Issue 58, January 2010
Federal Resources & Energy Minister Martin Ferguson says “likely” electricity investment needs in the new decade will be “of the order of $100 billion” for generation and networks.
The supply system will need to meet competing demands, he adds – higher consumption by a growing population wanting affordable energy and action to reduce greenhouse gas emissions. The situation is exacerbated, he warns, by the need to replace a large amount of power sector capital stock installed in the 1950s and 1960s.
The capital requirement is “huge,” Ferguson says, when the fact that the existing electricity industry asset base is valued at $120 billion.
“Given the scale of the required investment, energy prices will rise.”
Ferguson says the Rudd Government is taking a three-fold strategy to addressing the power situation: develop renewable energy, ensure that the market can deliver timely investment signals and ensure that the energy networks are expanded as needed. The new renewable energy target, legislated last year, provides a $20 billion cross-subsidy to promote clean energy, he claims.
Regulatory decisions already made, draft decisions pending a final tick and proposed bids to the Australian Energy Regulator indicate that the capital outlays by electricity distribution service providers could total $31.29 billion between now and 2015.
Robert Pritchard, executive director of the Energy Alliance of Australia, reckons that energy policy around the world is as unsettled at at any time since the 1973 oil crisis. Three factors mean Australia is not exempt from this situation, he adds.
The first global issue, says Pritchard, is the hangover of the global financial crisis,”which is unlikely to dissipate for another three years.” The second factor is the continuing upsurge in energy demand from China and India. “Then there is the raft of measures to reduce emissions from energy use now all up for review in the light of the sub-optimal outcome of the UN meeting in Copenhagen.”
Pritchard believes the energy industry is feeling its way and is unsettled by the protracted wait for the United States to take a lead in policy formulation.
Domestically, he says, the continuing uncertainty over the fate of the Rudd Government’s emissions trading scheme and an unanticipated slump in renewable energy scheme certificate prices are additional causes for concern.
“The industry is also anxious to see the Rudd Government’s energy green paper,” he adds.
The Energy Alliance hopes to contribute some clarity to the situation through its annual “Energy State of the Nation” forum – to be held in Brisbane on March 25.
It has lined up executive speakers from nine industry associations and the CSIRO Energy Transformed Flagship for the review and has invited Barry Worthington, executive director of the US Energy Association, as a keynote speaker. Details of the forum are available at www,energyalliance.com.au.
The Climate Group, in its annual review of eastern Australian greenhouse gases, claims that emissions from burning coal in power stations dropped 4.9 million tonnes in 2009 compared with 2008, with electricity production overall falling 1.9 percent as a result of the economic slump. It says emissions from petroleum use also dropped 0.8 percent.
The report says that gas-fuelled plants share of electricity production in the NEM rose to 9.3 percent from 8.4 percent in 2008 while the renewables sector’s share rose marginally to 2.8 percent.
While The Climate Group analysis shows that eastern seaboard emissions from energy use were 9.6 percent higher in 2009 than in 2000, the report provided the South Australian Government with the opportunity to brag that SA emissions dropped 3 percent over the decade despite the State economy growing 28 percent. Premier Mike Rann claims that projected growth in SA mining will not drastically cut in to these gains because miners will have to commit to abatement processes as part of obtaining approval for projects.
After two years of debate in and outside Federal Parliament, less than half the Australian community may now support the Rudd Government’s emissions trading scheme at the beginning of what is expected to be an election year.
A Roy Morgan Research telephone survey conducted in mid-January revealed that the ETS now had the support of 46 percent of respondents (down four percent on a previous poll in November before the Senate again defeated the legislation) with 36 percent of those interviewed now opposing it (up five percent from November). The slump in support is even more marked from August, when Morgan polling indicated 55 percent approval.
The poll indicated that opinion was now sharply split between Coalition supporters (62 percent disapproving) and ALP supporters (66 percent approving).
Antony Green, the ABC’s political analyst, in a January review of possible election dates says that constitutional timing issues make the seven Saturdays between 7 August and 18 September this year the most likely dates for a federal election.
