Issue 63, June 2010
Welcome to the sixth edition for 2010. This issue covers the Federal Parliament finally agreeing to amend the renewable energy target, allowing an estimated $20 billion in investment, and the latest data on Australian power demand. It also reviews the new Zero Carbon roadmap for future electricity supply. It includes a suite of reports from submissions to the (former) Prime Minister’s task group on energy efficiency.
In the overwhelming shadow of the ruling Labor Party deposing its leader, Kevin Rudd, and replacing him with Julia Gillard, Federal Parliament managed to find time before recessing for the winter to approve critical amendments to the national renewable energy target, opening the way to an outlay of about $20 billion, to be mostly spent on wind farms, over the rest of the decade.
With the new Prime Minister promising an election before the end of 2010, the parliamentary decision takes a substantial second tier issue off the political agenda, leaving the debate on a carbon price – to which Julia Gillard committed in her acceptance speech on 23 June – to be hotly debated during the campaign.
Climate Change Minister Penny Wong has hailed the RET decision as an “important milestone” in the move to a cleaner energy future and the Clean Energy Council claims that the measure would cut Australian greenhouse gas emissions by a cumulative 388 million tonnes this decade in addition to 50 million tonnes to come from the earlier target scheme launched by the Howard Government in 2001.
Miles George, managing director of Infigen Energy, estimates that more than 8,000 MW of new wind generation capacity will be needed to meet the target while AGL Energy managing director Michael Fraser says his company will now fast-track the $800 million Macarthur wind farm in Victoria that he had previously suspended because of the certificate market slump.
The legislation splits the RET in two from next January – a small-scale scheme will support household installation of solar panels and solar hot water systems and the large-scale target will drive investment in wind turbines, commercial solar power and other alternative resources such as geothermal energy. The arrangements required amendment because the initial Rudd Government scheme allowed purchase of RET certificates for rooftop solar power to flood the market, pushing down the certificate price and stalling utility-sized developments.
The Greens are expressing concern that the RET will allow use of native forest timber, residue from other forestry operations, to generate power.
The Clean Energy Council estimates that the RET system will increase retail electricity prices by six per cent by 2020. “This is dwarfed,” it says,” by the impact of rising wholesale electricity prices and increased transmission and distribution charges.” The CEC says most Australian households face electricity price rises of up to 40 percent over the next three years just to meet the cost of network upgrades.
Residential customers have led the continuing charge towards new heights in national electricity demand as the commercial and industrial sectors faltered in 2008-09 in the face of the local impacts of the global financial crisis.
The 2010 Energy Supply Association yearbook reports that the residential sector increased power demand by 3.5 percent in a year that recorded overall consumption growth of 1.5 percent. ESAA says that the household consumption figures highlight the strong uptake of energy-intensive appliances such as air-conditioners and electronic goods.
A telling aspect of this demand is that peak power requirements reached record levels in 2008-09 for the third year in a row, creating a new peak on 29 January last year of 35,432 MW in the eastern seaboard market and a winter record of 34,292 MW on 28 July.
Western Australia’s south-west interconnected system also recorded a new summer high of 3,515 MW.
Governments and the private sector continue to build generation capacity to meet demand. ESAA says 1,083 MW of gas-fired plant has been commissioned since June last year, with 4,762 MW under construction or in advanced planning. In addition, 1,023 MW of wind capacity has been commissioned in the past 18 months, with work “well advanced” on another 1,592 MW.
The association says a further 3,444 MW of new capacity is under advanced planning for delivery over the next five years.
Tony Concannon, executive director of International Power’s local operations, has used a talk to the Committee for the Economic Development of Australia in Canberra to express ongoing concern with energy policies and their impact on investor sentiment.
Concannon is reported in the media as believing “there is a very high risk” that the electricity industry may not be able to raise the $100 billion it needs to fund growth this decade. Banks, which have $20 billion in current loans to power companies, are reluctant to write new arrangements and will only roll over debt on short terms.
International Power refinanced $742 million in debt for its Hazelwood power station in Victoria earlier this year.
Concannon called on government to “talk to business, not at it.”
New Prime Minister, Julia Gillard, says the Rudd Government failed to convince the Australian community that an emissions trading scheme is necessary.
In a television interview three days after winning office, Gillard said she was concerned, while serving as Deputy Prime Minister, that, if “something as lasting and big to the economy as a price on carbon” was to be pursued, a “lasting and deep” community consensus was required to support its introduction.
“I don’t believe we had that lasting and deep community consensus,” she added.
