Issue 72, April 2011
Welcome to the fourth issue for 2011 at a time when the major power market in the country has a new government – the Coalition was last in office in New South Wales when the NEM was in the planning stages – and controversy continues to rage over power prices and the proposed carbon charge. The inability of governments to take a long-term, strategic view of resources and energy issues is currently on display for all to see. Meanwhile the opportunities for the Australian LNG industry have been canvassed in detail at the APPEA conference in Perth.
Reacting to the latest round of proposed power price rises in New South Wales, new Premier Barry O’Farrell is to initiate an immediate review of network capital expenditure “to ensure that it is not gold-plated.”
“There could be room to reduce the level of investment while providing the appropriate amount of reliability,” he says.
And here is a Coolibah prediction: this time next year, the independent State external review of the independently regulated (by the Australian Energy Regulator) network capital outlays will find that they are justified and that the independent pricing pass through (by the State’s Independent Pricing & Regulatory Tribunal) was/is justified, too. Sure, there will be an announcement of several hundred million dollars of savings – that is not hard to achieve in a budget of billions of dollars by putting off some activity – but it will not change the direction of price movements more than a small amount.
Why? Because you cannot increase the population, grow the economy and indulge in large-scale residential and commercial use of energy-thirsty appliances without expanding the networks – and you dare not ignore the need to replace aged assets, some of which were installed as long ago as the 1950s.
It is an axiom of the electricity supply industry that only one thing exceeds public outrage over new prices and that is blackouts and brownouts.
Everyone with any genuine knowledge of the electricity supply business knows that tens of billions of dollars must be spent this decade to expand and augment the network system. It stands to reason that any regulatory regime can be fine-tuned, but populist outbursts about the present price trend are for show and political gain.
A word of warning to all concerned in the current performance (a word used with intent): ask Peter Beattie about why he had to set up the Darryl Somerville inquiry in Queensland a decade and what it found?
The NSW Independent Pricing and Regulatory Tribunal attributes six per cent of the State’s proposed electricity price rise from 1 July to costs associated with the federal renewable energy target and the ousted Keneally government’s rooftop solar power scheme. IPART says 10 per cent of the 17 per cent increase is down to higher network charges.
IPART has condemned the Keneally scheme and the federal small scale RET provisions to promote solar power as “high cost abatement.” Better environmental outcomes could be achieved at the same cost, it says. The State’s solar bonus scheme was “poorly designed” by Labor and not subject to adequate cost-benefit analysis.
IPART says the outcome of its draft decision will be prices rises of about $315 a year for a typical residential customer and up to $350 a year for a typical small business. It says it expects the 2012-13 prices to rise again by up to $190 for householders and up to $230 for small business.
A household using 7,000 kilowatt hours annually will face a bill in 2011-12 of about $1,513 in the metropolitan area, with customers paying about seven per cent more in the Endeavour Energy (formerly Integral Energy) franchise area and about 36 per cent more in rural and regional areas. A significantly higher proportion of households in country NSW are likely to spend more than six per cent of disposable income on electricity than in Sydney and its surrounds.
IPART seeks to set the price rises in perspective by pointing out that, while NSW power bills have risen by more than 40 per cent real (i.e. in inflation-adjusted terms) over the past 10 years, average weekly earnings in the State have grown by 43 per cent and the CPI has increased by 31 per cent.
Meanwhile in Queensland, where the proposed 2011-12 power price rise is 5.83 per cent after increases of 11.82 per cent in 2009-10 and 13.29 per cent in 2010-11, the State Energy Minister, Stephen Robertson, has said that the costs are cheaper than in NSW, Victoria, South Australia and Tasmania.
IPART has, in effect, passed the regulatory ball back to the Council of Australian Governments in its latest power pricing determination: it has called on the NSW government to push for an Australian Energy Market Commission review of the rules under which the Australian Energy Regulator makes judgements about network expenditure.
