Issue 88, August 2012
Welcome to the eighth issue for 2012 as we look at a large amount of data about power demand and supply, writes Keith Orchison. A number of segments of this issue are drawn from the 2012 yearbook of the Energy Supply Association. It also reports a new paper making a case for the Queensland government to sell its portfolio of generators – and first ministers getting antsy about the time it is taking to review network capital outlays and ensuing power price rises before the Prime Minister attacked them in a widely-publicised speech. It records a warning about impending large gas price spikes, too. (In July this website aggregated 22,700 unique pageviews – triple the number for the same month in 2011.)
Prime Minister Julia Gillard flung herself in to the electricity reform process on 7 August, elbowing aside Resources & Energy Minister Martin Ferguson to take his speaking spot at an Energy Policy Institute of Australia lunch in Sydney, and threatening State governments with “a big stick” if they don’t agree to a new regulatory set-up by the year’s end.
In doing so, she has put at risk the spirit of federal co-operative action which has driven the “national electricity market” reforms for 15 years. The immediate response of State governments to her attack was anger and accusations that she is seeking to deflect voter resentment of the carbon tax.
She also stands accused of hypocrisy for attacking new Coalition governments when she did not put price pressure on the ousted Bligh and Keneally regimes in Queensland and NSW.
The acid test of Gillard’s focus on politics rather than principle came immediately after she finished speaking at the EPIA lunch.
She had been heavily on the attack against State government-owned network businesses for inefficiency and waste compared with investor-owned firms, so I asked her if the speech signalled her support for their privatisation.
Her response: It’s up to State governments and their voters.
Gillard’s own political position is heavily dependent on ALP forces that bitterly oppose electricity privatisation.
Asked as well if her focus on the need for households to be given greater electricity choice meant the federal government would seek to drive the States harder and faster to roll out smart meters and implement time-of-use tariffs, she, in effect, said no.
The lone Victorian smart meter roll-out is highly controversial and politically unpopular. Martin Ferguson said in the forum Q&A that it has seen “a failure to sell the benefits of community engagement” – that’s a failure by the Bracks and Brumby Labor governments who initiated the roll-out in a way that has sent all other States scurrying for cover on the issue.
Full roll-out across the east coast is thought likely to cost about $7 billion to $10 billion, with consumers required to pay higher network charges.
Calling for greater State effort on reform, Gillard told the EPIA audience, which included John Pierce, chairman of the Australian Energy Market Commission, the independent east coast market rule-maker, that: “We won’t lightly use the big stick of regulation – but it’s a stick we hold and which we’ll use if necessary.”
What she and her advisers apparent don’t understand is the small-F federal underpinning for the east coast’s market regulation,
Due to the process of cooperative federalism under which the “NEM” was established, the National Electricity Law is contained in a schedule to the National Electricity (South Australia) Act. The “NEL” is applied as law in each participating jurisdiction of the “NEM” by application statutes, for example the National Electricity (Victoria) Act 2005.
The committee of resources and energy ministers chaired by Ferguson is due to meet again in December to discuss market reform issues. It will be followed by a meeting of first ministers as the Council of Australian Governments.
Whether Julia Gillard has boosted or blasted the chances of change being implemented swiftly remains to be seen.
A central theme of the Prime Minister’s “blame game” electricity speech in Sydney was to attack State governments owning network businesses (essentially NSW and Queensland) for taking an over-large share of higher prices through DBs’ dividends and tax equivalent payments.
Unfortunately for her, the record clearly shows the guilty party: her side of politics.
A report commissioned by the Keneally NSW government in December 2010, when Gillard was back as Prime Minister after the “hung” federal poll, reveals that it was the State Labor Treasurer who installed a new process that would ratchet up his networks income from $726 million in 2008-09 – before the new round of capital outlays approved by the federal Australian Energy Regulator – to $1.88 billion in 2012-13.
Speaking at the EPIA lunch, the Prime Minister said: “Revenue for network enterprises owned by State governments is up 50 per cent over the previous five year period. Revenue to the States went up nearly twice as fast as revenue to private network operators.”
