Issue 38 March 2008
Belinda Robinson, chief executive of the Australian Petroleum Production & Exploration Association (APPEA), told a Sydney conference this month that the petroleum products balance sheet has slid from being in the black in 2000 -- when domestic crude oil and condensate production peaked -- to being currently $6.2 billion in deficit.
At present, she added, Australia exports crude, condensate and refined petroleum products worth $15.6 billion -- the 2006-07 figure -- and imports crude and refined products worth $21.6 billion.
By 2017, she forecast, production will offset only 32 percent of consumption -- compared with 55 percent in 2006-07. Oil reserves are now calculated to represent only 10 years of current consumption.
The industry, she said, is spending $2 billion a year on exploring for oil and gas and has targeted finding sufficient liquid fuels to sustain the production-to-consumption ratio at 57 percent in 10 years time.
Robinson says petroleum producers are contributing $8 billion a year at present in direct tax payments.
ESAA estimates that load growth, under business as usual conditions, will rise from 220,000 gigawatt hours a year now to 300,000 GWh in 2020 and 356,000 GWh in 2030.
The ESAA numbers, provided to an energy conference in Sydney, appear as the Australian Bureau of Agricultural & Resource Economics releases its 2008 perspective of the national energy outlook to 2029-30 -- and ABARE is forecasting that gross electricity generation will rise from 257,000 GWh in 2005-06 to 415,000 GWh by 2030.
The data differs because the ABARE projection includes network line losses and electricity used by the power stations themselves -- versus ESAA's consumer statistics.
One of the major issues to be resolved in Australia's new carbon-constrained policy environment will be what share of power production can be captured by natural gas supply. ABARE projects that, without taking in to account policies now being developed by the new Rudd Government, the share of generation based on gas supply would rise from 15 percent now to 24 percent in 2030. This would represent an increase in market share for gas-based generators of about 60,000 GWh a year by 2030.
However, the new mandatory renewable energy target proposed by the Rudd Government would see wind and other "green" generators grab 35,500 GWh of electricity production growth by 2020 -- and, on ESAA projections of consumption, about 48,000 GWh in 2030.
On today's electricity wholesale prices, this would represent an income loss to gas-fired suppliers of some $17 billion annually in 2030.
Modelling undertaken by CRA shows that MRET plus ETS will see the gas-fired generation sector lose 12,620 GWh per year by 2020 compared with a "pure ETS" scenario, pushing up power prices by an extra six percent.
CRA says: "A mandated renewable energy target is less efficient at achieving a given environmental outcome because it forces higher cost renewable energy in to the generation mix at the expense of exploiting lower cost emissions abatement opportunities elsewhere in the economy.
"Contrary to the popularly-held belief that such targets generate jobs," it adds, "the overall effect on the economy is the generation of less jobs than would otherwise have occurred and a loss of output in the economy as a whole compared to the outcome with a well-designed emissions trading scheme."
The CRA study shows that the big winner from the ALP embracing both MRET and ETS is the wind farm sector -- its modelling claims that the combined policy will see more than 10,000 wind turbines erected in Australia between 2010 and 2020 and annual production from wind generation reaching nearly 44,000 GWh, or more than 33,000 GWh per year than would occur under a "pure ETS" policy.
High wind
Los Angeles-based market research firm Clean Edge is projecting that the global wind energy sector will beef up its revenue almost threefold in the next 10 years.
In its latest review of the international renewable energy market, Clean Edge forecasts that wind farm income will rise from $US30 billion in 2007 to more than $US83 billion in 2017.
It also predicts that global revenue from sale of photovoltaic panels and other solar energy components will jump from just over $US20 billion now to $US74 billion in 2017.
(For context, several of the world's largest energy companies, leaders in oil supply, each currently report annual sales revenue greater than $US100 billion a year.)
There is abundant proof, the analysts add, that renewable energy has moved from "marginalised to mainstream" in the past 10-12 years. Global investment in renewable energy technologies now stands at just under $US150 billion a year.
Clean Edge's research points to demand for wind development in the United States and China as leading the sector's upward drive. American wind energy installations grew by 45 percent in 2007 over 2006 and the US is expected to supplant Germany by 2010 as the world's largest wind energy market.
The Forum says a $20 per tonne carbon price is likely to add about $28 per megawatt hour to the cost of production from a typical coal-fired power station -- but less than half of this may be recoverable in the national electricity market under the NEM's minimum cost despatch model. Marginal generators with lower carbon intensity setting the price in the NEM could have a cost burden from emissions trading of only $10 per MWh.
