Archive for March, 2012

The price is not right

The ACT Chief Minister nailed the solar feed-in tariff shemozzle in one soundbite late last year.

“The whole episode,” said Katy Gallagher of what had happened in the Capital Territory, “demonstrates the folly of making policy on the run.”

Gallagher gets a mention in the new AGL Energy economics working paper published this week.

The authors are Tim Nelson, the company’s head of economic policy and sustainability, chief economist Paul Simshauser, who is also professor of finance at Griffith University, and James Nelson, one of the company’s energy market analysts.

The backdrop to their analysis is the fast take-up of small-scale solar photovoltaics on household rooftops on the east coast since 2007 – a development that has had environmentalists in raptures.

The two Nelsons and Simshauser report a 100-fold increase in rooftop PV installations in just four years.

The other side of the coin, which has the environmentalists and solar sellers enraged, has been the way the boom has spooked governments, leading to a substantially winding back of feed-in tariffs in New South Wales, Victoria and South Australia.

This leaves Queensland out in front in solar give-aways – and it remains to be seen what new Premier Campbell Newman will do.

The AGL trio point out that, even if Queensland winds back its FiT, those who have acquired rooftop PVs will continue to access premium tariffs.

“The consequence,” they say, “is the cost of its scheme, and its adverse welfare effects on low income households, has been locked in for the entire policy tenor. In the case of Queensland, this is out to 2028.”

The writers devote a fair part of their 20-page report (to be found on the AGL Energy website) to addressing the claim that the solar FiT is a boon because adding it to the market suppresses east coast wholesale energy prices.

“However,” they say, “our analysis and those from international studies (make it) clear that, while the merit order effect may well be real, any consumer benefits are at best transient and the overall effect on (social) welfare is adverse.

“The notion that suppressing wholesale prices and adversely affecting the profitability of existing producers (of whom of course AGL is one) by subsidising a sub-economic technology through a premium FiT and distorting an otherwise properly functioning competitive market is somehow desirable policy is simply not correct.”

Looking at Queensland, the AGL team has found that the effective rate of taxation paid by low income households through the impact of the State solar scheme is 3.4 times higher than the burden on wealthier home-owners.

In NSW the least able to afford the hit bear 2.7 times the implied tax rate on higher income brackets.

The costs of the Rees/Keneally scheme in NSW are relatively short-lived (lasting seven years), but electricity consumers in Queensland and South Australia will continue to feel the pain for two decades while those who grabbed the offers will receive “substantial profits.”

The often-touted claims of network benefits from the solar bonus schemes are dismissed in the paper. “The benefits,” the writers say, “are at best likely to be trivial and are not supported by any compelling evidence to date.”

The Nelsons and Simshauser note that politicians in all States and from all persuasions were initially eager to be seen to support rooftop solar power, but they point out “policymakers around the country have not understood that regressive wealth transfers are almost always the result when the electricity industry is used as a taxation collection mechanism.”

Read with the savaging that Labor policymakers received over solar FiT schemes from the auditors-general in Victoria and NSW as well as the towelling Michael Lambert gave the NSW program in his State audit for the incoming O’Farrell government, the AGL commentary highlights just how unsound it is to fall prey to populism and feelgood green gimmicks.

Those here who keep pointing to the “success” of FiTs in Germany and Britain to argue for their retention prefer not to dwell on the fact that governments in both countries have slashed the tariffs in half in the past 12 months.

In passing, it is also worth drawing attention to modelling done by AGL, which is a wind farm developer, of market impacts of wind energy in South Australia because there has been much hallooing in the media in recent weeks about the growing contribution of wind to the SA system.

The writers point out that, yes, it is true that the addition of a relatively large amount of wind output in SA has cut spot market prices from $75 per megawatt hour to $64 – but it has also had the effect of pushing up system average costs from $99.75/MWh to $109.75.

Whoops!

“In the long run,” they say, “the effects of introducing high average cost, low marginal cost generation cannot be price-beneficial to consumers.”

The warning in the paper that should be read with care by policymakers is that, while small-scale renewable resources may recover their capex costs through subsidies, new thermal plant will only be built where investors can see that market prices will cover their costs.

“Under a worst-case scenario,” the writers add, “where thermal plant investments are delayed excessively due to excess FiT capacity, wholesale prices may eventually ‘snap’ when new thermal investment becomes vital to maintaining security of supply.

“The extent of market volatility that comes with (this) scenario is not in the interests of consumers, producers or investors,”

This, as Paul Simshauser is fond of saying, is “non-trivial” stuff that, to quote Katy Gallagher, demonstrates the folly of making policy on the run and, I add, as a political gesture.

Terrified? Hardly!

One reads some weird stuff in the media and on blogs about electricity supply.

I got sent one from Crikey on Tuesday afternoon headlined “Why power generators are terrified of solar.”

Well, there’s a very short answer to that.

Here in Australia, they are not and have no reason to be.

Let’s leave aside the latest projections to 2035 from the Bureau of Resources & Energy Economics, which, because it is part of Martin Ferguson’s portfolio, seems to be regarded by environmentalists as a member of the “greenhouse mafia”.

Let’s focus on the work done for Federal Treasury last year by consultants SKM MMA and ROAM as part of the “clean energy future” policy promotion.

Because the Gillard government spun on the promise of very large abatement in 2050 to support the carbon price legislation and because this approach was lapped up at the time by the media, any green muttering about renewables use projected in the consultancy reports was muted.

(It took old Orchison to point out that the “clean energy future” will feature the burning of more than a billion tonnes of black coal in Australia over the next quarter century for starters, an inconvenient fact the federal government and the rest of the media are continuing to ignore.The “clean energy future” also sees the burning of gas for making electricity trebling in this time frame.)

The Treasury consultants predict, on the basis of government policy, (a) that demand for electricity in 2030 will be suppressed by about 10-15 per cent below what BREE foresees but will still be more than a third higher than today – and (b) that black coal generation’s share will be 38 to 44 per cent, brown coal’s share will be 6.6 to 11.3 per cent and gas-fired plant will contribute between 19 and 24 per cent.

At the the most green-friendly level of the two projections (SKM MMA), this adds up to conventional power generation delivering 64.4 per cent of supply in 2030.

SKM MMA’s renewables projections are for wind power to deliver 16.6 per cent, geothermal 8.4 per cent, biomass 3.5 per cent and long-existing hydro-power 6.2 per cent.

Solar power? Just 0.9 per cent in 2030, say SKM MMA.

Oh, that must be why solar power has conventional generators “terrified”!

The maligned BREE, making its predictions to 2034-35, sees conventional fossil-fuelled plants contributing 76 per cent and renewable energy operations 24 per cent (of which solar accounts for one per cent).

More “terrifying” news for today’s generators.

The peg du jour for those parading the “be very afraid” line of chat is Germany, but a closer examination of the scene there suggests they may just be getting a little carried away, even allowing for Angela Merkel’s plans to kill off nuclear energy.

