Issue 39 April/May 2008


Fasten seatbelts

The Australian energy business has not been in such turbulence since Rex Connor's notorious reign as energy minister in the Whitlam Government -- and, while Connor's nationalist (and semi-socialist) approach drove the Australian petroleum industry to the periphery of investor interest for nearly a decade, the current policy upheaval has a much wider scope and the potential at least for far wider-ranging damage.

The global lending crisis and the local uncertainty created by the lengthy delay in revealing the details of the Australian emissions trading scheme are among the key factors in the current state of investor unease. Federal Resources & Energy Minister Martin Ferguson has publicly acknowledged that the trading scheme is causing "considerable concern" in industry, including trade-exposed sectors.

Some sense of the ratty state of current play was provided at the APPEA annual conference in Perth by the revelation that there are 25 substantial petroleum projects now committed or under evaluation for delivery in the next 5-10 years, with a cumulate value of $100 billion -- closely followed by a rejection by Woodside's chief executive, startling and upsetting APPEA, that achieving this level of development was possible.

White paper

Rather lost in the welter of debate over the past month has been the announcement by Federal Resources & Energy Minister Martin Ferguson that he has ordered production of a new national energy white paper.

White papers don't appear very frequently. There have, in fact, been only two on energy in Australia in 20 years: the "Energy 2000" review of the Hawke Government in the late 1980s and the "Securing Australia Energy Future" review of the Howard Government earlier this decade.

Ferguson says production of a national energy security assessment, leading to the new white paper, will be the primary focus of his department this year.

Selling off

Despite all the current fuss about electricity privatisation, governments have been slow to shed their power assets in 20 years of market reform.  Across Australia, including New South Wales, governments still own more than 28,000 MW of the 45,000 MW of grid-connected capacity. When you consider that back in 1990 at the start of the reform they owned 34,800 MW, this is hardly startling progress.

In addition, governments still own all the network systems in Western Australia, Tasmania, NSW, Queensland and the Northern Territory.

Meanwhile, even by NSW standards, the fiasco over generation and retail privatisation in Sydney has sunk to previously unplumbed standards of incompetence, reaching a nadir at an hysterical ALP State conference at the Darling Harbor convention centre.

While NSW Premier Morris Iemma and Treasurer Michael Costa seem poised, despite the large vote against the policy at the conference, to proceed with some form of sale, the threat of power blackouts has been unveiled by unionists as their last card.

Northern lights

Quietly waiting in the background of the NSW ruckus is the Queensland ALP government of Anna Bligh. The energy sector believes that sale of its generation assets is on the cards following the successful shedding of its energy retail businesses last year.

The government owns more than 7,000 MW of generation capacity in Queensland and is confronted by likely growth of State consumption of about 19,000 GWh between 2007 and 2016 -- compared with the growth trend of 10,500 GWh by 2014 in neighbouring New South Wales that has thrown the Iemma government in to its present morass.

While a substantial portion of Queensland's extra power needs may be met by private sector development of gas-fired plants, using the State's abundant coal seam methane, Bligh's administration, it is speculated, may find it expedient to depart genco ownership in the next few years, using the revenue to fund other, urgently needed infrastructure.

Western demand

The Western Australian stand-alone power market is a midget by comparison with the eastern States' "national" electricity market -- consuming barely 15,000 GWh annually compared with 195,000 GWh -- it is rapidly expanding.

The power industry estimates that demand in the West -- in fact only the grid-connected south-west corner of the giant State -- will reach 20,000 GWh a year by the middle of the next decade and the rate of growth may outpace their predictions.

The State's network service provider, Western Power, says burgeoning demand now requires it to spend about $1 billion a year on upgrading and augmenting infrastructure -- compared with $250 million annually at the start of the decade.

Peak consumption in the State has jumped from 2,446 MW at the start of the decade to 3,575 MW.  The Energy Supply Association forecasts that the peak load will jump to about 4,500 MW by 2016. This has been driven by the wealth creation of the resources boom in the West enabling homeowners to buy air-conditioning. These purchases have sent residential air-conditioning soaring from 47 percent in 1999 to 82 percent today.

The number of new homes being connected to WP's system now stands at 30,000 a year -- it was 22,000 annually in 2001. As the utility points out, every 4,000 homes (and the businesses, including shopping centres, needed to serve them) requires an additional 20MW of power capacity.

Meeting this level of demand is not being helped, notes Western Power chief executive Doug Aberle, by the huge cost pressures now being experienced by the global energy sector. Rising commodity prices in copper, aluminium and steel have driven up the cost of providing transformers, cables and overhead lines.

The utility estimates that it will need to outlay $3.4 billion in capital expenditure between 2008 and 2011, having spent $3.1 billion since the start of the decade.

Meanwhile, according to ESAA reports, there are plans being considered to add more than 2,800 MW of new generation capacity in WA over the next 8-10 years, five times the building need that has thrown the Iemma government in to a selling frenzy in NSW.

Overall, WA is growing as fast as Queensland. The State economy grew 6.3 percent in 2006-07 compared with 3.2 percent nationally -- in real terms gross State income rose a whopping 12 percent compared with a national average of 4.6 percent.

Enormous growth

The British energy company BG Group, which is trying to buy Australia's Origin Energy, says the global LNG industry is at a critical development juncture.

