Issue 67, October/November 2010
Welcome to the tenth edition this year. October got away from us for one reason and another, so this edition covers two months. The focus in it is heavily on the vexed issue of power bill increases, network development and possibly upcoming additional carbon charges. The latest New South Wales government panic, resulting in a substantial cut in subsidies for rooftop solar power, is also covered. The commentary suggests that the Australian Labor Party has managed to wedge itself politically to a remarkable extent on the related issues of energy costs and carbon policy, a problem that has just delivered a “shellacking” for the US President. The absence of an energy white paper is decried.
Politicians and the media have kept the electricity prices monster well buried for almost three years, notwithstanding Coolibah and a few others drawing attention to the problem continuously. Now the price kraken is fully awake and is front-page news in newspapers – and nowhere is it more of a problem than in New South Wales where conventional wisdom is that the Keneally government is due for its own “shellacking” on March 26 next year.
The situation represents a particular problem for the renewable energy industry, which finds not only overly-generous subsidies for rooftop solar power now under attack but also the whole renewable energy target scheme, finally legislated in a workable form only this year and now the poster child for media commentators wrathful about price increases.
A measure of the political dimensions of the issue is that Prime Minister Julia Gillard felt obliged to take it up in a keynote address to the Australian Industry Group in late October, acknowledging that the situation is “not a pretty picture.” She used the speech to argue that inaction on introduction of a carbon charge will lead to power bills being still higher in the future.
This led to a strong contender for the year’s silliest newspaper headline – “Power price to rise unless carbon price is set soon” – in the Sydney Morning Herald.
The outlook, of course, is for end-user prices to double by mid-decade on the back of rapidly rising network charges, the much lower, but still real costs of renewable energy and the eventual introduction of a carbon charge. Under some cicumstances, they could treble by the end of a decade in which capital expenditure on networks alone is now predicted to be about $70 billion.
In the two largest demand area, NSW and Queensland, outlays on networks have risen from about $6 billion in 2001-05 to $20 billion in the regulatory period now ending and will exceed $32 billion between 2011 and 2015. The prospect for 2016-2020 is for a similar expenditure. This cannot do anything other than drive up end-user prices significantly as network charges are 45 per cent of the final bill.
In addition, it is estimated that a $30 per tonne carbon charge, which may not be adequate to drive abatement to achieve the 2020 reduction target of 140 million tonnes a year, would increase wholesale energy charges by about 25 per cent.
The environmental movement is set on driving a carbon price through the new federal parliament, believing, activists explained to a Chatham House rule forum at the University of NSW in early November, that this could be achieved by mid-2011, given the emergence next July of the Greens holding the balance of power in the Senate. It then would be impossible, they explained, for the Coalition to change the legislation should they win office at the next election because they would lack upper house support.
As the environmental movement wants a price high enough to make an impact on emissions by coal-fired power stations – the electricity industry believes a carbon charge of $20 to $25 per tonne is needed to support large-scale building of combined cycle gas power stations to supplant coal – and as this level of impost will flow through to end-users because energy prices make up half the final electricity bill, voters will go to the polls federally in 2013 with their costs as much as 60 per cent higher than in 2008.
On the east coast, home to more than half Australia’s power consumers and more than half demand, the cost per megawatt hour has risen from $130 in 2008 to an estimated $195 today an is predicted by AGL Energy chief economist Paul Simshauser to be on its way to $250 to $300 by 2015.
Deeply disappointing and a shock to all Victorian businesses and households, was the Energy Users Association reaction to the Australian Energy Regulator’s final determination of capital outlays and operating expenses for the State’s five network distribution businesses at the end of October.
The regulator saw its 1,031 page decision differently – it headed the media release “AER rejects significant price rises by Victorian electricity distributors.”
AER chairman Andrew Reeves argued that some consumers will see slight reductions in their quarterly bills and others an increase of up to $20.52. The average Victorian householder spends $1,600 a year on electricity.
The decision imposes an increase in network charges of 4.4 per cent on average in 2011 and rises of around 6.5 per cent in each of the following four years of the regulatory period.
The Energy Users Association complains that the changes will see distribution charges rise by more than $15 per megawatt hour over the five years of the determination, pointing out that this comes on top of a 20 per cent increase in Victorian bills in the past year.
The regulator has given the distributors approval to spend $4.7 billion on capex and $2.7 billion on opex over the determination period, rises of 45 per cent and 32 per cent respectively from the regime now concluding. The need for higher expenditure, it says, is driven by higher peak demand (as a result of use of more energy-intensive appliances such as air-conditioners) and the need to continue to replace ageing assets. The network businesses had sought to spend $5.5 billion.