According to IPART, which is chaired by Port Jackson Partners consultant Rod Sims, an adviser to Julia Gillard on climate change policy, the current rules create “risks of bias towards higher, rather than balanced and efficient, network prices and outcomes favouring the commercial interests of the monopoly businesses rather than the customers’ interests and efficient overall outcomes.”
IPART wants the regulatory rules to be amended to provide the AER with an obligation and sufficient powers to ensure that network expenditure is prudent and efficient.
Translated, barely five years after CoAG went through a major exercise in setting up the AER at a time when it must have been obvious to every government concerned that the effect of large-scale capex and opex outlays by networks would be large increases in end-user power bills, it is now being proposed that the process will be reviewed because, mirabile dictu, it is delivering prices rises that are politically painful.
It is not only the deity who moves in mysterious ways his wonders to perform.
Federal Climate Change Minister Greg Combet has claimed in a National Press Club speech that “the 50 largest polluters” will be responsibilities for two-thirds of the liabilities under the government’s proposed carbon charge.
The claim puzzles observers when set against the electricity industry’s breakdown of customers: 27.7 per cent residential, 22.8 per cent commercial, 18.3 per cent metals industry, 11 per cent aluminium smelting, 9.4 per cent mining, 9.1 per cent manufacturing (including food processing), one per cent transport and storage businesses and 0.8 per cent agriculture.
Combet asserts that, under the government’s compensation plans, “millions of households will be better off under a carbon price.”
Greg Combet says that the Gillard government plans to introduce legislation to create a carbon tax system introduced in Federal Parliament in the third quarter of this year with the aim of having the measure operating from July next year. There is, he says, “ample time” to do all the preparatory work to meet this deadline. “There are a lot of things going on simultaneously, but I am confident we can draw it together.”
The Federal Opposition has signalled that it is considering adopting the Queensland mandatory gas generation policy on a national basis if it wins office at the next election.
The Queensland scheme started at 13 per cent and has been lifted to 18 per cent, but Opposition energy spokesman Ian Macfarlane told the annual conference of the Australian Petroleum production & Exploration Association in Perth in April that a target as high as 40 per cent could be considered for a national scheme.
Macfarlane also issued a warning to the community: the Opposition, because of the Greens’ numbers in the Senate, would not be able to ameliorate the Gillard government’s carbon plans in the present parliament. It negotiated changes to the original Rudd government CPRS scheme because it was able to win Senate votes.
Meanwhile the Greens have said that natural gas is still a fossil fuel and “must be phased out in favour of renewable energy.”
The Clean Energy Council has called on the Gillard government to establish a national energy efficiency scheme requiring retailers to pursue demand gains.
The government has not yet responded to a report by an advisory group recommending the move, although its findings were delivered to the Prime Minister six months ago.
The group recommended a move to cut the average use of power by Australians by 16 per cent over the decade, achieving a reduction of 30 per cent per unit of GDP.
The council says the scheme should be in addition to the carbon change.
If implemented, the efficiency scheme will join the carbon charge and the renewable energy target in imposing costs on end-user bills.
The Grattan Institute says the combined impact of the federal government’s renewable energy target, the NSW greenhouse gas abatement scheme (introduced by the Carr Labor government) and the Queensland electricity target (mandating gas power) will be annual reduction of 40 million tonnes of carbon dioxide in 2020.
The institute claims that governments have paid out $5 billion to date for rebates on installing solar panels, use of solar hot water heaters and home installation, but the cumulative effect in 2020 will be abatement of two millions tonnes of greenhouse gases, a cost of $200 per tonne.
Using rebates to achieve the 2020 target – of cutting national emissions to five per cent below 2000 levels, at present requiring annual abatement of 160 million tonnes at the end of the decade – would cost $300 billion, the institute adds.
Meanwhile, Alan Moran, director of the deregulation unit at the Institute of Public Affairs, says that Australia is currently spending $3 billion a year on promoting decarbonisation and subsidising carbon-reducing technologies. This is in addition to the renewable energy target, which, he says, is going to add $2.7 billion a year to electricity charges in 2020. A carbon tax at $30 per tonne will add $6 billion to annual electricity costs.