Let me use a really “suss” source for these numbers, one clearly on the dark side: the German Wind Energy Association, writing in “Wind Energy International 2011/12.”

Looking at 2010, the latest official numbers, the association reports that German generation totalled 620 TWh (nearly three times our output) and featured 263 TWh from black and brown coal, 86 TWh from gas, 139 TWh from nuclear power, 37.5 TWh from wind power, 25.8 TWh from hydro-power, 28.5 TWh from biomass and just 12 TWh from solar photovoltaics – plus a whole lot of bits and bobs.

I’m not going to go on and on here about the enormous subsidy cost involved in the German PV party. It’s been well documented.

An American energy industry publication reviewing the German scene last November gave the comparative wholesale prices for the generation mix as $US83 per megawatt hour for coal, $US124 for onshore wind and $US207 for offshore wind and $US268 for solar.

You may care to note in passing that Germany has the second most expensive residential and industrial end-user charges for electricity in the EU.

One other thing, the market in mainland Europe for power traffic is quite strong. France and Germany trade electricity both ways as energy retailers pursue the best deals, but here’s the rub – in 2010-11, I see from the Web, net French exports to Germany were 65 TWh, almost all nuclear power, five times as much as produced inside the country from PVs.

The fact is that, apart from the decision to close the nuclear industry, the most interesting news out of Germany in recent months has been an announcement by Siemens that, working with the giant utility E.ON, it has built the world’s most efficient power station in Bavaria – the plant converts gas to electricity with 60.75 per cent efficiency, meaning that it consumes a third less fuel per kilowatt hour than the average gas power plant worldwide.

Given the widely-projected rise in the use of gas internationally by the electricity industry – BREE’s modelling predicts a rise here for gas power from 40 TWh a year three years ago to 126 TWh in 2035 – this has considerable potential with respect to carbon abatement, energy security and power prices.

The bottom line, then, is that, whatever the solar outlook is doing for generators here (and more than a few suppliers are interested in seeing how they can make some use of it), “terrified” they ain’t.

And it worth adding that as soon as we have battery storage capable of meeting the demands of the power grid cost-efficiently, the generation companies – not least the “gentailers” increasingly dominating the market – will take a whole new approach to solar and wind.

Before then, of course, Australia may have finally opened the door to nuclear energy.

Look up the Bill Gates-backed Liquid Metal Battery Corporation in the US to see where storage may – emphasise may – be heading.

Shocking news

Here’s a headline to consider: Electric shocker – power prices set to rise sharply.

Of course you have read it before, but this one isn’t from an Australian newspaper.

It’s from Canada, where they are being told that their power bills are likely to rise 40 per cent between now and 2020 as new generation is built to meet demand and as large expansion and refurbishment is undertaken on their networks.

It’s germane news right now as our large energy users whip up a local media storm with a new report claiming that Australia’s electricity prices are “very near to the highest in the world” – and pointing out that they are a lot higher than in Canada.

It is going to be interesting in 4-5 months to see the new survey of international industrial electricity prices from NUS Consulting, an global research and advice firm that has been churning out large user power comparisons for years.

In contrast to the Energy Users Association of Australia’s numbers, the 2010-11 report by NUS, issued last August, found that power bills for manufacturers here were 12th cheapest out of 16 developed countries.

(NUS is selective about what it studies. It excludes one of the most expensive countries, Japan, also the hydro-power dominated Norway and Brazil. It also does not include taxes.)

Topping the NUS list (ie the most expensive) were Italy (with 19.70 American cents per kilowatt hour) and Germany (18.56c). In a group behind them came Spain (15.37c), Belgium (15.23c) and Britain (15.10c).

Australia, which had been 14th on the list in 2009-10, slipped two places as its industrial prices rose 15.2 per cent over the year to 10.02 US cents.

The leader in this report, as it is in the EUAA study, is Canada at only 7.98c, just ahead of South Africa (8.55c) and comfortably better than the US (9.48c).

Immediately behind Australia on the list is mostly-nuclear France at 9.61c after a 10 per cent price rise.

The local energy users’ claims also run counter to figures the Reserve Bank produced last year for household prices in 2010 – which showed an Australian average at US20 cents per kWh versus 17c for France, 32c for Germany, 23c for Japan and 21c in Britain as well as nine cents in Canada and 12c in the US.

Why do the Canadians do so well in the price game?

For a start half their electricity comes from very large hydro-electric power complexes that were built a long time ago – a gift of all that snow, you see – and, when nuclear energy is taken in to account, they source 75 per cent of their supply from the two fuels almost as unpopular with our Greens as coal but with low production costs once you have got the huge capex out of the way.

Like here, Canadian networks have to bring electricity over quite long distances to deliver to a few large loads – and they also despatch more than 50,000 gigawatt hours a year (equal to about a quarter of our east coast power station output) to Americans as far away as California and Florida.

A great deal of their generation is owned by provincial governments, who strive to keep costs as low as possible, but half of the country’s generation assets are more than 30 years old.

Canadians benefit, too, at present from the fact that provincial regulators have been sitting on network capital investment plans for years.

The Canadian Electricity Association warns: “Canada’s system is on the verge of an important transformation. A growing population, economic recovery and growth and evolving expectations of how Canadians want their energy needs met will necessitate fundamental changes.”

The Canadians predict that almost $C294 billion will be spent on power supply between now and 2030. By comparsion, the federal government here forecasts that $240 billion will be outlayed over 20 years.

British Columbia suppliers are looking to put up prices by 37 per cent between 2011 and 2014 and Ontario rates will rise 46 per cent by 2015.

Householders in Ontario (which mirrors New South Wales, except for the weather and a total disinterest in cricket and football) can expect their power bills in 2013 to be $C600 higher than in 2007.

The average national residential power charge had risen by only 1.4 cents (Canadian) per kilowatt hour over the 10 years to 2010. The latest CPI numbers show that it rose 8.7 per cent in the 12 months to February.

The price freeze game must always eventually deliver a rude shock to consumers or taxpayers when the music stops – as has been demonstrated in Western Australia where the Barnett government, after a decade of price freezes under Labor, has been forced to increase tariffs 57 per cent in three years or run the risk of landing taxpayers with an accumulated State-owned electricity supplier debt rising from almost $1 billion today towards $3 billion by mid-decade.

The bottom line comparison, perhaps, for Australian householders is that Canadian power bills take up just over two per cent of their residential income compared, after a series of increases, with 2.3 per cent for energy bills here, according to the latest calculations of our Bureau for Resources & Energy Economics.

Canadians also pay monthly, not quarterly, and the bills average about $C100 nationally – from as little as $C68.75 in Montreal to as much as $C161 on Prince Edward Island.

The only fully deregulated electricity market in Canada is in Alberta (their version to an extent of Queensland, except for the weather etc etc.) Most Albertans sign up to buy power from investor-owned suppliers on a monthly rate that varies according to the wholesale market price.

