Issue 89, September 2012
Welcome to the ninth issue of this newsletter for 2012 after a month of extra-ordinary energy-related developments, writes Keith Orchison. The amount and importance of the news is reflected in another rise in this site’s readership, with 27,500 unique page views recorded in August. The contents of this issue cover the federal government’s backflip on carbon prices, the establishment of a Senate inquiry in to power prices following the Prime Minister’s speech on the topic, ongoing debate about network costs and the arguments about the RET among other matters.
The Energy Supply Association, reacting to the federal government’s decision to abandon its plan to pay for the closure of coal-fired power stations, says the electricity sector has been hit by “an unprecedented wave of uncertainty.” (See also “Lost opportunity” below.)
Meanwhile “Business Spectator” commentator Robert Gottliebsen says energy groups are telling him that industrial demand for electricity is the eastern States capitals is falling because, outside mining, companies have stopped investing.
Managing uncertainty in the “NEM” will be the topic of a key conference to be held in Sydney on 17-18 October (see advertisment on this website).
$25 billion hit
Using modelling by ACIL Tasman, TRUenergy is claiming that meeting the renewable energy target could cost Australians an extra $25 billion by 2030.
The modelling asserts that the total cost of the RET under the federal government’s current approach will be $53.3 billion by 2030 and this could be reduced to $28.1 billion if the target was kept at its originally-intended 20 per cent of demand.
TRUenergy managing director Richard McIndoe says that the current RET was devised when power demand was rising at record levels. “A policy that forces new capacity to be built for an already over-supplied market calls in to question the sustainability of the market itself.”
The east coast’s black coal generators, and the State governments owning most of them in New South Wales and Queensland, are agitating for the federal government to reconsider its compensation arrangements in the wake of the backflip on carbon pricing.
The generators and the governments argue that the change, allied to $5.5 billion in compensation for brown coal businesses, has put them at a further disadvantage.
Queensland Treasurer Tim Nicholls says the State’s coal-fired gencos have suffered a $1.1 billion write down as a result of federal carbon policy and the State budget could lose $1.6 billion over four years.
NSW Treasurer Mike Baird says the State’s generators have lost $3 billion in value at a time when he is seeking to sell them.
Speaking in Sydney three days after the Prime Minister’s highly publicised power price speech in early August, Rod Sims, chairman of the Australian Competition & Consumer Commission, said there are now “significant” challenges to the way the electricity supply industry has to operate.”
He told journalists that there should be a debate over whether to sell off network businesses as well as generators, claiming it was wrong to link privatisation with higher prices.
This is a direct contradiction of the assertions of New South Wales opposition leader John Robertson, who has repeatedly argued that privatisation will push up prices – and who struck back at federal Resources & Energy Minister Martin Ferguson on the same day after he was reported as calling for more power sector privatisation.
“If the federal government is serious about making electricity more affordable for families, the last thing they would do is recommend privatisation," Robertson said.
The issue represents a $50 billion dilemma for the recently-elected NSW and Queensland Coalition governments, faced with major infrastructure funding problems but afraid of a community backlash over selling power assets – other than the generation plants Premier Barry O’Farrell has committed to offload in the wake of the Keneally government’s “gen-trader” deals.
"I think we should be having a debate about privatising the networks, People think privatisation means higher prices. That's because governments have in the past made mistakes," Sims told reporters in Sydney in a week when Julia Gillard elevated the power debate to the top of the news.
“With the private sector, you do get better processes for control over capital expenditure and operating expenditure.They're also much more focused.
Addressing a forum presented by the NSW Independent Pricing & Regulatory Tribunal, Sims said that, while the east coast wholesale market “has been successful to date in delivering the kind of generation investment required, when it is required and where it is required,” power prices have grown by an average of 50 per cent in east coast capital cities in real terms over the past five years and are driving “much of the cost of living debate we are currently having in Australia.”
On the challenge of peak demand, Sims said two key debates need to be resolved.
“The first is whether market solutions driven by pricing signals are the only method, requiring consumers to shift their demand or to adopt alternatives such as small scale generation. This will require the adoption of smart meters and retail peak pricing (and) it requires retailers to offer contracts that expose customers to price signals. Or should we also be looking at more direct control approaches, such as load management?”
