TiP

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

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