Issue 83, March 2012
Welcome to the third issue of Coolibah’s newsletter for 2012. The past month has done little to allay energy investors’ concerns about an uncertain environment. This issue starts with a look at the latest review of electricity supply and demand by the federal Bureau of Resources & Energy Economics. It also looks at a serve for politicians from the network businesses because they are simultaneously trying to contain rising power prices and require industry actions that can only push prices higher. A number of stories deal with the ongoing saga of the carbon price – including whether the east coast market’s “reserve trader” safety net should be retained in an uncertain investment environment.
While the debate rolls on about suppressing causes – is it a downward trend or a blip strongly influenced by the current economic malaise – the national demand for electricity continues in fact to grow, albeit only slightly. Or does it?
The new review of the market by the Bureau of Resources & Energy Economics says that national power demand in 2010-11 was 226,110 gigawatt hours – compared with 223,700 GWh in 2009-10 and 223,200 GWh in 2008-09.
However, what is clearly contributing to the perception of declining demand is the data from the three major areas of consumption: New South Wales, Queensland and Victoria.
BREE’s data shows that demand in these States has fallen from 182,200 GWh in 2008-09 to 181,500 GWh in 2009-10 and to 177,300 GWh in 2010-11.
The most noticeable dip has been in NSW with demand declining from 78,200 GWh in 2008-09 to 75,200 GWh in 2010-11.
The data published by BREE also shows that Queensland, Victoria and Tasmania generated more electricity than was needed inside State borders in 2010-11 and NSW and South Australia needed to import supply.
Total generation in NSW, according to BREE, declined from 79,400 GWh in 2009-10 to 67,400 GWh in 2010-11.
Meanwhile the Australian Energy Market Operator, releasing an update of its 2011 “statement of opportunities” says that it estimates of demand for 2011-12 on the east coast have been revised downwards from 202,600 GWh to 192,000 GWh.
It attributes the decline it sees to “the changing economic landscape, a more energy-conscious public, the impact of rooftop solar installations and milder weather.”
AEMO says the estimate it made last year was influenced by official economic forecasts predicting stronger growth than has occurred. The high value of the Australian dollar has also put pressure on local manufacturing (which accounts for about 28 per cent of consumption).
The revised outlook has caused AEMO chief executive Matt Zema to tell The Australian Financial Review newspaper that double-digit price increases in household bills across the country in recent years has started to change residential behaviour and more quickly than the supply industry forecast.
“Everyone,” he told the newspaper, “was saying it was going to take a generation or a decade for people to change their electricity behaviour. I don’t think so.”
Advocates of stronger environmental action have been quick to read in to the AEMO numbers a message that Australia can afford to go harder with a carbon tax and energy efficiency measures to drive down greenhouse gas emissions, while others have used the data to push their views that the electricity network businesses have inflated their estimates of future demand.
The declining numbers in NSW, however, suggest that the key factor is the economic impact on manufacturing and small business.
Australia’s electricity distribution businesses are expressing concern that they are subject to conflicting governments’ policy aims.
The Energy Networks Association CEO, Malcolm Roberts, says the networks sector has rarely seen such a flurry of government activity on such a broad front, including moves on economic regulation, energy efficiency and demand-side participation.
On one hand, Roberts adds, governments are concerned by rising electricity prices – “there is a political imperative to contain them” – and on the other they want the energy sector to meet ambitious policy goals that can only put upward pressure on prices.
Roberts says some see a solution in policy and regulatory changes to constrain network capital investment.
He warns this could create “dangerous uncertainty” while doing nothing to affect the real drivers of higher costs such as rising peak demand, ageing assets and higher costs of capital and inputs.
“There is no shortage of critics who claim the electricity market has failed because they believe that there should be more energy efficiency activities or more demand-side participation. Their solutions tend to be more government intervention rather than measures to make the market more efficient.
“Given a choice between reforming retail prices to give customers an incentive to reduce use during peak demand periods or introducing new schemes, governments typically choose the latter.”
Roberts says the bid to extend the Energy Efficiency Opportunities Act to transmission and distribution businesses is a case in point.
“Existing regulations already require them to consider non-network alternatives where prudent and efficient. A carbon price will increase the value of such options (but) adding another layer of compliance activity will do little if anything to improve efficiency.”
He warns that the move will impose new costs without producing energy savings – and that the costs will be borne by customers.