Sims said the second issue is the role that regulated monopolies should play in driving demand-side management. “The difficult issue is whether network businesses should begin to provide demand management services to customers in competition with retailers or other third party service providers in contestable markets.”
On privatisation, Sims said: “The incentives of government shareholders are unavoidably mixed and complicated. Perhaps clearer, more commercially-disciplined governance and internal expenditure review processes would have assisted in preventing some of the recent significant price increases.”
He added that the generation sector and its structure plays a critical role in setting prices at peak times and called on the O’Farrell government, currently seeking to sell the parts of generation still in State hands, to restructure Macquarie Generation in to separate portfolios and to sell its power producers to “many owners” to achieve a competitive market structure and to help lower future power prices.
The ACCC chairman also highlighted how ad hoc policy developments by governments “can have unintended consequences and contribute to cost and price increases.”
He cited “the plethora of (government) subsidies for solar panels” as an example of how “ill-considered policymaking by different levels of government can lead to large and unnecessary costs for all consumers and uncertainty for business.”
Structural change in the national economy is having disparate impacts across the eastern and south-eastern States, particularly in the wake of the global financial crisis, says the Australian Energy Market Operator.
AEMO managing director Matt Zema says electricity use has dropped more than at any time since the “NEM” commenced in the late 1990s. “Investment signals for new, large-scale electricity infrastructure are muted when compared with a year ago.”
The annual energy requirement for 2011-12 in the market is expected to be 5.7 per cent less than AEMO estimated in its 2011 “statement of opportunities.”
The agency says the situation is likely to result in the deferral of substantial new generation and transmission investment “for years.”
After a decade in which State governments demanded higher network reliability, partly in response to trade union pressures, the east coast market’s rule-maker is now wrestling with way to reduce the ensuing costs for consumers.
The Australian Energy Market Commission, in a task for the New South Wales government, says any gains from reducing network reliability will deliver only “modest” price cuts for households because investment to maintain existing standards is only one driver of distribution costs.
AEMC chairman John Pierce says one scenario modelled by the commission would see $2.5 billion in capex savings over 15 years while posing the risk of power outages increase two to 15 minutes a year.
The commission points out that NSW customers will be required to fund expenditure that has already taken place on reliability – as part of the $16 billion worth of capex approved for 2009-14 by the Australian Energy Regulator – for the next 45 to 50 years.
Analysis undertaken by the AEMC has estimated that regulated retail electricity prices in NSW may increase by 42 per cent in nominal terms
between 2010/11 and 2013/14, with rises in distribution prices contributing around 36 per cent of this.
It adds that a survey of 1,288 customers it has undertaken shows that NSW consumers place “a relatively high value” on a reliable electricity supply. Many would require a significant discount on their bill before they accepted lower reliability. More than 60 per cent said they were prepared to pay at least one per cent more for improved reliability.
The AEMC is due to produce a national report on network reliability in November.
The AEMC and the Australian Energy Regulator are holding out proposed new rules, also to be finalised in November, to address the burning question of network costs – the issue at which Prime Minister Julia Gillard waved “a big stick” at the start of last month.
The rule change will focus strongly on benchmarking distribution businesses, a controversial area, and require the AER to publish annual benchmarking reports on distribution business performance.
The rule change will also allow the AER to take past efficiency in to account when determining future spending.
AEMC’s John Pierce says he wants to give the AER new tools to determine efficient costs and to enable it to be the arbiter of efficiency.
In a statement that should resonate with the Senate select committee the government has set up to examine power prices in the wake of the Prime Minister’s speech, Pierce said: “There is no one single cause of the rising costs of providing electricity and gas infrastructure. The revenues required by service providers are impacted by such (factors) as demand, the cost of capital and reliability standards. Price outcomes are also impacted by the effectiveness of management and shareholder oversight of network businesses.”
Pierce has reminded protagonists in the networks debate that pricing rules for transmission (2006) and distribution (2008) were last put in place when the biggest concerns were the risk of under-investment and the need to meet reliability standards imposed by governments.
