Issue 66, September 2010
Welcome to the ninth edition for 2010, in which there is a focus on the need for governments to address retail price regulation, the outlook for much higher electricity prices under decarbonisation policy, the proposal to link a hydro-electric power station in Papua New Guinea to Queensland, the prospect of $70 billion being spent on distribution networks this decade and the impact of policy uncertainty on investors’ ability to raise capital funding.
Michael Fraser, AGL Energy managing director, has highlighted one of the biggest failures of the two decades-long eastern seaboard power market development, the inability of governments, other than Victoria’s, to bite the bullet and put an end to price controls for uncontracted householders and small business.His call for a national release of controls on pricing has come as the Energy Supply Association suggests that the carbon price needed to achieve Australia 2020 abatement target could see tariffs rise at an annual average of 15 percent for a decade – “a huge rise in the real cost of producing and delivering electricity over a short space of time.”Despite the predictions about price rises, the Federal Treasury “red book,” the advice it gives an incoming government after an election, released for the first time in the atmosphere of a “hung” parliament following the 21 August poll that eventually saw the ALP returned to office with independent MP support, does not contain any detailed comment about economic pressures arising from decarbonisation policy feeding high tariffs..Meanwhile decisions about retail prices, described by the Energy Supply Association as the “cash register for the entire electricity industry,” remain in the grip of politicians in South Australia, Queensland, Tasmania and the ACT – as well as in Western Australia. ESAA argues that it is “aparmount that retail prices are allowed to be set by the market to ensure that costs can be recouped from end customers.”
Fraser told a Sydney conference in September that price regulation represents substantial unfinished business for east coast market reform. He warned that four broad policy objectives are being constrained by ongoing retail price controls: macro-economic efficiency (with flow-on effects for economic growth, wages and jobs), product innovation (because poor regulatory outcomes may mute price signals), environmental aims (because inefficient pricing can lead to over-consumption) and building an attractive environment for investment (because there are risks that price setting will not support construction of new supply capacity).Fraser claims that failure to move further on market reform may have cost Australia $4 billion in lost GDP over a decade, basing the argument on the original Bureau of Agricultural & Resource Economics’ forecast that there would be a $2.4 billion per year gain from electricity reform, revised down to $2 billion annually by the subsequent Parer Review. The unrealised benefit is running at $400 million a year, he asserts.Fraser says there is no policy justification for continuing price regulation. If a policy objective is hardship minimisation, he adds, then governments should pursue it through transparent use of community service obligations paid to retailers and going directly on to customer bills.There are “significant monies” available from GST receipts from energy bills to fund higher CSO payments, he adds.“Finish the (power market reform) journey,” he urges the federal, state and territory governments.
The 2010 edition of the Powering Australia yearbook, written by Keith Orchison and John Arlidge, will be published in November by Focus Publishing, the custom book division of CommStrat. The RRP for the yearbook is $29.95. Purchase enquiries should be directed to Shirley Kirkwood, operations manager, Focus Publishing – by email to email@example.com or by telephone to 61-2-8923-8022.
The end of September saw a verbal punch-up between the Bligh government and the Liberal National Party opposition over the next tranche of power price rises.Natural Resources, Mines & Energy Minister Stephen Robertson said the truth about electricity prices is that state householders pay less than in New South Wales and South Australia and their bills are on a par with those in Victoria and Western Australia. The difference between Queensland and NSW for residential customers is about $170 a year, he adds.The LNP wants the state government to promise not to remove its control of retail power prices, a key requirement for energy retailers in order to ensure that they are not trapped between rising costs and a capped end-user bill. Opposition spokesman Jeff Seeney says regulated electricity prices in the state are “a great legacy of former coalition governments.”
The Executive Connection, a chief executive mentoring group, claims that Western Australian business leaders are not especially concerned by the electricity tariff increases introduced on 1 July. It says a poll of CEOs finds that 55 percent do not believe the increases are having an impact on their businesses because they are able to pass on the costs in a strong state economy.