Australia’s newest major coal-fired power station, the Queensland government-owned Kogan Creek plant near Chinchilla, is to add a 44MW solar thermal facility to its 750MW capacity.
CS Energy says that the solar system will add 44,000 megawatt hours a year to the plant’s output.
Construction is planned for the near future.
CS Energy is also bidding for funds from the federal government’s Solar Flagships program to build a 600MW plant.
Departing Woodside Energy chief executive Don Voelte, speaking at the APPEA Conference in Perth to 3,400 delegates, a record turn-out for the 51-year-old event, has said that global markets are looking to this country to make a greater contribution to sustainable energy.
The greatest practical contribution Australia can make, he argues, is to export as much natural gas as possible, particularly to developing markets in Asia – a claim that the nation’s uranium exporters might dispute.
Voelte says both the upstream petroleum industry and government need to reinforce public understanding of the value of the LNG business and policymakers need to provide supporting solutions that go beyond a carbon price regime and include company tax, depreciation of large investments, availability of skills and resources, productivity improvements and industrial relations.
Meanwhile APPEA used the conference to launch a report for it by WorleyParsons to boost the green credentials of LNG from coal seam gas.
The report says that every tonne of carbon dioxide emissions associated with domestic production of LNG from coal seam gas will result in up to 4.3 tonnes less of emissions in China when the fuel replaces coal. A project exporting 10 million tonnes a year of LNG to China can avoid more than 32 million tonnes of emissions there. Over a 30-year life, such a project could avoid emission of almost a billion tonnes of carbon dioxide.
APPEA chief executive Belinda Robinson, who is retiring from the role in July, argues that these numbers underline the need for the federal government to avoid disadvantaging the LNG industry in making carbon price policy.
“Recent polling,” says Robinson, “shows many Australians are unconvinced that a domestic carbon price will make any difference to reducing global emissions. If a cost is imposed on Australia’s LNG industry, global emissions will increase as a consequence of there being less gas available to replace more greenhouse-intensive fuels.”
Around 80 per cent of Chinese electricity generation is coal-fuelled.
Robinson says that there are $88 billion worth of LNG projects currently under construction across Australia and at least another $180 billion in developments under consideration.
A study of the upstream petroleum industry over the past decade released at the conference by Deloitte petroleum services group says that the potential total capacity for Australian LNG production from planned offshore projects could reach 170 million tonnes a year – compared with output of 20 Mt today and present production by the world’s export leader, Qatar, of 77 Mt annually.
Deloitte says there are numerous hurdles to the development of all 10 planned conventional LNG projects in Australia and it is “extremely doubtful” that all will go ahead in the stated time frames.
Federal Energy Minister Martin Ferguson described the LNG industry as “tomorrow’s energy today” to the APPEA conference.
He says LNG demand is predicted to more than double within 25 years, reaching 360 million tonnes annually around the world. Australia, he claims, is on track to be the second largest global producer by 2015.
If estimates that there are 150 trillion cubic feet of coal seam gas on the eastern seaboard are proven, he says, Australia’s existing known gas reserves will be doubled.
Ferguson told the APPEA conference that demand for labour by the resources and energy industries will be “immense” over the next few years, peaking in 2014. There will need to be short-term immigration programs to attract workers Australia can’t provide for $150 billion worth of projects.
APPEA chairman Eric Streitberg says the upstream petroleum industry accepts that, in the absence of a coal seam gas to LNG track record, the regulatory framework in Queensland may need to be more onerous to provide the public assurance being sought.
“Its newness, its onshore footprint and its visibility have led to a great deal of interest in Queensland and NSW, including from the regulators. The industry has been successful in supplying a domestic gas market, but the expansion needed to meet a global energy market introduces new challenges – environmental, social and land use.”
