Issue 23 November 2006
Leaving aside its observations and claims on nuclear power generation prospects in Australia, the single most interesting aspect of the Switkowski Committee report is the five-page section dealing with the electricity demand outlook.
This is the first formal commentary on power supply and demand since the Australian Government brought down its white paper on energy in 2004. That study was only prepared to look out to 2020 -- and it projected that electricity demand would rise from 186,000 gigawatt hours in 2000 to 284,000 GWh two decades later.
Now comes Switkowski & Co, who look out to at least 2030 -- with an extrapolation to 2050. The committee (which talks about "consumption" when it appears to mean electricity sent out, including line losses) projects a supply system required to handle 410,000 gigawatt hours on 2030 against 240,000 GWh today.
That broadly lines up with the latest projection from the Energy Supply Association, which has told the South Australian Government, in a submission about the draft SA climate change bill, that, even with increased energy efficiency, it expects electricity demand to rise by 65 per cent between now and 2030.
This level of demand growth, the association asserts, will require $35 billion to be spent on constructing 30,000 MW of new generation capacity. The introduction of emissions trading or higher renewable energy targets, ESAA adds, will increase this cost "significantly."
(This capital outlay can be put in perspective against the power industry's current total asset value of $98 billion.)
The Switkowski Committee -- which talks about a need for 100,000 MW of new capacity by 2050, two-thirds or more of it baseload -- targets 2010 as the tipping point for new generation investment. "Under-utilised capacity exists," it says, "but from 2010 growing demand will require significant investment in new capacity, especially baseload."
Given that Ziggy Switkowski (in an interview with the Ten Network on 26 November) says the most likely time frame for development of Australia's first nuclear power station is 15 years, the statistics his committee and ESAA are using throw up a big question about investment in non-nuclear power, not least when the committee says it will require a charge of between $15 and $40 per tonne of emitted carbon dioxide to make nuclear power competitive in the NEM with conventional coal-fired plant.
The Switkowski Report's comments in this regard resonate with one of the key findings of the COAG Energy Reform Implementation Group's draft report, which also appeared in November. ERIG says investors in generation see greenhouse risk as one of the most important barriers to new development in Australia.
The ERIG task force says the Australian energy market is now entering a period of "considerable uncertainty" -- not just related to the size of the generation investment required but also because of the complex policy and technological responses required by global warming strategy.
The draft ERIG report -- the final report to COAG of the task force chaired by Bill Scales is due by the year-end -- focuses sharply on the risks created for investors by governments.
ERIG says it has been "struck" by the significant concern raised by NEM participants about market uncertainty in relation to future greenhouse gas abatement initiatives.
It adds that it is not suggesting governments should, or could, act to remove all market risk. Rather, it argues, they should act to remove as far as possible uncertainty about their policies, something that is largely under their control.
ERIG comments unfavourably on the "current, relatively unco-ordinated proliferation of State-based renewable and greenhouse schemes." Some investors, it says, are also concerned about State governments using measures as vehicles for regional development and, in the process, affecting commercial investment decisions. Market participants see State-based schemes raising their regulatory risk, imposing additional costs and imposing more red tape. The result, says ERIG, is unco-ordinated and inefficient market outcomes, leading to reduced liquidity in energy financial markets.
Buried in the Switkowski Report is a similar warning: the risk of competing against State-owned generation assets in the NEM may deter private investment in large power plants
Both the ERIG draft report and the Switkowski Committee report take a swing at State governments over continuing meddling with retail power prices.
ERIG admonishes governments for creating a "Catch 22" situation where they will need to deem that adequate market competition is in place before they will remove retail price caps. It urges governments to set a timetable for the removal of price regulation and to work with market participants to make the transition as painless as possible.
The task force sees retail price controls as a key impediment to effective demand-side management in the NEM. Pointing to the blindingly obvious, it reminds government that, if consumers are not exposed to the higher costs of using power in peak times, they have little incentive to reduce consumption or change their patterns of use. Its message on this issue comes down to telling the States that they need to move faster and their failure to do so to date is helping to distort the NEM.
The Switkowski Committee points out that peak demand -- which, in addition to generation requirements, imposes a requirement on distribution network providers, most of them owned by governments, to spend billions to cope with high surges in consumption on only a few days a year -- is growing faster than average demand in Australia. This, it says, is leading to short-term investment in fast-response gas turbines where the high cost of the fuel is not an impediment because of the returns for peal supply. "Under current retail arrangements," it echoes ERIG, "electricity prices for most consumers are averaged and regulated, thus providing no incentive to reduce demand."