Gillard says she believes Australia should have a price on carbon. “I will be prepared to argue for (it),” she adds, “but we are not there yet.”
The National Generators Forum has told the Federal Government it is concerned that the eastern seaboard “national” electricity market rules could be charged to provide an incentive for energy efficiency. Doing so would be “a high risk venture,” it warns, and could jeopardise energy security.
Responding to a draft issues paper produced by the Rudd Government’s task group on energy efficiency, the NGF has cautioned against a judgement that a “step change” is desirable or feasible.
In Australia, it says, the emissions intensity of electricity generation is falling as older plant is replaced by lower-emission facilities. Curbing market growth to delay investment could extend the life of existing, more emissions-intensive assets. In the US, it points out, the proportion of of energy generated by older, coal-fired plants has risen over two decades.
The NGF adds that California is often mentioned as a model for Australia. But California relies increasingly on importing energy from other states, it points out, and has residential power prices almost 60 percent higher than the American average.
In a separate submission, International Power has told the Government that embracing the Californian “load ordering” concept here will “effectively scrap the NEM.”
The NGF believes that the key stimulus to energy efficiency in Australia must be accurate price signals in a competitive market. They will drive better decisions about resource use, it says. The next decade, it adds, will see a genuine step change in energy prices and this will become the main driver of greater efficiency.
With one exception, the NGF points out, governments in the States and Territories have continued to interfere with retail electricity prices. As a result, the charges have blunted price rises and they now do not reflect actual industry costs, it says. This has effectively undermined investment and innovation.
Somewhere between the two lies what may happen: a leaked Victorian Government report, according to a Melbourne newspaper, foresees 25 percent of the State’s electricity supply coming from gas and renewable energy by 2020 while Melbourne-based Zero Carbon Australia has just published a new national energy plan that envisages a 100 percent transition to renewable energy by the end of the decade.
The required ZCA investment is $37 billion a year. To put this in context, the recently-approved $32 billion outlays by 2015 for the regulated networks sector will see power bills rise by 40 percent over the next three years, according to the Clean Energy Council, and the amended renewable energy target (aiming at 20 per cent renewable electricity supply by 2020) will increase prices by an additional six percent.
Those who favour nuclear energy will point out that all Australia’s power generation could be met from this source for a lot less than $370 billion, which includes more than $90 billion on augmenting and expanding the transmission system under the Zero Carbon plan.
The gas industry will also point out that replacing coal with gas would cost nothing like this vast capital sum and would not require the expenditure on transmission, being able to use the existing system – although meeting the full load would involve diverting gas from export markets to the eastern seaboard via long and expensive pipelines.
ZCA report that a team of engineers, scientists, researchers “and others” contributed thousands of hours of pro bono work to put together its roadmap to replace coal and gas as the generation fuels. Whether the effort is worthwhile comes down to whether you share their perspective of significant climate change requiring major, emergency transformation of Australia’s energy system – and whether you believe the rest of the world would follow this example.
The Germans, the Danes and the Spanish, who can be held up as the examples par excellence of pursuing a renewable energy future (although none have plans to follow ZPA’s “game-changing” proposals), all live in highly interconnected power systems where they have access to coal, gas and nuclear alternatives – and large-scale hydro-electric power in the case of Denmark. This is a luxury Australians do not share.
This path is also only worth following if the Americans and the Europeans are going to chase zero emissions in the short to medium term – and they are not. Nor, of course, are the Chinese, the Indians, the Vietnamese and so on.
So is the ZCA effort a waste of time? I would argue that it isn’t – even though it does not have a snowball’s chance in Marble Bar of being pursued by any government – because it provides an interesting pointer to where new renewable energy technology efforts could (and should) be directed.
It can now be taken as a given that Australia will pursue greater use of wind power and, as one thing leads to another, development of wind farms will push the RET envelope, leading to a greater commitment to making renewables part of the power mix.
If geothermal energy meets its technological, logistical and investment challenges over this decade, it is possible that this source could be delivering capacity equal to that in Victoria today by 2030.
Acceptance of a carbon price by the electorate – a priority challenge new Prime Minister Gillard has set herself – will lead to several thousand megawatts of baseload, gas-fired generation being commissioned later this decade and an equal amount of old, inefficient coal generation being retired.
One missing link is utility-scale use of solar power, with the Federal Government attempting a lukewarm amount of incentivation via a $1.5 billion subsidy scheme (designed to attract about $3 billion in private investment).
Another is the potential to shift Australia’s private and small commercial vehicle fleet from petroleum to electricity – which could see a need eventually for about 30,000 to 40,000 gigawatt hours a year of additional demand, all of which could be met from renewables with appropriate planning. (A task, by the way, more likely to take 20 years than 10.)