AER chairman Andrew Reeves claims the changes will ensure that “consumers will not be required to foot the bill for inefficient over-spending.” He says the new rules will give him “greater scope to reject excessive proposals.”
While the Energy Networks Association has responded cautiously to the proposed changes, Grid Australia, representing the high voltage transmission sector, has retorted sharply.
Chairman Peter McIntyre, CEO of TransGrid, has warned that the transcos run a risk of being caught up in the efforts to curb the outlays of the distribution businesses. “Our role,” says McIntyre,”is quite different to that of companies connecting directly to households. The integrity of the grid depends on our services.”
McIntyre says Grid Australia is concerned that the AER will over-react to current political and consumer concerns and starve the HV sector of vital funds.
The Gillard government has chosen the former head of NSW Labor, Senator Mark Thistlethwaite, to chair its fast inquiry in to power prices. The select committee, which includes Greens leader Christine Milne in its membership, is required to report to the Senate by 1 November.
The NSW Public Interest & Advocacy Centre observes: “The committee has a herculean task. It has 10 weeks in which to investigate 17 thorny and complex topics, receive and review submissions and produce a written report.”
It is tempting, the centre says, to be sceptical about whether this “can lead to comprehensive reform.”
It adds: “A committee report that maps out ways to challenge rising prices and keep electricity affordable will be valuable. A report that fuels more political blame-shifting is just a waste of energy.”
The committee has been given five key tasks: (1) to identify the key causes of price rises and those likely in the future, (2) to review the legislative and regulatory drivers of network investments, (3) to consider options to reduce peak demand, (4) to investigate how households and businesses can reduce energy costs, and (5) to investigate opportunities and barriers to “the wider deployment of new and innovative technologies.”
A week after her speech on power prices in Sydney at the Energy Policy Institute of Australia lunch, Julia Gillard used a Dorothy Dix question in the House of Representatives to reprise her attack:
She claimed a 60 per cent price rise in NSW had not come with any form of assistance to the community in general.
At no point in her comments did she acknowledge that the Labor Party had been running the State when the record-breaking network capex was proposed and authorised by the national regulator or when the reliability standards now applying were introduced.
She said: “ People have not been supported as electricity prices have skyrocketed and, at the same, time, the dividends paid by the electricity assets owned by the NSW government to the government itself have skyrocketed as well.
“Of course, there are a number of factors at play here. There is investment necessary because there is a backlog. There is growth in peak demand. There are changes that have raised reliability standards and come at a high price and there is the patchwork design of the ‘NEM’ itself.
“ I am concerned at the dividend gouging of State governments and I am concerned about a market design which means that, if you over-invest in the poles and wires, you earn more dividends and you pass that price through to the community.
“We are concerned about this and are determined to act – and that is what CoAG should do and will do at the end of this year. We are determined to see action at the CoAG meeting in December. We should prefer to do that with the co-operation of States and Territories, but, if that co-operation is not forthcoming, we are determined to get this done for Australian families.”
One of the key points advanced by the Prime Minister in her August power price speech was an attack on the new-ish NSW Coalition government for the dividends it received from the State-owned distribution businesses.
Julia Gillard continued to run with this line in media interviews through the following week.
In one radio interview, she commented: “There’s an incentive now to just keep investing in poles and wires, more investment, more investment, more investment than we need because that boosts up State government dividends from the electricity assets that they own.”
In a doorstop interview with journalists in Newcastle, she said: “The more (State governments) invest in the poles and wires, then the greater the dividends they get.”
In an interview with John Laws on Radio 2SM, Gillard repeated the charge: “There’s an incentive in the system to keep investing in more and more and more poles and wires, and the more you invest, the more the State government earns. That’s money straight out of the wallets and purses of the people of NSW in to Barry O’Farrell’s State budget.”
Pressing the argument, Climate Change and Industry Minister Greg Combet conflated all dividends from electricity businesses to the NSW government, saying in a media statement that “the O’Farrell government is not assisting households while also take over $1.5 billion a year in revenue. That’s over $500 for every household in NSW.”
