Issue 43, September 2008
Replacing 28,000 MW of Australian coal-fired power generation with gas plant will cost about $30 billion, according to KPMG energy expert Antony Cohen.
Speaking to a Madgwicks Lawyers energy forum in Melbourne, Cohen, head of energy and resources at KPMG, estimated the additional cost of meeting the Rudd government's 20 percent renewable target by 2020 at about $27 billion.
The questions that arise, he added, are who will build and finance the new plants, when, where and what rates will they be built and how and at what cost will the fuel be supplied and delivered. New transmission lines would also need to be provided.
Cohen comments that, in the short term, changing the merit order of dispatch in the national electricity market will have consequences for reliability of supply because energy sources and technologies are not 100 percent substitutes for each other. "At the moment," he says, "there is no quick fix, no substitute for coal-fired baseloaders."
The coal plants, he adds, cannot be run as intermediate and peaking plants and the open cycle gas turbines are very expensive to run as baseloaders.
Cohen says that the Victorian brown coal plants can be expected to shut down 10 to 20 years ahead of plan as a consequence of the government's emission trading scheme.
Trying to drive down electricity industry emissions to deliver a cut in Australian greenhouse gases 10 percent below 2000 levels by 2020 will be "very challenging," according to a consultancy report for the Business Council.
The report by Port Jackson Partners (PJPL) warns that "many" coal-fired generators will see asset values "significantly impaired," requiring "some form of compensation" to be considered.
The BCA's headline-grabbing statement on the Rudd Government's carbon tax green paper was attacked immediately by the Greens and environmental movement activists despite the council tying itself in knots not to be condemnatory of the emission trading concept. Buried in the wording, however, is the grim message that big business is not convinced the government can sustain economic growth and cut emissions.
Among the details in the 170-page PJPL supporting document is the estimated need for $4 billion to be spent every year from 2010 to 2020 on generation plant and transmission to meet the target -- a near doubling of current capital investment -- as well as a forecast of a three-fold increase in gas consumption by power stations replacing coal burners. The report adds that the new developments will need to include building wind farms at a rate of 600 MW a year, providing 500 MW of biomass, 1,350 MW of geothermal plant and 1,000 MW of concentrated solar power capacity.
As wind generation approaches 6,000 MW, or 20 percent of the estimated average power load, the report says, significant back-up capacity will be needed to cover intermittency problems.
"The heavy reliance on gas and wind creates major risks to supply (while) many of the gasfields are yet to be fully developed," the report adds. "Mechanisms need to be investigated to ensure supply reliability even if this compromises the emissions cap."
PJPL forecast that electricity prices will need to "rise considerably" to achieve emissions reductions.
Additional hurdles they identify for implementation of a radical cut in emissions include a ceiling on how far new gas generation can be built given the rate at which associated infrastructure can be provided -- there is currently a waiting list of three to four years for equipment delivery -- and the time needed to install renewable power systems and associated networks.
They estimate that gas supply for generation will need to grow from 139 PJ a year now to between 375 and 466 PJ annually by 2020.
Meeting this level of gas requirement on the eastern seaboard, the consultants point out, will require significant development of yet to be defined natural gas reserves in Bass Strait, expansion of coal seam methane supply in Queensland almost five-fold to 530 PJ a year and the establishment of a NSW coal seam methane industry able to deliver about 40 PJ a year.
They also draw attention to a NEMMCo estimate that, without any new carbon emissions programs, current power demand growth will require 6,900 MW of new generation capacity to be installed by 2017. With the demands of meeting emissions targets taken in to account, the building program grows to 18,000 MW by 2020.
"The government," the report concludes, "needs to set the emissions cap trajectory to ensure that it can be delivered by the electricity industry."
PJPL draw attention, as well, to a number of uncertainties that cannot be modelled. One is the ability of some coal-burning generators to stay in business in the shorter term when confronted by a range of problems flowing from introduction of the policy, including inability to acquire adequate debt financing. They point to the possibility that these plant owners may be compelled to reduce maintenance levels to maximise short-term cash flow rather than asset life, leading to early closures.
PJPL also point out that other industry sectors will find a 10 percent reduction target "even more challenging" than electricity suppliers as it will require them to cut emissions 21 percent below present levels.
No-one, says the BCA president, Greg Gailey, should be under any illusion about the enormity of the task or about the availability of a quick fix -- "and the task is all the harder in the absence of a global response."
The Australian Industry Group has called for a "gentle start" to emissions trading. The AiG's national executive, having sat through a speech by Climate Change Minister Penny Wong in Canberra, has responded that the emissions cap the government plans should be introduced slowly and with a low cost. The group wants the government to "adopt a gradual approach in the initial years."