Meanwhile the Australian Chamber of Commerce & Industry (ACCI) has called for a new cost/benefit analysis of the proposed emissions trading scheme versus other carbon abatement options – and The Climate Institute has argued that the Rudd Government should immediately introduce a $10 per tonne carbon charge “to raise revenue to invest in efficient technologies and send a signal to new investors that the old days are over, while not being so high that it would have a significant effect on emission-intensive, trade-exposed industries.”
The potential for western Victoria to become a substantial power generation province has moved up a notch with news that AGL is considering development of an 850 MW open cycle plant at Tarrone, 300 kilometres from Melbourne.
This follows decisions by Origin Energy (now working on the 550 MW first stage of its intended 1,100 MW peaking power station at Mortlake, 57 km east of Tarrone) and Santos (proposing a first-stage 500 MW baseload plant at Orford, 13km west of Tarrone) to pursue developments using gas from the offshore Otway basin.
The projects are encouraged by the area being located not far from the 500kv Moorabool to Portland high voltage transmission line. If all built, they will require outlays nearing $2 billion.
The AGL Energy project is intended to start with a 500 MW plant. A planning application to the Victorian Government has yet to be filed, but already the State Planning Minister, Justin Madden, says it is “enthusiastic” about the proposal.
A spokesman for AGL told the media that the company was “comfortable” with pursuing the development even without the Federal Government’s emissions trading scheme being introduced because the key incentive was Victoria’s need for peaking power. He was careful,however, to play down prospects for the project, saying that there were “many aspects” that still needed to be considered.
The company now has more than $1.5 billion worth of new generation development on its hands.
The renewable energy industry has been rattled by a sharp slump in REC prices -- from almost $60 per megawatt hour to as low as $23 before a revival to $35 -- as a result of the flood of purchases of heat pumps and solar hot water systems.
Among those expressing concern at the potential impact of the slump on large-scale renewable developments, including a number of wind farms, is Victorian Energy & Resources Minister Peter Batchelor, who has told media in Melbourne that heat pumps and solar hot water systems do not belong in the Rudd Government’s RET.
Batchelor’s angst has been exacerbated by comment from AGL Energy, which claims to be Australia’s largest renewable energy operator and developer, that it has doubts about proceeding with its $800 million Macarthur wind farm in western Victoria in the current REC environment. The 350 MW project, intended to be sited 50km from Hamilton, is the second major renewable energy development to fall in to doubt – with the 154MW solar power station planned for Mildura falling victim to Solar System’s inability to raise sufficient finance. The company is now in receivership.
AGL Energy chief executive Michael Fraser has told media that the Macarthur project is just one of eight wind investments under threat as a result of Rudd Government policy. “The reality is that there have been virtually non new announcements of large-scale investments in the renewable sector from anybody for months now,” he added. “By definition, we are not going to see investment in renewable generation when we are creating renewable certificates from technologies that don’t produce electricity.”
In a letter to the Federal Department of Climate Change, Hydro Tasmania, which describes itself as the largest generator of renewable energy in the country, has said that the low REC price will mean that “many large-scale renewable energy projects will remain difficult to commercialise in the short to medium term.” If the low prices are sustained, it warns, investment certainty for large-scale renewable development will be undermined and the achievement of the 20 percent target by 2020 will be jeopardised.
Tasmanian media reported in late December that the State Government-owned business has acknowledged that its 168 MW Musselroe Bay wind farm development,in a joint venture through Roaring Forties, is facing “significant financial hurdles.” The developers say they have spent more than $30 million already on the project, estimated to cost $350 million.
The renewables sector is lobbying for the Federal Government to take action to support the RECs price above $50 by intervening to create demand. The Greens argue that solar water heaters and heat pumps should simply be removed from the definition of renewable energy under the RET.
The Clean Energy Council claims that the wind farm sector can increase its employment in Australia from 1,600 people at present to 7,600 at the end of the decade. The whole renewable energy industry, it says, can push up employment from 10,370 people in 2009 to more than 24,000 in 2020.