Yes, it has, Prime Minister – through the actions of the Keneally government in NSW, a grab for revenue that neither you nor anyone else in the Labor government in Canberra criticised until now.
Piggy-backing on Julia Gillard’s Sydney power speech, Greens leader Christine Milne has called for a Senate inquiry in to energy because, she says, the CoAG electricity market reform process is too slow.
First ministers from all nine administrations called for faster action on steps to address electricity network charges when the Council of Australian Governments met in late July.
CoAG, chaired by Julia Gillard and featuring all State premiers, “expressed concern” over the recent substantial electricity price rises arising from factors including increases in transmission and distribution charges.
It told energy ministers – who have been studying market reform, through the Standing Council on Energy and Resources since last year -- to focus current reviews of market regulation in the interconnected east coast market on achieving efficient future investment which does not result in undue price pressures on consumers and business.
“Noting the interest of governments, business and consumers in competitive markets,” COAG asked the SCER task force to undertake further work and advise it by in 2012 on any additional action required to deliver a regulatory framework that promotes a competitive retail electricity market, including appropriate support for vulnerable customers, and efficient investment.
What’s notable about this decision is that it pre-dated Julia Gillard’s “big stick” speech at the Energy Policy Institute and indicated agreement by all first ministers that the energy reform process needed to be pushed along harder.
Despite Gillard government political rhetoric about Australia’s “clean energy future,” the latest industry estimates of fuel consumption see black coal continuing to hold a leading role by the end of the ‘Twenties.
The 2012 yearbook of the Energy Supply Association (ESAA) has increased the outlook for the use of gas in power generation from a forecast three years ago, but it also sees black coal’s contribution rising.
The latest yearbook reports that grid-connected power stations consumed 1,139 PJ of black coal in 2010-11 financial year and 1,279 PJ in all forms of generation. This was the second year in a row for a fall in the fuel’s contribution to grid systems in New South Wales, Queensland and Western Australia.
However, ESAA forecasts that consumption will rise to 1,560 PJ in 2030-31.
For gas, the association reports that consumption, which reached a new record of 343 PJ in 2010-11, will rise to 411 PJ in 2015-16, go to 558 PJ in 2020-21, then 692 PJ in 2025-26 and reach almost 795 PJ at the end of the ‘Twenties.
The yearbook also projects a decline in consumption of brown coal, now burned in Victorian and South Australian plants, from 721 PJ in 2010-11 to 578 PJ at the end of the ‘Twenties.
While the estimates for two decades are in the realms of speculation, given the volatility of energy and carbon policies, they do indicate that the energy industry expects existing black coal power stations to be a major part of the supply mix, mainly on the east coast, for a long time.
Burning of black coal in NSW and Queensland totalled just under 47 million tonnes in 2010-11.
This is substantially lower than the record 52 Mt recorded in 2007-08, but the decline in power demand in the two States of recent years, partly a response to economic and other conditions and partly reflecting the Queensland floods, is one key cause.
The other, in both States, is the rise in supply from conventional gas and coal seam methane-fired plants.
Use of coal seam methane by Queensland power stations has doubled since 2008-09.
The ESAA yearbook numbers suggest that the industry expects east coast gas prices to trend to high levels later this decade and in to the next one, benefitting the black coal power stations rather than renewable generators.
A new review of Australia’s gas supply outlook published by BREE in July indicates that politicians and consumers on the east coast should prepare themselves for a pricing rollercoaster ride, with short to medium-term hair-raising experiences.
The agency says wholesale prices can be expected to rise sharply over the next five years because of the start-up of the Gladstone-based LNG projects. However, high prices can be expected to drive investment in gas production and eventually this will deliver downward costs pressure, it asserts.
It is the price rise scenario and its implications for both consumers and politicians that suggests a bumpy ride through much of the rest of this decade.
BREE says that wholesale gas consumption is relatively inelastic to prices increases, with existing mining and industrial consumers unlikely to reduce their consumption substantially. The same applies to the residential sector.
This, of course, does not mean that suppliers and politicians can avoid an explosion of unhappiness from these customers.