A single pie chart tucked away in the middle of the Switkowski Report sums up what will happen in the electricity market between now and 2030 if no carbon charge measure is introduced. Natural gas, says the committee, can be expected to increase its market share by 50 per cent (to 21.8 per cent) -- but black coal will continue to dominate supply (maintaining a 51.4 per cent share with brown coal holding 17.4 per cent). While renewable energy will increase its market share, it will be coming off a low base and in 2030 hydro power, wind, biomass and biogas will still have less than 9 per cent of consumption. There will, of course, be no nuclear power stations. This part of the commentary ignores the potential for geothermal power from hot dry rocks.
Australia's energy chief executives to not see much prospect of capture and disposal of carbon dioxide from fossil-fuelled power stations being coming in to use for 15 to 20 years.
The CEOs of 40 energy businesses have told the South Australian Government through the Energy Supply Association that CCS -- for "carbon capture and sequestration" -- is not likely to be commercially available here until 2020 to 2025, and "certainly later" if it not "appropriately supported" (in other words given government subsidies for research, development and demonstration as is happening with the Australian, Victorian and Queensland governments).
ESAA adds that zero and low-emission technologies can be expected to be "at least 30 per cent" more expensive in 2030 than conventional generation technologies.
This has been an extraordinary month for focus on major energy policy, with the draft report of the ERIG committee on market reform for COAG and the Switkowski Committee report on prospects for nuclear energy both being delivered.
Not surprisingly, it has been the nuclear report that has hogged the headlines, with its suggestion that that a third of Australia's electricity could be provided by 25 reactors in 2050.
The missing link here -- at least as far as the media and politicians are concerned -- is what else flows from this forecast.
The context is the level of demand for electricity in 2050. Both ERIG and Switkowski seem to agree that consumption then will be around 600,000 gigawatt hours, treble what it is today. The energy supplier projections, albeit out to 2030, support these long-term forecasts.
Switkowski seems to be accepting that it will be probably beyond 2020 before even the first nuclear reactor could be commissioned, let alone 25 of them. So much will have to happen environmentally, economically and politically for this to come to pass that, apart from the debate's value to the incumbent national government in the run-up to the 2007 federal election, there is little immediate impact on domestic power investment in prospect. More broadly, Australia's energy export trade could be boosted if the national nuclear debate, and the outcome of the next election, opens the way to development of more uranium mines.
For those of us who are focussed on the bigger picture of electricity demand and supply, these two reports -- and the latest ESAA submission to the South Australian Government reported above -- throw up some important markers on the Australian energy roadmap.
For a start, if nuclear is to provide a third of the new generation capacity needed beyond 2020, what will fuel the very large balance, some 70,000-plus megawatts on the forecasts being advanced -- this is very nearly double the present Australian electricity production capacity?
As well, if zero or low emission technology is not going to be operational until 2020 and beyond, and then at prices 30 per cent more expensive than conventional technology (see the report above), what other generation technologies will come in to their own?
And what does this imply for industrial power users and the ever-sensitive residential customers? What measures, strategies and policies need to be brought in to being over the next 10-15 years to reduce the pain and the problems from these predictions being realised?
A fully efficient power market, a "transmission superhighway" rather than the present "long and thin" system with its regional constraints and world-class end-use energy efficiency are three critical developments that come easily to mind -- and it bears noting that all were subject to intense discussion 15 years ago when the power reform process began and are still not actually happening.
One of the important issues that the draft ERIG report has thrown up -- not that any of the stakeholders were unaware of it -- is the immense problem created by governments owning power assets as well as presiding over regulation and making policy.
What these reports -- and their precursors in the form of the Parer Report, the Tambling Report on renewable energy, the Productivity Commission review of end-use energy efficiency policy, the Somerville Report in Queensland on distribution network reliability and the abortive New South Wales green paper on energy, as well as the federal energy white paper -- mostly strongly tell us is that the present electricity supply set-up is not good enough and that the years we spend in this decade not being decisive about fixing policy are ever more likely to haunt us and our children and grandchildren in the decades to come.
Keith Orchison
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