In her speech to AiG, Wong signalled that the government was now awaiting delivery in October of Treasury's modelling of economic impacts before deciding its approach. Looking at industry assistance, Wong said the government would (a) "provide a limited amount of direct assistance" to existing coal-fired generators and (b) assist trade-exposed firms that have "a sufficiently material impact" on their cost structures as a result of emissions trading. She indicated that the government was open to proposals for an alternative to its use of emissions per unit of revenue as a measure of impact.
Meanwhile environmental groups ranted that the government "should ignore the greenhouse mafia" after Energy Minister Martin Ferguson met 70 large firms and allied industry associations to discuss the carbon trading plans. Assistance would be "immoral and uneconomic," said Greenpeace.
Desperate governments at election time reach for any and every card -- West Australian Premier Alan Carpenter, facing a potential loss in the September State election, has come up with legislation to outlaw uranium mining and storing nuclear waste in WA. The miners have labeled the ploy "bewildering" and pointed out that his statement that "much of the world is moving away from nuclear power" is simply wrong.
The Australian Uranium Association has responded that WA could earn an estimated extra $460 million in government revenue by 2030 through exporting uranium, contribute $3.2 billion to the State economy and help reduce emissions by substituting nuclear power for fossil fuels.
Global news agency Reuters has taken to describing Australia as "the world's 16th biggest carbon polluter" in its coverage of the emission trading debate, saying it accounts for 1.5 percent of the world's greenhouse gas emissions, but "produces five times more carbon pollution than China" and is the fourth-largest per capita emitter.
The Washington-based Worldwatch Institute said in August that the US was responsible for 19.5 percent of global greenhouse gas emissions in 2007, with China contributing 18.3 percent -- up 57 percent since 2000. The institute noted that India now contributed eight percent of global emissions. A fifth of the world's coal is located in China and India.
Management consultants Ernst & Young say Australia remains stuck in 13th position in a list of the world's 25 most attractive countries for investment in renewable energy.
Despite environment movement execration of the Bush administration, the US has retained first place in 2008 as a result of favourable state-based schemes. China has knocked Britain out of the company's annual grading of the top-five renewable energy markets. The leading five nations are now the US, Germany, India, China and Spain.
Australia's is also 13th in the consultants' list of most attractive countries for wind farm investment, despite the impending greatly enlarged MRET. The US leads this index, too, with China, India and Germany, then Britain -- which last year was rated second. Ernst & Young warns the British government that it may be "overly ambitious" in its current wind targets and needs to facilitate an improvement in wind farm project delivery to meet its goals.
The likelihood of the New Zealand government introducing its version of emissions trading this year may not have run out, as political observers were predicting.
New Zealanders must go to the polls by 15 November and, while an election date has yet to be set, it was considered in mid-August that the parliamentary time to pass ETS legislation had run out because the government of Helen Clark lacked minor party support to drive through the bills. However, deals done behind closed doors with the Greens and, separately, the NZ First party may enable passage in a rushed debate before the election.
The minor parties reportedly have won concessions worth $NZ1 billion in the form of subsidised home insulation and cash compensation for households for power price rises.
The opposition National Party, while supporting the concept of trading, has said it will make key design changes if it wins the election.Commentators also believe that NZ Labor may ditch its plan to impose a 10-year ban on any new gas-fired or coal-burning power stations if it is re-elected and the opposition National Party has indicated that it will abandon the moratorium.
More than a third of the natural gas produced in New Zealand at present is used for power generation, but reserves are running down and most exploration is targeting oil.
The resources sector and major users have reacted strongly to Labor's ban on new fossil- fuelled electricity supply -- part of a plan to make New Zealand 90 percent reliant on renewables for electricity by 2025 -- and have warned that reliability will be threatened and power prices will rise sharply.
Origin Energy-owned generator Contact Energy has a proposal to build a 400 MW gas-fired plant near Auckland that is caught by the moratorium.
The government's plans are not helped by the fact that New Zealand is experiencing a drought this winter, placing pressure on hydro-electric supply (which currently meets 68 percent of power demand) and pushing up wholesale prices.
National Party leader John Key is telling voters that the droughts of 1992 and 2001 provide evidence of the economic impact of power shortages and that uncertainty about future supply reliability is impacting on manufacturing investment plans.
Key says modelling indicates that 175 MW of new power plant will have to be built each year and he points out that only 125 MW of net new capacity has been added annually on average since 2000.
Greenpeace rubbishes his argument, retorting that 1,520 MW of renewable energy, including 745 MW of geothermal power, is likely to be commissioned in the next four years.