In this context, the ZCA work on potential new electricity supply from solar systems makes interesting reading. ZCA proposes development of concentrating solar thermal power stations of 3,500 MW capacity, each requiring an area of 230 square kilometres (the size of South Australia’s Kangaroo Island). One of these would cost about $16 billion – about triple the cost of an equivalent wind farm.
In the 1960s Barry Goldwater famously ran from the American right for the US presidency on the slogan “In your heart, you know I’m right” – to which Democrats retorted “In your guts, you know he’s nuts.” Tempting as it may be to throw something like this at Zero Carbon, a more charitable and long-sighted reaction to the roadmap may be to say that, while it is impractical in today’s context, it offers an interesting test for the imagination of policymakers and power suppliers as they feel their way in to an uncertain future.
The number of customers connected to the south-east Queensland electricity network has risen 33 percent since 1997, but system maximum demand has increased 99 percent in the same time, Energex, the government-owned network service provider to 2.9 million people in the region, has told the federal task group on energy efficiency.
The rate of growth for total electricity use in SEQ is about half the rate for peak demand, Energex adds, highlighting the impact of air-conditioning.
However the network company also points out that there has been a quiet revolution in Queensland over the past 30 years, creating “one of the world’s largest energy demand management programs,” the remote cycling of electricity hot water systems. More than 700,000 small energy consumers in SEQ now use off-peak hot water tariff options, it says, and this has avoided the need to spend hundreds of millions of dollars on more peak demand assets.
In another submission to the task group, the other government-owned network business in the State, Ergon Energy, predicts that Queensland peak demand will rise by an an annual average of 5.4 percent, reaching 3,365 MW in 2014-15 and 3,900 MW in 2019. It suggests that, if this trend is not checked, a further $4.4 billion will need to be spent on generation, transmission and distribution to meet customer requirements.
Leading power business Origin Energy has told the Federal Government that it has “serious concerns” about Australia’s ability to achieve the bipartisan decarbonisation target of driving emissions to five percent below 2000 levels by 2020.
In its submission to the task group on energy efficiency, Origin says: “If we want to have a reliable and competitive supply of energy by 2020 that has certain attributes in terms of carbon emissions, the energy industry needs to make the investment decisions to underpin the (necessary) developments in the next two or three years. Industry and government do not have a lot more time to figure out the answer to this question.”
Origin argues that, while energy efficiency is important, the decisive factor will be a price on carbon. The policy that will make the biggest impact on carbon emissions is the point of production, it adds – how we use fuel, what fuels we use and what technology we use to turn fuel in to electricity.
Meanwhile, in trying to come up with an energy efficiency approach that works, the company suggests, the Federal Government should focus on the fragmented state of policies. “There are currently more than 200 State and national policies pertaining to energy efficiency,” it says, and “while (they are) well intended, the amount of work required to comply (with them) is substantially unproductive.”
In both the eastern seaboard and West Australian markets today, only peaking open-cycle gas generation can be justified commercially in the absence of a significant price on greenhouse emissions or a gas incentive scheme, says ERM Power, which has developed more than 40 percent of new generation nationally in the past five years.
The privately-owned company says energy production efficiency would not have delivered any combined cycle generation investment over the five years, during which 5,000 MW of new gas plant has been constructed.
ERM is arguing for the Queensland incentive scheme, which requires 18 percent of the State’s power to be generated from gas by 2020, to be extended nationally. Doing this, it says, will enable 38 million tonnes a year of carbon dioxide emissions to be abated.
The Energy Retailers Association says there is a disproportionate focus in Australia on pursuing energy efficiency in the residential sector. Households use only 17 percent of national energy consumption, it points out. The greatest efficiency opportunities are in buildings, industry and transport.
Meanwhile Engineers Australia has told the task group on energy efficiency that Australian governments spend too much time devising policies and not enough on implementation. Most aspects of a national strategy for energy efficiency were settled over a decade ago between governments, it points out. Progress requires actual implementation of a national program rather than revision of the policy design.
This perspective is echoed by the Consumer Utilities Advocacy Centre, which expresses “deep concern” that the task group is starting from first principles instead of accepting the significant evidence base on energy efficiency that already exists.
It also warns the Federal Government to beware of the “rebound effect” in pursuing energy efficiency policy – the well-recorded reaction of households to spend their savings from efficiency on more electric appliances, like energy-hungry flat screen television sets, continuing to drive up demand.
