilisation rate for existing infrastructure.

The company says its economic research clearly demonstrates that the introduction of smart metering and dynamic pricing (with appropriate measures in place to help customers who suffer hardship) should be given policy priority.

“This is (also) critical for ensuring that electric vehicles improve rather than worsen (electricity supply) capital utilisation rates.”

Another of the retail “big beasts,” Origin Energy supports the AGL view that EVs could lead to an overall decrease in network prices over time through use of appropriate price signals but it warns policymakers against charging in and make big changes to energy market arrangements right now because it expects market penetration to “take many years” and vehicle, battery and charging system technology to change significantly over time.

“Changes that seek to solve today’s challenges could actually be inappropriate to the future,” it cautions.

One of the big questions is how far and how fast EVs will go – in the sense of consumer take-up.

There is still considerable uncertainty around the pace and scale of this.

Electric vehicle promoters Better Place say there are two schools of thought among forecasters.

The first is that EVs will sell at fairly low volumes and, says Better Place, it is based on flawed assumptions about price and charging networks. The second, which it obviously supports, is that, with battery finance and charge networks available, there will be large-scale take-up of the vehicles during this decade, especially where motorists face high petrol bills.

As we all know from motoring around urban and rural areas, our roadsides are littered with cautionary signs about winding roads, hidden entry lanes and slippery surfaces.

It is obvious from the AEMC review process that this is a handy metaphor for the policymakers in considering how to facilitate use of electric vehicles.

The laws of the road require us to drive with due care and attention.

Here, too.

Given an early focus on policy needs, the prospects for “costs shocks” from this development are hardly high, but a whole set of not-very-nice experiences in the recent past (pink batts, solar bonus schemes, screwed-up RET arrangements, regulatory alarms and excursions) justify Us Outdoors being a bit on edge – and this is something to which the media plays.

Return of serve

In the 1960s when I worked as a reporter, a daily newspaper news editor and a news magazine editor it was a given that, once you started a story running, you finished it – you didn’t leave the readers hanging.

That was far away in time and distance (Africa), but I don’t think the media imperative to keep up with running stories has disappeared – it is just often ignored and not least when the emerging information doesn’t suit the line the media are running.

A good example of the breed is the coverage of electricity network businesses and power prices.

If there is an angle that will enable the media to play up the populist line – see “Electricity giants win the right to sting Victorians again” in the “Herald Sun” newspaper on 20 January – then it is a sure thing for coverage.

My point is well illustrated by reporting in Brisbane of the Powerlink Queensland capex/opex determination for 2013-17, which is at present before the Australian Energy Regulator.

The AER draft determination provided the opportunity for a story in “The Courier-Mail” headed “Bills up on power overspend,” which (correctly) reported the regulator was criticising the network for “consistently over-estimating growth in power demand.”

The draft determination slashes $1.4 billion from Powerlink’s $5.9 billion bid.

However, the network has now returned serve with a second submission to the AER which seeks at considerable length to answer the criticisms and counter the reductions – but nary a word is to be seen in the Brisbane media.

One should not simplistically put this down to bias on the part of the media. We are just coming out of the “silly season” and the media, like most businesses, have had staff on holidays.

A former deputy prime minister used to tell me in my lobbying days that, if choosing between a conspiracy and a cock-up, odds favoured the latter rather than the former.

The regulator, of course, is under pressure from energy-intensive users, community organisations, the media and the body politic to be seen to be doing something about the continuous increases in power bills.

Powerlink, on the other hand, points to its proposal being based on the need to meet peak demand, to replace ageing assets, to meet higher (State-imposed) reliability standards and to extend the transmission system to serve new areas.

In turn, it stands accused of over-stating its costs – and in particular of putting forward an inflated view of the likely growth in average and peak demand.

The AER website now contains Powerlink’s 191-page return of serve.

At the core of its amended proposal is an argument that this will lead to a small nominal increase in transmission charges by 2016-17 and, based on inflation forecasts, a real reduction of 4.8 per cent.

This, says the network, is all the more notable because it is dealing with the highest power demand growth on the east coast, competition for skilled labor from the energy and mining sectors, the need to extend the high voltage system and the need to cope with changes in the mix of power generation – plus, of course, the need to replaced assets that have reached the end of their working lives.