BREE warns that high prices are “likely to have a large impact on users such as fertilisers and ammonia plants (and) the iron and steel industry and basic chemicals industry are also likely to be relatively responsive to increases.”
In the electricity sector, it says, substantial and prolonged higher gas prices may also make it unprofitable to construct new gas-fired generation.
(BREE reports that 4,280 MW of generation capacity fired by conventional gas and coal seam methane has been constructed across Australia since 2008. This does not include the 550 MW Mortlake gas plant currently being commissioned by Origin Energy in south-west Victoria.)
The implication of this bland recitation of impacts, of course, is a huge public outcry about gas prices and their impact on households, businesses and job mid-decade.
In an observation that would be funny if it were not so serious, BREE comments: “The process of adjustment (to cost spikes) will depend on consumers’ sensitivity to changes in prices.” Well, yes, quite!
The Australian energy technology assessment published by BREE at the start of August has re-opened the debate on nuclear energy.
Boiled down, the assessment of 40 generation technologies produces a ladder of levelised electricity costs in 2030, based on the federal Treasury model of the carbon price (which will be at about $60 per tonne in today’s money values by then).
For baseload power supply, the BREE modelling has 1,000 MW nuclear plants at $102 per MWh, small scale nuclear at $116, combined cycle gas at $135, CCGT with carbon capture and storage at $163, supercritical black coal at $164 and geothermal energy at $214.
Little over a year ago, Treasury supported the government’s “clean energy future” plans with modelling that a shift could be made from conventional coal to CCGT, geothermal and fossil fuelled plants with CCS at acceptable costs.
One of Australia’s most prominent nuclear power advocates, Adelaide University’s professor Barry Brook, says the AETA demonstrates that reactors are “a proven, fit-for-service, low-carbon ‘plug-in’ alternative for coal.”
He argues that the principal limitations on the use of nuclear power in Australia are not technical, economic or fuel-related but are linked to complex issues of societal acceptance, fiscal and political inertia and “inadequate critical evaluation of the real-world constraints facing low-carbon alternatives.”
He says: “For the heavy-lifting job of supplying abundant, low-carbon electricity to the always-on baseload market to displace coal from the grid we simply can’t ignore nuclear energy.”
The farthest opposite side to Brook’s views is represented by professor Andrew Blakers of the Australian National University – who claims in a review of the AETA paper that solar photovoltaics “is now cost-competitive with retail electricity throughout Australia.” Blakers asserts that “a solar revolution is taking place that will soon transform Australia’s energy system.”
The federal and Victorian governments are calling for bids for $90 million in subsidies for new brown coal technology projects in the State’s Latrobe Valley.
The grant program has been announcement soon after a $100 million subsidy for a gasified coal project in the valley was withdrawn after the proponents were unable to satisfy government criteria.
Federal Resources & Energy Minister Martin Ferguson says the valley contains a fifth of the world’s low-rank coal reserves and it is important to look for ways to harness the resource.
The move has been attacked by the environmental movement.
A new commentary by management services company AECOM argues that removal of Australia’s renewable energy target scheme could expose consumers to significantly higher costs where the replacement is gas generation in a high price environment.
The AECOM paper has arrived amid a frenzy of concern that has developed in the environmental movement over the RET ahead of a review to be undertaken by the newly-formed Climate Change Authority.
The starting point for the “save the RET” campaign was comment earlier this year by Origin Energy managing director Grant King that, given the decline in electricity demand since 2008, holding the scheme to a fixed delivery level (41,000 GWh in 2020 from the large-scale program) would see the 20 per cent by 2020 goal over-shot and add to consumer costs.
King’s case is that the 20 per cent target initially equated to the expected growth in generation requirements this decade, but, with the fall in consumption, the fixed goal will crowd out other investment.
The greens’ concerns were exacerbated by a talk to the Clean Energy Council’s week-long conference in late July shadow energy minister Ian Macfarlane.
He is interpreted as leaving open the door under a Coalition government to holding the RET at the promised 20 per cent – which, given the current trajectory of consumption forecasts, might curb it at around 28,000 GWh in 2020.