NSW Treasurer Mike Baird set up a Dorothy Dix question in the State Legislative Assembly in order to hit back, but got virtually no media coverage.
He said that the previous State Labor government had forecast network business dividends of $903 million for 2011-12. It had actually come in at $820 million, the Coalition claiming credit for a reduction of 19 per cent.
(The Coalition only won office in late March 2011 and the primary impact on dividends was reduced revenue as a result of a demand downturn caused in part by the GFC.)
Labor, Baird added, had forecast the dividends would rise to $1,144 million in 2012-13 and the current outlook for the financial year is for $999 million, a reduction of 13 per cent.
Baird forecast that there would also be a $400 million efficiency savings outcome over four years from present efforts to restructure the distribution businesses.
The Treasurer also pointed out that the O’Farrell government was providing a “family energy rebate” to 700,000 NSW households.
A report undertaken for the Keneally government and received in December 2010, but still not released when it lost office, shows that the Labor Treasurer, Eric Roozendaal, budgeted for network business dividends, tax equivalent payments and a government guarantee fee to escalate from $726 million in 2008-09 to $1,693 million in 2013-14.
The report quoted the Labor government’s 2010-11 budget papers as explaining that earnings from the networks would rise largely because the capex allowed by the AER increased the regulatory asset base from which a large portion of the regulated revenue is derived through a return on capital.
In short, the costs to NSW households censured by the Prime Minister were set in place by her own party while in State office.
Such is political life.
Meanwhile, Baird’s colleague, State Resources & Energy Minister Chris Hartcher pointed out that the previous Labor government had “ripped” $14.2 billion in dividends from electricity businesses overall during its long term in office.
Federal Resources & Energy Minister Martin Ferguson says the recommendations of the Parer Inquiry in to the electricity market during the Howard government’s time in office should be pursued. “The review a decade ago advocated a truly national and efficient energy market as fundamental to improving outcomes for consumers,” he says. ‘While we have made considerable progress on this goal, there are still identified actions that remain outstanding. It is an opportune time to re-invigorate this agenda.”
One of the requirements of an effective market supported by the Parer Review, Ferguson adds, is “a strong, accountable and transparent regulator that instills confidence that consumers are receiving value for money. The regulator needs a sound legal and independent basis so that it can effectively pursue the public interest on an impartial basis. It must also consult widely in a timely and transparent manner.”
Ferguson says he wants to open discussions with state and territory energy ministers on enhancements for the Australian Energy regulator.
The environmental movement has lashed out at the federal government for “losing a golden opportunity” to achieve carbon emissions cuts by not proceeding with its plan to pay some companies to shut down older coal-burning plants.
Resources & Energy Minister Martin Ferguson says the talks with five companies, all but one operating brown coal plants, have been ended because there is a “material gap” between what funds the generators want and what the government is prepared to pay.
The government has been hoping to bring about the closure of 2,000 MW of coal plant by 2020.
The Australian Conservation Council complains that the government has foregone “a golden opportunity to close some of the oldest and dirtiest power stations in the world and switch over to some real energy.”
Green lobbyists Environment Victoria argue that the decision compromises the entire government clean energy plan.
Other parts of the environmental movement are calling for the government to break its commitment to pay $5.5 billion in compensation for the carbon price to brown coal generators and to switch the money to subsidising big solar plants.
The National Generators Forum says the government has focused too much on the brown coal plants and should have considered abatement options beyond Victoria and South Australia.
The Australian Greens leader, Christine Milne, has attacked the government for a “breach of faith,” claiming it was never really committed to the closures. She accuses Ferguson and the companies with whom he negotiated of “going through the motions.”
Milne wants the Productivity Commission to review the level of carbon price compensation to be paid to brown coal generators by the federal government.
The Climate Institute says, in the wake of the failed program, the federal government should return to its election pledge to introduce regulated performance standards for power stations.
Coalition leader Tony Abbott says the decision relates to government attempts to “patch up the federal budget.” He claims the Coalition plan is not to close down the plants, but to clean them up.