The AER also warned that, if the State government, which is at the polls in November, opts for a new approach to bushfire mitigation, any higher capex burdens on the distributors will need to be factored in to the determination and passed on to consumers.
On the upside, the regulator expects that there will be gains from the impact of smart meters on Victorian demand – the State is the first to embark on a full-scale roll-out of the new meters – and it monitor results to ensure that customers benefit.
The Tasmanian government has reacted to pressure over electricity supply issues in the State by setting up an expert panel to review its power industry (which is taxpayer-owned).
The review will be headed by John Pierce, chairman of the Australian Energy Markets Commission, and will include his AEMC predecessor, John Tamblyn, and Allen Consulting group’s Jerome Fahrer, an associate professor at Melbourne Business School.
“We are absolutely committed to minimising the impact of rises in electricity prices and ensuring that we have a sustainable energy industry,” said the State energy and resources minister, Bryan Green.
The State government recently conceded that its energy retailer, Aurora Energy, was “in crisis” because it had been paying the government-owned generator, Hydro Tasmania, too much for energy.
The main State newspaper, Hobart’s Mercury, claims that the operating costs of the three government-owned electricity corporations – generator Hydro Tasmania, distributor and retailer Aurora Energy and high voltage network operator Transend – have risen 485 per cent since the monopoly Hydro-Electric Commission was broken up at the start of the past decade. The paper claims that the costs should only have gone up 40 per cent.
The Mercury reported that Tasmania’s electricity prices have risen at twice the rate of the CPI over five years.
ABC-TV’s Stateline program recently used a small supermarket owner complaining that his power bill had risen in two years from $4,800 a quarter to $7,000 to illustrate business unhappiness with the situation.
Public unease was not helped by retiring Treasury secretary Don Challen saying the State’s government business enterprises needed a major overhaul and querying the size of senior executive remuneration.
Calling the review is seen as the price the minority Labor government had to pay for Greens support for a change in regulations to allow the Treasurer to set the wholesale price of power.
Hydro Tasmania’s payments to the operators of Basslink for use of the interconnector, long a source of Greens complaint, can also be expected to receive attention in the review.
The real value of International Power Australia’s Hazelwood power station, a substantial greenhouse gas emitter slated for early closure under decarbonisation policy, has been called in to question by environment groups after the Commonwealth Bank wrote down its 2.1 per cent shareholding in the operation to $1 million.
Hazelwood supplies a quarter of Victoria’s electricity and emits three per cent of national emissions.
IPRA has hit back by arguing that that the revaluation is “simply (the bank’s) accounting treatment.” Its spokesman told media: “The simple fact is we acquired Hazelwood in 1996 from government with a 40-year life and we paid $2.35 billion. Several hundred million dollars have been spent on improving the plant’s efficiency by more than 10 per cent. That’s out starting point as to the valuation of the business.”
IPRA has been in negotiation with the Brumby government in Victoria on a compensation package for closing a quarter of the Latrobe Valley operation by 2014 – equal to 400 MW of capacity. The State government wants federal financial support for compensation, but a recent meeting between the premier and the federal climate change minister, Greg Combet, reportedly did not advance the move.
Activists Environment Victoria have attacked the federal government for being prepared to spend $100 million supporting a new coal-fired development in the Latrobe valley and for earmarking $394 million for their “cash for clunkers” program to take old cars off the roads, but “not being able to find a cent to retire our most polluting power station.”
On the eve of going to the polls, the Victorian government has hit back at Liberal Party claims that the State could face power cuts and brownouts because it is holding up gas-fired power station development while promoting wind farms.
Retiring State energy minister peter Batchelor said construction was under way of a 500 MW gas-fired plant at Mortlake and approval had been given for construction of another 1,500 MW plant at Shaw River, both western Victorian sites.
The large business users of electricity are leading a charge against the enlarged renewable energy target, intended to be the driver of a $19 billion investment in zero emission generation, mostly wind farms, this decade.
The Energy Users Association says that an examination of the measures passed by federal parliament earlier this year shows that the so-called LRET (covering utility-scale renewable development) will add $2.20 per megawatt hour to electricity costs in 2010 financial year while the SRES (which covers small scale schemes such as rooftop solar installations) will add $3.80.
It forecasts that the total cost to consumers of the scheme will rise from $500 million this year to $1.2 billion next year “and these costs can be expected to get bigger as the scheme gets bigger.” The utility-scale program is being phased in over 10 years, starting at 12,500 gigawatt hours this year and planned to reach 41,000 GWh at the end of the decade.