The Energy Supply Association has jibbed at the Prime Minister’s task group on energy efficiency highlighting a “hugely wasteful” generation sector where fuel inputs of 2,371 petajoules a year produce only 753 PJ of usable power.
This, it says, overlooks the fact that there are physical barriers to achieving 100 percent efficiency of electricity generation and transport in a system based on a relatively small number of large thermal power stations and a widespread delivery system.
The Secretary of the Federal Climate Change Department, Martin Ferguson, says he left last December’s Copenhagen summit deflated, but “on sober reflection” believes that significant gains were made even if global governments did not progress as far or as fast as had been hoped.
Speaking to the Property Council in May, Parkinson argued that agreements by both developed and developing nations to take responsibility for action to hold global temperature increases to below two degrees celsius and to specify what they will do to achieve this goal are “historic achievements.”
The Copenhagen accord, he claimed, provides a “practical pathway” to a future agreement worth having.
Parkinson asserts that the major future risk for Australia is not that we move others on abatement but that this country gets left behind. However, the national target for 2020, which requires a 140 million tonne cut in emissions, can’t be reached without a carbon price, he says. “Without an over-arching carbon price, there will be resort to a complex pathwork of regulatory and other measures (across governments), all interacting in unpredictable ways and creating large and unnecessary compliance costs for business.”
Parkinson told the Property Council that commercial and residential buildings are responsible for 23 percent of emissions, with commercial buildings accounting for 10 percent. Emissions from the commercial sector are projected to increase by 2.1 percent a year.
Power and automation technology giant ABB says a different approach needs to be taken for new versus existing electricity installations when considering energy efficiency policies in Australia.
A lot of equipment is designed with a life span of 30 years or more, ABB Australia points out, and current practices put little focus on whole-of-life costs against the purchase price. Poor decisions made today for equipment with significant life spans means that there will be adverse consequences for years to come.
ABB says there is a lack of effective communication between the R&D industry and companies taking up new technology. “Many state-of-the-art products in the electricity industry fight for life as there is no incentive to use them.”
The company calls for a “suitable combination of legislative requirements and enforced compliance,” coupled with targeted incentives, todrive industry towards implementing best solutions. This cannot happen, it adds, without “underlying energy cost drivers.”
Europe is seriously considering large-scale solar projects, it says, but in Australia, with far better conditions, such projects “seem to have excessive and ongoing delays.”
The upstream petroleum industry is again urging the Federal Government to make natural gas the centrepiece of policy to reduce greenhouse gas emissions.
Australian Petroleum Production & Exploration Association chief executive Belinda Robinson says the Government should accelerate the shift to natural gas for generating electricity. “Unfortunately, the market signals that are required to make this shift are simply not there,” she told a CEDA forum in Melbourne.
In the wake of the Federal Labor Government’s 23 June leadership coup, the electricity industry is enmeshed in a paradox: policy uncertainty is greater than it has been since at least 2006, but the industry is also embarking on one of the biggest infrastructure expenditure outlays in its history.
The high level of capex is explained by the influence of the expanded and amended Renewable Energy Target, finally approved by Federal Parliament, and by regulatory decisions to allow more than $31 billion worth of network development between now and 2015. A view of the investment required to meet the RET sees 7,000 MW of wind farms, about 700 MW of biomass and perhaps 500 MW of geothermal plants being built by 2020.
The high level of uncertainty flows from the lack of clarity about how the Gillard Government will approach emissions trading, concerns that politicians will continue to attempt to prevent the full cost of decarbonisation flowing through to residential retail customers, political angst over community reaction to the roll-out of smart meters and the “dynamic pricing” moves that will follow, the inability of governments to act in a timely fashion on rules for new transmission development, the prospect of further RET changes in 2014 when the scheme is reviewed, the possibility that a Federal Government need to drive energy efficiency may lead to attempts to change the eastern seaboard wholesale power market, the continuing inability of the New South Wales Government to accomplish its semi-privatisation of electricity supply, concern about the lack of progress on pursuing new baseload capacity development for NSW and an awareness that all the present policy initiatives will not come close to delivering the level of abatement needed to achieve the bipartisan emissions goal for 2020.
To this list could be added ongoing uncertainty about whether and when carbon capture and sequestration technology for both new fossil-fuelled power stations and existing coal-burning plants will be viable. Some leaders of the generation sector believe this will not occur until after 2020; others see some prospect for first moves with new projects in the second half of this decade.
In the interim, it is believed that development of a new coal-fired power station – two of 1,000 MW are proposed for NSW by government-owned generators, but the State Government proposes they be built by the private sector – will be almost impossible this decade because of opposition from the environmental movement and court action to abort or delay such projects.