Powerlink initially proposed almost $3.5 billion in capex outlays over five years. The AER proposed cutting this to $2.35 billion. Powerlink is now asking for approval to spend $3.32 billion.

All of this is being watched closely by other east coast transmission and distribution networks as they prepare to put bids for 2014-19 before the regulator, which, in turn, is seeking Australian Energy Market Commission approval to change the rules under which it works.

This is a high stakes game for all concerned, including consumers and politicians.

Unfortunately, the way in which the issue is presented to the public through the media is lopsided, biased by emotive language (eg “sting” or “hit” or “slug,” the headline favourites) and lacks an informative narrative, other than the assertion that the networks are up to no good, whether they are government-owned or investor-owned.

The debate in the regulatory arena about demand is of interest to more than the immediate parties.

This impacts also on Martin ferguson’s energy white paper, which is supposed to be completed this year, and on the Treasury assumptions about electricity use that are the backbone of Julia Gillard’s “clean energy future” policy.

In the case of Queensland, the difference between the AER’s views and Powerlink’s works out to about 1,300MW in capacity by 2016-17 – not huge until you remember that, in dealing with a major spike in peak demand in extreme weather, this could determine whether the power stays on.

Part of this debate, and important to the federal assertions about demand, is the impact on consumers of higher prices and propaganda about greenhouse gas emissions.

Where the rubber hits the road, again, is in peak demand.

Powerlink points out that the Australian Energy Market Operator considers the price elasticity of peak demand is less than half what it is for overall energy consumption.

In other words, householders who moderate their use at ordinary times due to price will still have the air-conditioning running flat out on a hot and humid summer afternoon.

Policies such as phasing out old-fashioned light bulbs and off-peak electric hot water systems can be expected to impact on consumption, but they will have a negligible impact on peak demand.

How this all pans out – with respect to the immediate Powerlink bid, the proposed rule changes and the decisions about the rest of the east coast network – remains to be seen.

How the popular media will play the game, unfortunately, is only too obvious with a range of “angry consumer groups” ever-ready to provide quotes.

In Melbourne, the Consumer Action Law Centre was happy to fuel the “Herald Sun” story about the latest “sting” with this quote. “Enough is enough,” said its “expert” spokesperson. “The law needs to change to stop power companies putting shareholders ahead of customers. People are sick and tired of constantly rising power prices and can only bear so much.”

Faced with this sort of media coverage, politicians in government are essentially gutless. (In opposition they rant and rave, too, of course.)

An exception is West Australian Premier Colin Barnett, whose government has approved a 57 per cent increase in end-use power bills in three years after Labor kept the charges frozen for a decade.

“I know that people will say the cost of living has gone up and that the focus is on utility charges, particularly electricity,” says Barnett, “but there are a lot of other factors that have resulted in greater pressure on households.

“I am not criticising them, but how much do people spend on mobile phones, on the Internet and on Foxtel? Communication and entertainment has become a major item of household spending.

“Someone has to pay for the electricity.”

In this context, it is interesting to note a commentary by the New South Wales Independent Pricing & Regulatory Tribunal last month – ignored so far as I can see by the media – about power use by Sydney householders.

IPART says consumption by a swimming pool costs $620 a year at current charges. The second fridge adds $290. A spa adds $240.

Using air-conditioning 5.5 hours a day – average use is 280 hours a year – costs $163.

Using driers and dishwashers once a week adds $154.

The average Sydney household energy bill is $1,500.

Imparting this information to media readers, listeners and viewers would be useful, but sub-editors would find it hard to work “sting” or “scam” in to the headline, I guess.

Cognitive dissonance

Psychologists define cognitive dissonance as a condition where we are made uncomfortable by competing beliefs or desires – for example, wanting to smoke cigarettes even when you know the habit will impair your health.

There is a significant amount of cognitive dissonance involved in the widespread public anger at rising electricity prices when residential users continue to drive up peak power demand, a major contributor to costs, by use of air-conditioning as well as use of many relatively new energy-intensive appliances (eg plasma TVs).

The federal government’s draft energy white paper notes that the need to build additional infrastructure to meet growth in peak demand is an important factor in the declining productivity of the national electricity system.