Re-elected Prime Minister Julia Gillard, back in office by the tightest of parliamentary margins, appears to have backflipped on her federal election promise that the ALP will not pursue a carbon tax in this term. At the end of September, she said in a television interview that “circumstances have changed” – the government is partly dependents on a Greens MHR for a Representatives’ majority and will face the Greens holding the balance of power in the Senate from next July – and her government “had to be realistic.” The Coalition, which is three seats from winning office in the hung parliament, has called for Treasury modelling of the impact of a carbon tax on electricity prices to be released. The government aims to set up a multi-party parliamentary committee to debate carbon pricing in the parliament.Meanwhile the chairman of the US Senate energy committee, Democrat Jeff Bingaman, has said in Washington that he sees no chance for a a climate change bill, embracing emissions trading, reaching the Senate floor in the remainder of President Barack Obama’s first term, undermining the administration’s hopes of taking a lead role at the next round of UN decarbonisation talks in Mexico later this year. Bingaman is pushing instead for the US Congress to pass a bill creating an American version of Australia’s national renewable energy target, a measure intrdouced here by the Howard government in 2000.In Australia, the business community is warning that special attention needs to be given to the risks associated with this country’s mining-fuelled economy. The biggest boom since the 1850s Gold Rush is said to be straining the capacity of the economy and putting pressure on the workforce and the Aussie dollar. This is seen as a major challenge for trade-exposed industries, which use a third of Australia’s electricity supply and employ more than a million people, because they are finding it more difficult to attract and retain employees, to source and fund capital borrowings and to compete with overseas rivals. They cite decarbonisation policies among the top five policy areas affecting their viability.Prime Minister Julia Gillard has also announced that she will personally chair the parliamentary committee that will investigate ways to put a price on carbon. Treasurer Wayne Swan, Climate Change Minister Greg Combet, Greens leader Bob Brown and his deputy, Christine Milne, and independent MHR Tony Windsor will be members of the committee, but the Coalition has yet to indicate if it will accept positions on the group. Gillard has appointed Ross Garnaut, Will Steffen, Rod Sims and Patricia Faulkner as expert advisers to the committee.
Federal Treasury has advised the Gillard government that strong population growth, a key factor in electricity demand, will continue over the next 10 to15 years and dealing with the needs of more people “depends crucially on planning and investing now.”.In its “red book” advice to the incoming government, Treasury says the current population is 22.2 million and its projects it to lie between 26 and 29 million in 2030, depending on immigrant intakes. It expects much of the growth to occur in cities. “Over the next 20 years, around two-thirds of the increase is projected to occur in capital cities. The ability of government to counter-act (this) through regional policy would appear limited.”It warns the government that dealing with the needs of a higher population is about “more than simply building new infrastructure.” Attention, it says, has to be given to investing in the right kinds of infrastructure and using existing assets more efficiently. “This requires appropriate regulation and pricing, private investment and contestable and competitive infrastructure markets.”Treasury warns that Australia’s cities have high, but declining, standards of amenity, low population densities, growing congestion, worsening housing affordability and low levels of industry clusters. “Many of these outcomes result from fractured and ineffective governance arrangements.”
Origin Energy has startled the Australian energy supply sector by unveiling the region’s largest hydro-electric development since the Snowy Mountains Scheme was built more than a half century ago, aiming to dam Papua New Guinea’s third-largest river and channel power across Torres Strait in to North Queensland.Origin managing director Grant King will not place a price tag on the 1,800 MW project, saying only in answer to questions that it will cost “many billions of dollars.”The proposal has been greeted with acclaim by the politically-embattled Queensland government of Anna Bligh, derided by the independent federal MP Bob Katter and treated with caution by the North Queensland community, environmentalists and electricity industry analysts.Bligh claims that being able to draw 1,200 MW of the Purari River scheme’s capacity for Queensland use will enable the state to reduce greenhouse gas emissions by up to eight million tonnes a year, to deliver power to the North West minerals province, enabling a range of new industrial developments, and to provide a reliable energy base for development of Townsville as a major regional city.The proposed site for the power station is at Wabo, 198 kilometres upstream on the Purari River and 100km overland from the Gulf of Papua. The catchment area has one of the highest annual levels of rainfall in PNG, averaging about eight metres a year. The transmission requirements, in effect, necessitate building two Basslinks, the 290 km high voltage line between Tasmania and Victoria, and a total of 1,600 km of cables in all.A feasibility study on the development is proposed to be completed in 2012 and it is thought that it would be 2020 before the Wabo plant could deliver electricity to Australia.