The Coalition has called on the government to apologise to Latrobe Valley power plant workers for the uncertainty the abandoned scheme created.
The biggest energy news of August was not the Prime Minister’s power price speech, but her government’s major backflip on carbon pricing, linking the Australian emissions trading scheme to the European Union one.
More than half the media seem to agree that the government has produced a clever ploy, but there are fierce critics of its change of heart.
Senator Mathias Cormann, the Coalition’s finance spokesman and former cgair of the Senate carbon tax inquiry, says the government’s claim that there will be a unified world price for carbon by 2016 is “manifestly false.”
Cormann says the EU ETS is “deeply flawed” and “crafty European bureaucrats have locked a gullible Gillard government in to a carbon headlock.”
A former Reserve Bank board member, Australian National University economist Warwick McKibbin, was yet more vehement in lashing the decision.
The move, McKibbin said, is “astounding” and raises the economic costs of the existing carbon policy because it creates even greater uncertainty about the carbon price in future year.
Linking the Australian scheme to the European scheme is equivalent to linking the Australia dollar to the euro, McKibbin argued. “At a time when European economic judgement is widely questioned, the federal government is giving up the right to determine its own carbon price and giving (it) to Europe.”
Meanwhile The Australian Financial Review newspaper has revealed that the government is planning for a tripling of carbon emission permit sales in 2013-14 in order to bolster the federal budget. Coalition climate action spokesman Greg Hunt claimed in response that the change was a “desperate grab” for revenue that would drive up electricity prices even further.
Prominent economics commentator Geoff Carmody has called for a genuinely independent inquiry, with broad terms of reference, in to the rules determining networks investment and another in to the bidding rules for generators in the “NEM.”
Carmody adds that the Prime Minister’s concerns about conflicts of interest between efficient power supply and boosting State budgets can be eliminated by complete privatisation of all electricity assets.
On carbon prices, Carmody argues that current and projected costs are unlikely to induce any significant shift towards lower emission generation, the more so after the federal government’s policy backflip.
He says the EU is the wrong trading market for Australia because its main trade competitors don’t have emissions trading schemes and “siding with the EU ensures adverse effects on our international competitiveness.”
Management of community concerns around environmental and land access issues associated with unconventional energy, especially coal seam gas, have failed to keep pace with industry development aims, according to the Committee for the Economic Development of Australia.
Launching a new study on unconventional energy options, CEDA chief executive Stephen Martin said the full potential of unconventional energy can only be realised if it has social licence to operate.
Despite the successful development of coal seam gas in Queensland, the NSW developments remain exposed to protests and Victoria has announced that it proposes a moratorium on CSG extraction.
Martin said: “Government and industry must ensure that the right balance is struck between meeting community expectations and protecting the environment while allowing this resource to be developed.”
He added: “Superficial arguments that pit farmers and environmentalists against miners, something seen regularly in the mainstream media, are holding back the discussions that need to take place.”
CEDA is calling for the upstream petroleum industry to be required to develop stringent precautionary measures until more is known about the long-term implications of CSG development on water resources.
Martin said the key issues to be resolved are the economic opportunities for Australia, ground water management and property rights plus plugging gaps in current laws and regulation.
Stakeholders have until mid-September to file submissions on the future of the renewable energy target with the Climate Change Authority, which has a review of the RET as its first task.
The authority, chaired by former Reserve Bank governor Bernie Fraser, aims to produce a discussion paper in October and to deliver a report to the federal government before the year’s end.
The environmental movement and renewable energy businesses displayed a substantial degree of nervousness about the review before the CCA issues paper appeared in late August – and the questions it poses will not ease their minds.
The key questions posed in the issues paper are whether the RET is needed at all now the federal government has introduced carbon pricing and whether a fixed gigawatt hour target for large-scale green generation is appropriate?
The issues paper also asks if there is a case for the RET to continue after 2020?
It tackles the argument that has been going on this year over the size of the large-scale RET in the wake of the downturn in electricity demand.
Origin Energy CEO Grant King has argued that the target should be downsized to around 27,000 GWh instead of the present 41,000 GWh, a proposal met with loud protests, including some from rival AGL Energy CEO Michael Fraser.