It uses as an illustration a graph showing that demand, driven by air-conditioning, was 65 per cent higher on one hot and humid November day in Brisbane’s AlbanyCreek/Arana Hills area than the day before.

In Victoria in 2008-09 about 25 per cent of State network capacity was used for only 10 days.

The white paper cites Queensland government estimates that the incremental cost of installing network and generation capacity to deal with peak demand growth is $3,500 per kilowatt or $3.5 million per megawatt.

A particular problem is that households nationally make up only about 27 per cent of electricity consumption, but their claim on peak supply can trend towards 50 per cent.

The Australian Energy Regulator, in its new “State of the Energy Market” report, says east coast seasonal peak capacity requirements have risen from around 26,000MW in 1999 to 35,000MW in 2011.

Just how big an ongoing problem this issue is can be found in a review by consultants Ernst & Young, commissioned by the Australian Energy Market Commission as part of its current “Power of Choice” inquiry and made public late in December.

As reported in the latest issue of Coolibah’s monthly newsletter, published this week on this website (see News), Ernst & Young believe that, on present trends, east coast peak power needs may rise from 38,225MW last financial year to more than 61,000MW in 2034-35.

Over this period air-conditioning installations are expected to rise 97 per cent.

This soaring demand will require building more than 950MW every year for a quarter century as well as constructing a huge amount of network infrastructure.

In today’s money, meeting this infrastructure requirement will cost two to three times as much as the claimed capital outlay on the national broadband network.

The long-term flow-through to higher end-user costs is obvious.

The AEMC “Power of Choice” inquiry is described as “exploring what changes can be made to the electricity market so that consumers can make informed choice about the way they use power.”

Translated, this means how can we alter the price signals to force consumers to use power at non-peak periods?

As a PricewaterhouseCoopers study, also for this review, points out, “(at present) the majority of consumers are unlikely to face a price that reflects the costs of supplying electricity largely because most residential and small business customers do not have interval meters, which measure consumption on an hourly or half-hourly basis.”

As politicians in Victoria have found, however, rolling out “smart” meters is much more costly than was first thought – more than $2 billion rather than $800 million in the State – and is resented and resisted by the end-users.

Ernst & Young observe: “Price signals are generally blunt (today), particularly for residential customers. Consumers pay a tariff which does not increase when the system is at a peak period. This means that for many customers there is no or limited financial incentive to reduce loads.”

Comfort is king in this debate.

The consultants find, hardly surprisingly, that temperature (and humidity, I’d add) and peak demand are highly correlated.

The situation is not helped by the fact that “there is limited or in some cases no opportunity for substitution of electricity with other fuel sources.”

Despite the loud noises from the boosters of solar, the consultants add: “The ability of solar PV generation to reduce peak demand growth is difficult to quantify.”

And the bottom line: “Being an essential service required on demand, the peak demand for electricity tends to be highly inelastic, perhaps even more (so) than average demand.”

Yup and consumers push back when time-of-use charges are implemented – which is why all the other State governments are in no hurry to follow Victoria’s example despite pious noises at CoAG about the size of the peak problem and the need to address it.

Us Outdoors don’t like (mild expression) rising power bills, but we are not going to stop using the power.

Cognitive dissonance.

And in this vein let me share with you an emailed response published in “Business Spectator” to my commentary (appearing 16 January) giving the “Sunday Telegraph” a big serve for its egregious “Dark Ages” lead story at the weekend.

The respondent wrote: “The cost of extending networks is not one the consumer should bear.

“The provision and maintenance of infrastructure of the great public utilities is a responsibility of government.

“Consumers are being hit with unreasonable charges because of the consistent misapplication of public funds by governments.”

Yikes!

Reliability informed

This Sunday morning I have been reading two very different publications on a similar electricity topic.

One is the Sydney-based “Sunday Telegraph,” which in typical style has a news story that “families suffering from raging energy bills could soon be forced to endure power blackouts as part of a strategy to rein in prices.”

The “Telegraph” claims that an interview with ACCC chairman Rod Sims reveals he will “strongly” push State governments to lower reliability standards, “which could lead to more blackouts,” in a bid to arrest rising bills.

This, says the “Telegraph,” will put the ACCC “at war” with the network power companies, “who insist families have come to expect reliable electricity supply and will not cop frequent outages.”

