TiP

Soon after Barry O’Farrell was elected leader of the New South Wales Liberal Party, and hence leader of the State opposition, someone thought it might be a good idea to have me brief him on issues electric.

So it came to pass on a sunny morning that we sat down for a chat in the opposition’s quite salubrious offices in Parliament House, Macquarie Street.

In his avuncular fashion, O’Farrell kicked off by saying “So, Keith, what’s your advice about electricity?”

My retort was “Given the way things are, don’t win the next election.”

There was a pause and then O’Farrell said gamely “Well, that’s not actually my plan.”

I wonder, now that he is Premier of the State, whether he remembers that conversation? Certainly, by now, he will know that my comment was not an idle one.

Among the issues he has to handle in the hot seat are:

(1) The State, in the words of his own minister, is facing an energy crisis mid-decade because of the ending of the existing contracts for gas supply from interstate – accounting for 95 per cent of consumption – and the immediate lack of options to replace them.

(2) There is an insurrection among farmers in the State’s north, aided and abetted by the environmental movement, against coal seam gas development and also a running row between the petroleum industry and manufacturers over a reservations policy to sequester some of the resource for domestic use. Without local coal seam methane and low access to interstate supplies, 1.1 million NSW gas customers have a big problem ahead.

(3) The festering sore of rising power bills, which can only briefly be sheeted home to the federal Labor government until Tony Abbott secures victory and ditches the carbon tax – with it out of the way, prices will continue to rise for a range of reasons, not least increasing network charges.

(4) The fact that the trajectory for NSW network capex is set in concrete until mid-2014 by the Australian Energy Regulator’s determinations and ongoing substantial retail price rises are a given with more to come because the AER may slice and dice the 2014-19 bids but the capex it approves will still run to billions more dollars and hence higher tariffs.

(5) The problem he has made for himself by committing before the 2011 election not to privatise the networks, thus denying his government some $25 billion in essential infrastructure funding until at least after March 2015 (when the next poll will be held).

(6) The complexity of melding the three distribution businesses in to one, a task now under way and one unlikely to deliver significant savings when set against ongoing expenditure and ensuing charges. Get the cuts and the set-up wrong and a series of blackouts will be even less acceptable to voters – confer the Queensland experience under Peter Beattie.

(7) The inevitably unpopular deal he has had to cut with the Shooters’ Party to get his generation privatisation through State parliament, returning the government, he says, a meagre $3 billion. (See below.)

(8) The major problem of peak demand, which is worse in NSW than anywhere else in the country, with predictions that, if current trends are maintained, the State’s peak capacity will need to rise from almost 15,000 MW in 2010-11 to more than 20,000 MW in 2030 with perhaps 3,000 MW of the increase occurring this decade. Every megawatt adds about $4 million in capex requirements.

(9) The supply industry expectation that the State will agree to abolish regulation of household and small business power prices as part of a longstanding COAG agreement and will embark on a roll-out of smart meters and a consequent introduction of time-of-use charges, not an easy or popular exercise.

(10) Continuing pressure on the State government to allow large-scale wind farm development as part of the national renewable energy target set against a vocal rural community opposition to such projects and O’Farrell’s own negative outlook on wind power.

One could go on. The list is by no means complete – but, as it stands, is already enough for a major political headache over the course of the Coalition’s first term in office. (And I have not even mentioned privatisation of Snowy Hydro………)

Unpopular though it is – especially with the ABC, the Fairfax media, the environmental movement, doctors’ wives and the inner-urban types who seldom set foot in a State forest but like the thought that they are there – O’Farrell’s deal with the shooters to enable the generation sales is a pragmatic step to resolve a mess inherited from Labor.

The present “gen-trader” situation for two of the three generators – Delta Electricity and Eraring Energy – is simply unworkable and there is no case for selling them and holding on to Macquarie Generation.

Indeed, MacGen is where the sales value now lies.

The ACCC, however, has signalled already that it will not wear MacGen being retained in its present form.

The market power to be gleaned from Bayswater and Liddell plants in the hands of one private business is simply not on.

Logically, the break-up will see Bayswater and the Bayswater B site sold together and Liddell in a second package.

However, the latter power station will be 50 years old in 2022 and what it is worth in a carbon-constrained environment – which we will still have even when the Coalition has won office federally – is an open question.

I confess to being puzzled as to why O’Farrell and his Treasurer, Mike Baird, or the Sydney media are letting the Labor leader, John Robertson, get away with a re-run of his tendentious argument that the sales will push up electricity prices – dog-whistling as he goes about a 30 per cent increase in South Australian prices following that State’s sell-off of ETSA (it’s distribution and transmission business).

The simple point about the NSW generators is that they have to sell their product in to a competitive wholesale market.

What’s more they do not have enough output to completely meet State demand – about seven per cent of NSW consumption comes from Queensland.

The State gencos are price takers not price fixers and any suggestion that private investors could game the market is to assume that Rod Sims and the ACCC will be asleep at the regulatory wheel when it is rather obvious that the contrary is the case.

NSW wholesale power prices may rise substantially this decade – but it will be because of greater reliance on gas generation, whether supplied from coal seam methane or other sources interstate, plus whether or not there is a carbon tax. The gencos’ ownership is not the point at issue.

It is terrible journalism for the ABC and the newspapers to allow Robertson to parrot his “prices will rise” line without pinning him on why he claims it will happen.

The bald assertion (!) should not be allowed to pass unchallenged.

The bottom line here is that a successful genco sale – and there will be endless debate about what success looks like – will not solve the energy challenges facing O’Farrell and his government even if it gives them a short breathing space.

Managing energy policy is one of the hardest tricks in government today – overseas as well as here – and spin simply will not work.

My suggestion is that O’Farrell needs an energy white paper, something that Bob Carr squibbed in 2005-06, and that it needs to look out to at least 2022 and perhaps 2025 and to be scheduling the task for revision in 2016 and 2020.

The problem for the government is that this will require it to take a stand on a range of issues and to be well-prepared to deal with the brickbats, of which there will be many.

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