Meanwhile the Australian Plantation Products and Paper Industry Council (A3P) says the addition of hundreds of millions of dollars in RET costs comes on top of increases in electricity prices that are “significantly eroding the competitiveness of Australian industry, particularly manufacturing.”
A3P chief executive Richard Stanton is focused on the small-scale scheme as a particular problem because it is uncapped. “Many industry groups told the federal government there would be a substantial cost as a result of the design of the SRES,” he says. “Major electricity customers were assured that the liability would be no more than $440 million a year. However, forecasts of demand for SRES support now suggest that electricity consumers could be burdened with a minimum $1 billion increase in costs through the SRES alone in 2011.”
Stanton argues that the additional cost in unncessary. He says the federal government could move in April to set the support price for small systems below the initial $40 per MWh established in the legislation. It could also use the regulations underpinning the RET to allow the cost impacts to be reduced where there is evidence that small generation units are being provided at little or no out-of-pocket expense to their buyers.
The average regulated retail price for electricity in New South Wales can be expected to increase by between 20 and 42 per cent by 2012-13, according to the State’s auditor-general, Peter Achterstraat, who has just handed down a report on the government-owned electricity agencies in NSW.
Achterstraat, who warns that projected demand in NSW is expected to exceed available supply by 2016-17, says the highest spot price for power affecting the State in 2009-10 was reached on 20 November last year when it stood at $9,283.95 per megawatt hour – and the lowest was on the afternoon of February 11 this year when it dipped to minus $264.31.
Across the east coast market, he adds, wholesale prices rose in 2010, with the NSW average being $44.19 per MWh, an increase of 13.7 per cent over the 2009 average.
He says electrical energy use in the State has increased at an average of 1,310 GWh over the past 10 years and notes that the high voltage network business, Transgrid, expects peak electricity demand to increase on average by 3.8 per cent a year for the next 10 years.
Transgrid, having spent $429 million on capital works in 2009-10, will outlay $2.6 billion over five years to cope with rising demand.
Achterstraat also warns the Keneally government that it faces a number of challenges with its restructure of the State’s electricity industry, “the more significant of these is uncertainty with any future carbon pollution reduction scheme and the complexity of the gentrader model” in the privation scheme that is scheduled to be completed early next year. “Privatising the NSW electricity industry has been ongoing for 12 years and continues to present challenges to the government,” he adds. The original date for completion of the present privatisation process was “mid-2010,” he points out.
Achterstraat also quietly underlines the value the ALP government has lost for taxpayers between 1997 and now by being unable to implement its initial privatisation plan. The sale proceeds expected in 1997, he points out, were between $22 billion and $25 billion. By the time of the Owen inquiry in 2007 they were down to $10 billion and there is no public estimate available of what the government hopes to raise from the present process.
He also points out that the number of NSW customers buying green energy from electricity suppliers has decreased by 23 per cent from the previous financial year, dropping to 182,000 account holders, He notes that there were 25,717 customers using rooftop solar systems at 30 June this year.
The NSW Auditor-General’s report also reveals that the State’s electricity businesses pushed up their revenue by $1.1 billion – to a total of $12.4 billion – in the financial year to June 2010. While expenses also increased, their profits rose to $1.2 billion compared with $847 million in 2008-09.
The bulk of the revenue was earned by the three distribution/retail businesses. They earned $8.9 billion
As a result, the returns to the State government also rose – reaching $1.4 billion compared with $1.2 billion the previous year – and included $867 million in dividends.
Meanwhile, Queensland media report that the State’s two government-owned distribution businesses have also returned increased profits in 2009-10. Energex recorded a 44 per cent increase over 2008-09, posting a $185 million profit, while Ergon Energy recorded a 28 per cent rise, reaching $166 million.
The Consumer Action Law Centre has called on State and Territory governments to put customers before gathering profits from their electricity businesses.
The Queensland Competition Authority has identified NSW, South Australia and Tasmania as the most expensive States for residential electricity, according to Anna Bligh. The Queensland premier has released QCA data showing that her State, Victoria and Western Australia all have household average prices just under $1,800 a year – while NSW, South Australia and Tasmania all exceed $1,900 a year. The Northern Territory sells power to homes for an average of $1,650 and the ACT offers the cheapest of all -- $1,426 per year on average.
Meanwhile a senior federal Liberal figure, former Speaker and minister Kevin Andrews, has published a commentary claiming that NSW residential costs for power are 50 per cent higher than five years ago and that the rise compares with 16 per cent for total householder expenses. Currently, Sydney people are spending more on power than on fruit and vegetables, he says.