"A large part of the generation sector -- coal-fired plants produce more than 80 percent of Australia's current electricity -- faces a significant increase in costs without the ability to pass them on," the NGF argues. "There will be a significant loss in their asset value and the shareholders and lenders of the generation sector will be disproportionately affected."
The Forum warns that the flow-on effect from these losses will mean higher costs of capital for the electricity generation sector and potential delays in providing new investment funds. It warns that a re-run of last year's drought impact on generation capacity could be "great magnification" of the volatile prices experienced then.
It is also warning that a failure to compensate the coal-burning generators "will freeze investment," leaving electricity supply vulnerable to future disruption.
The NGF argument is shared by the Energy Supply Association, which shares a large proportion of the Forum's membership. ESAA has told Garnaut that compensation for loss of asset value is "highly desirable from an equity and effeiciency perspective."
The electricity industry, which has known for more than a decade that any form of effective carbon charge -- ie a cost that would actually change the despatch order in the NEM -- would hit its coal-fired capacity hard, took heart last year from the recommendation of the Howard Government's task force that free permits should be issued to coal plant suffering "disproportionate losses."
The coal-based generators' problem today is that Garnaut is adamantly opposed to special compensation for them and this view is thought to be shared by Federal Treasury.
However, how far the government is prepared to go in accepting this approach remains open to question. Consumer Affairs Minister Chris Bowen's reaction to Garnaut's comments that prices would rise was to suggest that petrol refiners might be exempted in order to protect motorists.
Garnaut's new discussion paper, released at Easter, calls for the government to set emissions limits, with a declining annual cap, starting in 2013. Permits should be auctioned at regular intervals, he proposes.
The economist is also being blunt about the overall impact of emissions trading. "This scheme will cost," he says, "but the cost will be manageable if we safeguard the simplicity and credibility of the market and use the proceeds (of permit auctions) to transition Australia to a low-carbon economy."
Garnaut has set 18 April as the deadline for further submissions to him.
Meanwhile the Rudd Government is consulting separately with both industry associations and non-government organisations on the implementation of emission trading. It has set July 2010 as the date for the scheme to come in to force.
Climate Change Minister Penny Wong, who made a pointed comment earlier this year that the government welcomes Garnaut's advice but is not committed to taking it, has responded to the latest round of fuss over the new discussion paper by saying that the government will "take a careful and methodical approach" to resolving the policy.
She adds that the government seeks to "minimise the risks for the economy."
The government plans to release a "green paper" on emissions trading in July and aims to have legislation drafted by the year end.
Answering questions on television program Meet the Press, Garnaut commented: "It will be significant. It won't be overwhelming. It won't be a doubling. It will be well below that, but significant."
Hollins is one of the latest of a small galaxy of international speakers the association habitually attracts to its conferences, with the Perth event expected to attract 2,000 delegates. Its trade exhibition space has been sold out for months.
Hollins is the head of European gas and power consulting for international government and industry energy advisers Wood Mackenzie. "There is no doubt that we are firmly embedded in the era of gas, with its penetration of the fuel mix growing consistently and projections that it will continue to do so," he will tell the APPEA delegates.
"However, it would be wrong to assume that perennial gas demand growth is a given across all markets. High oil prices feeding in to gas prices have impaired gas demand growth -- and growing import dependence in many markets has resulted in increasing focus on security of supply, with geopolitics playing an increasing hand."
The key challenge for the global gas industry, Hollins argues, is the fact that government-owned corporations control most reserves, limiting the opportunities for investors. Domestic needs, rising capital costs and depletion policies are preventing development in many areas. "Australia," says Hollins, "has the reserves and an environment conducive to investor participation, but it is not immune to these challenges -- as well as others such as permitting and approvals."
Hollins' views will be reinforced by a keynote address from Linda Cook, executive director gas and power of Royal Dutch Shell, who will point out that future success in the LNG market will depend on the appetite and the ability of companies, contractors, governments, customers and consumers to resolve key factors -- including the need for more investment in advanced technologies as well as increased capacity and productivity, the uncertainty created by soaring costs and also regulatory moves, the problems of sustaining an adequate industry talent pool and the demands for enhanced energy efficiency in a carbon-constrained environment.
Ian Plimer, professor of mining geology at Adelaide University, says the State -- which is considered to hold the world's largest uranium deposits -- needed to do more than just encourage mining and exploration. It should also establish an industry to create fuel rods for nuclear power station, lease and reclaim them after use and dispose of the waste. This would make SA a dominant force in global energy supply.