Expletives are flying and the newspapers are having a field day at the expense of both Premier Morris Iemma and Opposition Leader Barry O'Farrell after the State government pulled its initial power privatisation plan because it lacked a parliamentary majority, ditched the idea of leasing its three generation businesses and decided to continue sale of its trio of energy retailers without further recourse to parliament.
The government has seized on a revision by Standard & Poor's rating service to place the State on a "negative" outlook because of failure of the full privatisation package to go through. In effect Iemma has declared a state of mini-emergency, promising a government budget revision within 10 weeks.
He has also announced that the government will withdraw from energy retailing -- something Queensland did more than a year ago following Victoria and South Australia -- and will sell potential power station development sites to private operators. While the latter move may sound like a decision to prevent government generators from building new capacity, in fact all three have the ability to increase the size of their twelve 660 MW units by up to 80 MW -- a development that by itself would end any immediate concerns about baseload supply at 2013.
Iemma and Treasurer Michael Costa have succeeded in thoroughly confusing political journalists by continuous reference to the need for about $12 billion to be spent by the generators -- but this is not to provide new baseload. It mainly refers to the notional cost of retrofitting the coal-burning plants to capture and dispose of carbon dioxide, a process for which there is currently no commercially viable technology anywhere and therefore no genuine costing.
The issue of most substance, largely being ignored at present, is that the State government is committed to extending regulation of retail electricity prices until 2013 -- years after the Rudd government's emissions trading scheme comes in to being. What has yet to be publicly appreciated is that measures to prevent retailers from recovering the full carbon costs from consumers could trigger a California-style power supply crisis.
Belinda Robinson, chief executive of the Australian Petroleum Production & Exploration Association, says the proposed gas-related investments in Queensland from now to 2014 total $20 billion. To this can be added $17 billion in coal industry investments, excluding the Bligh government's proposed spending on export facilities at its ports. There are five LNG projects at Gladstone included in the gas-related capex estimates as well as gas-fired power stations and pipelines.
Carolyn Collins, APPEA's government liaison officer in the association's newly-opened Brisbane office, says coal seam gas production reached a record 20 million barrels of oil equivalent in 2007 and CSG reserves in Queensland are now estimated to be 7.3 trillion cubic feet (or 140 million tonnes of LNG equivalent). Total combined sales of domestic and export gas for Australia last year were 1.6 tcf. Collins says the coal seam gas reserve has been estimated to have a potential of 250 tcf -- and every 3 tcf of gas has the same energy content as Australia's total annual coal exports, she points out.
APPEA estimates that coal seam methane is now meeting 18 percent of eastern Australia's domestic gas consumption.
Meanwhile a new ABARE report on national major energy and minerals developments says Australia has a record $70.5 billion committed to such projects, with petroleum, coal and uranium investors accounting for 55 percent of them.
Leading national law firm Corr Chambers Westgarth says increased project capital cost from the time lag between final investment decisions and first production are the energy industry's largest challenge in the next 18 months. CCW partner Michael Harrison says developers of new LNG projects may need to seek higher prices to compensate for the higher risk.
Allen Consulting has delivered a report to the Council of Australian Governments which calculates that requiring large energy users to investigate efficiency options and to implement any with a payback period of three years or less will deliver a net economic benefit over a decade of $710 million.
The estimate assumes that the Rudd government's emissions trading scheme will impose a carbon price averaging $15 per tonne between 2010 and 2020.
However, the consultants warn CoAG that energy consumption is relatively unresponsive to price changes and that more than a carbon cost in needed to overcome large consumer "inertia."
Allen Consulting say that emission prices in the $25 to $30 per tonne range are likely to trigger electricity prices increase of 10 percent in eastern Australia and 30 percent in the West. While such a rise might be seen as significant, they add, it will only push up the energy bill as a share of large company operating expenses from about six percent now to seven or eight percent. (They acknowledge larger impacts for such industries as aluminium smelting, paper manufacturing and some chemical operations, where they say energy bills tend to be 20 percent of operating costs and for steel production at 11 percent.)
Federal Energy Minister Martin Ferguson said after the June meeting of CoAG's Ministerial Council on Energy that a decision on a mandatory energy efficiency would be put on hold until after the final Garnaut report on emissions trading is delivered -- now expected during September -- and until CoAG has completed all its reviews of climate change policy issues. It is expected that the Greens, who hold a key share of Senate votes, will insist on mandatory efficiency requirements for 1,200 large energy users as part of their price for supporting the emissions trading legislation.