This makes for very volatile power bills — including winter 2012 ones that were double those in 2011 — and the politicians have frozen the network charges in an effort to hose down voter unhappiness………….

The Canadian residential average is substantially less than for the typical Sydney or Melbourne household, now handing over between $2,250 and $2,300 annually in quarterly payments.

It is noteworthy that the environmentally iconic Sierra Club of Canada is arguing that prices should rise there. “Allowing rates to actually pay for the cost of electricity is the right thing to do,” it says, “but it is tactically incompetent of governments to not ensure that those who have difficulty paying are taken care of.”

Meanwhile, it will be interesting to see what both the Australian government and the electricity industry come up once they have had a chance to digest and dig in to the energy users’ numbers.

The Energy Supply Association CEO Matthew Warren accuses the EUAA report of being “designed for shock and awe,” claiming that aspects of it are “inaccurate or exaggerated.”

Martin Ferguson can use BREE to analyse the user assertions, too.

Can-Do and Bandaid

The landslide defeat of the Labor government in Queensland at the weekend will have one immediate effect on electricity supply: a popular but strategically misplaced move by in-coming Premier “Can-Do” Newman to freeze the State’s standard domestic tariff, reducing, he claims, residential power bills by $120 a year.

As it happens, the last week of the Queensland election campaign – with the result heavily influenced, according to voting booth exit polls, by community concerns over the cost of living – coincided with the publication by the Australian Energy Market Commission of a 241-page “Power of Choice” commentary pointing towards real ways of addressing network costs, the key issue in current power bill increases.

In essence, the AEMC is pushing further forward the concept that power tariffs should vary according to the time of day and season – ie they should be very expensive when weather dictates maximum consumer use of electricity for living comfort – and raising the prospect that network operators could remotely switch off appliances such as household air-conditioners and pool pumps when demand passes a certain point with consenting consumers getting lower tariffs.

The time-of-use tariffs and intervention steps, of course, require the roll-out of smart meters across the east coast, a not easy task as the pursuit of the measure has been demonstrating in Victoria over the past two years.

No current estimate of the capital cost of smart meters across the east coast is available – a guesstimate of about $7 billion was made at a time when the Victorian roll-out was claimed to cost $800 million. This has turned out to be nearer $2 billion.

The state of the debate – fuelled by recent claims from large energy users about the comparative costs of power in Australia versus other countries that are disputed by electricity suppliers but have been heavily promoted in the media – leaves policymakers, driven by the political imperative to be seen to be addressing voter concerns, to turn to steps like “Can-Do’s” tariff freeze and the O’Farrell government’s efforts to find $400 million for consumer handouts through playing with the structure of its network businesses.

The bedrock of the dilemma is spotlighted by the AEMC in the latest paper it has released: “Retail prices have risen by a nation-wide average of around 30 per cent over the past three to four years and are expected to continue to rise by around 37 per cent out to 2013-14.

“This is the equivalent to a price increase in the total residential electricity price of 8.34 cents per kilowatt hour between 2010-11 and 2013-14.”

What this represents for a household with a couple of air-conditioning units, plasma TV and so forth, using about 8,000 kWh a year, is a rise over four years of about $667 in the power bill – which would have stood at $1,200 in 2010-11.

Back in November 2010 I was one of the few media writers to highlight a two-page commentary by Macquarie Bank that is is critical to understanding the cost of living situation. (If you put the bank’s name and “Power surge” in to Google Search, this note is still accessible.)

What the bank said in short is that 15 months ago householders were confronted by the sharpest annual increase in the utility bills’ share – power, gas and water – of our national CPI since 1983 and that their council rates were going up fast as well.

The other critical political factor is petrol prices. They have nowt to do with electricity bills, but they are an additional, essentially non-discretionary, burden for most households – and they are probably aggregating twice the cost of annual average residential power purchases.

Add up all the energy bills for a typical Aussie household and I suspect you get no change out of $6,000 a year.

In these circumstances you must expect the owners of hip pockets to be less than happy with every imposer of cost.

The bleeding obvious in this stuation, as the AEMC points out, is that the pressure, as far as electricity prices are concerned, is going to continue out to 2013-14 because of existing regulatory and policy decisions.

(In fact, of course, the problem will roll on beyond this point because we are en route, as Port Jackson Partners have predicted, for a range of reasons towards residential power bills in 2017 being double what they were last year.)

Against a backdrop of what voters have now done to Labor governments in New South Wales and Queensland in the past year, this is not exactly good news for Julia Gillard and her advisers as they confront a late 2013 federal election.

What odds would you place, therefore, on a strong political drive, spearheaded by the federal government, to push ahead with “smart meters” and time-of-use charges over the next 12-18 months?

Don’t hold your breathe is my advice.

Much has been made in some quarters of a trend downwards in average household power consumption on the east coast since 2009, but, apart from the need to service supply to new suburbs and inner-urban higher-density housing developments as well as to replace ageing equipment, the big ongoing requirement for network capex is peak demand – which is climbing inexorably.

On the east coast, using the Energy Supply Association load forecasts from last year (a new one will be published in mid-2012), peak demand could be close to 50,000 MW by 2019-20 on present trends. It stood at just under 40,000 MW in 2010-11.

Peak demand nationally has grown 70 per cent in 20 years – a key element in the requirement for network capital outlays, which in NSW alone, the biggest area of expenditure, is seeing $22.4 billion being spent in total between 2005 and 2014.

Add Queensland and the 10-year network outlay figure for these two States nears $40 billion.

As the pair of them are set to be the political killing grounds for the 2013 federal election, this is not irrelevant information.

The AEMC reports that national networks now include $11 billion worth of assets that are used for only 100 hours a year.

It says that peak demand growth is responsible nationally for 44.7 per cent of current distribution business capex (adding up to $16 billion of the present tranche of spending) and 52.5 per cent of transmission capex (adding up to $5.3 billion).

AEMC says that the vast majority of households do not have adequate information or knowledge about the costs of their consumption and/or the metering technology that could give them more information.

A big part of the problem identified by the commission is the lack of incentive to invest in installing smart meters.

The AEMC points out that consumers do not have sufficient information to assess costs and benefits. Retailers do not have any certainty that they will retain a customer long enough to recoup the meter costs. Networks do not have certainty that they can recover the installation investment through the regulatory process.

Hello! Do you detect a large-scale failure of policymaking here?

I certainly do and, of course, when the music stops at election time, the politicians’ knees jerk and we get “Can-Do” type “solutions.”

Except that it’s not a solution. It’s a Bandaid.

The underlying problem remains.

Vale of fears

Resources and Energy Minister Martin Ferguson grinned at the Energy State of the Nation conference attendees in Sydney on Friday and ad-libbed “Contrary to the views of some, I actually think the Latrobe Valley has a very bright future.”

Taking a long handle to the greens and The Greens comes naturally to the federal minister and this was his buy-in to a commotion that has erupted in his home State, Victoria, over a Baillieu government proposal to explore the prospect of exporting the Latrobe Valley’s giant brown coal resource.