Streitberg told the APPEA conference that regulators and policymakers will need to be careful about balancing dealing with these needs and facilitating the LNG sector’s growth.
Coal seam gas development, he says, will transform the rural economies in Queensland and have a “profound impact” on the economy of the State.
Job allegedly said “O, that mine enemy would write a book.” The 18th century pamphleteer William Cobbett certainly wrote “O, that my enemy would write a letter” and used it to tear his adversary to shreds.
Closer to hand, the federal Labor Party has provided a 15-page briefing note for MPs struggling to deal with public antipathy to the proposed carbon tax and it deserves much more exposure that it has been getting.
The “top lines” offered in the Labor guide says this:
“We believe climate change is real and taking action is the right thing to do.
“We want the top 1,000 biggest polluting companies (sic) to pay for each tonne of carbon pollution they produce.
“A carbon price will provide incentives for the big polluters to reduce their carbon pollution. (And those that try and pass costs on to consumers will be under cut by companies that do the right thing and invest in clean energy.)
“Australia is the worst per head carbon emitter in the developed world.
“Other countries are taking action, even China and India. Australia must make a start or our economy will be left behind.
“We will be protecting existing jobs while creating new clean energy jobs.
“Every cent raised by the carbon price will go to households, protecting jobs in businesses in transition and investment in climate change programs.
“There will be generous assistance to households, families and pensioners (tax cuts are a live option).”
In all, the ALP has published about 5,000 words in this briefing, an invitation to be given the full Cobbett treatment if ever I have seen one.
Just two points here in comment on this guff:
First, Australia’s emissions, which are actually slightly lower per capita than those of the United States and not much higher than Canada’s according to the latest UN Human Development Report, are attributable to two important supply factors – this country (unlike the US, Canada or Scandinavia, for example) has limited access to hydro-electric power and eschews the use of nuclear power. As well, local low electricity costs, as a result of burning coal, enable output here of products like aluminium for importation by other developed nations. They have out-sourced their emissions to us, in other words.
Second, the comments on the flow-through effects of a carbon price are implicitly untrue.
Businesses – from the largest manufacturers to corner stores, as well as hospitals, educational institutions and other service suppliers – must pass through higher costs to consumers.
A $30 per tonne carbon price imposes a $6 billion per year extra cost via electricity charges.
With a third of the power used nationally being consumed by energy-intensive, trade-exposed industries, this leaves about $4 billion a year in extra costs to fall on households and domestic businesses.
Some of the commentary is simply blatant pushing of information with the intention to deceive or because the writers are too ignorant to understand the facts.
For example, the use, as part of argument about the impact of a carbon price on jobs, of the fact that the allegedly threatened Great Barrier Reef provides employment for 60,000 people.
Absolutely nothing that Australia can do domestically about greenhouse gas emissions will count against the extra billions of tonnes of carbon dioxide added to the atmosphere by other nations over the next 20 years.
If the Reef jobs are threatened over the long term (i.e. towards the end of this century), taking action that weakens the domestic economy this decade (by despatching aluminium, steel, cement and petroleum refining industries overseas, for example) will not change the threat in the absence of global action.
“We will create new jobs that we can’t even imagine yet,” the Labor MPs are briefed to tell the voters while offering “engineers in solar power plants” and “electricians working on wind farms” and “computer software engineers for smart grids” as examples of the bounty that will flow from Gillard’s carbon charge.
The government’s own energy assessment report, looking out to 2030, says that renewable energy will account for 20 per cent of power supply then while fossil fuels (coal and gas) deliver 80 per cent.
It is hard to say which is worse: that a government should despatch its MPs in to the field with such shonky advice or that it actually believes what it says in this document.
There’s a paragraph in the new review of the east coast electricity supply business that will leap out at players in the market.
The Australian Energy Market Commission, the uber-watchdog for the system and for the governments who ultimately run it, says: “The expected changes in generation mix over the coming years and possible increases in spot price volatility may have impacts on the resilience of the market to financial outcomes. More volatile spot prices change, and potentially increase, challenges for generators and retailers to manage and hedge their financial risks.”
