Issue 48, February 2009
The new West Australian government of Colin Barnett is wrestling with whether or not to approve a recommendation from its Office of Energy to impose a major increase in the retail price of power over the next 2-3 years.
On the upside, Barnett’s government can blame it all on its ALP predecessor without much fear of a comeback. On the downside, the size of the increases over a short period of time represents a blow for small businesses, already struggling as the boom comes off the boil.
The Office of Energy’s recommendations would see small business power bills rise 85 percent in three years while residential charges would rise 116 percent.
Energy Minister Peter Collier set the tone for the government’s response in releasing the OOE report at the end of January. “The increase required to reflect the cost of supplying electricity," he said, "is a“direct result of the former Labor government's refusal to address the issue in eight years in office. It held prices artificially low for too long as part of the disaggregation (of Western Power) process." Collier said the price increases are a key component in a rescue package for the government-owned generator, Verve Energy, which has been chalking up near-crippling losses.
The additional sting in the tale for consumers is that the federal government’s carbon policy will impose further increases in power bills following the introduction of its proposed greatly-enlarged renewable energy scheme and then emissions trading, due to take effect in mid-2010.
The OOE recommendations would see residential bills rise by $9 a week in the next financial year, $7 a week in 2010-11 and another $4 a week the following year. The State’s average residential bill is estimated to be $930 a year.
The previous State government had signalled similar levels of price increases, but planned to introduce them over six to eight years.
OOE points out in its report that the size of increases it recommends follows political decisions to freeze power bills for a decade. As a result, in inflation-adjusted terms, the tariffs today are 30 percent lower than they were in 1997. It also points to the size of retail increases elsewhere in Australia, saying that they have ranged between 23 and 69 percent (in dollars of the day terms) over the same period. The biggest increases have come in Tasmania, Queensland and New South Wales, ranging from 53 to 79 percent, taking in to account changes to take place in 2009-10.
In a quote that perhaps should hang on every government wall in the country, the agency says: “It is not desirable to require electricity to be supplied at a price where the short-term and long-term reliability of supply is unsustainable.”
The WA Office of Energy has included a handy check-list of what is happening to retail electricity prices across Australia in its report to the WA Government.
OOE says prices are going up in every part of the country:
The OOE has included in its report a table calculating future power costs broken down by segment. For WA, this shows that by 2011-12, the Rudd government’s emissions trading scheme will be costing residential customers 2.73 cents a kWh out of a total cost of 30.72 cents (up from a proposed 21.71 cents in 2009-10 under the new State tariffs) with the RET adding 0.25c/kWh. The biggest segments of the bill are energy costs (estimated to be 11.42 cents in 2011-12) and network charges (13.58 cents).
South Australian Premier Mike Rann has called for an inquiry in to NEMMCo’s power cut directions during the late January heatwave on the southern seaboard.
Reacting to rolling stoppages affecting 260,000 homes, more than a quarter of the State’s residential customers, Rann says there needs to be a report on how NEMMCo made its decisions and how they were communicated to the industry.
Initially requiring his own bureaucrats to report, Rann signalled the State government’s intention to call for an inquiry, which can only be pursued through the national Ministerial Council on Energy, saying it was “inevitable.”
Under NEMMCo rules, rotational interruptions are required when it faces problems balancing the demand for electricity in any region of the market.
In the middle of the southern seaboard heatwave, which saw temperatures exceeding 43 degrees Celsius and days of plus-40 degrees heat, NEMMCo directed load shedding in both SA and Victoria when power flows from Tasmania to the mainland over Basslink were impaired, creating a shortfall overall of about 730 MW in supply.
ETSA Utilities said one of the problems it encountered was that the directive came at the last minute, preventing it from issuing a warning to South Australians about to lose power.
One of the effects of the southern coast heatwave in January was to drive up wholesale prices – soaring from as low as $30 per megawatt hour to more than $600, with some half-hour periods seeing power from Tasmania surpassing $5,000.
While the large price spikes benefitted generators, they bit in to energy retailers’ bottom lines.