Katter, one of the five independent members holding the balance of power in Australia’s House of Representatives, has described the proposal as a “big fat load of cow’s manure” and pointed to an earlier, abandoned project to bring natural gas from PNG to Queensland.
Commentators have highlighted the political volatility of PNG, the need to satisfy multiple tribes living in the development area and the potential impact of drought on the scheme’s viability.
The state-owned China National Electric Equipment Corporation and HRL have formed a joint venture to build a 600 MW power station, using brown coal, at Morwell in Victoria’s Latrobe Valley. The proposal is being considered by Victoria’s Environmental Protection Authority. It is intended that the development be based on integrated drying combined cycle technology, supported by a $50 million subsidy from the Victorian government and $100 million from Canberra.HRL general manager Paul Welfare says the proposed plant will emit less carbon dioxide per megawatt hour than any other coal-burning power station in the country and will use 75 percent less water than the existing Latrobe Valley operations.Environmental groups are campaigning against the development.
Julia Gillard has re-appointed Martin Ferguson to serve as Energy and Resources Minister in her government and Tony Abbott has re-appointed Ian MacFarlane to the shadow role. With Penny Wong moved to Finance Minister, Greg Combet has become Minister for Climate Change & Energy Efficiency.
South-east Queensland electricity distributor ENERGEX says that it will outlay $1.02 billion on upgrading its network this financial year and spend $342 million more on maintenance and operating costs, an average of $3.7 million a day.The government-owned company says the average SEQ home now uses 70 percent more power than it did ten years ago and it will spend a record $5 billion on capital works over its present five-year regulatory period. At the centre of demand is the Logan urban area lying between Brisbane and the Gold Coast, with population in the area forecast to increase 13 percent this decade.
Federal Department of Climate Change & Energy Efficiency officials have told the Australian Industry Greenhouse Network that, while there is an emerging consensus among negotiators meeting under the UN umbrella that a new climate change treaty, broader than the Kyoto protocol, is the preferred outcome post-2012, the global summit at Cancun, Mexico, in December could not be expected to deliver a new agreement. However, they expressed the hope that this could be achieved by the end of 2011.
Capital outlay numbers emerging from the electricity supply industry indicate the huge development task the sector confronts this decade.Speaking to a forum of the Committee for the Economic Development of Australia, George Maltabarow, Energy Australia chief executive, told a questioner that he expected the NSW government-owned business to need to spend as much again in the second half of the decade on capital outlays as the national regulator had approved for the 2010-15 period. Maltabarow, who has recently stepped down as chairman of the Energy Networks Association, said he expected other distributors would be on the same spending trajectory. This implies a total capex outlay for distribution this decade of the order of $70 billion, to which needs to be added requirements for transmission links, driven in part by the enlarged renewable energy target.The Energy Supply Association, in a briefing to the All Energy Australia Conference in Melbourne, said modelling undertaken for it using carbon prices similar to those in the Federal government 2020 abatement target scenario suggested about 15 percent of current power stations would need to be retired by the end of the decade. Replacing these, meeting the national renewable energy target and delivering capacity to meet the rising load would require nearly $35 billion to be invested in generation.In addition, according to ESAA, existing power station owners would need $10 billion to fund carbon permit purchases when the Gillard government’s proposed emissions trading scheme commenced.