Roberts calls for “informed decisions” rather than more layers of regulation “to distort the market.”
Meanwhile the Energy Supply Association has told the federal government in a submission that it should not create a national energy savings scheme that saddles retailers with new obligations but focus on harmonising the State-based programs that already exist.
Moving to add a national scheme risks adding another layer of complexity to the plethora of State programs, it says.
AGL Energy managing director Michael Fraser says Australian investors in new generation capacity find themselves in no-man’s land because of a lack of clarity about carbon pricing.
Writing in “Climate Spectator,” Fraser, whose company is bidding to buy all the shares in the Latrobe Valley’s Loy Yang Power business, says uncertainty about what the carbon price will be or when it will start hinders investment in gas-fired baseload plant while businesses can’t invest in new coal-fired power because they are pretty sure there will be a carbon price in the future.
His views echo the recent comment by Origin Energy managing director Grant King, who does not expect to see new baseload plant built on the east coast before 2020.
Looking at abatement targets for Australia, Fraser says AGL expects the renewable energy scheme to deliver about 40 million tonnes of emissions cuts.
In a presentation setting out AGL’s plans to acquire the shares in the 2,200MW capacity Loy Yang Power and the adjacent coal mine it does not already own for $448 million, Fraser has said that east coast wholesale electricity prices are now at a low point in the commodity cycle.
Gas and black coal prices are expected to rise on the back of export pricing pressures.
Fraser says the company expects east coast LNG projects to drive gas prices in the market towards $6 to $9 per gigajoule plus transportation costs, leaving brown coal as one of Australia’s least expensive fuel sources.
Against a backdrop of rising fuel prices, AGL expects Loy Yang power station to generate positive cash returns at carbon prices exceeding $50 per tonne.
The National Generators Forum has told the NSW parliamentary generation inquiry that there is little scope to improve the operation of east coast power stations apart from dealing with the number of State and federal policies that mandate particular technologies, subsidise inefficient outcomes and distort investment.
“Ultimately,” says the NGF, “these policies impose a significant cost burden on electricity consumers and pose a threat to system security.”
Wind generation, encouraged by the federal renewable energy target, the NGF adds, suppresses wholesale pool prices and reduces incentives to invest in firm peaking capacity. “Under current market rules intermittent generation and non-scheduled generation potentially creates dispatch risks for firm generation and present investment risks for scheduled capacity.”
The generators warn that wind generation “faces an increasing cost curve as sites with more marginal resources or further from the existing network are developed,” putting pressure on governments to subsidise new transmission links.
Generator ERM Power says the large-scale RET for 2020 is “unlikely to be met” and consumers will pay up to a 30 per cent premium on their power bills in direct scheme costs plus additional indirect costs of duplicated network and generation infrastructure.
The inquiry is being undertaken by the NSW Legislative Assembly Public Account Committee.
European wind farm developer Epuron, which is planning to build a large project near Broken Hill, has told the NSW generation inquiry that the State is susceptible to any kind of threat to coal production or any malfunction in its fleet of coal-burning power stations, four of which have capacity over 2,000MW, providing a dominant role in the supply mix.
The threat includes possible complications in developing the proposed new railway line to link the new (and still unbuilt) Cobbora mine with the power stations, Epuron adds.
Drought is also an issue because of the reliance of the coal-burning plants on cooling waters, the company says, pointing to the problems between 2007 and 2010.
Epuron urges support for the State plan to have 20 per cent of supply from renewable energy by 2020. NSW, it says, has world-class wind resources. Gas-fired generation already in place will support more than 2,000 MW of wind farms with no changes required to networks.
“Gen-tailer” TRUenergy has warned the NSW generation inquiry that the proposed transition away from brown coal power stations in Victoria may reduce the amount of low-cost energy which can be exported across the border.
About 10 per cent of NSW generation needs are currently met from importing electricity from interstate, mainly from Queensland. The State imported 7,978 GWh via interconnectors in 2009-10.
TRUenergy says that demand growth in Queensland flowing from LNG and mining developments could also affect NSW during the next decade by restricting energy available for export.
Shadow Treasurer Joe Hockey says that the Coalition’s first priority if it wins the next federal election will be to rescind the “poorly designed and economically destructive” carbon tax.