Demand in Victoria at the height of the heat peaked at 10,494 MW, breaking last year’s record, set in March, of 9,818 MW. Demand exceeded 10,000 MW two days in a row and at one point left just 320 MW of reserve capacity for the State.
Earlier in January NSW demand set a new record peak at 13,581 MW as temperatures reached 40 degrees in coastal Sydney and passed 44 degrees in the city’s populous outer western suburbs. This sent wholesale prices up from $244 per MWh to $5,210 for a half hour in early afternoon. The previous summer record was 12,900 MW in January 2008.
Professional services consultants PricewaterhouseCoopers say that 2008 was the year when Australian oil and gas industry mergers and acquisitions fell away after record dealmaking in 2007.
However PwC expects to see some upward trends in 2009 because of the New South Wales government’s plans to sell electricity assets and the expected disposal of Babcock & Brown Power’s national portfolio.
The PwC report does not include the BG Gas $5.3 billion acquisition of Queensland Gas because it occurred beyond the review’s cut-off point.
The survey shows Australian oil and gas mergers falling away to barely $3 billion in 2008 after hitting $29 billion in 2007. Internationally, power and gas transactions fell away from $US372.5 billion in 2007 to $US205.6 billion last year despite a large increase in the number of deals done.
Looking at the Asia Pacific, PwC adviser Mark Hughes says 2009 will be a year of “obstacles and opportunities.” While the constrained availability of finance will inhabit deal activity and affect deal values, he adds, businesses and assets may become available because some companies run short of cash for expansion or face debt refinancing problems.
The PwC report says that a key factor affecting the Australian M&A market in 2008 was uncertainty about the Rudd government’s emissions trading plans, making deal valuations very difficult. It adds that the failure of the NSW power privatisation process in 2008 took “between $US5 billion and $US8 million” out of deal values for the year.
Summing up the energy environment for business internationally, PwC comment that the expectation that “volatile prices are here to stay” means that users will need to minimise their exposure to high prices while locking in the benefit of falling prices wherever possible. Most energy users have traditionally sought a reliable energy supply at the best possible cost, they add, but paying for energy is “no longer a simple procurement decision.” The consultants argue that consuming companies need to start looking at energy as a commodity and to adopt a more strategic approach to use, purchases and hedging arrangements.
Looking at energy investment, PwC comment that the project funding squeeze for renewable energy will continue in the absence of major regulatory changes and an easing of financial market constraints. In turn, they point out, this will lead to buying opportunities for companies seeking to expand their renewable portfolios.
A substantial new energy report from the Academy of Technological Sciences & Engineering in January was diverted to yet another media frolic about nuclear power when Energy Minister Martin Ferguson, launching the review, opted to knock back its nuclear power comments in his speech.
Beyond the ATSE report’s call for nuclear power options to be kept on the table in Australia and a suggestion that nuclear could provide 15 percent of national electricity supply by 2050, the study canvassed a range of issues that are likely to be taken up in this year’s Federal Parliament debates on the Rudd government’s carbon abatement policy proposals.
The ATSE study estimated that replacing coal-fired generation with low and zero emission technologies to meet new demand would require an investment of at least $30 billion by 2020 to meet a 10 percent reduction in emissions from the sector.
Delivery of new technology, it added, would need to be supported by some $6 billion worth of R&D funding between now and 2020.
ATSE projected that it would cost $250 billion (in today’s dollars) to deliver an electricity industry able to meet the Rudd government’s goal of reducing Australian emissions by 60 percent below 2000 levels in 2050. However, it argued, this massive outlay could be substantially reduced by ensuring that the annual growth of electricity demand was cut significantly. ATSE said reducing annual average growth to under one percent – instead of more than two percent – could reduce the long-term investment outlay by $150 billion.
Looking at priorities for R&D funding support, ATSE said:
ATSE added that, while wind power could offer a strong contribution to renewable generation, its ability to replace baseload plants foundered on the impact of variable weather, losses in transmission from remote sites and the lack of low-cost storage at the scale required.
The Academy report also noted the capacity of coal seam gas to make a major contribution to fuelling generation. Estimates of the amount of CSM to be found in Queensland and NSW suggested that the reserves could be larger than those of Bass Strait, the Cooper Basin and the North West Shelf combined.