This, he argues, is occurring at a time when household savings are falling and the share of debt-free households is down to 36.2 per cent, according to Melbourne Institute of Economic Research data.
Andrews quotes the Melbourne price comparator GoSwitch as predicting that some households could be faced with prices as high as $10,000 a year this decade.
Supporters of solar power took to the streets of Sydney to protest after the Keneally government slashed its feed-in tariff for residential customers from 60 cents per kilowatt hour to 20 cents after the overly-generous scheme had been rushed by PV unit buyers.
More than 20,000 people are claimed to have signed a petition on-line against the move.
The solar industry says that its business could drop 80 to 90 per cent in NSW, the largest demand area in the country. The National Electrical and Communications Association says the decision is a “gross mistreatment of small business.” NECA accuses the government of panicking on receiving a review of the scheme and acting without consulting any stakeholders.
Greens MP John Kaye says he supports a reduction in the tariff but the government has over-reacted. The Greens would support a 30 cent gross feed-in tariff although it preferred a 40 cent subsidy
The Keneally government says it had to act to prevent more than 700 MW of solar systems being ordered under the scheme. It has now limited the program to supporting 300 MW, with 100 MW already connected and a further 93 MW to be installed under the initial tariffs by householders who beat the closure deadline. The take-up had exceeded its expectation six-fold, it admits.
The breakdown of the NSW solar PV arrangements (prior to the tariff cut) was set out last month in an AGL Energy presentation. It said the cost of a 1.5 kW solar PV system was approximately $7,500, with the renewable energy target providing $4,800 and an installer, on the basis of 2.5 MWh of gross energy output a year, being able to earn a rebate of $10,500 over seven years, leaving him or her $7,800 ahead at the end of the subsidy period.
As the Keneally government backflip became news, solar power solutions provider Energy Matters complained that the issue was being turned by some in to a rich versus poor debate on the argument that only the wealthy could afford the systems. “The truth is that most small solar owners are not rich,” they said. “They are average families trying to help the environment and to shield themselves against rising electricity costs.”
Energy Matters add that “everyone knew” the Keneally government’s solar tariff scheme, introduced at the start of 2010, was badly managed as it raced towards full capacity. By slashing the scheme so aggressively, they add, the State government has endangered hundreds of jobs.
The consultants argue that the problems in NSW strengthen the case for a national, uniform system to support solar PV after several years in which solar power rebates and incentive programs have been axed or substantially changed “with little or no warning.”. The situation, they say, is not helped by thefact that each State has a different system. They want a “moderate, gross feed-in tariff” across Australia.
At present, Victoria (60c per KWh), Queensland (44c) and Western Australia (40c) have net feed-in tariff schemes where people with solar systems are paid for electricity they feed back to the grid. NSW and the ACT (47c) allow solar users to charge for all the power their installation produces, including what they use themselves.
Meanwhile NSW media are reporting that all householders will have to pay an extra $600 on their power bills over six years to cover the costs of the abandoned tariff scheme when the PV take-up reaches 200 MW.
In Victoria, according to the solar industry, energy retailers are penalising some solar system owners by applying time-of-use charges to the electricity they take from the grid on the basis that they now fall outside the scope of the government-imposed moratorium on ToU following controversy about the smart meter roll-out. Householders not installing solar power are safe from the ToU arrangements until 2013.
AGL Energy has told The Australian newspaper that it has gone to tender for construction of the Dalton gas power station in New South Wales at an estimated cost of between $1 billion and $1.5 billion.
AGL proposes to construct a 250 MW to 780 MW open cycle plant on rural grazing land near the small NSW town of Dalton, 11 km from Gunning, with the aim of eventually building the installation up to 1,500 MW. The initial cost will fall between $250 million and $800 million.
The rationale for the project, it says, is that there will be a rising demand in NSW over the decade for rapid-response power supply owing to rising peaks and the expansion of the renewable energy target.
The site offers proximity to fuel supply via the Moomba to Sydney gas pipeline. Full development of the plant would require Transgrid to upgrade its proposed Bannaby to Yass high voltage line in the region.
One of the most famous cartoons ever published in the British magazine Punch appeared in 1895, leading to a new expression in English. It depicted a humble curate having breakfast with a bishop, who suggests he may have been served a bad egg. “On no, my lord,” comes the reply, “I assure you that parts of it are excellent.”