“The carbon tax is a bad tax,” Hockey argues. “It will severely hamper the competitiveness of Australian industry on the world stage because no other country is introducing an economy-wide carbon tax. The tax will put greater upward pressure on business costs and there is a danger that the increased welfare payments and tax cuts for households will not fully compensate for the increased costs.
“The resultant transformation of the economy will reduce growth and must therefore reduce growth in jobs.”
Hockey adds that the Treasury, in modelling supporting introduction of the carbon price and then emissions trading, has assumed full employment over the long term. “In other words, Treasury assumes all workers displaced by the tax will magically find new green jobs.”
Federal Energy Minister Martin Ferguson has spoken optimistically of the potential for deep-drilled geothermal energy to play an eventual equal role with hydro-electricity in meeting Australian electricity needs.
Talking to an investor forum in Sydney, Ferguson has pointed to BREE modelling that suggests geothermal could be delivering four per cent of power supply by 2034-35.
On the Bureau’s modelling, this would equate to delivering almost 14,000 gigawatt hours annually in 25 years’ time.
It has the prospect, Ferguson says, of providing the “holy grail” of generation – clean and plentiful baseload power.
However, he acknowledges, development of the technology continues to be confronted by a catch-22 situation: investors are reluctant to involve themselves until it is proven, but it can’t be proven unless they are willing to invest.
The sector, he adds, still faces investment barriers in the form of high upfront costs involved in drilling deep wells to identify heat sources.
Ferguson says the federal government has already allocated about $200 million to support the geothermal effort and “with the introduction of the clean energy future package (will) provide an unprecedented level of (further) support.”
This will include an immediate tax deduction for exploration for geothermal energy to come in to effect on 1 July.
The NSW Coalition government easily fended off a move in the Legislative Assembly in late February to require a State referendum before any further public utilities can be sold.
The Coalition’s large numbers in the Assembly in the wake of the March 2011 election ensured the motion from Northern Tablelands MP Richard Torbay, a former Speaker, could not succeed.
Supporting the motion, the sole Greens lower house MP, Balmain’s Jamie Parker, argued that privatisation of the State’s remaining generation assets would undermine greenhouse gas abatement.
Meanwhile the NSW Greens are claiming that the O’Farrell government will seek to exclude liability of “availability liquidated damages” from generation sales deals and leave them to the taxpayers’ account.
The issue relates to the “gen-trader” sales pursued by the Keneally Labor government in which Delta Electricity and Eraring Energy are liable to pay damages to TRUenergy and Origin Energy if they are unable to deliver contracted production.
The NSW Auditor-General revealed last year that Delta had budgeted for $46.3 million in such damages payments over four years.
However, the State’s largest power producer, Macquarie Generation, was not part of a “gen-trader” deal – nor were Delta’s Central assets.
Federal Greens deputy leader Christine Milne has told an Institute of Energy forum in Adelaide that “the global energy system needs to be reinvented.”
Senator Milne says the solution is “one hundred per cent renewables.”
She says that carbon trading will not be sufficient to deliver this goal in Australia. Reforming the east coast grid is “critical” and this is her current focus.
The Greens want the Australian Energy Market Operator to plan for 100 per cent electricity supply from renewables by 2030 “and they are going to be asked to do this.”
Milne says the Clean Energy Finance Corporation, which the Greens persuaded the Gillard government to introduce this year with a $10 billion budget, “will take the risks that the private power sector will not take.”
The Bureau of Resources & Energy Economics, in its energy projections to 2034-35, sees renewable sources of energy, including hydro-electric power, meeting 24 per cent of generation output a quarter century from now.
South Australian Mineral Resources Minister Tom Koutsantonis says that the revived debate over nuclear power for Australia is a “non-starter.”
Koutsantonis adds: “You need a social licence to operate and there is not a social licence (here) for nuclear power. The Australian public don’t want it. I don’t think it is economic. I don’t think it’s viable and I don’t think it’s politically saleable.”
He says gas is so abundant and cheap in Australia that only a future energy crisis could lead governments to consider nuclear power.
Meanwhile the Australian Nuclear Science & Technology Organisation has told the NSW parliamentary inquiry in to generation that, despite strong anti-nuclear sentiment in this country, “there are signs that the general public is willing to discuss the possibility of nuclear development as part of a rational debate in to the energy mix.”
Even at the height of the Fukushima crisis in Japan last year, ANSTO says, a Lowy Institute opinion poll showed that 35 per cent of respondents continued to support local development of nuclear power.