Australia has been at the forefront of solar technology development for almost 50 years, Energy Minister Martin Ferguson said in January, but the sector still has to make the leap “from niche to network” despite a million households and businesses using solar-heated hot water.
Launching the Australian Solar Institute headquarters in Newcastle, Ferguson said the Rudd government was determined to make solar power a realistic energy option in Australia and he announced $15 million grants to support ASI projects. Five million dollars will go on helping development of a crystalline silicon pilot line at the University of NSW, $5 million on building a solar thermal tower at CSIRO’s renewable energy complex in Newcastle and $5 million to help establish “a world-class process and chracterisation solar research facility” at the Australian National University, Canberra.
The world, added Ferguson, is “crying out for cost-competitive solar technology.”
Meanwhile The Greens are calling for the Queensland and federal governments to support development of two 250 MW solar thermal power plants close to existing baseload infrastructure in the State. They estimate the projects will cost $4 billion and have called for funds proposed to be spent on the ZeroGen clean coal demonstration plant to be re-allocated to solar.
In Melbourne, the Brumby government is under fire from the environmental movement for, it is claimed, using incorrect information to turn down a solar power subsidy scheme.
Leaked departmental information, it is claimed, shows that a gross feed-in subsidy would cost State households $18 a year (which would aggregate at about $40 million). The government, instead, has opted for a net feed-in tariff and is expected to legislate for it in the near future.
The preferred scheme would pay households only for electricity fed back to the power grid while the gross scheme rewards all power generated including that solar homes consume. State Energy Minister Peter Batchelor told a parliamentary committee that the cross-subsidy between solar power users and the rest of the residential sector from a gross feed-in subsidy would be about $100 million a year and unfair on low-income consumers.
In California, the Schwarzenegger administration is boasting that its solar power program, introduced in 2007, is creating $US5 billion worth of development at a cost of $775 million in government subsidies.
The state government says that installation of photovoltaic power in 2008 was double that in 2007 and capacity now stands at 441 MW, the highest in America. Schwarzenegger’s target is to achieve 1,940 MW of solar installations by 2016 at a cost of $US2.17 billion in subsidies.
Federal tax breaks delivering up to 30 percent of the cost of installation plus the state government’s rebates of between 20 and 50 percent are credited with sustaining household support for the scheme despite a general negative impact on renewable energy investment in the US as a result of the global credit squeeze.
New Zealand’s largest electricity generator spent most of January pouring money down the drain – or at least down the Waitaki river.
Meridian Energy has had to spill 200 cubic metres a second of water (enough to fill six Olympic-sized swimming pools every minute) from its three-lake South Island system after an unusually wet spell in the region required losing water for the first time in a decade. Ironically, North Island’s east coast has been suffering from drought at the same time. The situation is made more bizarre by scientists warning that a La Nina weather pattern later this year could result in dry conditions affecting South Island and inadequate dam levels for the power industry.
New Zealand relies on hydro-electric power for as much as 70 percent of its supply and the spills have seen average power prices for South Island fall 51 percent in the NZ wholesale market. Prices at Lake Benmore, where the overflow is being sent downstream were as high as $NZ100 per MWh three months ago and fell to less than a dollar in January.
The spills highlight the volatility of the New Zealand supply system. Last year industrial users, including the Tiwai Point aluminium smelter, had to cut output as drought drove down lake levels and pushed power prices to record highs.
The current spills could provide power to supply half the households in the country, if most were not on the more populous North island. Irritation among residential customers that the power cuts are not reaching them has led the new conservative government to indicate that it is monitoring retail prices. Energy Minister Gerry Brownlee says he will be watching the end-February retail prices for residential customers to see whether he needs to step in.
Meridian and Origin Energy-owned Contact Energy have responded to criticism by pointing out that last year’s revised residential rates do take in to consideration low spot prices.
Academics and other commentators are calling on the NZ government to take a fresh look at the potential for a large pumped storage project. Lake Onslow in central Otago has been identified as having the capacity to hold enough water to generate 12,000 GWh of power – nearly three times the country’s existing storage. The scheme would cost about $NZ 1 billion, it is estimated.