In a particularly outrageous sentence, the “Telegraph” adds “Sims said NSW families had been duped in to the massive power bills by energy networks who pass on to consumers the cost of upgrading their equipment to meet stringent government standards.”

One could go on for a very long time about what is wrong with this sentence alone – not least that I doubt it even paraphrases what Sims said – but it is bettered by this preface to another paragraph: “despite the radical move to thrust NSW back in to the dark ages.”

This is reinforced by an editorial entitled “The Dark Ages” in which in the editor, Neil Breen, asserts “a combinatiuon of unwieldly green schemes and an over-emphasis on avoiding blackouts at all costs has blown energy bills out of all proportion.”

“Sceptical consumers,” the editor asserts, “suspect much of this work is being carried out to make companies look better to potential buyers.”

People who know the electricity business, of course, will just roll their eyes, shrug and say “well, what do you expect?” from the tabloid media, which only a few years ago were making a cottage industry out of feigned rage over each new report that showed some reliability performance was slipping.

The second publication I have been reading is the bulletin of the Electric Energy Society (EESA) in which president Robert Barr also focuses on “the relentless upward pressure on electricity prices,” which he attributes to “national and State green schemes, the uncertain generation investment environment, the need for large-scale network investments and the concentration of retail ownership.”

Everyone has their own demonology in this debate.

“Is the current large capital spending on networks justified?” asks Barr. “In one sense it is because we need modern and reliable networks that the capital spending is providing. On the other hand, the sheer size of expenditure forces up unit construction costs, adding to the largely unwanted jumps in electricity prices.”

Barr argues that what is needed is a long-term view (by governments and regulators) of building networks to meet customer needs. “Good industry regulation will provide for a network just adequate to meet the acceptable needs of the average customer.””

EESA wants the regulators to have a hard look at themselves.

Barr says: “The capital spent on networks over the past decade resembles a feast to famine mindset. Regulators have oscillated between ‘drive the system harder’ and (building) ‘low risk’ networks immediately.”

He asserts that regulators live in fear that they will be held responsible for forcing networks to cut back on capital projects, leading to power disruptions.

“There is a fine line,” he says, “in balancing the risks of cutting back capital spending and maintaining adequate levels of reliability and customer service.

“There are long time lags between the spending and customers receiving benefits – (which) are not always directly measurable but appear in the form of reduced risks of blackouts and loss of reliability visible only to planners and system operators.”

Something else that I have been reading this weekend is the draft report on the Tasmanian electricity system commissioned by the State government and chaired by John Pierce, the chairman of the Australian Energy Market Commission.

(While this report is obviously focused mainly on the island State, it has quite a lot in it about the east coast power sector and is worth a read. The consultation process is due to wind up in March.)

The Pierce committee notes with respect to network reliability: “In distribution, reliability is measured by looking at the number of interruptions, their average duration and the average total time every year that customers experience a lack of supply. Measures of reliability are susceptible to contingency events such as extreme weather.”

Emphasising that distribution reliability measurement is also affected by factors like the size of supply areas and the length of feeder lines, the committee points to the Energy Supply Association 2010 yearbook data – which show (for mainland east coast States) that NSW has a SAIDI (system average interruption duration index) of 197.6 minutes versus 186.8 for Victoria, 155.1 South Australia and 345.2 Queensland.

The SAIFI (system average interruption frequency index, measuring how often a customer on averages loses supply) has NSW at 1.7, Victoria at 1.8, SA at 1.5 and Queensland at 2.6.

Expecting tabloid media editors and reporters to get their heads around this stuff may be asking a lot.

Ross Garnaut, in writing his last magnum opus on federal carbon policy, included a chapter on “transforming the electricity sector,” in which said this about reliability: “Several States have recently adopted higher reliability standards for networks. These require additional capital investment to ensure that the standards can be achieved within the regulatory requirements.”

(Not, “Sunday Telegraph” please note, an effort by the networks to gold plate themselves to attract investors in a hypothetical sales situation.)

Garnaut took the view that “the setting of reliability standards and service requirements has not been subject to institutional or regulatory reform.”

Most States, he said, had used a “relatively crude and deterministic approach” to dictate reliability requirements.