It’s all about certainty, according to Keith Jones, and, he warns, investors in energy developments in Australia can’t wait until after the next federal election for things to be resolved.Perth-based Jones, managing partner of Deloitte in Western Australia and the consultants’ new leader of its national energy and resources group, points out that there are $110 billion worth of resource and energy developments currently building or approved for construction, with another $200 billion to $400 billion worth of projects under consideration for a start in the next five years.Access to capital, he says, will be a major deciding factor in whether and when they go ahead. “Without capital, there is no development. Without certainty, there is no capital. Without development, we will have an energy supply/demand crisis if projected economic growth occurs.”Jones sees the economic fundamentals for resource and energy investment in Australia as being “very healthy,” but argues that the intensity of competition around the world for project funding demands resolution of a number of issues that have remained in play locally for the past 3-4 years.A key to a more certain investment climate, he says, would be publication of the long-delayed energy white paper, which the Rudd government listed as a priority when it came to office in late 2007 – but it is vital, he adds, that the paper embraces all the energy issues needing to be resolved and does not leave important policy such as carbon pricing outside its ambit.“Suppliers of capital for Australian projects need to feel comfortable about the economics of their investments,” he tells me, “and right now they are not.”He acknowledges that this is not a problem peculiar to Australia, but a world-wide phenomenon. “Investor will not commit when the foundations of their decisions could be subject to significant variation due to policy gaps or lack of settled policies that fully cover key issues.”Jones says electricity supply is a strong example of the pressure on policymakers to deliver the right signals to investors and the financial institutions from which they are seeking backing. In Australia, he adds, the power generation sector has entered “a period of unprecedented uncertainty” over the past two years after operating in a relatively constant investment climate for 14 years previously.“The main cause is the protracted and increasingly polarised debate about national carbon policy. Whatever position is adopted, the generators’ ability to recover the full costs of supply to their customers, something that is highly politically sensitive, must be understood. Customers and policymakers have to recognise that higher power prices are an inevitable product of both decarbonisation and constantly-expanding network systems.”He says it is importanbt for policymakers and regulators to deliver certainty for the transmission sector as well as for generators because the high voltage links are critical to the successful development of power stations to meet demand and to deliver lower carbon emissions.In particular, Jones says, governments have to recognise that Australia has a significant issue with the age of its power generation and transmission assets on top of their ability to cope with fast-rising demand. “This problem will only grow while there is a shadow over the ability of developers to raise sufficient funds in internationally competitive markets.” (This report, written by Keith Orchison, originally appeared in Business Spectator on 30 September.)
The Energy Supply Association has explained the fierce resistance to the Rudd government’s emissions trading scheme by some of its generator members.In an interview with Business Spectator, ESAA chief executive Brad Page said: “The big gap (in the scheme) was that essentially the way it was applied over the first 10 years meant that about $10 billion in net present value was removed from the generation sector.”He added: “For a number of generators that value was so great that it stranded their assets. It meant they could not service billions of dollars of debt and they could not return any equity to their owners.“They actually had nowhere to go – no buyer for their assets because there was no future for them. The compensation packages provided in the first and second stages (of the ETS negotiations) met only 25 percent and then about 35 percent of that asset value.”
The Victorian government, facing an election in November, has committed to support a 180 MW solar power station at Mildura with a $100 million grant, but the project’s development will depend on it also receiving a subsidy from the Gillard government under its “Solar Flagship” scheme.The plant is proposed by TRUenergy in partnership with American solar specialists First Solar and will be designed to deliver 345 GWh a year of electricity.If the Mallee solar park receives the go-ahead, it will be built 10 kilometres from Mildura between 2012 and 2015, using the latest in thin-film solar photovoltaic technology.The project is the second solar development proposed for north-west Victoria. Sydney-based Silex is considering building the 154 MW facility initially put forward by Solar Systems, which went in to receivership last year. The Victorian government has offered $50 million to help bring this development to fruition and it, too, will depend on access to federal money to go ahead.Meanwhile German researchers are claiming that solar technology may be able to compete commercially with conventional grid-connected power by 2020 provided renewable energy storage systems can be moved along swiftly, arguing that the the high costs that are currently the key barrier to photovoltaics can be mitigated by increased production capacity around the world and the economies of scale. University of Stuttgart lecturers Sven Seidenstricker and Christian Lindner claim, after interviewing solar experts in the US and Europe, that thin-film technologies and other innovations will contribute significantly to solar’s power conversion efficiency this decade.BP Solar, part of BP Alternative Energy, has announced that it is testing new technology in Saudi Arabia designed to perform more efficiently in extreme heat. The 14 kW pilot project constructed in the grounds of the King Abdullah University of Science & Technology incorporates a backsheet layer to facilitate faster heat dissipation and thus higher power output.