A subset of the debate is a claim by Climate Change Minister Greg Combet that abolition of the carbon price regime by the Coalition would make the RET $20 billion more expensive by 2030 (which is when the mandatory requirement expires under present legislation that holds the target at 20 per cent through the ‘Twenties.)
The waters are further muddied by the Greens campaigning for the RET to be substantially increased after 2020 en route to their dream of 100 per cent electricity supply by renewable energy – a position effectively blown up by the new BREE technology report despite the hype about solar and wind power in the media in the wake of the assessment being published.
Among the strongest critics of the Origin Energy view is its rival AGL Energy, whose managing director, Michael Fraser, told the CEC conference that a shift to a variable target would “move the goalposts,” causing additional sovereign risks, destroying investor confidence and costing jobs.
Fraser is also opposed to the federal government’s plan to have the Climate Change Authority review the RET every two years, arguing this will only cause confusion for investors.
AECOM, meanwhile, in a paper prepared by senior consultant Jenny Riesz, says that there is now “material uncertainty” over future domestic gas prices in Australia as a result of the development of the east coast LNG industry.
“Electricity prices are likely to become increasingly linked to gas prices” and “Australian electricity prices could become exposed to the possibility of sudden, unexpected high international prices over which we have little control or short-term ability to mitigate.”
AECOM’s Riesz argues that continued investment in renewables will help to decouple power bills from gas prices.
In the absence of the RET, she adds a carbon price in the range of $50 to $70 per tonne will be needed to drive renewable generation investment.
Maintaining the RET, she says can help protect the future of Australian businesses by making power bills more resilient in the face of rising gas prices internationally feeding back in to the domestic market.
The Climate Change Authority is required to report on the RET to the federal government before the end of 2012.
The Clean Energy Council, in a letter to the “Australian Financial Review “ has lashed out at Origin Energy managing director Grant King over his comments on the RET.
“Origin Energy’s criticism seems to buck all the trends you would expect of a major company in the electricity industry, “ the letter says.
“This is an industry with investment horizons that often stretch to 20-30 years, and the thing most market players are chasing is certainty so they can invest.
“Origin is promoting further tinkering with the RET, one of the electricity industry’s few investment-grade policies which is responsible for over $10 billion of investment over the past decade.
“The most reasonable explanation for Grant King’s recent position is that he is trying to carve out more territory for Origin’s gas interests, which for his company has always been the main game.
“Given Origin have not followed other energy businesses in making long term investments in renewable energy, they are understandably annoyed their competitors are ahead of the game, particularly now renewable energy is starting to outperform gas and coal.
“One of Grant King’s assertions is that, because of falling demand for power, we may actually exceed the 20 per cent RET by 2020. It is far too early to know what will happen by the end of the decade but, when it comes to clean energy, King is certainly not guilty of over-ambition.”
Meanwhile a report commissioned by the CEC suggests that the current direct employment in the renewables industry could be 2,300 and total employment about 6,900.
New Zealand energy business TrustPower, majority owned by Infratil, will build a 270 MW wind farm near Snowtown in South Australia, 160km from Adelaide, the second in the area.
The project, planned to cost $439 million, is scheduled to be fully operational in 2014.
Origin Energy has committed to buying the Snowtown 2 output.
A case for privatising the Queensland generators is made in a new economics paper.
The commentary from AGL Energy explains that life is now extremely difficult for east coast merchant generators -- stand-alone operators selling their production to the spot and short-term forward markets (without long-term contracts or a retail supply business) – unless they can secure power purchase agreements.
The economic theory of electricity markets has collided with the harsh realities of real-world corporate financing constraints, the paper argues.
Professor Paul Simshauser, AGL chief economist, and Griffith University graduate James Nelson say that one of the striking features of the east coast market’s early years was the initial enthusiasm for investment in existing State-owned and new entrant merchant power plant capacity.
They calculate that $18 billion was invested in Australia in the sector between 1998 and 2002.