ANSTO argues that NSW should consider a more diverse combination of traditional technologies, including advanced coal and gas, and mature alternative technologies, such as nuclear and wind power, forming a secure and reliable energy mix in the future.
Nuclear energy, it says, offers NSW advantages including fuel price stability, low operating costs, low emissions and waste volume and a secure fuel supply. It merits serious consideration.”
As the environmental movement seeks to step up its campaign against new coal mine developments, Martin Ferguson has highlighted the energy sector’s contribution to the national economy.
Launching the new BREE report “Energy in Australia 2012,” Ferguson has pointed out that earnings from energy exports were $70 billion in 2010-11, accounting for a third of national commodity sales overseas and increasing Australia'’ share of world energy production marginally to 2.5 per cent.
The BREE report shows that thermal coal exporters achieved an 18 per cent increase in their earnings last year compared with 2010 while the LNG industry increased its sales 16 per cent.
The two sectors earned $26.7 billion between them last year at a time when there was a 22 per cent dip in into and steel sales (although iron ore export values rose 20 per cent).
Meanwhile the Australian Petroleum Production & Exploration Association has accused the environmental movement of waging “ideological war” on the energy industry with its “Big Green” strategy “to derail investment and create legal confusion.”
APPEA chief executive David Byers labels the position of the Greens in opposing coal exports and LNG developments and advocating a “move straight to renewables” approach as being “as dishonest as it is politically opportunistic.”
The Australian Energy Market Commission, in its initial response to the Australian Energy Regulator’s request for changes to the rules for electricity network capital and operating cost determinations, has agreed that “some areas could benefit from enhancement.”
AEMC has identified how the regulated asset base is determined, how the rate of return is set and the process for making determinations as key areas for potential change.
The commission notes that the AER is concerned that the present rules restrict its ability to interrogate and amend network demand forecasts and that this means costs are being set at higher than efficient levels. AEMC says it will seek more evidence to understand the drivers of increases in network costs.
Australia’s largest distribution network business, the NSW government-owned Ausgrid, will spend more than $4.5 billion over three financial years on system capital outlays approved by the Australian Energy Regulator.
In its latest statement of corporate intent to the State government, Ausgrid says its capex budget for the current financial year is $1.57 billion and its expenditure next financial year will be $1.49 billion followed by $1.51 billion in 2013-14.
When non-system capital works are included, the expenditure for the three financial years will total $4.97 billion. By comparison, the distributor spent $4.48 billion in capex between 2009-10 and 2010-11.
Ausgrid’s franchise area covers 22,275 square kilometres from Sydney’s south to Auburn in the city’s west and the Upper Hunter Valley in the north.
The statement of intent says the business provides more than 32,000 GWh a year to 1.57 million residential and business connections.
An opinion poll conducted by Victoria’s Consumer Utilities Advocacy Centre has found that 40 per cent of respondents switched electricity supplier at least once in the past two years.
The poll found that 68 per cent of switchers who had accepted an offer made by a door-to door salesman were very or somewhat confident they had chosen the best deal.
Nonetheless, CUAC says, 73 per cent of respondents had a negative or very negative attitude towards door-to-door approaches.
Of the 266 who had experienced door-to-door selling, 22 said they had made a complaint, mostly to the energy company represented, and 140 said they had not complained because they did not know to whom to direct it, because they believed it would make no difference or (mostly) because they did not consider the issue sufficiently important or were too busy to get round to complaining.
Thirty-nine per cent of respondents (104) said they had no reason for complaining.
CUAC wants to see door-to-door selling cease and is arguing for increased monitoring of current practices and greater enforcement of existing consumer protection regulation.
The Australian Alliance to Save Energy, chaired by Energetics executive Jon Jutsen, claims that more than $5 billion in energy outlays can be saved annually through efficiency actions.
The Alliance is lobbying for a national target to be established to drive energy consumption 20 per cent below “business as usual” levels by the end of the decade.
The group says Australia is lagging behind other developed nations in energy efficiency. It argues that a key priority should be reforming regulations to focus on minimising peak power demand.
Writing in an Energetics newsletter, Jutsen says manufacturing industries have commonly faced 20 per cent per year energy price rises over the past three years and can expect similar outcomes over the next two years.
Australia, he adds, is moving steadily up the international price comparison list.