Meanwhile NZ environmental groups are attacking Meridian over six hydro power generation proposals it has under investigation or proposed for approval at a cost of $NZ3 billion. The country’s increased demand for power and the supply industry’s demand for more hydro dams are placing wild and scenic rivers at risk, they argue.
Completion of all the projects, and other generation proposals, would increase NZ power capacity by about 50 percent above its present 9,000 MW.
In a further twist to the always-complex New Zealand electricity debate a court in Queenstown is hearing an appeal against regulatory approval for Meridian Energy to build a $NZ2 billion, 176-turbine wind farm on the South Island’s Lammermoor Range.
Put your euros where your mouths are, is the challenge activists Greenpeace have issued to European Union governments after the late January release in Brussels of a new paper urging greater international co-ordination of activity to ward off global warming.
The European Commission, the EU executive arm, has published the paper as part of the year-long propaganda effort before next December’s UN summit in Copenhagen in search of a replacement for the Kyoto treaty.
But the environmental movement has immediately accused the Commission of having erased a proposal included in earlier drafts of the paper to make $US39.7 billion worth of financial aid to poor countries to adapt to the effects of climate change.
The unwillingness of developed nations to make large-scale funding available to developing countries helped to undermine progress in the treaty preliminary negotiations at Poznan, Poland, in December last year. The Asia media in particular have carried numerous scathing commentaries on the point since the Poznan meeting. The thrust of the developing nations’ message to the EU and the rest of the developed world is “No (big) money, no deal” on a post-Kyoto treaty.
Their unhappiness will be reinforced by analysis from an independent Brussels think tank, the Institute for European Environmental Policy, which claims that, having promised in 2001 that EU funding for poorer nations would be $US369 million a year from 2005 onwards, the Europeans have come up with as little as $US160 million a year so far.
The new EC paper calls for global governments to agree to pursue a cut in greenhouse gas emissions of 30 percent below 1990 levels by 2020, upping the ante on a previous EU pledge to pursue 20 percent cuts in the union. The Commission says the Europeans would support the higher pledge if China, India and other developing countries agreed to pursue cuts of 15 to 30 percent in their greenhouse emissions below where “business as usual” activity would have them at 2020.
The concept comes with an enormous price tag – an estimated capital outlay of $US70 billion a year round the world – but the EC wants to tighten the ability of develoed countries to claim credits from activity in the developing world by cutting out rising industrial powers such as China, India and Brazil from the scheme.
As a starting point, the Commission proposes that all 30 OECD members set up a European-style emissions trading scheme by 2013, allowing permits to be traded in the developed world from 2015.
The first big hurdle facing the Commission’s paper is obtaining approval from its own 27 member governments, who are finding it hard to cope with the global economic crisis and would be challenged to take on any new and costly carbon concepts.
Meanwhile in the US the Democrat-dominated Congress is considering two bills that would tie acceptance of a cap-and-trade emissions scheme to impose a border tax on imports of steel, cement, paper and glass from countries that do not have carbon charges. Any such move is expected to see litigation initiated by China and India on the basis that it breaches World Trade Organisation rules, a development that would make the road to Copenhagen far rockier than it already is. Brazil already has a complaint filed against the US over Americans tariffs and subsidies on its sugar cane ethanol. The Brazilians want ethanol classified as an “environmental good” in the Doha round of trade talks, a move opposed by both America and the European Union.
Credit Suisse has told the January world energy future summit in Abu Dhabi that it expects global investment in sustainable energy to treble by 2012 despite the current worldwide economic crisis.
The bank, a major sponsor of the conference and convention, says “cleantech” energy investment in 2007 stood at $US148 billion around the world and it predicts outlays will reach $US450 billion in 2012, an annual growth rate of 25 percent.
Credit Suisse argues that the increased investment will be driven by climate change issues, increased energy needs and declining oil reserves.