This included purchase of more than 9,000MW of pre-existing plant capacity worth $13.4 billion.
Over the same period, a further 4,000MW of new merchant plant capacity was developed at an investment cost of about $4.5 billion.
Simshauser and Nelson note that the blueprint design for the “NEM” envisaged breaking the four State-based electricity commissions into 20 independent generators and 16 franchise retailers.
Today, they say, “the market now looks very different, with only 11 independent generators – four of which have non-franchise retail businesses – and three large vertically integrated franchise retailer/generators plus up to six independent retailers. This excludes small/boutique generators below 200MW of capacity. There are also two small (government owned) vertically integrated franchise retailer/generators in Queensland and Tasmania.
A 2006 prediction that vertically integrated entities would undertake a significant degree of investment has been proven entirely correct between 2006-2012, they add.
Simshauser and Nelson argue that, in the market environment, the Queensland government should privatise the 16 merchant power plants it owns, accounting for about 57 per cent of the State’s generation capacity.
Last financial year, they say, the combined financial results of the generators produced asset returns of 5.1 per cent.
“Given an aggregate asset base of $6.3 billion, corporate gearing of about 52 per cent and an assumed interest cost of 7.5 per cent, this translates to an equivalent equity return of about 1.7 per cent.”
This, they argue, raises the issue of whether public ownership of merchant plants makes economic sense given the drag they place on State government balance sheets and therefore, taxpayers.
“We believe government generators would be better privatised in competitive processes because presumably, vertically integrated firms will be able to value the plants as part of an integrated portfolio in a way that is no longer possible by government owners – subject to retail market regulatory conditions.
“If so, then the proceeds from privatisation and the reduction in total government debt should comfortably exceed the present value of future dividends from such businesses.”
The 2012 Energy Supply Association yearbook highlights the ongoing challenge of rising peak power over this decade.
Based on demand in 2010-11, the ESAA load forecasts project that east coast peak requirement will exceed 50,000 MW in 2020-21 while the Western Australian peak will be nearing 6,000 MW.
In 2010-11, the association reports, the east coast peak was almost 39,000 MW and the West’s requirement was 3,740 MW.
On this basis, the “NEM” infrastructure’s capacity will have to be increased at an average of more than 1,000 MW a year, signalling a continuing long-term impact on consumer bills.
Going back three years, ESAA’s rolling 10 year projections saw east coast peak demand in 2019 at just under 48,900 MW.
This was in the context of system average load rising from 22,544 MW in 2008-09 to just under 27,000 MW in 2018-19.
The new yearbook sees system average load in 2018-19 as slightly above 27,000 MW and peak demand at almost 48,000 MW.
The report also sees power generators’ demand for gas steadily rising over the decade, although it has fallen back in the past three years.
ESAA says power stations used 420 PJ of gas in 2008-09 and back then it expected consumption to push on past 440 PJ by 2010-11, but instead it reduced to 343 PJ.
The association’s outlook now is for gas demand by generators to reach 558 PJ in 2020-21 – this is 11 per cent below the earlier forecast for the start of the new decade but is seen by analysts as representing a substantial rise in open-cycle gas turbine requirements being commissioned both to meet higher peaks and as the least-cost and risk investment in generation capacity in a turbulent policy and market environment.
The ESAA yearbook contains a strong pointer to a reduction of the importance of manufacturing in the Australian economy over the next two decades.
Looking out to 2030-31, ESAA predicts that mining will overtake manufacturing on the ladder of gas demand.
In 2010-11 (the latest year for firm data), manufacturing had reclaimed first place on the demand ladder from electricity generation, but the projections indicate that it will fall well behind power stations by the middle of this decade and behind mining by the end of the ‘Twenties.
ESAA forecasts that power station consumption of gas, having fallen from 420 PJ to 343 PJ in the three financial years to 2010-11, will rise to 795 PJ by the end of the ‘Twenties.
It sees manufacturing demand, which fell only marginally between 2008-09 and 2010-11, moving only sluggishly upward over two decades, reaching 500 PJ in 2030-31.