Lawyers Clayton Utz, in a commentary on the review, point out that projected power demand in 2020 is now well below the forecast the federal government used in setting the RET.
A change in the target does not require amending legislation, the lawyers point out.
The climate change minister has the power to determine the target and prescribe it by regulation. (Greg Combet has said the government does not propose to amend the RET – but, observers point out, he was arguing the case for the previous carbon price arrangements up until days before the government changed them and even though it had been engaged for weeks in negotiations with the European Union in Brussels.)
The CCA issues paper has raised the relationship between the RET and the activities of the controversial Clean Energy Finance Corporation, too.
The government has agreed that investments supported by the CEFC should not be eligible for certificates under the RET scheme.
The issues paper says: “If the target remains unaltered, CEFC investment would most likely affect the mix of renewable energy generators rather than increasing (output) beyond 41,000 GWh.”
CCA argues that an option is to increase the RET target so that any certificates created by CEFC-funded generation are additional to the existing target. “This would require a prediction of how many CEFC-funded projects are likely to produce out to 2030, which is likely to be difficult in the short-medium term.”
The Climate Change Authority issues paper repeats an AEMC report from late last year when dealing with the consumer costs of the RET.
The modelling, which estimates that compliance costs for the scheme will be $1.5 billion in 2019-20 (in 2010-11 dollar values), attributes 2.3 per cent of national residential electricity prices to the RET in 2013-14 and another 3.9 per cent to State-based schemes, including solar feed-in tariffs.
The key impacts on household bills are wholesale power prices (36.1 per cent), distribution charges (36.3 per cent), retail on-costs (14.2 per cent) and transmission charges (7.3 per cent).
The RET will require between 6,000 and 8,000 megawatts of further capacity investment by 2020, according to Infigen Energy CEO Miles George, a prospect he describes to journalists as “very challenging.”
George says he believes the construction effort can be done, but is concerned that it may not begin before 2015.
However, the Brussels-based Global Wind Energy Council claims that installed wind capacity in Australia will triple from 2,200MW to about 6,900 MW by 2016 – and the NSW Labor opposition claims that there is potential to build 3,000 MW of capacity in the State. It criticises the Coalition government for not doing sufficient to promote this form of energy.
Meanwhile New Zealand-based TrustPower has announced that it has appointed Siemens as turn-key supplier for the latest Australian wind farm development, the Snowtown 2 project of 270 MW in South Australia. The wind farm will have 90 turbines.
As well, New Zealand's Meridian Energy will start construction of the Mt Mercer 64-turbine wind farm in Victoria in December. The project will cost approximately $260 million, take two years to construct and have 131 MW capacity.
Mt Mercer will be Meridian's third wind farm in Australia.
Paul Simshauser, AGL Energy chief economist and professor of economics at Griffith University, says little effort has been made by policymakers to articulate the public policy objective of continuing price regulation in most of Australia’s east coast electricity market.
Regulation represents a policy constraint in most “NEM” regions, Simshauser says in the latest of AGL’s series of economic discussion papers.
The combination of a deregulated wholesale market and regulated retail tariffs caps can represent a particularly dangerous combination, as demonstrated in California a decade ago, he adds.
Simshauser’s commentary is sparked by a decision by the Queensland Competition Authority to use only short-run prices from the spot and short-term contract market to set the State’s default tariff – a move being challenged in court by energy retailers.
He says that the approach is “distinctly intrusive” on the workings of a competitive market because the regulator is using “highly imperfect” information. Should this be extended more widely in the “NEM,” he warns, it “could very quickly eliminate the investment-grade credit that exists for the merchant energy industry.”
If the flow of investment is disrupted, Simshauser argues, there is a risk of unwinding 15 years of market reform because investment flows within the “NEM” hinge critically on the ability of integrated utilities to maintain their credit ratings.
“Taken together,” he says, “tariff policy uncertainty and the requirement for long-lived, capital-intensive plant investments do not fit neatly at all.”