There’s an odour of fish arising from the UN’s Intergovernmental Panel on Climate Change. A review of its work has re-invigorated sceptics’ assertions that it has been doctoring its output to fit the dominant global warming thesis. How the problem should be managed by the international community will be a front-and-centre issue at an IPCC plenary meeting in South Korea in October and this throws up an early challenge on climate change attitude for the new federal government in Canberra.Not even a review panel carefully selected by the 15 top national academies of science, the IPCC’s umbrella organisation, to consider its practices – following a year of media badmouthing and the revelation of some extra-ordinary failures in assessing input despite its claims that it uses only peer-scrutinised information – has been able to disguise the panel’s pong.Contrary to a widely-held view in the media, the IPCC is not a scientific body. As the review points out, it “sits at the interface between science and politics.”The review committee also did not have the job of the assessing climate science, although some reporting of its findings give the impression it has given a big tick to the IPCC’s work. The committee looked at the panel’s mode of operating – and the bottom line is surely that an organisation that provides erroneous advice to world governments about the threat to the Himalayan glaciers because, on the review’s findings, relevant experts did not see the offending material obviously needs reform. There are claims in overseas media that the South Korean meeting will see a strong attempt to replace controversial Indian engineer Rajendra Pachauri, the panel’s chairman, who is in his second term. Even Greenpeace is reported as saying that his departure could help restore confidence in the IPCC. However, India is already signalling it won’t wear this.Which side will the Australian government take?
Just one point from the review illustrates how complex and difficult the assessment task is – the IPCC received 90,000 comments on its draft 2007 report and this “stretched” the ability of lead authors to “respond thoughtfully and fully.”One of the problems the committee identifies is “confirmation bias,” the tendency for the panel’s lead authors to place too much emphasis on their owns views, to which the lay observer can only say “What a surprise.” Not.Pachauri, who resisted recognition of the Himalayan error among other perceived failings, hardly seems the right person to lead the n ecessary change, but ditching him is not the primary issue. What really matters is achieving a high level of accountability and transparency in the panel’s processes, something the review committee, no matter how diplomatic its language, obviously does not believe is on offer at present.The committee wants the IPCC to appoint a full-time executive director drawn from outside the scientific community and to restrict both his or her tenure of office, as well as that of the chairman, to one six-year stint. It wants the tenure of the six editors of chapters restricted in the same way. It also wants the panel to be more diligent in considering and incorporating the comments of reviewers and to reformulate the methodology it uses to describe the uncertainty of forecasts.The situation is also somewhat awkward for Rudd’s friend, UN Secretary-General Ban Ki Moon, who was sent letters signed by more than 100 senior scientists in 2007 and 2009 warning him that the IPCC had process problems. He did not even acknowledge receipt of either of them and stands charged now with allowing this ulcer to fester at a critical time for international policymaking on decarbonisation, culminating in the failure of last December’s Copenhagen summit.Commentary
In the new parliamentary spirit of frankness and transparency, the incoming federal Minister for Climate Change, Greg Combet, might like to start by explaining to us all what’s involved in pursuing the government’s decarbonisation target for the end of the decade.It’s something that his predecessor, Penny Wong, never got round to doing during her stint in the portfolio.
As the 2020 target is one of only two pieces of climate change-related policy on which there is bipartisan consensus – the other is the enlarged renewable energy target – it is something of a lodestar for energy investors at present as they wrestle with a very uncertain business environment and bolshie bankers reluctant to support projects.