Mining, on the other hand, having needed just 157 PJ in 2008-09 is expected to reach 320 PJ at the start of the next decade and 500 PJ at the end of the ‘Twenties.
Looking at residential direct use of gas for heating and cooking, ESAA projects a steady but relatively slow rise – from 145 PJ in 2010-11 to 182 PJ in 2030-31.
Projecting total national domestic demand for gas, ESAA claims that it will rise from 1,128 PJ in 2010-11 (a slight reduction over three financial years) to 1,560 PJ at the end of this decade and 2,080 PJ by 2030-31.
Upstream petroleum suppliers have rejected a call for a national gas reservation policy as “mere protectionism.”
The Australian Workers Union has called on the federal government to emulate Western Australia and require a percentage of gas to be set aside for domestic use.
The Australian Petroleum Production & Exploration Association retorts that the AWU and manufacturers are trying to get one industry to subsidise another.
“It’s protectionism dressed up as an industry development policy,” says CEO David Byers, who asserts that it is “bad policy to subsidise declining industries when Australia should be leveraging its strengths.”
He argues that, in turn, gas suppliers could ask aluminium and steel manufacturers for below-cost inputs to help facilities that are not commercial.
Federal Resources & Energy Minister Martin Ferguson is also resisting calls for restrictions on gas exports, saying it will send the wrong signals to petroleum investors, who currently have $170 billion worth of LNG projects under way.
“Price restrictions lead only to the inefficient allocation of resources,” he adds, “ and ultimately can lead to supply and reliability issues.”
Craig Arnold, managing director of Dow Chemicals Australia, which has been in the forefront of the manufacturers’ push for gas reservations, argues that valuable industrial fuel, feedstock and jobs are being exported along with LNG. Effectively, he says, present policy puts Australia on the same playing field in terms of prices as neighbouring countries that have no gas.
He accuses the gas suppliers of being “self-serving.”
Major gentailer AGL Energy has taken on east coast governments and regulators over setting artificial price caps in the competitive retail market.
In a paper written by chief economist Paul Simshauser, who is also professor of economics at Brisbane’s Griffith University, the company says that, outside Victoria, governments are pursuing pricing constraints “without any clear articulation of the public policy objective.”
Simshauser points out that power retail markets in the “NEM” have higher customer switching rates than such industries as mobile phones, airlines, health, insurance and banking – and yet the Queensland Competition Authority is using “highly imperfect information” to interfere with pricing via judgements on wholesale costs.
He adds that capital outlays in the “NEM” hinge “quite critically” on the ability of integrated utilities to maintain investment-grade credit ratings. “This,” he says, “is not widely understood within the utilities themselves, let alone by policymakers, lawmakers and regulators.”
Simshauser warns that, should other regulators take up the QCA approach, which is presently under challenge in the courts, distortions could be created that affect the efficiency of the “NEM.”
The situation could create a generalised rise in the industry’s cost of capital, leading to increases in the cost of new projects and eventually end-user prices.
The Energy Supply Association has sharply criticised the chief executive of the NSW Independent Pricing & Regulatory Tribunal over remarks on network charges.
ESAA chief executive Matthew Warren was responding to comments by IPART’s Jim Cox that power prices in the State have been unnecessarily inflated by excessive network spending.
Warren says the remarks are “misleading and unhelpful.”
In an interview with the “Sydney Morning Herald,” Cox said NSW annual network charges are costing a typical State household $654 more than five years ago, a rise 72 per cent above the inflation rate.
He called for the NSW Treasury, acting for the government-owned networks’ shareholder ministers, to take steps to improve productivity and efficiency – and he questioned whether stronger reliability standards had delivered value for money.
“It should be possible,” Cox told the paper, “to have more flexible standards and to achieve the same level of reliability without imposing such significant costs on consumers.”
Warren says a major driver of increased spending on NSW networks over the past five years has been a massive upgrade and replacement program to sustain the State system’s reliability after more than a decade of under-investment.
By the middle of the past decade, Warren argues, networks in NSW “were approaching breaking point” because capital spending had been suppressed since the 1990s by the regulatory approach.