Simshauser says that, if the objective of price regulation is to reduce or manage impacts on vulnerable households, it is a poor choice because it will not achieve the desired outcomes and the attempt is likely to damage the competitive market system.
AEMC chairman John Pierce will be a keynote speaker at a conference on “Eastern Australia’s energy markets 2012-25: managing rising uncertainty in the NEM.”
Ian Macfarlane, the Coalition’s spokesman on resources and energy, will also be a speaker.
The conference is presenting a series of panel discussions that will map the current state of the east coast market and examine prospects for resolution of a host of problems now making the front pages of newspapers and challenging policymakers at federal and State levels.
One of the biggest current issues is the urgent need to address peak power demand and this will be addressed by panel of Quentin Grafton, executive director of BREE, Clare Petre, the NSW energy and water ombudsman, Tim Nelson, head of economics and sustainability at AGL Energy, Tim Reardon, executive director of the National Generators Forum, and Michael Dureau, deputy chairman of The Warren Centre for Advanced Engineering.
The full conference program is available at www.questevents.com.au.
Canadian energy company TransAlta Corporation has bought the stand-alone, 125 MW Solomon power plant from miners Fortescue Metals Group for $US318 million.
The plant will continue to support iron ore mining operations in Western Australia’s Pilbara region under a 16-year power purchase agreement with Fortescue.
You only have to read the nine issues of the Coolibah monthly newsletter this year to appreciate just how dangerously messy management of Australia’s electricity supply arrangements has become.
This month’s issue alone highlights the confusion and heightened uncertainty existing in electricity supply – and much could also be written about issues affecting domestic gas supply.
From coast to coast, and not least on the national stage, politicians are pursuing populist approaches, or retreating from taking actions because they fear a voter backlash or have run in to budgeting problems, rather than producing policies and rules for the long term.
The fact that electricity supply is very political and that governments will play politics with it is not new.
More than a half century ago a Country Party premier in Victoria wrote to Sir John Monash, who had returned to engineering from soldiering in World War One and become head of the State’s electricity commission, in which role he sought a differentiated tariff to deal with the extra costs of delivering power from the Latrobe Valley to other rural areas beyond Melbourne.
The letter was short and curt. “You may have won the Great War,” it said, “but I govern Victoria and this matter is closed.”
Watching the new Queensland and New South Wales governments playing with the leadership and management of State-owned electricity assets at present suggests little has changed in political attitudes over the decades.
What has changed is that key elements electricity supply – its generation and its retailing – have altered radically since the 1990s and the core delivery of electrons has become much more expensive as networks strive to catch up on investment after years when their capacity to spend was suppressed.
Private investors are now a critical part of the supply equation and most of them have options to invest beyond Australia. Some are overseas-owned, with Australia a peripheral part of their portfolios.
The so-called national electricity market – which isn’t national because it does not cover Western Australia and the Northern Territory – was designed in the early 1990s and implemented in 1998 after a huge amount of hard bargaining between federal and State governments.
While some would say it was compromised from the get-go because of the inability/unwillingness of some governments to move out of the business of supply as well as by the rejection in Queensland and NSW of any attempt to create a “national” high voltage company to address the critical need for efficient transmission across the five States and the ACT, the “NEM” remains a good example of micro-economic reform.
Even in its current form, it is credited with contributing an additional $2 billion a year to Australia’s gross domestic product.
The market has attracted some $12 billion in investment in new generation over its life so far.
The critical questions relate to what will be spent over the next 8-10 years, to what the generation mix will be in the early ‘Twenties, to whether the network system can maintain reliability of service, to what level consumer prices will climb and to what demand will be.
While a lot of fuss is made about residential power bills – which actually form a slightly lower portion of household budgets today than in 1984 while the cost of housing has soared – the really critical issue is the state of manufacturing, not only because its decline will impact on the national economy but because it is the bedrock of power demand.
The opening sentence of this issue quotes ESAA on the unprecedented uncertainty of electricity supply. This isn’t hyperbole. The current situation poses many more questions than policymakers have answers – and we still have all the potential uncertainty of the next federal election and what may follow from it in energy policy waiting down the track.
7 September 2012
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