The CEC adds that 559 MW of wind development is currently under construction, with a further 6,000 MW of projects proposed, many of them having already received planning permission. Total installed wind capacity in 2009 stood at 1,668 MW.
The Australian Energy Market Operator’s first report on gas demand and supply on the eastern seaboard claims that resources will be adequate to cope with a huge increase in consumption over the next 20 years.
AEMO forecasts that demand in Victoria will double in the next 15 years while export and domestic requirements will see a three-fold rise in Queensland consumption. It expects Victoria’s reserves to halve before 2030 and South Australia’s to fall by a third in two decades, but believes gas resources will continue to be adequate because Queensland’s coal seam reserves will more than double.
Without LNG sales, total annual gas demand in eastern Australia will grow from 626 PJ last year to 1,205 PJ in 2029, AEMO adds. A high economic growth scenario could add another 479 PJ to this demand.
Origin Energy expects to commission its Darling Downs power station, the country’s largest combined cycle gas plant, in June this year, having met a key milestone in mid-December by synchronising the first of three 120 MW turbines to the grid.
The development, which will incorporate a steam turbine generator driven by hot exhaust gases, is located at Braemar, 250 km west of Brisbane, will have a capacity of 630 MW when completed. It is budgeted to cost $780 million and is designed to take advantage of coal seam gas resources around Roma and Chinchilla – to which it is linked by a recently-completed 205 km pipeline.
Origin has bought a 77 hectare block adjacent to the Darling Downs site for possible further power plant development. When commissioned, the power station will bring Origin’s generation capacity to 2,100 MW.
Meanwhile the company’s executive director – finance and strategy, Karen Moses, has told an energy conference that natural gas should be seen as more than a transitional fuel for the power sector.
Two more open cycle gas plants were opening in eastern Australia in December – the 667MW Colongra plant operated by Delta Electricity on the New South Wales Central Coast and a 126MW extension of Origin Energy’s Mt Stuart power station in Townsville, taking the development’s capacity to 414MW.
Completion of the $500 million Colongra project enables Delta Electricity, owned by the NSW Government, to boast that it is now the largest capacity generator in the country, with more than 5000 MW of plant.
The Energy Users Association has warned large industrial consumers to brace for more energy prices rises in 2010. EUAA executive director Roman Domanski said early in January that network charges appeared to be set to rise substantially in New South Wales, Victoria, Queensland, Western Australia, South Australia and Tasmania.
Domanski believes significant elements of these price rises are avoidable because they “reflect inefficiencies in the costs of network businesses.” The Australian Energy Regulator “needs to take an axe” to management practices, he argues.
In addition to increases in network charges, the EUAA says, end-user costs can be expected to come under increasing upward pressure because of the renewable energy target, higher transmission charges, pressures on gas prices and the cost of the emissions trading scheme when it is legislated.
The association’s members expressed “alarm” in December at the impact on their operations of higher tariffs with some, including large gas users in Queensland, claiming that they unable to negotiate contracts for gas on a long-term basis.
Tony Gray, director of sustainability at the Pratt family’s $3 billion Visy Group, told the Australian Financial Review that the company had been “staggered” by increases in NSW transmission and distribution charges of 40 percent.
The Ministerial Council on Energy, Domanski complains, is not showing that it is on top of the problem. In presentations to conferences he has raised the prospect that retail electricity costs could rise from between $150 and $200 per megawatt hour last year to more than $300/MWh by 2014 and as much as $450/MWh by 2020.
Meanwhile the Australian Energy Regulator has said that it will push electricity and gas companies to justify price rises to business users as the networks sector gears up for a record level of capital spending over the next five years. AER chairman Steve Edwell says he has written to the suppliers to urge them to forewarn corporate customers about impending price increases. A number of users in NSW “copped very significant increases that were a surprise to them,” he told journalists. Edwell wants the networks to brief business on the price path for at least the next three years.