State Mineral Resources Development Minister Paul Holloway told the conference that there was potential for $25 billion to be invested in 30 uranium projects, including the current planned $5 billion expansion of the giant Olympic Dam site. At present South Australia has two of the country's three producing uranium mines.
Meanwhile in Sydney Michael Angwin, executive director of the Australian Uranium Association, has foreshadowed a 49 percent increase in the use of nuclear power around the world over the next 25 years. He points out that existing Australian uranium sales annually displace 400 million tonnes of greenhouse gas emissions that would otherwise be produced by fossil-fuelled power stations -- and that this is more abatement each year than the total calculated to be achieved by the new, enlarged Australian MRET scheme between 2010 and 2030.
Energy (and environment) ministers seem to come in two moulds -- the show ponies and the grafters, and Ferguson is shaping up early in the Rudd Government term as one of the latter.
In his AEA talk, he was careful to acknowledge the fundamental place of the energy sector in meeting national and economic needs and the large-scale changes taking place in the energy industry over a short time.
He also acknowledged that the design of the emissions trading scheme -- along with the measures that will complement it -- is probably the most important challenge of the government's first term.
He naturally harped on the new government's promises to spend more than a billion dollars on encouraging renewable energy and low-emission energy technology -- and, as a politician, can be forgiven perhaps for not adding that this is a mere drop in the bucket in terms of what really has to be spent on innovation and driving new technology to commercial viability. (Just linking the large geothermal resource in central Australia to the national electricity market via a high voltage system would leave not much change out of a billion dollars.)
One of the most important comments Ferguson made apparently passed by the few journalists on hand for the talk: the government is relying on end-use energy efficiency to deliver 55 percent of its abatement target in the medium and long term (the former being 2020).
This is not something to be passed over lightly.
The Department of Climate Change has indicated it is relying on a cut in electricity demand of the order of 35,000 gigawatt hours a year by 2020 through efficiency gains.
This needs to be seen against the background of almost two decades of energy demand management policymaking that has delivered not a great deal.
To describe the goal as a big ask is an understatement.
It will take far more than a $20 per tonne carbon charge to deliver anything like 35,000 GWh of annual savings in power demand over the next 12 years; try $100 per tonne -- and then contemplate what impact that cost would have on the economy.
One of the first issues that Kevin Rudd raised on the day he became opposition leader was what future did Australian manufacturing face?
Under Prime Minister Rudd and a $100 per tonne carbon charge, the answer for energy-intensive manufacturers would have to be: None.
The real point at issue here is that it is critical for Ferguson, Penny Wong and other ministers to join all the dots across the policy spectrum and to come up with an holistic approach that is not merely acceptable in the short term to voters (and green advocacy groups) but which delivers energy security in the medium and long term.
For example, the energy efficiency goal -- and the harsh carbon cost required to drive it -- jibs with Ross Garnaut's claims (see above) of the impact on power prices of the emissions trading scheme he will propose.
In this respect, Ferguson at least put his finger in his Sydney speech on the right rhetorical buttons: energy security is about meeting growing needs in the short and long term; adequate, reliable and affordable services need to be delivered -- and it is the job of the national government to get the policy settings right to deliver open, competitive markets and investment certainty.
This, he said, was his top priority -- and he announced that he had launched his department on the task of making a national energy security assessment, as promised in the election campaign.
The NESA is intended to provide an integrated picture of the outlook for electricity, gas and liquid fuels supply in five, 10 and 15 years.
Ferguson promised consultation on NESA with industry over the next three months.
When one adds up the energy policy issues now being addressed, of which those mentioned above are only some, and then factors in the pressure for decisions in the near future about all of them to provide both investor certainty and encouragement -- it seems to be lost on some that investor certainty that the Australian regime is adverse is not the desired outcome -- it becomes evident that we are now in the toughest working environment for policymakers in the past quarter century.
In this context, it is ironic to contemplate that it was a Labor Federal Government in the late 1980s -- under Hawke -- that ripped the entire chapter on greenhouse gases from its "Energy 2000" policy document on the (never-publicised) grounds that canvassing the issue would be detrimental to the coal industry.
That decision eliminated almost a decade of serious government consideration of greenhouse gas abatement policy -- during which 4,400 MW of the now-threatened coal capacity was developed to be followed by another 3,000 MW in the past decade.
Keith Orchison
24 March 2008
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