The move was revealed through “The Age” newspaper gaining access to a draft State cabinet submission dealing with a tender process expected to be finalised in mid-2013.

The “pro” argument starts with the fact that a quarter of the world’s brown coal reserves are located in Australia, with 90 per cent of them in the valley. (Only Russia has a bigger brown coal resource.)

A review for the Howard government in 2005 estimated the economically-recoverable reserves of Latrobe brown coal at 53 billion tonnes.

Power generation today uses 65 million tonnes a year of the resource.

(By the way, the largest producer of brown coal for power generation is not Victoria, as you might imagine, or the Russians, but those clean-and-green Germans, who account for 16 per cent of the world’s use of lignite versus eight per cent in Russia and seven per cent in each of Turkey, China and Australia.)

Transforming brown coal in to an exportable form, the State government and would-be investors argue, could unlock tens of billions of dollars in new resource income and deliver a new lease of life to the beleagured valley community – which is on the front line of the Gillard government’s carbon policies.

News of the Baillieu government’s consideration of bids for new brown coal projects coincides with the release of a Regional Development Victoria report warning, as the “Herald Sun” newspaper put it, that the Latrobe Valley could become “an economic basket case with many residents reliant on welfare.”

The commissioned report by researchers from Victoria University’s Centre for Strategic Economic Studies warns that the valley could end up with “entrenched pockets of disadvantage” similar to those in Britain’s coal-mining regions after the 1980s problems.

The report claims that the livelihood of four workers could be endangered for every one direct job lost in the valley’s mining and power generation sector as a result of the carbon policy and it warns that the magnitude of the adjustment task is going to be bigger and more complicated than the federal government (ie the Treasury) has anticipated.

Some of the most vulnerable valley residents are unlikely to be in a position to relocate, it adds.

The federal government has allocated $5.5 billion for regional assistance as the carbon policy bites,although there is no specific financial commitment to any area as yet, and the Victorian report – by academics Sally Weller, Peter Sheehan and John Tomaney – calls for moves to develop new projects in the valley to “avoid economic and social collapse.”

State Energy Minister Michael O’Brien (tagged in some quarters as a future Premier) says talks are going on with the Japanese government and companies about how to process brown coal in to an export product.

The State opposition retorts, somewhat weakly, that any such plan is “clearly” decades away from fruition and a rail line will need to be built through Gippsland to the port of Hastings to enable exports.

Which begs the question of whether a Labor government would eschew the whole idea – and did it not, in fact, in government under Steve Bracks consider a tender process for new brown coal developments using leading-edge technologies?

Cue the environmental movement and the Greens in full froth mode.

Baillieu is an “environmental vandal,” says federal Greens MP Adam Bandt. (I can’t find anything on Google, however, that shows him commenting on the previous week’s decision by the Baillieu government to approve 400 MW of wind farm development in the State involving five projects.)

It’s “unacceptable” for Victoria to create a new brown coal industry just when efforts are being made to close down the Yallourn and Hazelwood power plants, says Greens deputy leader Christine Milne.

It’s not good enough, she adds, for Climate Change Minister Greg Combet to say the federal government can’t tell the States what to do with their resources.

So much, then, for the Constitution.

Victorian Greens MP Greg Barber says exporting brown coal could lead to onshore and offshore environmental damage “as well as driving up the price for domestic power stations.”

One could spend a few words on this point alone, but let’s move on.

The Latrobe Valley Sustainability Group is “disgusted” by the news to “create short-term gains for an industry with no long-term future.”

The State government, it warns, is setting things up for “a very big collapse in 15 to 20 years from now.”

On the investor side, Exergen says it intends to bid for up to one billion tonnes of de-watered brown coal to export to Japan and India.

Exergen’s joint venture partners include the giant construction and mining services provider Thiess, Tata Power of India and Japan’s Itochu Corporation.

Australian Energy Company says it is interested in another billion tonnes to produce briquettes and fertiliser using low emissions technology.

One thing that can be pretty well guaranteed is that we will now see a re-run in Victoria of the community debates in Queensland and northern New South Wales over energy project access to farmland.

There are farms on the eastern and western sides of the Latrobe Valley that are affected by mining licences needed to allow this form of development.

Perhaps the Australia Institute’s Richard Denniss takes the biscuit for this week’s comment on the Latrobe Valley prospects.

“Mining,” he told the ABC, “doesn’t create a lot of jobs in absolute terms. There are only 200,000 people who work in mining across Australia and we have 23 million people, so less than one per cent of Australians work in mining. Far more people work in Woolworths than in coal mining.”

The boosters of wind farms – who claim 10,000 jobs could be created over a decade from new wind development, although I challenge the use of this figure because it assumes every wind project proposed would go ahead – might grimace at these comments.

For the record, according to the Australian Coal Association, just the black coal industry employs 40,000 people directly and 100,000 indirectly, mostly in the regions.

This involves remuneration of $4.4 billion a year to mine staff and $5 billion annually to contractors plus $16 billion spent buying goods and services and $4.4 billion in royalties to the Queensland and New South Wales governments out of a total tax bill of $12.9 billion.

Latrobe Valley brown coal direct employment is around another 1,800 people, who get paid about $150 million a year. The Valley generators claim that their mining and power production activities contribute around $420 million annually in purchases of goods and services in Gippsland.

The green efforts to wring the neck of the coal chicken put me in mind of a 1940 Nazi threat in those terms to Britain.

“Some chicken. Some neck,” retorted Winston Churchill.

Saviour or Satan

If you want to get a grip on the vehemence of the environmental movement in campaigning against coal seam gas development in Queensland and northern New South Wales, read Tuesday’s (20 March) issue of “Climate Spectator.”

New editor Tristan Edis, late of the Grattan Institute and before that Ernst & Young, has juxtaposed commentaries by Matthew Wright, executive director of Beyond Zero Emissions, and Tony Wood, energy program director of the Grattan Institute and previously a senior manager at Origin Energy, on the potential future role of gas in Australian electricity generation.

Edis sums up Wright’s view as “even if gas is lower emitting than coal, a policy that supports a huge injection of investment in to new, long-lived gas assets is just creating an (abatement) millstone round our necks.”

Edis observes, however, that “there is no way you can persuade most politicians in Australia to sign up to 100 per cent renewables in 2040, let alone 2020” (which is the BZE dream).

Intriguingly, Wright says in his comments that federal Climate Change Minister Greg Combet will not accept briefings on a move to 100 per cent renewables.

I am also intrigued by Wood’s comment that Australia is blessed or cursed (with a question mark) with a bounty of energy choices.

I can think of a number of other nations that wish they were cursed like us! Japan for one.

Wood acknowledges that gas, in combination with wind and solar developments, can contribute strongly to the achievement of near-term abatement objectives, but he goes on to ask whether gas as “today’s saviour” will become “tomorrow’s Satan”?

If you read what Wright, Bob Brown and the raft of anti-CSG campaigners have to say, then they clearly believe that Satan is already swishing his tail in NSW and Queensland.