Consultants Ernst & Young, in a paper commissioned by the Australian Energy Market Commission for its “power of choice” review on the drivers for demand-side management, have estimated that Australia is the eighth most energy-intensive country in the OECD, although it is about five per cent less energy intensive than the world average.
The consultants point out that Australia increased its electricity consumption in all sectors except agriculture and fishing between 2000 and 2009. The highest growth sector was commercial and public services, with an annual average increase of 15 per cent. In the same period the OECD average increase for this sector was eight per cent.
Ernst & Young say Australia has exhibited the fastest growth in the OECD in energy consumption on a per dollar of GDP basis. Consumption as a proportion of GDP has grown from 358 megawatt hours per million dollars in the 1970s to 487 MWh in 2009. The OECD average was 352 MWh.
The consultants add that the average annual increase in residential sector demand in Australia since the 1970s is the equal-highest in the OECD with Canada.
Total electricity consumption here has increased from 70,000 gigawatt hours in 1973-74 to 242,000 GWh in 2008-10, averaging a rise of 3.6 per cent a year.
Australian businesses will have to buy 94 million tonnes of carbon emission credits a year abroad in 2020 at an annual cost of $3.5 billion, according to the Coalition’s federal climate change spokesman Greg Hunt.
Hunt told federal parliament that the Gillard government’s carbon price policies will impose a liability of $14.5 billion by 2020 – on top of which liable parties will need to obtain the foreign credits.
Despite this, he said, Australian emissions are predicted to rise from 578 million tonnes a year to 621 Mt.
In a parliamentary debate, Mark Dreyfus, parliamentary secretary for climate change, retorted that the Coalition “direct action” policy would impose a $30 billion aggregate cost on taxpayers by 2020.
The federal government stunned the solar industry by abandoning a hot water rebate scheme with minimum notice in late February.
The snap decision to close the “renewable energy bonus scheme” – which offered rebates of $1,000 for solar hot water installation and $600 for heat pumps and was originally introduced by the Howard government in 2007 – caught the sector in mid-lobbying effort.
The scheme was intended to close at the end of June, but solar companies and environmental supporters were urging its extension – and the government had allocated $24.5 million to support it in the 2012-13 financial year forward estimates.
The federal government says the scheme handed out $320 million over five years to 250,000 households to replace electric and hot water gas systems.
The Coalition, which called the shut-down “solar vandalism,” joined forces with the Greens in the Senate to pass a resolution calling for the program to be reinstated.
The Greens said that government would “bend over backwards” to help a car maker or aluminium smelter struggling to cope with the high dollar and cheap imports, but it had pulled the rug out from under solar manufacturers. The government, they added, was “sending precisely the wrong signal” about moves to a clean energy economy.
Solar companies claim that 1,200 manufacturing jobs and 6,000 installation jobs are at stake.
The Solar Energy Society complains that government has the sector on a “solar coaster,” a roller coaster ride of changing attitudes.
A review of NSW governance undertaken for the O’Farrell government by former senior bureaucrat Michael Lambert has delivered a scathing commentary on the Keneally government’s solar bonus scheme.
Lambert says the scheme was established “without sufficient analysis, under inadequate time frames and with last-minute policy and regulatory changes compounded by poor responsiveness to the higher than expected uptake.”
Poor policy process, he says, has meant that the scheme is very expensive for “only minimal, highly-inefficient outcomes.”
Lambert points out that the decision to launch the feed-in tariff scheme was made by the Keneally government without seeking departmental advice. The government did not seek an economic appraisal and gave no consideration to how it complemented or interacted with other State and national programs.
Major cost risks were ignored.
He also complains that the scheme – like programs in other States – was pursued despite the Council of Australian Governments examining and rejecting the idea of a national approach in 2008, but agreeing that any State schemes should be harmonised.
Lambert says the final cost of the NSW scheme will depend on a range of factors. It could vary from $1.44 billion to $1.62 billion.
He notes that the scheme carries a per unit cost of $600 per megawatt hour for the energy it produces versus around $120/MWh for a commercial wind farm.
He says estimates of the abatement cost of the scheme vary, but include figures up to and beyond $600 per tonne – compared with the proposed starting price of the national carbon price of $23 per tonne rising towards $30 over the decade.
A new research paper from the Centre for Independent Studies says the proposed Clean Energy Finance Corporation, to be provided with $10 billion in funding, is “likely to be a complete waste of money” and should be abandoned.