The goal is to bring down Australia’s total greenhouse gas emissions to five per cent below 2000 levels by 2020.
This sounds good – except to the Greens, who want a much higher target – but what it means would be lost on nine out of 10 voters.
Coming up with an actual abatement number for 2020 requires making an assumption about a number of things, including population numbers and the growth of the economy. The climate change bureaucracy in Canberra, using Treasury modelling, came up with a goal of reducing emissions by 140 million tonnes a year in 2020, another meaningless number for 90 per cent of the population.
It is generally accepted that most of this abatement will need to come from the energy sector, and Penny Wong has claimed that achieving the new renewable energy target, which requires retailers to source 20 per cent of the electricity they buy in 2020 from zero emissions generation, will deliver 39 million tonnes.
The energy industry estimates that this will require a private sector investment of about $19 billion over 10 years, mostly in wind farm development, erecting between 4,000 and 5,000 turbines across eastern Australia and several hundred more in the West.
Connecting the wind farms to the main power grid will add perhaps another $3 billion to $5 billion to the RET costs and, because wind farms are intermittent, generators will also have to build peaking power gas plants, able to be switched on and off very rapidly, unlike large coal-burning power stations. How much gas plant is needed is a controversial issue, but, at a minimum, this step will require another $3 billion or so.
This leaves 101 million tonnes of greenhouse gases to be found and cut.
The most popular move with the Greens would be to close down at least two of Victoria’s brown coal-burning power stations and others in South Australia, New South Wales and Queensland. The owners, unsurprisingly, want compensation, which would run to billions of dollars as well. Some industry analysts think about $10 billion would be needed to buy closure of half a dozen plants, but the owners no doubt see this as inadequate.
There has to be construction of new power stations before the old ones are closed and this would involve spending something like another $10 billion to $12 billion on baseload gas plants, the only viable option commercially available, given political opposition to nuclear power.
This step could deliver another 40 million tonnes of abatement, leaving half the job still to be done.
Opinions abound on what else should be pursued to fill the gap, including so-called “negawatts,” the gains from end-use energy efficiency. Australia has one of the poorest records in the developed for efficiency gains over the past two decades.
The Greens are very likely to try to drive the Gillard government towards introducing a mandatory efficiency target on the lines of the RET, requiring energy retailers to find the means of delivery the gains or paying penalties for failure.
An idea of the degree of difficulty involved is provided by the Canberra climate change bureaucrats, who have pointed out repeatedly, perhaps to throw cold water over those getting over-excited about solar power, that converting every residential rooftop in Australia to photovoltaic systems this decade would cost $200 billion (five times the projected cost of the national broadband network) and deliver only 16 million tonnes of annual abatement in 2020.
The impact of the capital outlays and the mandatory targets falls on all end-users of electricity through their power bills. When the Business Council, using Port Jackson Partners modelling, claimed last October that the combination of the RET, the emissions trading scheme Kevin Rudd proposed and the $35 billion worth of electricity network improvements and expansions currently under way would see power bills double by 2015, the federal government simply ignored the message and were not pushed to respond by Malcolm Turnbull, then the Opposition leader. As reported above, the electricity industry is now suggesting that the increase in power prices could be more than double.
Effectively, Australia is probably looking at power price rises averaging 15 percent a year for 10 years.
For Combet, and for Julia Gillard and her cabinet as a whole, the challenge is now to come clean with the electorate, to spell out how the target – described by Origin Energy CEO Grant King recently as a “huge, huge task” – can be reached and, most importantly for householders and business, what the impact of the moves to deliver it will cost.
For Abbott and the Coalition, the requirement is that they pursue these explanations with vigour inside and outside the parliament.
Rudd and Wong, and others in the government, including Combet, relied on spin and bluster, especially over the first half of this year as an Abbott-led Opposition challenged their policies, to obscure the decarbonisation picture.
Surely new paradigm politics requires complete openness about the details now?
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