Meanwhile the Energy Supply Association has called on household users -- who account for 28 percent of electricity consumed in Australia -- to start preparing now for the impact of carbon charges from 2010. ESAA is promoting householders switching to more efficient lighting, installing insulation and sealing gaps around doors. The association estimates the national average household electricity bill at $1,020 a year at present, with carbon charges likely to push this up about $163 a year. ESAA is urging State government to accept that the full cost of emissions trading should flow through to households.
Adelaide-based Petratherm says it will cost up to $200 million to develop its initial 7.5 MW hot rock geothermal project in South Australia's northern Flinders Ranges, with two more stages to take capacity to 260 MW and then 520 MW.
The company has negotiated a deal with Hong Kong-based CLP Group, through its local subsidiary, TRUenergy, to contribute $57 million towards pursuing the development. Last year Beach Petroleum agreed to spend $30 million supporting the project.
Meanwhile the Australian Geothermal Energy Association has estimated that the sector could provide up to 2,200 MW at a cost of $12 billion by 2020 as a contribution towards the Rudd government's new mandatory renewable energy target. AGEA chairman Gerry Grove-White says the developments' output of 18,000 GWh a year would be the equivalent to the power generated by 6,000 MW of wind farms.
AGEA believes that large-scale geothermal projects (bigger than 300 MW) will be able to deliver electricity for about $80 per MWh -- "the lowest cost of any form of renewable energy."
Most of the predicted capacity development between now and 2020 is expected to take place in South Australia.
The Rudd government has announced that it will contribute $50 million towards the cost of drilling deep geothermal holes and to help finance proof-of-concept projects. However, with each four kilometre well costing about $15 million and with 90 of them needed to serve a 500 MW project, this funding is not going to stretch very far.
One of Australia's prominent upstream petroleum companies, Adelaide-based Santos, has signalled a shift in to electricity production, announcing that it intends to build a gas-fired power station in Western Victoria.
New Santos managing director David Knox says the project is intended to have 500 MW capacity and to be fed fuel from the company's gas fields offshore Port Campbell in Bass Strait. Project development cost is estimated at $800 million.
Santos, says Knox, is the largest gas supplier in eastern Australia and the move to generation is "logical" in a fast-growing power market with emission trading about to be introduced.
While the Business Council's criticisms of the Rudd government's emission trading proposals have captured national headlines, another heavyweight Australian business association, the Australian Industry Group, has given the proposed increase in the mandatory renewable energy target a broadside.
The AiG attack is noteworthy because the Group's chief executive, Heather Ridout, is seen as being influential with the new federal government.
In a submission to the Department of Climate Change, AiG describes the enlarged MRET as "ill-advised and risky policy," like to increase the cost of greenhouse gas abatement. The group says its favours an approach that achieves least-cost abatement.
AiG that it is concerned that work on the new MRET is going ahead despite it being also roundly criticised in a Productivity Commission submission to the Garnaut Review.
The group says it has 10,000 employers in manufacturing, construction, the automotive sector, telecommunications, IT and calls centres and transport, as well as other industries, in its membership.
Australian journalists still love Paul Keating. Newspapers, television and radio still give prominent coverage to his views -- but none have picked up on what he said about emissions trading in August.
Interviewed on ABC Television's 7.30 Report, Keating was asked by compere Kerry O'Brien: "Do you sympathise with anybody having to sell an emissions trading scheme? Particularly since the government has committed to introduce emissions trading and emissions targets before the next election?"
This, in full, is how Keating responded: "Well, I was always very cautious. I was around when Kyoto started. But I was always very cautious about the idea that Australian energy, which was part and parcel of our internationally traded products, coal, ingot aluminium, which is congealed electricity, that we were not putting cost burdens on them. In other words, I would have been left to my own inclinations much more about the consumption in Australia......of reducing the consumption in Australia.......of carbon and carbon dioxide than I would have been with trying to deal with its production."
Not very coherent, but essentially what Keating seemed to be saying was that the focus should be on improved productivity in using energy rather than burdening trade-exposed industries competing with rivals who don't face the same carbon constraints.
O'Brien chose to move on very swiftly, but the message was clear. One of the most experienced former Labor political leaders, and one who actually knows quite a lot about energy-related issues, couldn't bring himself to endorse the Rudd government's direction.
That was on 6 August. Later in the month Australian Workers Union boss Paul Howes went to Canberra and apparently had a row with Climate Change Minister Penny Wong over the potential impact of carbon costs on the AWU's 135,000 workers. Howes had earlier convened a meeting in Sydney to discuss the issue with leaders of trade-exposed industries and would have travelled to the capital armed with a raft of concerns expressed to him.
