Issue 34 November 2007
The power generation reserve margin for New South Wales is at a 40-year low, Professor Tony Owen has told a Sydney forum of the Committee for the Economic Development of Australia.
Commenting on his report on the State's generation needs for the Iemma Government, Owen added that the consequences of late investment in baseload generation in NSW would be "quite profound." Development paths, he said, were far easier to slow down than to speed up. "New South Wales can't afford to be late with supply."
Owen points out that it is likely the State will need 91,000 gigawatt hours of electricity by 2013-14 -- 10,500 GWh above current consumption.
In the light of the debate about privatisation, it was interesting that Owen highlighted for CEDA the credit rating issues of the State taking on some $15 billion in power station debt, which would include about $6 billion for retrofitting existing coal-fired plant to meet carbon constraints.
There is growing concern in the business community that the Iemma Government is not showing any sign of delivering a response to Owen's report, not least because it is suspected that the delay is political: the government is suspected of wanting to avoid controversy over privatisation, the removal of the retail price cap for residential customers and the environmental implications of fossil-fuelled baseload development until the federal election is out of the way.
Energy-intensive manufacturers are keen to see not only an announcement that the government-owned retailers and generators will be privatised, but that the three current power station companies will be broken up in to at least five producers to reduce their market power.
Large industrial energy users are also nervous about a Iemma Government decision to insist on the next tranche of baseload generation being gas-fired because of perceptions of supply problems for the State, which has no domestic gas supply. Owen won't have made them feel any happier by pointing out that, as a result of strong demand for LNG, gas-fired plant was now not an option in Western Australia because it is being offered only at international prices.
Australia's largest energy market -- Newcastle, Sydney and Wollongong account for a third of NEM generation load -- is set to be faced with a major increase in electricity network capital expenditure over five years from 2009, costs that will affect more than 40 percent of power bills.
EnergyAustralia has revealed that it proposes to ask the Australian Energy Regulator -- network regulation is moving out of State hands -- for some $7 billion in capex approvals in the next determination and Integral Energy will be looking for $1.6 billion, in total well more than double the approved spending for the current five-year period.
Integral Energy says it expects to spend an average of $135 million a year for the next 20 years on its network system, with $2 billion needing to be outlayed in the next 10 years, while EnergyAustralia predicts that its annual network spending will pass $1 billion for the first time in 2009.
The two corporations, owned by the NSW Government, deliver the power needs of more than 3.5 million customers from the Illawarra to Newcastle and inland as far as Lithgow.
To their network upgrade and expansion needs can be added the capex requirements of the State-owned high voltage service provider TransGrid, which spent $213 million in 2006-07 and already has $550 million worth of projects under construction for completion in the next 2-3 years. TransGrid expects to ask the regulator to approve about $1.9 billion worth of work for the period 2009-14 compared with $1.3 billion approved for the current five-year period.
The soaring capex requirement flows from continuing strong residential growth in Sydney as well as business demand across the region. Seventy-five percent of national steel production is located in NSW, which also produces more aluminium than any other State and has the world's largest coal port at Newcastle. Overall, NSW consumes 37 percent of electricity production in Australia compared with 26 percent in Victoria and 25 percent in Queensland.
The wires operators point out that the State's capacity to grow economically is critically dependent on the reliability of electricity supply -- which in turn is crucially dependent on their networks. Substantial parts of these systems were built in the 1950s and 1960s.
Two senior British academics, writing in Nature magazine, have described the Kyoto climate treaty as "the wrong tool" for achieving global emissions reductions.
Steve Rayner of Oxford University and Gwyn Prins of the London School of Economics have called on international governments to radically rethink their approach before talks in Bali next month on a successor to the Kyoto agreement, which expires in 2012.
Rayner and Prins call for efforts to be focussed on the big emitting nations -- 20 nations including the US, China, India, Japan, Britain and Brazil account for 80 percent of global emissions -- instead of trying to involve the whole world, as the Kyoto fundamentalists insist. They also call for a massive increase in spending on research and development -- pointing out that the Americans currently have military research programs costing $US80 billion annually -- and a large commitment to funding climate change adaptation in poorer countries.
The treaty, they argue, has a symbolic importance but has failed as an instrument for achieving greenhouse gas reductions.
"We stare at stark divergences of trends," say Rayner and Prins. "On the one hand, the International Energy Agency predicts a doubling of global energy demand from present levels in the next 25 years. On the other, since 1980 there has been a reduction of 40 percent in government budgets for energy R&D. Without huge investments in R&D, the technologies upon which a viable emissions reduction strategy depends will not be available in time to disrupt a new cycle of carbon-intensive infrastructure."
Despite recent rains and a strong start to the snow season, the Snowy Hydro system storage is still close to the lowest levels since construction a half century ago.
Snowy Hydro, which is jointly owned by the Federal, NSW and Victorian governments, says prolonged, above average rainfall will be needed to return water storages to the levels seen prior to the current drought beginning in 1996.
Meanwhile the business has been able to maintain revenues through the operation of the 620 MW of gas-fired plant it has acquired and built in Victoria.