Leaning heavily to the populist side, he added: “There is no opportunity for consumers to make their own choices on what they are prepared to pay for greater reliability when standards are already high.”

This last bit is arrant nonsense, of course, but there is a solid case for State governments reviewing the standards and making decisions about what they believe consumers want and can bear.

This would have an impact on future regulatory determinations about network capex – ie beyond 2014, the horizon for the determinations already in play – but, even so, the politicians and the journalists have to understand that distributors will need to go on spending billions in the second half of the decade to meet any growth in power demand (including peak demand) and to replace aged assets (a very important constituent of maintaining reliability).

The previous east coast framework for network regulation (replaced by the existing arrangements in 2006-07) was driven by a focus on providing low prices for consumers at the expense of prudent, gradual and timely development and it delivered substantial under-investment – which is why the networks have been playing catch-up in the 2009-14 determination period and the consumers are copping big increases more or less in one hit.

EESA’s Robert Barr has a point, I think, when he calls for a regulatory approach that looks at where networks need to be in five, 10 and 20 years in order to stabilise the distribution component of power bills in the long term.

We haven’t had many cicadas in NSW this summer because it has been so cool and wet, but the shrilling of the media over power bills almost makes up for them.

The danger lies in poll-driven pollies allowing themselves to be influenced by this noise and delivering still more dumb outcomes.

On the other hand, there is enough noise out here now (informed and uninformed) to suggest that they grasp the issue of reliability and do some remedial policymaking.

Sharpening focus

Few years demand closer attention to energy policy than the one we are just beginning.

With the federal government moving to finalise its energy white paper, a project that is entering its fourth year, with the advent of a carbon pricing regime in July, with the privatisation proposed of generation in the largest single electricity demand area, New South Wales, with the renewable energy target to be reviewed, with the federal government seeking to enter generation investment through the Clean Energy Finance Corporation and with the rules under which our massive networks expenditure is determined to be recast, 2012 is a big, big year for all energy businesses and all Australian governments – and in the long run, of course, for all consumers.

(The export LNG business might grump at being left off this list, so, yes, of course, it is another big year for this sector on the west and east coasts and in the Northern Territory as it seeks to realise a “superpower” destiny.)

Sadly, for investors, despite the rhetoric of the Gillard government, the level of uncertainty is higher not lower than it has been for years.

“We keep pushing on in to the power jungle,” I wrote in my last TiP post (“Assessing an assessment”) – and with ironic intent I ended: “There is no reason to be alarmed by strange noises in its green depths.”

This got me an immediate response from one of the energy sector’s chief executives, someone with a long experience in the electricity business, who retorted by email: “There is good reason to be alarmed at the strange noises coming from the green undergrowth.”

The Australian Industry Group, in its submission to the CEFC establishment inquiry, has highlighted three important underlying problems – which it says are beyond the powers of the proposed corporation to address.

They are: (1) the domestic market is relatively small – with much greater profits, efficiencies and learning improvements to be found supplying overseas markets, (2) the local community is risk averse when it comes to clean energy investments, and (3) the Australian tax system, regulation and broader culture still do too little to encourage, reward and celebrate innovation and risk-taking.

I’ll go two steps further.

Another two big underlying problems are the strongest tendency to kneejerk policymaking we have seen in Australia in decades and a serious lack of understanding among the population that domestic energy prices must be cost-reflective.

Both latter problems are exacerbated by the way the mainstream media chooses to play its game.

When we are in an environment where power bills can be expected to double during the next 4-6 years and governments are on a knife edge federally and in a number of other jurisdictions, these two issues are a major cause of investor uncertainty.

And when a leading conservative commentator can present an argument in the main business newspaper that “the era of cheap energy needn’t be over,” as occurred today, seeking to rebut Martin Ferguson’s warning in releasing the draft energy white paper that the era is ended, then we are in deep and turbulent waters.

It is important, therefore, to grab opportunities to sharpen the focus of key players in the energy arena and three such are coming up in the next five months.

For starters, there will be the “Energy State of the Nation” conference in Sydney on 23 March, presented by the Energy Policy Institute of Australia (which has changed its name from the Energy Alliance).