On 27 August Rudd himself, in addressing the National Press Club, having spun himself past anything of moment on this issue in his main address, was challenged about business attitudes to emissions trading and other climate change policy at question time. His reply, in essence: "The government is open to negotiations with business. The plans for carbon trading are designed as a basis for negotiation. We intend this to be a real negotiating process."
On reports flowing back from business dealings with public servants assigned to deal with the responses, "negotiation" has not been uppermost in the bureaucratic minds. Now the sea change in approach signalled by Rudd seems to have percolated through to the departmental level. Climate Change secretary Martin Parkinson, whose tone in a speech and some newspaper columns has been more belligerent than "negotiating" and who has used language that some see as rather more suitable for politicians than public servants, reportedly told a 29 August meeting, chaired by Energy Minister Martin Ferguson, with business associations and a raft of CEOs that the government was willing to modify aspects of the trading scheme.
None of which seems to take policymaking anywhere close to delivering a 10 percent cut below 2000 levels by 2020 -- the Rudd government's notional goal.
The Business Council, which got wide and prominent publicity when it was finally driven to publicly protest about the direction of the carbon trading proposals after years of giving lip service to emissions trading and the need for "certainty," found itself roundly criticised in the media and by environmental activists for its attitude. The material it published, while quite comprehensive in scope, running to more than 170 pages, was not especially clear on outcomes.
BCA president Greg Gailey made a further attempt on 27 August to address the issue, decrying criticism that big businesses are trying to wriggle out of doing their fair share for abatement. "We actually want emissions trading," he said, "and we support Australia addressing the global challenge -- but there will have to be a serious debate about how much consumers are prepared to pay."
The mistake the BCA and others -- but not the AWU -- are making, it seems to me, is to focus the debate on cost, which the public interprets as an attempt to protect profits. Having to meet an extra $3 a week in power charges (see ESAA above) is hardly a burden for residential power users, so they cannot see what business is whinging about -- but facing any risk at all to their employment is another matter and the risks are real, as some sectors of the trade union movement are now appreciating.
While Keating hardly made himself clear in his ABC interview, he was, I think, pointing to the need to focus on consumption as a key part of this debate -- something which, to give the Rudd government some credit, it is trying to do, although the measure it is pursuing is in fact the work of the Howard government: drive the 1,200 largest business energy users to examine their efficiency and their options to improve it.
Some in the government, and all the conservation movement, want to go further than this: they want to require these companies to implement the efficiency options they identify, adding yet another layer to the carbon costs being heaped on trade-exposed businesses.
Like everything else in greenhouse gas management, this is not an easy issue: very large operations, such as smelters, can only make a step-change in efficiency by building new plants and it seems less and less likely that there will be large new industrial developments here under emerging conditions when they can be sited in the developing world. In addition, some Australian manufacturers have installed state-of-the-art technology to compete internationally and have nowhere to go in terms of systems at present to improve on that.
Many firms, however, could do a lot better in managing how they use energy. The Allen Consulting report to CoAG (see above) makes the point that end-use efficiency in this country has been relatively poor over several decades and lags behind that of many other OECD countries. Energy efficiency in some sectors actually is less now than a decade ago. There have been gains -- industrial energy intensity improved 0.5 percent between 1994 and 2001 compared with 0.1 percent between 1973 and 2001 -- but, say Allen Consulting, it is demonstrable that energy efficiency has not been a high priority here at a time of very low power prices.
The Allen Consulting case for CoAG moving to mandatory efficiency requirements for business is underpinned by the point that the price elasticity of demand for energy is low: even a 10 percent increase in power prices, they claim, will lead only to a 3.5 percent reduction in demand in the commercial sector (consumers of 23 percent of power) and 3.8 percent in industry (consumers of 46 percent of power).
Right at the moment it would be interesting to know how many in business would be willing to trade off a more trenchant government approach to requiring energy efficiency improvements against carbon prices that lock trade-exposed firms out of overseas market or allow their rivals to sell more products here, especially when the emissions trading system is to be accompanied by a much higher MRET, which (see above) seems to have a wider range of industry sectors spooked.
Part of the onus on the Rudd government is to ensure that what finally emerges from this process is an holistic approach to abatement across all the issues.
As reported above, for example, geothermal energy is starting to look as if it could deliver a large part of the new zero-emissions generation required by the bigger MRET and at a more reasonable wholesale price than wind or solar -- but the government's incentive offering in this area at present is derisory and its pace in sorting out strategic transmission development issues, critical to bringing more power resources to market, is funereal.
Good government, in the end run, is not only about good ideas -- the inspiration needs to be more than matched by perspiration in the form of excellent process. I do not sense this is what is on offer at the moment.
1 September 2008
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