CIS research fellow Oliver Marc Hartwich says that the government is launching a financial institution to facilitate clean energy and at the same time claiming it is meant to be a profitable body without competing with private investors. “These contradictions are impossible to reconcile.”
The proposed move from a carbon price to emissions trading will cancel out any positive effects of the CEFC, he adds.
“The billions of dollars that are set to flow in to this most dubious political entity are likely to be a complete waste of money as well as a distortion of capital markets.”
Construction firm Leighton Contractors has left the CopperString consortium trying to build a 1,000 kilometre power line from Townsville to Mount Isa and to open prospects for renewable generation in north-west Queensland.
The concept was undermined last year by miner Xstrata deciding to source its new energy needs from another stand-alone, gas-fired power plant near Mount Isa.
Queensland Premier Anna Bligh, campaigning in the State’s March election, said CopperString had failed because, even with substantial government subsidies, the project could not offer electricity at a competitive price.
The federal government had committed $335 million to subsidise CopperString.
Drew Clarke, Secretary of the federal Department of Resources & Energy, has told a Senate estimates hearing that there is a “very good prospect” that the G8 ambition to see 20 large-scale carbon capture and storage projects deployed around the world by 2020 will be achieved.
Clarke said there are eight large-scale CCS projects operating today and seven under construction. All 15 should be in operation by 2015 and saving 35 million tonnes a year of greenhouse gas emissions, “a serious amount in terms of the scale-up of the technology.”
He said 12 more CCS projects were due for final investment decisions this year.
Meanwhile a large-scale post-combustion carbon capture project at Loy Yang Power in Victoria’s Latrobe Valley has been allocated $100 million in support by the federal and Victorian governments.
The CarbonNet project will receive $70 million from the federal government and is being undertaken by LYP and TRUenergy with WorleyParsons, Mitsubishi Heavy Industries and Mitsubishi Australia as technical partners.
The demonstration plant is intended to capture up to 500 tonnes of carbon dioxide a day from an LYP generation unit. The project is expected to commence operations in 2015.
Away from the political hyperbole and media hype about the impact of federal climate policy, the Australian Energy Market Commission is wrestling with a question about a safety net for wholesale power supply on the east coast.
The Reliability & Emergency Reserve Trader (RERT) role in the market is to allow the Australian Energy Market Operator to obtain reserves in an emergency where the normal trading arrangements are thought to be unlikely to deliver adequate supply. It has never been used and is due to expire on 30 June this year.
The reliability panel of the AEMC wants the deadline extended to 2013 and the commission has made a draft decision to extend it to June 2016.
What’s bothering the AEMC is that market uncertainty created by the long-running political row over carbon pricing may delay investment in generation on the east coast. Having RERT up its sleeve allows AEMO to avoid load-shedding events and will give consumers greater confidence in energy security in the carbon policy transition period, the commission argues.
In answer to market participants urging the abandonment of RERT, the commission says that it accepts the measure may distort the market but it doesn’t believe the distortions are significant and thinks they are outweighed by the benefits.
The AEMC is helped in its bob-each-way approach to the issue by a split in the views of stakeholders.
Generators and retailers by and large want RERT despatched to history, arguing that there are “numerous and adequate” other ways to deal with removal of carbon-intensive baseload generators (essentially the older brown coal plants the Gillard government seeks to close).
Leery State government departments, such as the South Australian energy portfolio, argue that there is uncertainty in the market and the need for a continuing last-resort mechanism.
The Private Generators Group – the generators’ lobby has split in the past year and the PGP has been formed to represent AGL Energy, Alinta, Energy Brix, InterGen, International Power, Loy Yang Power and Truenergy – says the RET creates additional costs, is not transparent and distorts the market. To which the AEMc retorts that the measure’s infrequent use means consumers are not likely to face “materially higher” costs.
TRUenergy points out that it is impractical to think the RERT could be used to provide enough capacity to fill the market gap created by the exit of a large baseload plant.
The AEMC will need to make a final decision next month and, on the basis of its draft report, seems likely to opt for the “safety first” notion of retaining the RERT for the time being.
Messy does not even begin to describe the current state of the electricity supply industry in Australia with respect to policy and planning – not that we are alone in this situation as witness the fevered debates going on about power issues in the US, Canada, Britain and Germany to name but four countries.
In all this argument and counter-argument it is often easy to overlook the single most important policy issue for energy supply, overshadowing even the painful problems of increasing prices for consumers and politicians alike.