The Federal Opposition has accused the Rudd Government of seeking to hide the real cost to the community of tackling climate change, reacting to the Australian Energy Market Operator’s report released just before Christmas which contains whole electricity price scenarios rising from $30/MWh in 2009 to $60/MWh in 2012.
Opposition climate policy spokesman Greg Hunt challenged Climate Change Minister Penny Wong to answer a set of 10 questions on the cost impacts of the emissions trading scheme legislation by Australia Day. He claims that the ETS will raise $120 billion from “mums and dads, pensioners, teachers, police and emergency service workers” and asks if the Federal Treasury’s modelling shows that “5.7 million Australian families will be worse off”?
While the population of south-east Queensland increased by 33 percent in 12 years to 2009, peak electricity demand rose by 99 percent, according to the State Energy Minister Stephen Robertson.
The Bligh Government is seeking to deflect the political fall-out of a ruling by the Queensland Competition Authority that the maximum price of power for residential consumers should rise by 13.8 percent from July. The QCA decision will be finalised in May.
Robertson told journalists that the last annual comparison of electricity prices across Australia had shown Queensland to have the third cheapest prices in the country. He has promised to make a “strong submission” to the QCA before its ruling is finalised.
Meanwhile Energex, the government-owned distributor serving 1.3 million customers in the SEQ region, has projected a 20 percent increase in peak demand over the next five years as the population of the area rises just over two percent, reflecting the strong use of energy-intensive appliances and air-conditioners in particular. More than 30 percent of SEQ homes have two, three or more air-conditioners.
Energex says that an average of 120 homes and businesses are added to the power grid in south-east Queensland every day. It proposes to increase network capacity 40 percent between 2010 and 2050 to cope with the new demand pressures.
The network’s concerns were underlined on January 18 when the region’s hottest day of the summer so far saw SEQ peak demand reach 4,609 MW, passing the previous record of 4,500 MW set in February 2009.
After falling away in 2009 as a result of the global financial crisis, a reduced oil price and a surplus of supplies, the international solar photovoltaics is resuming its growth trajectory, according to Switzerland’s Bank Sarasin.
The bank’s sustainability research unit predicts that global growth in the PV market will reach 46 percent this year and lie between 45 and 50 percent in the next two years. Sarasin asserts that some 8,500 MW of photovoltaic capacity will be installed this year and it claims that “at least” ten new PV markets with an annual volume of 500 MW will emerge in the next two years. Global solar capacity will reach 155,000 MW by 2020, it says.
The major countries for international growth are China, India and the US.
As predicted, after two years of twists and turns, the road to Copenhagen did not come to a dead end, but also not produce anything resembling a new treaty on greenhouse gas abatement – to replace the Kyoto pact that expires in 2012 – in 11 days of formal discussions between 190 governments last month.
In the United States, President Barack Obama, whose Democratic Party need to ride out a poor economic situation in a mid-term election year, watches an emissions trading bill passed by the House of Representatives continuing to flounder in the Senate. The Republican Party is also poised to force a Senate vote on the move by the Environment Protection Agency to regulate carbon dioxide emissions as a fallback if Congress does not pass the legislation. The Senate will reconvene on 20 January.
The next UN summit will be in Mexico City in mid-2010.
Coolibah’s Keith Orchison now has a blog, entitled PowerLine, on the BusinessSpectator website at www.businessspectator.com.au.
It may be a new year and a new decade, but the Australian energy industry moves in to 2010 burdened by a wagon-load of policy-related baggage from the past 2-3 years and little clear indication that things will improve quickly.
The big local reality that emerged from the almost-farcical UN summit in Copenhagen – all that was missing in the end, groaned one observer, was a bear on a bicycle – is that abatement in Australia will have no impact on predicted changes to the global climate unless and until the rest of the world, and especially China, the US and India, agree on a genuine action plan, a prospect that appears remote at present.
Despite his pre-summit posturing, Prime Minister Rudd was not even in the back room where the only substantial agreement to come out of Copenhagen was negotiated – the US president cut it with the soc-called BASIC countries, Brazil, South Africa, India and China. He was not alone – the European Commission president allegedly learned of the deal in a text message to his mobile phone.