It’s funny how these debates circle around themselves.

To get a handle perhaps we should understand that the “gas” we burn, either directly for heating and cooking or in power plants to make electricity, is more or less pure methane and it can be sourced in several forms.

Back when I was running the Electricity Supply Association – from which I retired at the end of 2003 – the big gas issue was whether or not to build a pipeline from Papua New Guinea to Queensland to meet our gas needs as conventional east coast reserves ran down.

Then the engineers cracked how to extract methane commercially in large volumes from the coal fields of Queensland and opened the door to a whole new world: with large resources to meet domestic needs and to underpin a substantial LNG export trade from Gladstone.

This is the sort of development that makes total nonsense of efforts to prescribe what our electricity fuels will be in 2050.

Anyone suggesting in the 1980s, when I was managing the upstream petroleum industry association, let alone the 1970s, that we would have a huge energy business running on coal seam gas on the east coast would have been taken away in a sleeveless white coat!

Now we are told by the energy industry that the east coast has more than 110,000 petajoules of viable gas resources, around 92,000 PJ of which is attributable to the CSG accumulations in Queensland and northern New South Wales.

(And this is before we get to grips with the shale gas reserves deep under the Cooper Basin in central Australia – from which region pipelines are already in place to Adelaide and to Sydney.)

The Energy Supply Association, in its submission (available on its website) to the federal government’s energy white paper process, claims that cumulative domestic demand for gas over the next 20 years will be around 21,000 PJ, of which about 10,000 PJ is attributable to the requirements of gas-fired generation.

ESAA says it expects gas generation’s share of total power station production on the east coast to rise by about seven per cent between now and 2020.

A critical issue in how far gas makes inroads in to the power station patch is what it will cost.

In its submission, ESAA supports a view that the production cost for new CSG development will be in the range of $4 to $5 per gigajoule. The current east coast cost about $3 to $4.

Others, however, suggest that east coast wholesale gas prices could be around $9 per GJ in the second half of the decade, influenced by international values.

ESAA notes that getting more gas out of the Gippsland Basin could cost $7.20 per GJ, which raises a question in my mind at least about building new combined cycle plants in the Latrobe Valley if and when some of the brown coal plant is closed down.

Wood points out that the carbon price to be introduced on 1 July will add about $9 per megawatt hour to gas generation versus $18 for black coal and $28 for brown coal.

On its own, this level of carbon pricing is not going to do a great deal to support investment in gas-fired plant but the unwillingness of financiers to support new coal projects is likely to be a greater driver of new CCGT and OCGT.

(Edis, I note, has an expectation that, when the fixed price scheme shifts to emissions trading, the domestic carbon cost is likely to drop to a “measly $15 per tonne” in 2015.)

None of the trio refers to the 2034-35 energy forecasts produced in December by the Bureau of Resources & Energy Economics and to my mind the touchstone now for where things are heading.

With a carbon price rising at the federal government’s forecast levels and a medium increase in wholesale gas prices, BREE predicts that gas-fired generation output will rise from 40 TWh in 2008-09 to 64 TWh in 2020 and 126 TWh in 2035 as brown coal-based production slides from 53 TWh to 20 TWh and black coal output falls more gently from 129 TWh to 114 TWh.

The joker, BREE points out, is the situation if east coast wholesale gas prices do soar to higher levels.

This, it predicts, will result in gas plants’ share of generation output falling back to only 74 TWh in 2035 while black coal generation rises to 137 TWh and brown coal production bounces back to 40 TWh.

I note with a raised eyebrow that the fervent Matthew Wright declares in his “Climate Spectator” commentary that “I’d much rather see a fleet of dirty old coal plants spewing out emissions than newly-built combined cycle gas plant.”

Cor!

Wright dreams that the “dirty old coal plants” will survive only 10 years before being driven out by clean, green wind, solar and geothermal power.

His nightmare is that, if they win the BREE-forecast levels of market share, the gas generators will “crowd out the space for renewable energy in the next 60 years.”

He is actually supported, more or less, in this view by none other than the consultants employed by Swan and Combet through federal Treasury to produce the “clean energy future” projections.

The consultants suggest that in 2050 we will have a situation where conventional black coal plant still holds up to 10 per cent market share (although existing brown coal generation is deader than the flightless bird) and conventional gas plant holds between 20 and 26 per cent of the mix.

Worse, much worse, in Wright-world, coal and gas plants with carbon capture and sequestration hold between 25 and 33 per cent of electricity production mid-century while, leaving aside the long-lived hydro power (four per cent or so), the favoured renewable producers have but 30 to 37 per cent.

Edis asserts that it is “the fear of the unknown” that is the greatest barrier to “progress” – that is, in his terms, the wholesale replacement of coal with gas or renewables – while Wright frets that allowing gas to assume more than a transitional role will mean that the owners of such plants “will never consider writing off their billions of dollars of investment in 15-30 years time” and we will be “in the same predicament in 2030 as we are today” with fossil fuel generators’ demands for compensation.

I guess Wright will have to accept that, if he can’t get in Combet’s door, he has Buckley’s chance of doing so with whoever replaces him from the Coalition after the 2013 election.

This is the point, of course, at which my friends advocating nuclear power suggest modestly that there is an alternative to large-scale embracing of gas if your aim is zero emissions generation.

They, I fear, have no chance of getting in Wright’s door. Or Gillard’s.

Scaling the peaks

Nothing is calculated to bring ‘em out of the trees faster than anyone suggesting that the peak oil contention is bunk or at least no longer valid.

Veteran Australian journalist Alan Kohler – best known to most as a finance commentator on ABC Television and presenter of its “Inside Business” program and also editor-in-chief of the electronic independent news and commentary stable of “Business Spectator” and “Eureka Report” – would know this and have not been surprised that his commentary in “Business Spectator,” repeated on the ABC’s “The Drum” website, about the transformation of global energy markets as a result of shale oil and gas has drawn a mass break-out of postings, mostly of the “you must be mad” line of approach.

The commentary in “The Drum” drew 168 responses to add to the 25 when it first appeared in “Business Spectator.” To which you can add 87 responses to a critical piece in “Crikey,” also part of his stable, and a shoulder charge from a contributor to “Climate Spectator,” who told him that “none of your statements can be supported by statistical evidence.”

Kohler may care to potter over to Adelaide in the second week of May to the 2012 conference of the Australian Petroleum Production & Exploration Association – of which I was once, a long time ago, executive director for 11 years – and listen to one of its star plenary speakers, Christophe de Margerie, the head of French oil and gas giant Total.

Allegedly known to his workers as “Big Moustache,” De Margerie, grandson of the founder of Tattinger Group (as in champagne), stands out among the executives of the petroleum majors as still publicly stating that a peak is close in global oil production – with supply stalling at 95 million barrels a day (not that far up from today’s 91 million barrels).