Translated, this says, “Watch out. The risks are getting bigger. Some could get burned.”
Given that this is a multi-billion dollar market place, burned would come with lots of noughts attached to the dollar signs.
A number of the players in the NEM are government-owned, so the taxpayers have skin in this game as well as shareholders in investor-owned businesses.
Given what the ousted Keneally government got up to with its half-posteriored “gen-trader” privatisation scheme, the new O’Farrell regime would be well advised to ask for expert help in understanding the issues here.
The original justification for this deal was to reduce spot market risk for the government/taxpayers, but sale of the retail side has left the New South Wales generators exposed to any extreme volatility in spot prices.
The State-owned retailers, you see, were counter-parties for the State-owned gencos. They have been sold, too.
Previously the NSW taxpayers had a balanced portfolio, with the generators offset by the retailers, using a web of co-insurance and hedging contracts to eliminate energy market risk to a large extent.
This was demanded by the NSW Treasury in the late 1990s after a billion-dollar dispute between State-owned Pacific Power, now broken up, and internationally-owned PacifiCorp.
This is why, if you were going to privatise NSW power, you sold the whole market-facing shebang, not bits of it.
After the “gen-trader” deals, the position is dangerously lopsided, with the State-owned gencos exposed to the perils of the spot market and to trading errors.
In any market, of course, what is a worry for some is an opportunity for others.
Companies like government-owned Snowy Hydro, with its large fast-start, water-fuelled operations, and a number of private sector operators with open-cycle gas generation plants are essentially in the insurance business.
The other players use them to provide critical support when the spot prices go feral – and they can rise from the average $35 per megawatt hour to a regulated peak of $12,500 on very short notice, as in minutes.
The so-called national electricity market – it doesn’t serve Western Australia or the Northern Territory – is recognised as one of the most volatile markets in the world even while being lauded for its efficiency.
Behind the higher risk situation lies the higher investment uncertainty problem, something highlighted by management consultants Deloitte in two discussion papers published last year.
The AEMC is now reinforcing the Deloitte warnings, saying, “policy uncertainty, particularly about whether and when a price will be set for carbon, is currently affecting incentives to invest in generation capacity to meet the expected increase in demand.”
(This increase is not minor. The Energy Supply Association’s annual load forecast for the market – which has proved to be highly reliable over the past 20 years – indicates that system energy requirements in east coast electricity demand will rise from 197,492 gigawatt hours in 2008-09 to 235,400 GWh in 2018-19. This is a bigger increase than tacking on two more South Australias and Tasmanias to the market.)
Concern about policy may limit the number of investors able to finance new investments, warns the AEMC. “While investment will almost certainly occur to maintain security of supply, (it) is unlikely to be the lowest cost for customers.”
In other words, when in doubt, they will build open cycle gas plant – “peakers” – rather than baseload, cheaper and quicker to construct and also useful to back-up the large requirement for renewable energy dictated by federal policy.
The AEMC sums up the situation like this after pointing out that about $1.5 billion needs to be spent annually from now to 2016 on new generation for the market: “The nature of this investment will be impacted significantly by uncertainty about when and how a price will be placed on emissions.
“The uncertainty makes financing baseload, and possibly mid-merit generation, very difficult and appears likely to drive investment in peaking generation and wind generation.
“This seems unlikely to be the long-term, least-cost combination to meet future demand.”
Bottom line? This market should not be a playground for ideologues and amateurs (aka politicians) sooled on by the chatterers on the sidelines.
The risks are rising. The stakes are measured in billions of dollars. Corporately, getting really hurt could be a big problem, even terminal, if you are privately owned and, where the taxpayer is the owner, a further migraine for governments striving to find sufficient funds for a multitude of tasks.
For end-users and many voters, this is not a pretty picture.
Keith Orchison
14 April 2011
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