Now in its fifth year, “ESON,” run by my friend Robert Pritchard, brings together representatives of government, energy associations and business to review the domestic energy industry in a global context. Martin Ferguson will be its keynote speaker.

Late April and early May will deliver two major conferences.

First will be Energy Networks 2012, which has been running since the early 1990s and is hosted by the Energy Networks Association. To be held in Brisbane from 30 April to 2 May, it will be the electricity and gas networks industry’s big showcase for what the businesses are doing and what they would like to do.

In a period when the networks are under strenuous challenge from regulators, community organisations, large energy users in industry and the media – see today’s Melbourne Herald Sun story “Families slugged again for power bills” as the latest example – this conference is an opportunity for the businesses, a number owned by governments, to talk up their side of the story.

The biggest event of the lot follows in Adelaide from 14 to 16 May: the 52nd annual conference of the Australian Petroleum Production & Exploration Association, one of this country’s largest forums of any kind. In Perth in 2011, APPEA attracted a record 3,000 delegates and more than 160 exhibitors.

For the upstream gas industry in particular, with its coal seam gas (and shale gas) plans under continuous attack from environmental groups, the Greens and rural communities, APPEA 2012 presents a major opportunity to attempt to bring some balance to the public debate over an economically potent industry which, here and overseas, has become the focus of some of the most furious campaigning of the past decade.

(Anyone who wants to know more about these conferences should just type their name in to Google Search.)

At the heart of the debates on which these forums will focus is the fact that a politicised energy investment environment is not going to deliver real value to the community at large, let alone the commercial participants.

As the Australian Industry Group points out in its CEFC submission (available on the association’s website), despite periodic efforts at consolidation, the number of government policies, programs and agencies active in energy development continues to expand.

This, AiG says rightly, results in “confusion, distortion and duplication.”

Conferences are not going to solve this situation, but, having attended, participated in and run hundreds of them over the past 30 years, I know that the good ones are useful in both presenting facts and arguments in a new light and in enabling networking between attendees that can have longer-term benefits.

Having overseen or attended all but five APPEA annual conferences since 1981, I know the value of the upstream petroleum event, as do thousands of others who attend regularly, and I have come to value the ESON exercise as a relatively short (that’s not bad in these time-poor days) but snappy forum.

The networks conference began life as “Distribution 2000” in the 1990s, with the Electricity Supply Association, of which I was chief executive, the co-owner.

The millenium having passed, the event has changed name – and the “old” ESAA having been broken up, the oversight has changed hands, too, but the last one I attended rivalled APPEA in some respects for the breadth of papers and the size of the business exhibition.

I’ll definitely be at ESON and APPEA 2012, so perhaps I will see you there.

Hopefully all three of these events will help to sharpen the policy focus at a crucial time for the energy sector.

Assessing an assessment

A large number of Australians, perhaps most of us, are concerned about power prices, but few if any, at least on the east coast, worry about security of supply.

While a carefully-worded new federal government report suggests that our laid-back attitude to electricity security is largely justified at present, there are a number of factors that should be causing policymakers, State and federal, to think carefully about the issue.

The national energy security assessment (NESA), released by Resources & Energy Minister Martin Ferguson, is a key part of the energy white paper process he is pursuing.

The new review, in fact, is an updating of one prepared in 2009 when it was anticipated that the white paper would appear in 2010.

It didn’t and the 2011 NESA is now a contributor to the draft version currently in circulation.

NESA sums up the forward outlook like this: the electricity sector faces significant challenges, most notably reliability and price pressures associated with the implementation of climate change and renewable energy policies – and also substantial investment required to build new infrastructure and replace ageing equipment.

It reminds us that the Australian Energy Market Operator has forecast we need to outlay $72 billion to $82 billion between now and 2030 on new generation and transmission.

To which, of course, has to be added the distribution network outlays, which, if they average $5 billion a year,and that would be 20 per cent below present levels, will be more than $100 billion.

NESA also asserts that the federal government’s “clean energy future” package “should” allow appropriate and flexible market responses to the challenge – but then it would say that, wouldn’t it.

It does acknowledge that projected growth in demand could present investment challenges in the short to medium term when you note that the east coast market requires 2,500MW of non-intermittent generation by the middle of this decade ar a time when government policy is also aiming to effect the removal of 2,000MW of high emissions intensity capacity.