De Margerie argues for the exploitation of every energy source available, including coal, nuclear and solar power, and is heavily engaged in pursuing oil in American shale deposits.

Kohler, in his articles drawing fire from the doom-and-gloomsters, argues that the US alone has an estimated two trillion barrels of shale oil reserves (eight times what Saudi Arabia claims) and points to large prospects in Australia and elsewhere.

His critics say he is confusing reserves and resources, the former being the highly desirable 3P target for explorers (proven, possible and probable), and anyway the big problem is that accessing shale oil will create a whole new threat to life on the planet as we know it through adding to global carbon dioxide emissions.

Like the climate change debate itself, the peak oil argument can never be resolved between believers and non-believers. As the multitude of responses to Kohler’s commentary demonstrate, everyone has a statistic to throw on the pyre.

I am inclined to agree with those who argue that part of the reason upstream petroleum leaders, other than de Margerie and his Total team, don’t want to acknowledge even the prospect of peak oil is tactical – countries like Russia, Iran and Venezuela, with large still untapped reserves, will be in like Flynn to demand higher returns from them.

But it is not possible to assert that the perspectives of 2010, when the peak oil noise was last at its peak (sorry), are equally valid in 2012.

Standing back, one can see American production slowly rising again as a result of the shale revolution as conventional resources such as those in Alaska begin their decline and the Gulf of Mexico looks like finally making a comback from the Macondo disaster.

Meanwhile about half a million barrels of production a day has been yanked out of the market because of big-time hassles in South Sudan, Yemen and Syria.

On the other hand additions to supply could soon be reaching the market from Iraq, Angola, Libya and Colombia.

Kohler doesn’t say so in his commentary but I wonder if he has been reading the new analysis from banking giant Citi – put “Resurging North American oil production” in to Google Search and you, too, can read all 17 pages of it.

Heavily paraphrased, Citi’s riposte to “peak oilers” and their less bold cousins, “plateau oilers,” is that the International Energy Agency has misread the tea leaves, strongly influenced by the tendency in the past decade for major projects to come online much later than expected, at higher costs than budgetted and with much less oil.

Citi, in my interpretation, asserts that the IEA has committed the classic error of using yesterday’s information to forecast tomorrow’s outcomes and the bank predicts that a surge in discoveries and their conversion in to production should see a marked improvement in the oil supply outlook.

Apart from the US, Citi points to significant shale oil prospects in the Argentine and France’s Paris basin.

Australia comes in for a special mention: “Australia’s shale may also hold promise and drilling could be in for a break-out later this year and early next year, with oil field services companies positioning themselves for a ramp-up of activities.”

You would have to go back to the 1960s and 1970s, when Esso Australia and BHP (as they then were) made major discoveries in Bass Strait, to find this country getting a mention in the same breath in commentaries on global oil prospects.

Citi sums up the outlook like this: “The shale oil revolution is in full swing in North America. It is unlikely to stop there and eventually its impact will be felt globally. For now, the immediate, tangible market impact will be to drive down oil prices in the US versus the rest of the world. The US, after many weak starts, appears to be on course to achieve energy independence this decade.”

All this, of course, is terrific grist to the mill of APPEA for its 52nd annual conference in Adelaide (13-16 May – you can find the details on www.appeaconference.com.au) because the association has lined up, in addition to de Margerie, the Saudi Arabian Minister of Petroleum & Mineral Resources, Ali bin Ibrahim al-Naim, the new executive director of the IEA, Maria van der Hoeven, and ExxonMobil’s Emma Cochrane, one of the executives of its Asia Pacific and Africa gas marketing activities, plus the CEO of BHP Billiton Petroleum, Michael Yeager, and a bus-load of local senior petroleum types led by its current chairman, David Knox of Santos, to talk to the theme of “The Energy Revolution.”

A significant chunk of the APPEA forum’s agenda is being allocated to the environmental debate on unconventional petroleum drilling onshore, which is also an issue in North America and parts of Europe.

As Kohler (more-or-less) says in his much-maligned commentary, if the US could become self-sufficient in energy, the tectonic plates of global supply shift again, the international economic picture changes and the world’s governments, debating carbon abatement, have to think things through anew because the emissions picture in 2030 will be altered.

Meanwhile at CERA Week in Houston – wonderfully described in the “Wall Street Journal” as the global energy elite’s own version of Davos, sans the skiing – top speakers have been arguing this past week that the shale revolution is “changing the political dialogue on energy.”

I think that’s pretty well the point that Kohler is making.

PS: Full disclosure, I guess, requires that I note I contribute commentaries on energy issues, mostly electricity, to “Business Spectator.” You can find them by clicking my name on “The Spectators” on their tool bar – adding up to 166 contributions at latest count, I note.

Three in to one

It’s no surprise that the O’Farrell government in New South Wales intends to shoehorn its three electricity distribution businesses in to one organisation even though it has been warned by Michael Lambert, in his audit of the State, that doing so may impact on the value to be had when privatisation is pursued.

Although it went to the March election a year ago indicating that it would convert the three businesses in to two, it has been apparent for some months that the government is opting for Big Co, as the new entity is nicknamed.

It’s also no surprise that changing the government does not mean changing the addiction to spin that is now a cancer in Australian (and overseas) politics.

Hence the first sentence in the story leaked to the State’s largest Sunday tabloid newspaper: “The O’Farrell government today will announce its biggest initiative to reduce the cost of crippling power bills.”

Of course, this had to be accompanied by a comment from Energy Minister Chris Hartcher that the merger, to take place in July, would “significantly reduce the ability of the three businesses to goldplate their networks through unnecessary investment.”

The model, he asserts, “will cut administration and corporate costs by standardising operations.”

All this is straight out of the spin school of the previous Carr-to-Keneally Labor government (and the adherents to the practice in other States and in Canberra).

Here, by contrast, is how the federal government’s “National Energy Security Assessment” – published in late 2011 – sees the NSW network expenditure situation:

“The Australian Energy Regulator’s April 2009 determination for NSW distributors shows that, of the $14 billion of approved capital expenditure over five years, asset replacement accounts for around 31 per cent and growth in electricity demand represents around 42 per cent.

“The remainder covers reliability and quality of service enhancements (nine per cent) and costs associated with environmental, safety, statutory obligations and other system and non-system assets such as information technology and business support (18 per cent).”

The “NESA” review adds: “With most of the existing electricity networks constructed in the 1960s and 1970s, significant investment is now required to replace and upgrade these older assets, which have reached the end of their service life.”

Context of course is just about the last thing your typical politician wants voters to understand – it will only highlight the yawning gaps between the dreams being woven for the electorate and reality.

In NSW, for example, the O’Farrell government is working on population growing at an average of 90,000 annually and is pledged to drive business investment growth to average four per cent a year this decade.

Among the many implications of this is that there will be greater demand for electricity and it will put greater pressure on the networks’ ability to deliver energy.