Energy Alliance executive director Robert Pritchard made a cogent point in an opinion contribution to the Australian Financial Review last month when he said the world’s governments need to agree on sector-by-sector international standards for discharge of greenhouse gases and they need to provide substantially more financial support for low-carbon technology R&D.
Domestically, the Rudd Government’s emissions trading legislation is a wrong-headed approach to the issue, depending on a worldwide, artificially-contrived market for emissions permits, open to manipulation by traders and by developing country entrepreneurs. It deserved to be rejected on both occasions by the Senate last year and should be spurned again in February if it is brought back again.
The Government has comprehensively mishandled the emission trading issue, spending two years going nowhere and increasingly giving voters pause for thought as Cabinet members duck, dodge and weave on key information about the ETS impact on the economy and on households.
The new Leader of the Federal Opposition has rightly called on the Prime Minister to release all the Treasury modelling on household impacts rather than have ministers spinning selected snippets to promote the Government’s political position. At the very least, this information should be available to the Senate before Kevin Rudd brings the ETS legislation back to Parliament in February as he claims is his intention.
Something that may give him pause for thought is the negative outcome of the latest Roy Morgan Research telephone poll (see above) – which found that that public approval of the Government’s proposals has slid below 50 percent for the first time since the November 2007 election. This is no surprise. An Essential Report poll in mid-December showed only 24 percent of respondents agreed with the Rudd Government position while 27 percent agreed with the attitude of Tony Abbott and the Coalition with 17 percent supported the views of Bob Brown and the Greens. Thirty-two percent said they did not know who to agree with. After more than two years of propaganda by the Government and massive media coverage of the issue, these are telling statistics.
The Government has failed in its first term to produce a convincing narrative of how it will deliver large-scale and reliable supplies of electricity, at prices the community considers affordable and which do not undermine Australia’s trading advantages, while delivering abatement by the end of the decade of at least 130 million tonnes a year (its lowest target) and a much higher figure (perhaps 250 million tonnes) to achieve the two degrees warming goal it seemingly embraced at Copenhagen.
Over two years the Government has failed to produce a white paper on energy security. It has failed to produce an early start to delivering an enlarged renewable energy target – and has undermined the RET in recent months because of the populist games it has played with heat pumps and water heaters. It has failed to deliver a comprehensive plan to pursue commercially viable carbon capture and sequestration. It has failed to drive end-use energy efficiency to levels that will support its abatement targets. It has failed to lead the State and Territory governments to a genuine commitment to pass through carbon costs to consumers even though it is obvious that the present situation poses a risk to energy retailers. Most of all, it has failed to come up with an orderly plan to deliver closure of aged and inefficient coal-burning power stations this decade, the essential step in achieving substantial abatement.
Beyond all this, the Rudd Government has failed to lead the community towards understanding the reality of climate change because it has been working the issue to achieve short-term political advantage through joining in the scare-mongering of environmental groups, scientists pushing their barrows and a UN climate committee that is increasingly having its bona fides questioned – not least by a humiliating expose in January of false claims about the melting of the Himalayan glaciers, an issue widely used around the world (and in Australia) to promote public alarm.
As the International Monetary Fund’s fiscal affairs department pointed out in the run-up to the Copenhagen summit, the potential damage from climate change arises not from the flow of greenhouse gases, but from their accumulation in the atmosphere. A 10 percent fall in global emissions over, say, two years, would reduce the stock of gases by only about 0.1 percent – and a permanent cut of 10 percent introduced today would reduce the stock in 2040 (a realistic time horizon for present policymakers) by only about two percent.
Understanding this one point reveals the alarmist rhetoric of the Rudd Government in demanding a rushed verdict by the Parliament over the past two years for what it is: a bag of political wind. As the opinion polls are starting to show, the public’s reaction to this situation is increasingly one of dismay.
We may hope for better in 2010, but whether it will happen is much in doubt.
Keith Orchison
15 January 2010