The uncertainty meter has to be in the red here because Tony Abbott’s Coalition is determined to kill all aspects of the Labor/Greens carbon policy – he has re-appeared from his holidays to say so again in case anyone thought he might have had a change of mind over the 10 days of Christmas/New Year festivities.

NESA notes that uncertainty about carbon policies over a decade has affected investor confidence and resulted in delayed and/or sub-optimal investment in generation. It is hard to see how this is going to change until we have been through a federal election.

In NESA’s view, the introduction of the carbon price “will initiate a transformation of the electricity sector (on the east coast) by influencing fuel switching from coal to gas-fired and renewable generation.”

However, it says, the timing and size of this switch will be “strongly influenced by domestic gas prices, the carbon price and the cost of gas and renewable technologies.”

It is worth interpolating here a big point that investment bankers J.P.Morgan made to their clients about the time the NESA was being published. “Should gas prices in the NEM (the east coast market) move towards LNG netback levels of $6 to $8 per gigajoule, we estimate that baseload electricity prices could rise to well over $100 per megawatt hour – 200 per cent above current levels.”

As part of the national assessment, the government commissioned consultants to do a desktop exercise imagining what might happen if a large generator – they chose Loy Yang A – fell over, but it seems to me that they would have been better advised to ask for modelling about what happens when baseload electricity is 200 per cent more expensive than today in an environment where we also have a carbon price, renewables costs and continuing high network charges driving up prices?

One of the curiosities – for me – of the 2011 NESA is its comment that power demand can be expected to be strongly influenced by the carbon price.

“The reduction in demand growth expected in the short term will continue as a trend over the medium term as carbon prices increase and consumers respond.”

Curious because Julia Gillard and Wayne Swan have promised that most householders will be protected “forever” against the carbon price burden. Curious because, on Treasury modelling, the carbon price impact stays relatively low in end-user power bills out to 2030.

The give-away line comes on page 69 of NESA’s 113-page report: “The structure of the Australian economy will continue (according to Treasury) to shift away from agriculture and industry towards the services sector. This shift will continue to dampen the expected growth in energy demand over the long term.”

Bye-bye energy-intensive industries by about 2034-35 is what this is really saying.

And, as they take up a third of all the electricity consumed in Australia, it is not hard to see how, when very much higher power prices drive them away, demand will be “dampened.” Along with the economy and employment.

As I said a fair few times in 2011, Treasury has an obligation to show us how it came up with the demand scenarios it gave two sets of consultants last year to produce generation mix scenarios for the “high growth, low pollution” papers.

The bottom line is that the collection of commentaries that we have been given in the past 4-6 weeks (including work done for the Australian Energy Market Commission’s “power of choice” investigation as well as NESA and the draft white paper) are all useful in their way, but we still don’t have a really good helicopter view of electricity supply over the next two decades.

Few things are more calculated to give the federal Labor government leadership and its shadowy spinmeisters the heebie-jeebies faster than a suggestion that we tell the community the full, frank story about where supply is heading.

The mainstream media don’t have the depth of knowledge to even frame the right questions, let alone fully dissect the information that is coming in to the public arena.

An organisation that could give it to us straight is the Productivity Commission, but it only goes where the government (and formally the Treasurer) wants it to go.

Don’t hold your breathe waiting for it to be given this task.

Meanwhile, we keep pushing on in to the power jungle.

There is no reason to be alarmed by strange noises in its green depths

High voltage risk

Over a number of years I have amused myself by saying to conference audiences that electricity supply is at the mercy of three four-letter words. Pause. “Time, cost and risk.”

Every year brings reminders that this is an abiding true statement for the power game.

The latest is the announcement by Origin Energy that half of its operation at the new Mortlake power station in south-western Victoria will not be in service in the first quarter this year.

The company says a switchyard fault found during the commissioning process is the cause of the hold-up.

One of the two 275MW units in the $650 million project is now ready to supply power in to the east coast market, but the original target for full operation was the end of 2010 and then mid-2011. Adverse weather and mechanical issues have been among the delay factors.

Origin, which will be accountable for about 13 per cent of registered east coast market capacity when Mortlake is commissioned, has addressed the issues of risk in the prospectus for its current raising of $800 million from shareholders and institutions.