You can hypothesize a situation, you see, where a large part of new generation capacity to meet the needs of Greater Sydney in particular is located over the NSW borders – coal or gas power, even nuclear power, in central Queensland, geothermal or wind power in South Australia – but the energy can’t reach the customers without the wires, transformers, sub-stations etcetera located inside the State.

The major energy users argue that a big part of the present price problem lies in the alleged inefficiency of government-owned networks compared with those owned by investors. They suggest government-owned network outlays could be cut in half through “thorough reform.”

(Part of this reform, apparently, means behaving as if Victoria, Queensland, South Australia and NSW were located in England and Wales, but that is a different debate.)

A major part of the reform in mind, of course, would be selling the government businesses to the private sector – something O’Farrell went to the last election pledging not to do and he remains wedged today by his own faintheartedness.

In the case of the NSW distribution business, the facts are that the regulator slashed $641 million in capex allowance bids and $417 million from opex in the 2009 determination, citing slower economic growth and an expected slowing in the growth of maximum demand.

At the time, the AER, noting that the capital outlays for 2009-14 would be $6 billion or 80 per cent higher than in the previous five years, said its analysis “confirmed the need for and efficiency of increased investment.”

The regulator made three key points about the trio of networks:

(1) Country Energy (now Essential Energy after the Keneally sales process) needs to augment its network in high growth areas such as the NSW north coast and,among other things, deal with poor-performing feeder lines.

(2) Energy Australia (now Ausgrid) needs to meet growing demand in the Sydney CBD, to replace ageing and obsolete assets and to reinforce the CBD system to meet government-imposed reliability requirements for 2014.

(3) Integral Energy (now Endeavour Energy) has to build new sub-stations to cope with demand growth, particularly in Liverpool, Parramatta and Blacktown, while undertaking a major program to replace aged transmission and zone sub-station equipment.

Which bits of this are Messrs O’Farrell and Hartcher going to target in their crusade against “gold-plating”?

The other thing to bear in mind about electricity supply is that, while it is geared to meet demand as it happens, this is not a “just-in-time” industry when it comes to infrastructure development.

New power stations, new substations and new powerlines are projects that typically take 3-5 years from go to whoa.

The submissions that the new BigCo distribution business will be required to make to the AER in 2012-13 will cover capex for 2014-19.

Allegedly, the travails of the global economic crisis will be washed out of the Australian system by then.

If so, how far will demand be back towards the predictions in the 2011 Energy Supply Association yearbook – which saw a 2,800 MW increase in peak power requirements for NSW between now and 2019-20 and an almost 11,000 gigawatt hours increase in system energy?

This time frame covers the expected life of the Coalition government in NSW, given its huge 2011 majority, and how well it has coped with the twin challenges of delivering energy security and power cost management will be a big factor in its chances at the March 2019 poll.

It will not improve its long-term prospects with bluster and spin about the power sector for short-term gain today.

FOOTNOTE: This is what Michael Lambert said in his audit report to the O’Farrell government, in which he advocated a long-term leasing arrangement for the three distribution businesses: “The State is currently investigating the feasibility of merging two of the three distributors. It should be noted that a merger would be unnecessary and potentially counter-productive if the decision is made to proceed with a sale or long-term lease.” Lambert claims that there is evidence private sector owners will manage the businesses more effectively, achieving lower costs that would flow through to lower prices.

Chasing conflicting aims

The Energy Networks Association’s new chief executive, Malcolm Roberts, who previously ran the National Generators Forum, now split in two as members struggle with carbon and market issues, has made a very cogent point in the organisation’s newsletter.

“In 2012 (amid a flurry of activity on energy issues) governments seem to be chasing conflicting policy aims.”

This should be writ large in the public debate, but, if Roberts got a run in any of the mainstream media, it has escaped my eye.

His argument is that, on the one hand, there is a political imperative pressing on governments to contain rising power prices but, on the other hand, policymakers want the energy sector to meet their ambitious goals – which can only put upward pressure on prices.

As Roberts says, there are many who claim that the existing energy markets and regulation are not delivering what they should – which, I add, means fertile grounds for their pet ideas to flourish.

A case in point is the reaction this week to the NSW Independent Pricing & Regulatory Tribunal’s recommendations to further cut the return to investors in rooftop solar PVs. (The fall-out from the bungled “solar bonus scheme” by the Rees and Keneally governments rolls on and on.)

The environmental movement and sympathetic commentators have been quick to seize on the IPART determination to argue again that the “national electricity market” – the system serving the east coast but not Western Australia and the Northern territory – is “badly broken,” that the present arrangements are biased against solar and that there are billions more being spent on network infrastructure than is really required.

The debate isn’t helped by the inability of some to get their heads around the make-up of the final electricity bill.

Let me use the Port Jackson Partners modelling (as presented to my “Powering Australia 2011” conference in Melbourne last year) to demonstrate.

At present NSW residential power bills are about 20.4 cents per kilowatt hour (about 25 per cent up on what they were five years ago) and this is made up of 7.4c for wholesale energy, 9.7c for network charges, 0.8c for renewable energy costs and 2.5c for retail costs and margins.

If you factor in the upcoming carbon price, the higher required levels of the RET and likely increases in fossil fuel contract prices, as PJP does, by 2017, it says, the break-up will be 14.9c for wholesale electricity, 16.9c for network charges, 0.9c for renewable energy and 3.6c for retail costs and margins, adding up to 36.3c per kWh.

The big ticket factors in the rise are a 9.5c increase in wholesale costs and a 9.2c increase in network charges.

The network costs causing further increases in charges are largely set in stone – the product of the current Australian Energy Regulator determinations for 2009 to 2015. The capital outlays causing them have been driven by the continuing rise in peak demand to meet our modern lifestyle and the need to comply with government-imposed increases in environmental, safety and reliability standards.

How this signals that the NEM is “broken” surpasses my understanding.

As well, it is fanciful to think that the AER will slash the next tranche of network capex out to 2019-20 to such levels that will knowingly risk energy security – and IPART’s recent comments on the NSW “solar bonus scheme” (see its website) highlight that rooftop PVs have network cost implications too.

Malcolm Roberts notes that the “market has failed” critics are pushing for more energy efficiency activities, more demand-side participation and more investment in renewables.

“Their solutions,” he says, “tend to be more government intervention rather than measures to make the market more efficient.”

As he adds, given a choice between reforming retail prices to incentivise customers to reduce their peak demands or introducing new government schemes, policymakers typically choose the latter.

Roberts signals that the ENA will devote itself in 2012 to arguing against more layers of regulation to distort the market. One wishes him luck, but the odds are against his goal being realised.

Lost to view in all this debate is the fact that the electric power industry has continued to deliver reliable supplies across the country for the past decade. The hassles we are encountering relate to government interventions and the famine-then-feast approach to network regulation.

One observer of the regulatory scene points out to me that in Victoria, for example, the 2000 decision to slice 20 per cent off network revenues in the State and 10 per cent off their outlays was followed by peak demand growing 15 per cent in the next seven years.