“It is no surprise that a huge wave of capital expenditure was required to catch up.”
Warren rejects claims that falls in productivity in the energy sector are the result of badly-run networks. He says the fall in productivity in energy supply is partly due to essential asset replacement. “Much of the NSW network was built 50 years ago and is overdue for renewal. This spending delivers little productivity but is absolutely essential to keep the lights on.”
Another key factor in falling productivity, Warren adds, is rising peak demand.
ESAA asserts that current problems can’t be solved by more regulation. “That’s how we got in to this mess in first place,” says Warren. “The road to a more efficient and dynamic energy system is further deregulation and through empowering consumers with the right incentives coupled with smarter technology and flexible billing arrangements to ease peak demand.”
Meanwhile the association has also signalled that wholesale electricity prices will have to rise by as much as 30 per cent over the rest of the decade to justify construction of new generation capacity.
ESAA says there is no market signal on the east coast at present for new capacity except to meet peak requirements or the mandatory renewable energy target.
The situation is different in the West.
ESAA says its 2012 yearbook shows that the WA mining boom has helped drive up demand for power by 8.3 per cent in 2010-11 compared with 2009-10 – and this followed a nine per cent increase the previous financial year.
The State’s power needs have risen 26 per cent in five years – compared with a 7.5 per cent fall in the other resources boom State, Queensland, where the disastrous floods cut consumption.
The West has also seen an increase in coal-fired plant production and a fall in gas generation, which ESAA attributes to the high price of gas in the State.
A brief wave of media hype greeted a new CSIRO report on ocean renewable energy in late July and then quickly ebbed as an undertow in the form of messages about the difficulties involved in making the technologies a mass means of Australian power supply were made apparent.
The CSIRO study said the ocean energy would need to generate 46,000 gigawatt hours of electricity in 2050 to meet 10 per cent of national power demand. This was translated in to the electricity demand of Melbourne today (actually it’s Victoria) and the media hares were off and running.
However, CSIRO have been careful in the report to stress that a carbon price would be essential for wave power uptake – and the subsequent BREE report on technology costs places this form of generation way down the levelised cost ladder in 2030 (at $220/MWh compared with $135 for CCGT with a carbon tax and $163 for baseload gas with carbon capture).
CSIRO also states in the study that “in areas that rely on fishing, boating and environmental quality to attract tourists, it is likely that very large offshore installations (would be) problematical.”
(The technology is claimed to require an area of 50 square kilometres to serve a 250 MW wave farm – which could only contribute a fraction of the mooted power supply.)
Wave farm interaction with the commercial fishing industry would be a particular barrier to development.
The Australian Competition & Consumer Commission says it received 2,000 complaints and enquiries on its carbon price hotline in July.
ACCC chairman Rod Sims says the majority of contacts have been about general price increases, not specific complaints about carbon price misrepresentation. “This is especially the case with electricity complaints where cost increases reviewed by the ACCC have been of the order expected.”
The sectors that continue to record the most complaints are the energy, landfill, refrigerants, and building and construction sectors.
Sims adds: “I am pleased to say that, for the most part, businesses understand their obligations and have performed very well when making claims about price increases attributed to the carbon price.”
To achieve Prime Minister Julia Gillard’s “clean energy future,” Australian must take meaningful steps in the next 18 years to create a launching pad for greater abatement in the ‘Thirties and ‘Forties.
The biggest difficulty with the debate about what these preliminary steps should be is the unwillingness of more than a few to appreciate that they must embrace reliable supply at affordable prices as well as reductions in carbon emissions.
The bane of the debate over recent years has been the periodic emergence of claims about brave new technologies that cannot meet this three-pronged test.
This problem is exacerbated by the way in which a large part of the media greets each such “silver bullet” – the latest of which has been over-the-top coverage of a CSIRO report on ocean renewable energy that, on close reading, contained sufficient caution to warrant less effusive publicity.
The considerable value of the “Australian energy technology assessment” published by the Bureau of Resources & Energy Economics at the beginning of August is that it contains a wealth of information about potential generation options that raise issues well worth further debate.