On the “clean generation” side, the ability of geothermal power stations to become meaningful contributors to supply this decade is still open to question and dependent on both successful completion of demonstration projects in South Australia and expanded government support, both financially and in terms of ensuring high voltage links to isolated areas.
The prospects for nuclear power development in Australia this decade are regarded as nil and there would need to be a sea change in public opinion to enable steps to begin before 2020 to enabling progress in this area.
Above all, one of the significant failures of the Rudd administration was its inability over more than two years to deliver a promised energy white paper, a failure highlighted by the many issues raised in the Australian Energy Resource Assessment tabled in April by Resources & Energy Minister Martin Ferguson. The AREA report was the essential platform for the white paper, which is believed to have been one of the many victims of the Rudd office’s inability to manage policy process efficiently. There is now no indication of when a white paper may be delivered beyond the upcoming election.
This is a lengthy and daunting list, with few of these issues likely to be resolved in 2010-11 and their impact falling on a wide range of development plans for new electricity supply infrastructure.
The problem with achieving the 2020 abatement goal is highlighted by the latest yearbook of the Energy Supply Association, which forecasts that demand for electricity on the eastern seaboard, home to the bulk of the market, will rise from just under 200,000 gigawatt hours a year in 2008-09 to more than 235,000 GWh annually in 2018-19. The RET in its new form will not be sufficient to meet that level of increased demand, 79 per cent of which will occur in the two eastern black coal-burning States, NSW and Queensland.
The ambiguous nature of new Prime Minister Julia Gillard’s opening comments on the emissions trading scheme has served to highlight the concerns of some in the industry – as well as members of the trade-exposed, energy-intensive industries (EITEs). Gillard promised to pursue the establishment of a price on carbon (1) if she wins the federal election and (2) providing a “community consensus for action” is achieved.
To quote The Climate Institute, this statement could be code for either action or delay.
It does seem clear, however, that Gillard was closely involved in Rudd’s decision to defer action on emissions trading to 2013 (or later). A clue to her thinking can be found in a Channel Nine televised exchange with Tony Abbott on 30 April when she said: “Kyoto, the next commitment period starts at the end of 2012. We’ll see what international action has happened then and legislate in 2013.”
What could change this outlook is a federal election result that delivers the balance of power in the Senate to the Greens, who then use the issue as a lever in negotiation on other policies.
For the moment, however, the prospects for a carbon charge – an important factor for the gas generation industry, the solar power sector and the geothermal power sector among others – being pursued immediately after the upcoming election do not look high.
There are other pointers in Gillard speeches and comments as Deputy Prime Minister over the past 30 months.
They show her as committed to “a transition to a green economy.” She has argued that too much of the debate on this issue has been taken up by "duelling economists and accountants." She has said Australia should “be about adopting sustainability as a core principle of business and life” but has called for change to take place “at a pace we can adapt to with ease.” Sustainability, to her, equates with “more job opportunities for Australians.”
Given her close involvement with the trade union movement, and the fact that her winning power apparently has been orchestrated to a high degree by some unions and their parliamentary representatives, a pointer to her approach may be found in the ACTU’s submission to Rudd’s task group on energy efficiency, a review that closed receipt of submissions in May.
The ACTU argued in its submission that “Australia needs to maintain its status as a best practice producer of iron and steel, aluminium, cement, plastics, glass and paper and other energy-intensive industries and not lose them to other countries.”
It called for carbon policies that will enable the EITEs to apply best practice know-how to reduce emissions and costs. It also argued that, in the absence of an emissions trading scheme, Australia needs a strong energy efficiency strategy in conjunction with a renewable energy target, “creating new markets and business opportunities, pressuring change to purchasing and consumption habits.” It wants the Federal Government to commit to early action to create 40,000 training opportunities under the Productivity Places Program to develop green skills in building and construction, energy, agriculture and transport as well as in such financial services areas as auditing and accounting.
The most likely next indicator of what the ALP and the Coalition propose in energy policy for 2011-13 will be their election manifestos. Current thinking in the media commentariat and among lobbyists in Canberra is that the election may be called for either mid-September or mid-October.
In trying to assess voter sentiment between now and then via the opinion polls, it needs to be borne in mind that the only two factors that really count are the assessment of primary voting intentions and support for the Prime Minister and the Leader of the Opposition. The two-party preferred analysis, on which so much media time is spent, is a nonsense because it relies on what occurred three years ago.
The trigger for the coup was that both critical factors were moving strongly against the incumbent, Kevin Rudd.
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