One of the Victorian networks, she says, now has 40 per cent of its assets with an average age over 30 years – versus a desirable 25-year working life.

An important issue with network infrastructure, of course, is that the failure rate is asymmetrical – in other words it gets worse much faster on the downhill run to the assets’ end of life.

Something interesting to read just now is a consultancy report provided to the Australian Energy Market Commission – as it considers the AER’s proposals for regulatory rule reformation – by English professor George Yarrow, who is director of the Regulatory Policy Institute, Oxford.

Yarrow’s report (available on the AEMC website) says in passing that the British electricity industry is currently marred by political considerations dominating how generation investment is to be made.

The big question for the AEMC, Yarrow comments, is whether the major aspects of the current proposals in Australia would be an appropriate response to to identified problems arising from inadequate regulatory discretion or whether they will lead to inappropriate forms of rate-shock mitigation.

Yarrow says its is beyond contention that Australia has a general problem with increasing power bills and that network costs are major contributors to these price hikes – but this, he argues, takes us very little along the way to answering the question of whether the proposed rule changes are warranted.

The AER’s submission “nowhere actually provides evidence or convincing reasoning” in support of its contentions.

He notes that there is a working presumption in economics that a regulator with unconstrained discretion to set price controls will be tempted to opportunism and that the temptation will be particularly great in circumstances of rate shock.

Regulatory discretion, he adds, comes with biases of its own.

He also bitingly asks, with respect to the accusations that the networks have been over-forecasting demand (“gold plating” cried Garnaut, you may recall), what the AER believes the main aspects of the problem to be and why?

Do the utilities take on too many projects or do they over-engineer them? Do they undertake the wrong projects? Or is that, whatever they do, it is at a higher cost than necessary?

None of this, says Yarrow, is very clear.

The bottom line here is that the political tendency today, sooled on by vested interests and what the federal Treasury caustically denounces as “rent-seekers,” is heavily oriented towards a flurry of activity rather than delivering what the customers primarily want – reliable supplies at demonstrably reasonable prices – and cost-efficient carbon abatement

Sydney versus Melbourne

As many know, it is more than football code allegiance that makes Melbourne different to Sydney.

Having once lived in the Victorian capital for a decade, and with a daughter living there now, I am not so foolish as to offer opinions about which city is better than the other.

Australia’s largest distribution network service provider, Ausgrid, however, has been running the rule over household energy bills in the two cities and its views (which are available on its website) make for interesting reading.

The big residential energy difference between our two premier cities can be attributed to a bloke called Bolte.

Sir Henry Bolte was premier of Victoria when Esso Australia and BHP, as they then were, produced the Bass Strait oil and gas fields out of their explorers’ hard hats in the 1960s.

That was a time when upstream petroleum was all about oil – finding gas was barely second prize. The Bass Strait twins had found oil big time and were quite happy to roll over when Sir Henry put the hard word on them to provide Victorians with cheap-as-chips gas.

Nearly a half century later, the tangible evidence of Bolte’s ploy is still very much in evidence.

More than 92 per cent of Melbourne households are connected to mains gas (versus 45.7 per cent in Sydney).

More than 75 per cent of Melburnians use gas to heat their water (versus 31 per cent in Sydney).

Nearly 75 per cent of homes in Melbourne use gas for space heating (versus 16.7 per cent in Sydney) and 73 per cent use it for cooking (versus 36 per cent in Sydney).

The bottom line is that electricity use in Melbourne averages 5,700 kilowatt hours a year against nearly 7,400 kWh annually in Sydney.

The average Sydney home (in dual fuel households) consumes 20,000 MJ of gas annually versus 52,000 MJ in Melbourne.

On the flipside, residential customers in Victoria pay a higher annual service charge for electricity than in New South Wales – it’s all about asset costs and volume of energy sent down the lines – and this, of course, can lend itself to some selfserving claims by some stakeholders in the game.

By the way, bring the energy use down to one measuring point and Melbournians (in a dual fuel house) consume 70,360 MJ a year compared with 41,240 MJ in dual-fuel houses in Sydney.

(Ausgrid notes that a kilowatt hour of electricity can be translated to 3.6 MJ.)

Not to be forgotten in all this is that brown coal is a lot cheaper than black coal and this counts where it matters – in the final bills.

Comparisons of what householders pay always runs in to the fact that different homes use widely differing amounts of energy.

In Sydney, for example, according to Ausgrid, a small household consumes 3,500 kWh a year of electricity on average while an all-electric medium-sized home uses 8,500 kWh, with 2,600 kWh of this consumed by its hot water system on a controlled load tariff.

Big households, and you should walk around The Hills shire where I live in Sydney to note just how many of these there are, can consume 10,000 kWh a year even when they also have access to gas.

The energy needs of three or even four air-conditioning units and a couple of plasma TV sets plus the swimming pool system soon add up.

There is about 17 cents a day, on Ausgrid modelling, between what small Sydney and Melbourne householders fork out for electricity — $1,034 in Sydney versus $1,093 in Melbourne.

Medium-sized all-electric homes in Sydney cop an annual power bill averaging $1,860 versus $1,981 in Melbourne.

The better-off among us in dual fuel homes pay rather more in Sydney than Melbourne – averaging $3,364 versus $3,408 – with higher gas prices in NSW making up about $101 of the difference.

Gas delivered in Sydney is still about 30 per cent more expensive than in Melbourne (many thanks Sir Henry).

The bottom line in all this, of course, relates to those who want to tell us that there is a big advantage to investor-produced power over that distributed by government-owned utilities, or vice versa.

The facts are that, until you get up to the wealthy, the difference between the two, either way, would barely buy you a cup of coffee a week.

As I have made clear any number of times, I support electricity and gas being provided to us by the private sector.

Government shouldn’t have a role in these industries, given its involvement in policymaking and regulation (and the unsuppressible urge of politicians to mess with the system and its costs).

I think Barry O’Farrell blundered when he promised not to sell the networks businesses before the March 2011 NSW election.

He was always going to win by the length of Royal Randwick or Rosehill straight – and it is notable that a year later his margin of voter support over Labor, according to a new Newspoll, is still way out there, notwithstanding a so-so first year in charge.

He did not have to make that promise.

If he had $30 billion or more available now (to add to the up to $6.3 billion I see being claimed as the value of Macquarie Generation and the leftovers of Delta Electricity and Eraring Energy, not to mention his share of the $5-6 billion to be had from selling Snowy Hydro), he could be approaching much-needed infrastructure development in NSW with a song on his lips.

(It would help to have managed a small majority in the Legislative Council to go with the big one in the Legislative Assembly. As it is, O’Farrell and State Treasurer Mike Baird are going to have to haggle with the Shooters Party to get the generation sales legislation through the parliament.)

Labor, the Greens and the unions are still singing the “Just say No” song, of course.

But, on these Ausgrid numbers, trying to prove some inherent advantage of one over the other in the government-owned versus investor-owned debate – or that privatisation will invite the investor Goths and Vandals to our doorsteps – is tosh.