Unfortunately, both in the way BREE and the federal government presented the AETA publication and in the way boosters of renewable energy and a number in the media communicated the announcement, the tendency again was to lead Australians up (or down) the yellow brick garden path.
This criticism needs to be mitigated in one important respect. A number of media outlets – notably Nine News (important at this point because the channel was attracting a large number of people to watch the Olympic Games), Sky News and News Limited newspapers – seized on the report to say that it re-opened the nuclear debate in Australia.
In one sense, it does not do because both the mainstream political parties are most keen to avoid having a debate about nuclear energy ahead of the next federal election.
Using the BREE publications, including its 2034-45 energy projections published last December, and the Energy Supply Association yearbook, it is possible to identify some important factors for the Gillard government’s much-hyped “clean energy future,” the most important of which is that fossil fuels will continue to dominate electricity supply over the next 20-25 years.
This does not, however, promise “cheap” power.
The combination of a carbon price, a dearth of baseload generation investment this decade, growing expectations that east coast wholesale gas prices will soar and the likely imposition of a higher level of mandated renewable energy (through maintenance of the fixed volume requirement now in place) when taken with a failure by policymakers to curb the growth of peak power requirements is a strong indicator that consumer costs will continue their painful rise.
The Prime Minister and other first ministers seem to think that cracking the whip over energy ministers to get on with the job of examining rising electricity network charges is the solution to the problem (see the report above from the Council of Australian Government’s recent meeting).
This, however, is so much window dressing when east coast State governments, with the exception of Victoria, which inherited the project from its Labor predecessor, continue to shy away from pursuing smart meters and time-of-use tariffs.
It is also literally only half the problem, the other half being wholesale electricity costs.
A close look at the BREE technology assessment report tells us four things:
First, that the lowest-cost generation capacity available in 2030 without a carbon price (as modelled by federal Treasury) will be onshore wind farms, nuclear reactors, supercritical pulverised coal and combined cycle gas plants.
Two of these (wind and PVs) are intermittent. One (nuclear) is current ruled out by legislation.
Add the Gillard government carbon price (at the price Treasury forecasts for 2030) and the two fossil-fuelled options rise in cost by $35 per MWh (baseload gas) and $80 (supercritical coal).
Add post-combustion carbon capture and sequestration to the mix – BREE asserts that CCS should be commercially viable by 2030 – and the baseload gas option rises by another $28 per MWh (an outlook that appears quite optimistic from our present vantage point).
The great green hope of the Gillard government’s “clean energy future” is geothermal energy, but the BREE assessment is downbeat, forecasting that its 2030 cost will be $214/MWh versus $163 for CCGT with CCS.
By comparison, BREE assesses large-scale nuclear power (1,000 MW) at $102 per MWh and small modular reactors at $116.
An objective reaction to the BREE report would be that nuclear scrubs up pretty well as a key contributor to the “clean energy future.”
Engineers who support the technology tell me that some nuclear power could be added to the east coast generation mix by as early as 2025, but they acknowledge this “is a bit of a stretch.” They see no reason, however, why the technology could not be an important contributor to power supply by 2030.
The key question, posed by former Chief Scientist Robin Batterham, in a media interview is late July, is: “Why would you go for a more expensive option if a less expensive option is going to do the job?”
The environmental movement’s retort to this – at least from the more rational end of its spectrum – is that we must go harder at getting geothermal energy viable and advancing solar thermal with storage.
The coal industry’s stance is that the latest information highlights the importance of CCS for fossil-fuelled generation, a key factor in the federal government’s mid-century outlook for power supply, and greater effort needs to be made to support its commercial development.
The importance of what the BREE assessment tells us is that, while the baseload renewable and CCS options are worth more attention, they are expensive on the best current advice.
Adelaide University’s professor Barry Brook argues that, by 2020, the supply heat will be turned up to the point where politicians and others will be talking seriously about nuclear energy for Australia – which begs the obvious question to the present policymakers: can we afford to wait another decade to get serious about the next generation of investments?
8 August 2012
| to top of page |