TiP

Some idea of just how poorly rather too many in the media understand the carbon/energy issues can be found in this week’s ABC news report on a Standard & Poor’s/RepuTex review of the electricity market.

The ABC’s report starts like this: “Australia may still be dependent on coal-fired power stations at the end of the decade because of volatility in gas and carbon prices and a lack of infrastructure. Gas-fired power stations are not being built quickly enough to replace coal.”

What does it take to get the ABC and others in the media to understand that there is absolutely nothing in the federal government’s “clean energy future” approach that affects large-scale dependence on coal-fired generation this decade and a strong, if declining requirement for it over the next 25 years?

The current mix nationally is 70 per cent coal-fired power production plus 18 per cent gas.

The Bureau of Resources & Energy Economics 2034-35 report sees coal’s role at 57 per cent in 2020 and 38 per cent at 2035.

What this means in actual production terms is coal-fired generation declining from 182 terawatt hours to 178 TWh in 2020 and 134 TWh in 2035.

The BREE modelling sees gas-fired power rising to 21 per cent at the end of the decade and 36 per cent in 2035.

As I have pointed out several times before, this involves black coal miners providing more than a billion tonnes of their product to generators in New South Wales and Queensland over the next quarter century.

Why, given the ready availability of information, this outlook remains beyond the understanding of the ABC and others in the media is something of a mystery.

No doubt to the great surprise of the ABC, there never has been any “may” about dependency on coal power at the end of the decade, but the reporting does sustain the view that government spin – “clean energy future” – works with journalists unable or unwilling to undertake minimal analysis of information that is readily available.

The RepuTex research paper, co-published with S&P’s ratings, states the outlook quite straightforwardedly:

There will be a gradual transition to more gas generation. While many coal plants are ageing, they are well within the typical 40-50 year life span for such generation.

Despite its efficiency, gas plant is expensive to run. Even with the carbon price, conventional coal plant is relatively inexpensive.

The pace and scale of a transition depends partly on the rising price of gas and of carbon – and on what headroom is provided in the market by new demand.

“Medium to long term a soft baseload demand outlook is likely to result in few new plants being built,” say RepuTex.

They sum up their modelling by observing that, while gas is expected to be a winner under the existing carbon program, “the extent of the victory could be muted.”

The development of LNG projects on the east coast from 2014 is expected to push up gas prices and this, particularly if carbon costs stay low and construction capital costs continue to rise, “will preserve coal’s competitiveness.”

The analysts note that, with baseload demand remaining flat, investors are going to need to be convinced of returns from alternative power sources to drive large outlays and that investment in peaking plant is more likely – which is exactly what other analysts and industry executives have been saying for some time.

In the absence of substantial system demand, RepuTex add, wind farms could meet any supply shortfalls, further affecting the economics of building large-scale gas generation.

One of the conundrums of the times is whether advancements can be made in renewable technologies to make them more attractive to investors as a transitional fuel to a lower-carbon future, bypassing gas.

RepuTex suggest that by early next decade it may become difficult to convince lenders to take long term stand-alone exposure to new baseload power developments, including gas, but it also rightly points to the big, integrated suppliers (Origin Energy, AGL Energy and TRUenergy at present) having more ability to absorbed any stranded asset risk.

As for the outlook for renewable energy this decade, RepuTex say all three scenarios it has modelled forecast that the 2020 legislated target may not be met.

They point out that wind capacity will need to increase by between 4,750 MW and 5,000 MW to enable the RET to be achieved. If wholesale prices remain weak, as they are today, it may be cheaper for retailers to pay the market penalty under the RET legislation.

RepuTex suggest that the 2020 renewables market share could be 14 to 17 per cent rather than the desired 20 per cent.

“Judging by the current small size of the renewables pipeline, (reaching) the 2020 target could be a stretch.”

In sum,taking in to account the apparent impending Labor disaster in the next federal election and the views that gas prices on the east coast will rise, the direction of power generation investment is anything but straightforward – which, of course, BREE’s modelling made clear some months ago.

The alternative BREE scenario, based on a substantial hike in gas prices, sees three important trends:

First, demand out to 2020 is dampened – BREE suggests system energy needs will fall from 310 TWh to 288 TWh.

Second, output from coal plants stays pretty well where it is – at around 182 TWh.

Mind you, this is dependent on brown coal production remaining at present levels and the current federal government’s soon-to-be-announced decisions on buying the closure of 2,000 MW of coal generation is an important factor.

Third, gas generation’s share of system energy falls back from a projected 64 TWh in 2020 to 39 TWh, but this will depend on the plant closure outcome – it is a given that, if, for example, Hazelwood or Yallourn units are shut, the replacement will be combined cycle gas plant.

Whatever happens, BREE is looking to wind energy to build itself up to about 37 TWh of the national mix by 2020, but this, as RepuTex point out, requires the RET to be met.

While all this is of tremendous interest to the Greens and the environmental movement, politically, of course, the really big issue is what will happen to wholesale energy prices and therefore to the retail bills?

It seems likely to take 2-3 years for a new picture to emerge, including the fate of carbon pricing, and in the meantime the most likely outlook is for generation investors to continue to do what they have been doing for the past two years: sitting on their hands.

A fairly predictable return to hotter summers and colder winters in this period, with its implications for peak demand, is yet another factor in the mix.

There are lots more bumps to come!

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