The expression “curate’s egg” comes strongly to mind when looking at energy policy in New South Wales and more broadly in Australia. Both in the State and the nation, as it happens, power supply would be on a far stronger footing today if the ALP governments could have managed to produce promised energy white papers.
Bob Carr committed to one for the State in the middle of the past decade – and got as far as a green paper before giving the premiership away. His three successors in the past six years have floundered in a swamp over energy manageship ever since.
The Rudd government came to office in 2007 with a white paper firmly on its priority agenda, but was unable to get beyond delivering the (very useful) national energy resource assessment published earlier this year by Martin Ferguson. This is a major review by ABARE and Geoscience Australia but bereft of any cabinet decisions.
There is a view among certain onlookers that a major reason the federal white paper did not appear is that the energy assessment process led the government inexorably to the need to embrace nuclear power and Rudd and his senior ministers were too timid to do so.
This is political leadership in the tradition made famous by the television comedies Yes Minister and Yes Prime Minister but, in fact, based on a real-life late 19th century interview between a French socialist leader and a Paris newspaper in which he declaimed: “There go the people. I am their leader. I must follow them.”
The nuclear conundrum for Rudd, and now Gillard, is matched in minor key by the federal government’s inability to accept that it has a worthwhile alternative to rooftop solar power in the Australian invention of a fuel cell device.
Because the fuel cell system uses gas, it is beyond the scope of any of the renewable energy programs of the federal government despite the fact that it could be cost-competitive with rooftop solar PVs and far more effective in abating greenhouse emissions anywhere there is a gas supply system.
It is a huge irony that Ceramic Fuel Cells Limited has been awarded a well-regarded prize in the German state of North Rhine-Westphalia this year for the most innovative company to invest there in the past 12 months. The government described CFCL’s BlueGen fuel cell as “a key technology of the future.”
Its chief executive points out that his company has had to go global to survive because he can’t engender anything like this excitement at home.
The BlueGen device, about the size of a dishwasher, generally produces enough electricity to power an average household, unless it is summer and the customer has the air-conditioner running continuously, as well as enough heat to deliver a tank of hot water daily.
In Germany, utility companies are supplying BlueGen free of charge to households and billing them for the natural gas they use. Householders can make some money by selling power they don’t need back to the grid.
If widely implemented, the technology will save billions of dollars in future infrastructure spending in Germany through augmentation of the network system, the incentive for the utility program.
Contrast and compare this to proceedings in Australia, where the populist fixation on rooftop solar has now led the NSW government in to a disastrous political cul-de-sac (see above), while the need to build larger and larger network systems to meet household demand is the principal cause of the current surge in power prices – a source of political angst across the breadth of the country.
And then, of course, there is the matter of emissions saved. CFCL claims that is technology results in a third of the emissions of conventional residential supply on the current grid system, which is 80 per cent coal-fired on the east coast.
Residential demand contributes about 55 million tonnes of carbon dioxide emissions a year. The federal government has acknowledged that, if every rooftop in Australia was fitted with a solar system, apart from the enormous cost of the roll-out (estimated at $200 billion or five times the national broadband network capex), the total emissions saving would be just 16 million tonnes a year.
The shunning of this Australian-invented technology, which is now attracting attention in Europe, America and Japan, is just one illustration of how the lack of a genuine national blueprint for power supply is already causing trouble here and will cause much more trouble in the decade ahead.
Obviously, the inability of the federal government to come up with a policy that will attract large-scale investment in gas-fired baseload generation, the obvious transition fuel in decarbonising the economy, let alone its weak-kneed refusal to consider the nuclear options, represents an even larger example of the problem.
The fact that the Canberra regime is dithering around driving gas use harder, given that, according to CSIRO, we now have sufficient gas reserves to provide energy to a city the size of Adelaide for 5,000 years, is astonishing. Even if it feels inhibited about introducing a carbon tax, it could follow the successful example of the Beattie government in Queensland mandate the use of gas in electricity supply – it feels no qualms about doing this to promote the use of wind power.
There is no excuse for this failure in adequate policymaking for a key national service. The NSW and federal governments have let themselves and the country down by failing to pursue policy white papers (and the programs to implement them) – and, what is worse, neither is showing any sign of rectifying its behaviour.
Fortunately, it appears a near-certainty that the ALP will soon be swept from office in New South Wales, possibly for a long time, but the federal government has hopes of digging in and sustaining its minority administration until at least 2013 and then winning another term in its own right.
Are we to be denied a national energy white paper, something the Rudd government acknowledged as a priority in 2007, for years to come?
The country will pay a heavy price, literally and figuratively, if this does happen.
6 November 2010
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