Responding to a journalist who asked what was most likely to blow a government off course, Harold Macmillan, in retirement, sighed “Events, dear boy, events.”
We have been seeing the Macmillan effect at play domestically this past week.
On any guess, this would have been a week, in the run-up to C-day on Sunday, that saw the news focussed on the impending birth of the carbon tax.
As things have turned out, political attention has been largely consumed by the latest round of refugee drownings off northern Australian and a renewed head-butting of Labor, Coalition and Greens MPs on boats policy.
For the electricity industry, the expectation was roughly the same – a vigorous week of debate about carbon pricing – but, if not side-tracked, this has been substantially diverted at the week’s end by the release of the new generation forecasts from the Australian Energy Market Operator (AEMO).
This report has had commentators leaping out of their armchairs to cry “market game-changer.”
On Friday night, munching King Island brie and bikkies, accompanied by one of my friend John Arlidge’s Whiskey Gully cabernet sauvignon plus shiraz blends from Queensland’s Granite Belt,I have been digging through the AEMO report after two days participating in a commercial conference on energy and utilities, which included some really thoughtful presentations.
Here is my slant on what events have been delivering.
First, let’s get clear about what the AEMO stats show for consumer demand.
(The AEMO upfront numbers are for energy sent out, from which line losses have to be subtracted to identify consumption.)
If you take 2005-06 as the starting year – when the east coast consumed 191 TWh – you can quickly see (well, once you have rambled through 188 pages) that demand pushed on through the late years of the past decade to peak at alomost 198 TWh in 2008-09.
Now, yes, there has been an impact from higher domestic electricity prices and the inroads of the subsidy-fuelled solar PV rooftop arrays, but it is hardly a coincidence that, as the global financial crisis bit, so our power requirements started to fall back.
They have bottomed out, if you assume AEMO is right in its central scenario, in the financial year now ending at barely 191 TWh.
Where they go from here is the critical question.
AEMO has scenarios range from a fast global recovery to a rather slow one.
Looking out to 2015-16, AEMO suggests there is a possible spread of demand ranging from around 195 TWh to 215 TWh.
The market operator’s middle-ground scenario suggests – note I don’t and won’t say “predicts” – 205 TWh, which I point out is 3.5 per cent above the peak late last decade.
Now, with due respect to the outlyers on the east coast, can we focus on New South Wales (including the ACT), Victoria and Queensland because these areas account for roughly 86 per cent of the market.
What do we find?
Well, NSW (plus the ACT) peaked at almost 74 TWh in 2007-08 and is expected to slide to 68 TWh in the financial year we are just beginning. (Highlighting the political can of worms Premier O’Farrell inherited from the hapless previous governing regime.)
Victoria peaked at 47 TWh in 2007-08, slid to 45.5 TWh in 2011-12 and is expected to make a slight recovery in the financial year now starting to 46 TWh.
Demand kept rising in Queensland to peak at 49 TWh in 2009-10, fell back to 47.7 TWh in 2011-12 and is projected to go up again in the year now starting to 48.4 TWh. (Suggesting new Premier Newman needs to get his head around overseeing demi-prosperity rather than behaving as if he has inherited NSW government.)
Looking to beyond 2020 is probably a fool’s errand, but I do point out that, if you use 2017-18 as a horizon, which is five years away, AEMO is suggesting we could see just over 73 TWh of consumption in NSW (plus ACT), almost 60 TWh in Queensland and almost 50 TWh in Victoria.
The sleeper in Queensland is just what level of new generation capacity will be needed to power the LNG trains and new coal mines – and when.
There are some 4,000 to 5,000 MW of new capacity requirements in play here, along with a lot of transmission development, and nothing to rival it elsewhere on the east coast (except for Olympic Dam in South Australia).
In the southern States, the aluminium industry’s situation remains an open question if you look beyond the current flurry of action to get handouts ahead of the next federal election.
Could we see a situation around 2020 where demand in Queensland is treading on the heels of NSW just as this State’s consumption was doing to Victoria at the start of the past decade?
This could result in more than two-thirds of east coast power consumption being located north of the Murray by the end of the decade – in black coal and coal seam gas country.
I chuckled today when I saw a media commentator with a strong bent towards renewables list the causes of the present decline in the east coast market as “rapid growth in solar PV, greater energy efficiency, reduced economic growth and a reduction in manufacturing output” in that order.
AEMO, on the other hand, in its statement on the situation says this:
“ The main factors are as follows:
“ Changes in the economic outlook – reduced forecasts are consistent with a moderation in GDP, especially in the short term.
“ Reduced manufacturing consumption in response to the high Australian dollar, with an increase in cheaper imports expected to impact domestic manufacturing growth.
“ Significant penetration of rooftop PV systems.
“Residential and commercial responses to rising electricity costs and energy efficient measures.”
The AEMO data assert that consumption by large industrial customers, which has sunk to under 35 TWh a year on the east coast, could be expected to rise over 40 TWh by 2015-16.
One could have a long debate on this sub-thesis and I think it is worth noting that there are about 60,000 businesses in Australia serving energy-intensive manufacturers and miners.
The fate of large industrial power consumers will have a cascading effect on these supplier firms.
Who wants to be brave enough to predict how the “big polluters” – not a phrase much in favour today although Rudd, Swan and Wong could scarcely speak about carbon policy three years ago without using it – will fare down this decade?
Their business environment will undoubtedly be a big factor in where electricity requirements are going to land.
The implications of the current outlook for generation investment are interesting.
Substantial development will be needed in Queensland to meet the LNG and coal mine projects – the question here is when?
In the southern States of the east coast, the largest generation expenditure can be expected to be on wind farms, driven by the legislated requirement of the RET.
Current industry thinking points to an outlay of about $20 billion on 7,000 MW of wind farms, mostly in Victoria and NSW.
(Building them in South Australia to sell power to its eastern neighbours would require substantial transmission developments that simply aren’t on the cards right now.)
The outlay of another $3 billion on 3,000 MW of gas-fired peaking plant, most of it in the southern States, is anticipated and what will be spent on baseload, gas-fired generation may depend entirely on whether any brown coal plants are closed under carbon policies.
One of the awkward factors of the present demand situation is that the substantial east coast distribution investments, amounting to some $35 billion for the period 2009 to 2014, have been postulated on a different view of consumption.
Lower demand is likely to be translated in to higher network charges.
The power price pain phase is far from over and will continue to feed back in to consumption trends.
The bottom line here is that electricity supply environment has changed quite a lot in a short time, probably mostly because of the economic environment, but it is a tad unclear just how much further the situation will change over the rest of this decade, and especially post-2015.
Leaping to conclusions is probably best left to the Olympic competitors in London.
Events are unlikely to be done with us yet.