The federal election campaign reached week three with the ALP joining the Government in announcing a boost for renewable energy -- in Labor's case promising, as anticipated, that the mandatory renewable energy target will be increased to deliver "at least" 20 percent of national electricity supply by 2020.
Labor's higher MRET and the Government's proposed Clean Energy Target will offer new hope for development of geothermal and solar power, but the major beneficiary is expected to be the wind energy sector -- which has more than 2,100 MW of projects unbuilt but with planning approval and more than 2,300 MW of wind farms being pursued through the feasibility stage.
Most of the proposed wind farms are in Victoria, Tasmania, South Australia and Western Australia.
Responding to the ALP announcement, the Energy Supply Association said it was unlikely that solar or geothermal technologies would be sufficiently advanced at 2020 to contribute to the higher target and queried whether as many as 4,500 wind turbines could be erected in the time frame.
The renewables industry is talking about the capital outlay needed to deliver the ALP target reaching $12 billion.
Australian renewable energy company Oceanlinx says its Portland wave energy project -- which will deploy 18 units of 1.5MW, a total capacity of 27MW -- is the largest project of its kind in development around the world.
The company, which has announced that it plans to list on the London Stock Exchange, aims to produce both electricity and potable and industrial water from seawater. It claims that its technology will enable it to produce electricity on a larger scale, at a lower cost and with higher reliability than rival wave power devices now being tested around the world.
Oceanlinx also has a small test plant offshore Port Kembla and is pursuing a 5MW development in Cornwall, a Rhode Island project intended to reach a capacity of 15 to 20 MW, a small unit in Namibia and a 2.7MW development on an island in Hawaii.
The company points out that tide and wave energy conversion is expected to be one of the fastest-growing renewable energy sectors around the world this century, with the OECD projecting that it could eventually exceed the development of wind power.
The ALP, the Greens, renewable industry lobbyists and the environmental movement spend a lot of time harping on the large opportunities for Australian developers in the world marketplace if only they could get much larger subsidies at home.
Peter Garrett encapsulated this line in telling the recent AusWind annual conference that "a stronger renewable energy target will set Australia up as an exporter of a renewable energy technology in to a global market that is growing rapidly."
Conflating the growth in the global renewables industry with large-scale export opportunities for Australian-based industry is a long bow. Why, one wonders, would the Danes, the Spaniards and the Germans, who all have substantial renewable energy manufacturing sectors and significant plans for development of more wind power onshore and offshore, relocate part of their business to Australia other than for constructing equipment for use here?
This becomes still more problematical when one considers that the effect of climate change policies now being introduced in Australia will be a sizeable increase in power tariffs for the local manufacturing sector, disadvantaging it against rivals in countries where such carbon burdens will not apply or manufacturers get a helping hand from governments, too.
Deep green lobbyists do not seem to grasp the loop of illogicality in talking up Australian manufacturing opportunities for the renewables industry while arguing that adoption of these forms of power is urgent because the stark effects of climate change will be upon is in the next decade. Perhaps they haven't noticed that the drought has had the effect of driving up spot electricity prices by 100 percent in Australia in the past year. This might not have any real impact on their following in the city suburbs, especially in New South Wales where the State Government keeps residential power bills capped, but it represents considerable operating cost problems for energy-intensive manufacturers when it flows in to large increases in their next contracts for electricity.
It is one thing to argue that there should be greater subsidies for renewable energy to drive investment in its various forms for the Australian market, but making a case for this creating a large increase in employment as local manufacture winds a global market share smacks of considerable over-egging of the propaganda pudding -- and in net terms surely needs to be weighed against what a much higher industrial power cost will do to employment in existing energy-intensive manufacturing, which currently directly employs more than a million Australians.
That said, international analysis makes it clear that government incentive mechanisms are driving unprecedented growth in renewable energy across the world. Management consultants Ernst & Young, in their latest survey, predict that the annual investment in wind, solar, biomass and other "green" power forms globally could reach $US750 billion over the next decade, having only just exceeded $US100 billion for 2006.
That this level of growth will offer massive opportunities for manufacturers of turbines, gearboxes, bearings and other renewable energy equipment is obvious. That most of this investment will take place in China, India, the United States and parts of the European Union is also obvious. Manufacturing for renewables investment in these countries, says Ernst & Young, can be expected to be concentrated in the US, the EU, China, India, South Korea and possibly Japan, countries where governments are placing equal emphasis on supporting the equipment supply chain and electricity producers -- and the large players can be expected to be very active in pursuing mergers and acquisitions to build critical mass.
Ernest & Young also point to the problems being encountered by solar companies competing with the semi-conductor industry for raw materials and by wind turbine manufacturers with the many users of steel, aluminium and other metals as examples of tight supply issues for renewable energy developers.
Both manufacturer pursuit of profitability in a sellers' market and pinch points in essential supplies are going to see the construction costs soar for the renewable sector as they doing in the petroleum and conventional power industries. This, in turn, will require larger subsidies to keep some of these forms of electricity viable in competitive power markets against natural gas and existing coal-fuelled generators even when emissions trading is taken in to account.
On the other hand, emissions trading plus higher renewables subsidies may very well facilitate development of geothermal power in Australia and comprehensively eat the lunch of other green power developers between now and 2030.
Keith Orchison
30 October 2007
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