While Australians on the southern seaboard swelter in unaccustomed 40 degree heat and react with anger to hours of power failures in some metropolitan suburbs, the World Bank has estimated that by 2030 some 60 percent of people living in sub-Saharan Africa, where such extreme weather is the summer norm, will have virtually no access to electricity by 2030.
It is estimated that at present two-thirds of the whole continent’s population does not have modern electricity supply, with 30 countries experiencing chronic power shortages and blackouts. The majority of those with access to modern power supply are congregated on the north and south of Africa.
A potentially substantial African power source in poorer nations is hydro-electricity, but it is calculated that only seven percent of hydro potential has been developed.
Coolibah’s Keith Orchison now has a blog, entitled PowerLine, on the Business Spectator website at www.businessspectator.com.au.
The least believable line in Barack Obama’s sombre, even stern, and statesmanlike inaugural address last month dealt with energy.
“We will harness the sun and the winds and the soil to fuel our cars and run our factories,” said the new president.
Leave aside the heavy lifting that will be required to deliver on his campaign promise to drive up American electricity supply from new renewable energy from about 100,000 GWh (barely three percent of consumption) a year today to more than 400,000 GWh by 2012.
Focus on the transport fuel promise. Four of the five most recent presidents – Carter, George Bush senior, Clinton and George Bush junior – were sitting behind Obama as he delivered this line. They and the late Ronald Reagan ran the US government for eight terms between them and totally failed to curb the country’s addiction to petrol and reliance on foreign suppliers of oil, despite solemn vows to do so.
This addiction not only contributes strongly to US greenhouse gas emissions, but also exports large amounts of greenbacks – much of it to regimes that dislike Americans – and delivers political power to supplier nations, underpinning the need to continuously intervene in the Middle East.
Oil prices have soared and crashed over these presidencies, but demand trends only one way. Just in George Bush junior’s tenure of the White House, annual American oil imports have risen from 389 million to 418 million barrels. In 1974 the US imported 35 percent of the oil it needed; today imports account for 58 percent of supply and are predicted to pass 66 percent on Obama’s watch, assuming he serves two terms.
The previous administrations did nothing effective to encourage energy conservation in transport. Most recently George Bush junior believed the answer lay in finding more oil US offshore waters. Meanwhile two-thirds of American states have legislated to require a small percentage of petrol to be provided from non-carbon sources.
The Obama pledge is to reduce US oil consumption sufficiently in 10 years to cut imports by the combined amount bought today from the Middle East and Venezuela. To do this, he will pursue production of a million plug-in petrol/electric cars by 2015, commit to have half the federal government car fleet either hybrids or all-electric by 2012 and seek to drive the production and use of ethanol, for which, of course, he will need Congressional support.
Large-scale pursuit of agro-fuels -- as the critics catcall bio-fuels -- from corn, sugar cane, oilseeds, grasses, trees and agricultural and timber industry waste is already being damned by some quarters of the environmental movement. They say Obama’s “new green economy” will trap America in a “green bubble” of unrealistic promises, using unsustainable industry.
They argue that the large crops required to meet the pledge will make a massive call on soils, water, fertilisers and land, which are in shortening supply. Forty-four percent of US fertiliser use is already met from imports.
They fear that, as the US turns to importing ethanol (and Brazil is being touted as a major supplier), there will be large destruction of forests, displacement of native populations and recourse to synthetic biology, which they deem to be dangerous.
They warn that down this track lies an international crisis as agro-fuel crops displace food crops.
Their solution lies in part in pushing Americans towards being more efficient in their use of petrol, but here Obama is wedged by another campaign promise to “provide short-term relief to families facing pain at the pump.” This was a reaction to last year’s soaring global crude oil prices, which have now fallen a long way from their peak – but the huge number of US voters who are motorists are highly unlikely to welcome the pain being renewed through government taxes.
The other big ticket solution the critics put forward is a massive commitment to increasing and improving public transport, a task that will take a lot longer than the next eight years.
If Obama can triumph in this area where Carter, Reagan, the two Bushes and Clinton failed, he will indeed have achieved a great change, but what odds do you think a Betfair would offer on that outcome, given the past American track record and the height of the hurdles to be overcome?
Keith Orchison
3 February 2009
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