Its LNG development plans in Queensland obviously get attention in this document, but my interest is in what the company says about electricity supply risk.

“Wholesale electricity prices are volatile and influenced by many factors that are difficult to predict,” it comments, “including weather and climate patterns, operating constraints of power stations, transmission and distribution infrastructure, generator competitive behaviour, power station and gas plan reliability, the type and amount of newly built power stations and the actions of the market operator.”

Contrary to what some might think, “it is not commercially practical to mitigate or hedge all risks associated with exposure to the wholesale electricity price.”

This is not the sort of stuff you read when someone in the mainstream media is rabbiting on about power prices.

Origin adds that the competitiveness of its generation fleet (5,310MW, including Mortlake) depends on such factors as the ability to source fuel economically, to operate with high availability and reliability and to maintain reasonable operating costs.

A new risk factor for Origin, via its “gen-trader” acquisition of Eraring power station’s output, is that the deal requires it to procure coal for the plant.
“Strong market demand for coal is putting considerable upward pressure on domestic prices,” it points out.

Part of the contract involves Origin entering in to an agreement to take coal from the controversial Cobbora mine.

Supply is supposed to start in 2015, but the Cobbora project is full of ups and downs.

Construction of the New South Wales government-owned mine, 22 kilometres from Dunedoo and 64km from the grape-growing Mudgee area in the State’s west, was supposed to start in late 2010 with production beginning next year.

The plan now is to start construction in mid-2013.

The original concept saw the mine ramping up output from six million tonnes a year in 2013 to 20Mtpa in 2015. Now the target is 12Mtpa.

Cobbora is supposed to shelter the NSW government-owned, coal-burning plants (owned by Macquarie Generation, Delta Electricity and Eraring Energy), currently providing 90 per cent of the State’s power, from global prices as their existing long-term contracts expire this decade.

Assuming medium economic growth and taking in to account the introduction of a carbon price, the current outlook for NSW (based on TransGrid’s 2011 planning report) is for electricity production to rise from 78,800 GWh in 2010-11 to about 92,700GWh in 2020-21 and this implies greater coal-burning over the decade despite plans for gas plant and renewable energy projects.

Origin notes in its prospectus that “under certain circumstances, the contract price (for Cobbora coal) may be increased and the scheduled commencement date may be delayed.”

More broadly, the question of where east coast demand is heading raises its own risks for a company like Origin, which is one of the country’s three major energy retailers.

Just how difficult it is to get a handle on this issue is illustrated in the Origin prospectus where it says: “Demand is influenced by a range of variables, including usage behaviours in people’s homes and in business and industrial facilities, technological advancement, mandatory minimum appliance performance standards, new mandatory energy efficiency schemes, energy prices, prevailing consumer sentiment and economic conditions, weather conditions, long-term climate and temperature trends and alternative power generation sources.”

Not least of the problems Origin and other retailers face is to what extent the true costs of supply are allowed to be passed through to customers, especially in the two largest demand areas, NSW and Queensland, and in South Australia, where State processes can cap prices.

“There is a risk,” the prospectus notes,”that regulators may set prices that do not fully reflect underlying costs.”

This is what the Energy Retailers Association is on about in its recent letter to the Queensland Competition Authority, which is now looking at power prices for the State for 2012-13.

“The ability of retailers to offer contracts,” ERAA says, “is predominantly driven by the most influencing factor in the development of an effective energy market:the prevailing regulated retail price.”

If the prices are set too low, it points out, retailers “will cease to be active in the market” and, if they are too high, consumers remaining on non-market contracts will pay too much for their electricity.

Removing retail price regulation is not on the QCA’s agenda or that of the contending political parties in Queensland (where a State election is not very far away) no matter what pious noises are made at CoAG meetings.

The bottom line, says ERAA, is that, as retailers’ exposure to uncertainty and financial and commercial risk heightens, there will be an impact on competition and customer choice.

The association wants to see retail price monitoring in place of regulation.

The politicians (except in Victoria in a decision made years ago) want to maintain a grip on price rises under the guise of consumer interest.

In the long term, however, the three horsemen of the marketplace – Time, Cost and Risk – will have the final say.