Whatever one may say about the federal government’s approach to carbon policy and a “clean energy future,” one of the Prime Minister’s favourite pieces of spin, the key energy figure in its ranks, Resources & Energy Minister Martin Ferguson, cannot be accused of overlooking the importance of energy security. The issue figures highly and extensively in the draft energy white paper and the more recent “national energy security assessment” report issued by his department.
In his introduction to the latter, Ferguson notes that: “The secure supply of energy is essential to economic growth, jobs and the prosperity and wellbeing of all Australians.”
The “NESA” – the energy scene is a fertile environment for acronyms – is fairly sanguine about our national security for electricity, gas and liquid fuels, maintaining the “moderate” ranking for the short, medium and long term that was assessed originally in 2009.
However, Ferguson has had his advisers model “shock scenarios” as part of NESA.
In the case of electricity supply the “shock” examined is the sudden, unexpected withdrawal of a large baseload plant from the east coast market.
NESA’s judgement is that “the market could be challenged by such an event (and) it would place greater reliance on the capacity of interconnectors to adjust supply and demand arrangements.”
The assessment points out, too, that “the outage of a major baseload station (would) result in significant high-priced events and higher-cost generation being required to meet demand, particularly on peak days – and is likely to breach reliability standards in Victoria, South Australia and possibly New South Wales.”
NESA also acknowledges that a bad transmission outage occurring in the first two years after an unexpected and permanent exit of a large Victorian power station from the market – that is before investors can respond with building and commissioning replacement capacity – “may increase the likelihood of a reduction in reliability.”
NESA argues that government research shows there will be sufficient gas infrastructure on the east coast to manage the sudden departure of one of the four major Latrobe Valley generators (and its replacement by a baseload gas plant no matter how the Greens and greenies may howl) “although there would be some short-term capacity constraints affecting particular gas infrastructure during peak demand periods in the winter.”
In a comment to make State government ministers bite their lips, the assessment adds that a winter hassle in gas supply “would not result in any significant reduction in security of supply, but would likely increase the cost of meeting electricity demand.”
In tabloid media speak, the bureaucrats are saying that, should the you-know-what hit the fan in a worst-case scenario, consumer power costs would go through the roof as the open cycle gas generators cashed in.
The problem with a scenario like this is that its probability lies in the “your guess is as good as mine” category, but the fact that the federal government is not only prepared to envisage it happening but also to ‘fess up to the prospect in writing signals that the odds on it happening are not exactly nil.
Various stories in this issue of Coolibah newsletter serve to underline the real need for policymakers, the minders of the market and the suppliers to be on top of the dangers and well-prepared to deal with them because they would be required to make decisions in the face of a hurricane of consumer, community and media alarm if the worst case did occur.
One only has to visit the files on the Varanus island explosion crisis in Western Australia and the long-past but not forgotten crises in Victoria, when there was an explosion at the Longford gas plant, and in Auckland, when the transmission system comprehensively failed, to see what happens in such circumstances.
One of the risks for decision-makers is looking at the positive history of east coast market performance as a guide to future security.
This point has been put to the Australian Energy Market Commission by both Victorian and South Australian energy departments as it wrestles with the future of the east coast market’s reserve trader provisions (see report above).
The AEMC itself observes in its RERT draft commentary that there will be a degree of uncertainty in the market until the size and location of generation to be closed under carbon policies is known – and, one might add, until federal elections have sorted out who is going to be in charge of carbon policy for much of this decade.
Without clear information, say the AEMC, market participants may delay investment decisions.
“When decisions are delayed, there is potential risk that additional generation capacity is not deployed in sufficient time to meet increasing maximum demand and the reliability standard may not be achieved,” the commission says.
As the federal Bureau of Resources & Energy Economics has reported recently, only a couple of wind farms were commissioned on the east coast in the past year, with a number of projects delayed owing to factors including difficulties in negotiating fuel inputs and finalising financial arrangements.
By comparison, 11 generation projects were completed in 2010 and 17 in 2009.
We have had 10 years on the east coast where the level of unserved energy has been just a fraction of one per cent in each of them, with the exception of Victoria and SA in the drought year of 2008-09
The core argument today is not that we should now be alarmed, but we certainly should be alert – and that the community should be informed about the situation rather than it being kept as “secret supply business.”
Keith Orchison
10 March 2012
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