Speaking at a US gas conference, executive vice-president Martin Houston has noted that the LNG sector has pursued "steady but unspectacular" growth for 35 years. Its relatively high cost base ensured that it remained both regionally-based and a niche fuel.

Capital cost reduction achievements this decade have changed this perspective.

While Australia's LNG focus tends to be on Asia, not least China, Houston points out that it is the world's largest natural gas buyer, the US, that is the global market's real engine of growth. With contracts for delivery of more than 70 million tonnes of LNG in the next four years, the US is a key factor in sparking "enormous growth" in the gas trade in the decade ahead, he says.

The future, he adds, is a more globally connected, flexible and integrated market -- and this, in turn, makes it harder to predict how the international system will function.

The current outlook is that gas is the unavoidable fuel fix for power generation in a carbon constrained world, Houston notes, but how will this play out as gas follows oil in its dizzying ascent of the price spiral? The LNG future, he adds, will depend on how far carbon charges undermine gas as a competitor for power supply and whether there will be a renaissance in nuclear power.


CNG anyone?

One of the by-products of the spiralling global price for oil, Australia's burgeoning oil deficit and its large natural gas and coal seam methane reserves is a resurgence of self-promotion by the compressed natural gas sector.

CNG proponents have had high hopes in the past of a role in supplying transport fuel, but they have not come to anything to date.

Now the sector, and elements of the media quick to spot a new source of controversy, are asking why Australian gas should be "sold off by the ship load" -- through the fast-growing LNG trade -- when it could be used at home for vehicles and to cut the cost of petrol.

The issue is given legs by the parlous state of domestic oil supply.  Resources & Energy Minister Martin Ferguson is now predicting that "Australia is looking down the barrel of a $25 billion a year trade deficit in petroleum products by 2015."

Veteran energy industry executive Ollie Clark, now chairing the Natural Gas Vehicle Association, went on national television at the end of April to push the point that it is "rather quaint" for Australia to pay up to $25 billion to buy oil when it receives "a paltry $4 billion" for selling gas overseas.

The CNG industry argues that its fuel would cut current petrol prices at the bowser by 60 percent.

The lobbying re-ignites one of the oldest debates in Australian energy -- whether national gas reserves should be retained for domestic use.  This was a furious issue of policy between the 1970s Whitlam government and the petroleum sector and has been revived to an extent in Western Australia in the past two years by the State government's demands that 15 percent of gas production be quarantined for local use, a regulation the upstream petroleum industry continues to fiercely resist.

So far as transport fuels are concerned, at present the Federal Government and elements of the energy industry are much more interested in converting coal and gas to synthetic diesel than CNG.

Generating argument

Australia's power generators continue plugging away at the Federal Government's emissions trading guru, Ross Garnaut, but there is no sign that they are winning the argument over free allocation of carbon permits as "structural assistance" in the transition to a new regime.

In a new submission to Garnaut, the National Generators Forum points out that the industry, much of which is owned by State governments, has $40 billion invested in infrastructure and a wholesale income of almost $12 billion a year at stake in the debate.

More than 40 percent of electricity consumed in Australia is used by the manufacturing sector, the NGF adds, and the impact of carbon trading will flow on to it.

Imposition of a $20 per tonne carbon price will add about $28 per megawatt hour to coal-fired generation costs, the NGF says, but may only be able to recover $10 per MWh in the national electricity market.

The bottom line of the generators' pitch to Garnaut and to the Federal Government is that Australia has been relying to a large extent for years on the power station investments of the 1980s and the 1990s -- even the 1970s -- and that there is not much spare capacity to meet continuing electricity demand growth.  Eat in to the power owners' asset values and risk delays in investment in new capacity that will flow on in to politically-unpalatable supply unreliability is the core message.


Pushing renewables

Climate Change Minister Penny Wong is targetting introduction of a national, enlarged renewable energy target a year early -- in 2009 instead of 2010 as promised in the ALP federal election manifesto.

Wong says bringing together the State and federal renewable energy programs has been enhanced by a March meeting of the Council of Australian Governments' working group on the issue.

The outcome next year, she says, will be national legislation requiring 45,000 GWh of renewables-based electricity supply to be available in 2020. (This would be in addition to the 15,000 GWh a year provided by existing hydro-electric systems.)

In its latest Garnaut submission (see above), the National Generators Forum comments that the renewables policy will account for about 60 percent of all new electric energy supply requirements between now and 2020.  "This has clear implications for future investment in energy supply and transmission," it adds, "and for the cost of energy."

If the Rudd Government sticks to the $40 per MWh premium the Howard Government provided for the existing MRET, the cost of renewable energy in 2020 will include a $1.8 billion a year subsidy (and a cost for users, a third of consumption falling to trade-exposed manufacturers).

Price impact

One of the uncertainties of the power environment over the next decade is what price will be charged for gas as generation demand grows. Fitch Ratings is suggesting that the proposed liquid methane exports from Gladstone may create another pricing issue.

The ratings agency points out that east coast gas still trades at a discount to international prices because it is, in effect, "stranded" -- it has not the means of getting to the global market. Now that Queensland Gas (in a joint venture with BG), Santos and others are proposing to launch LNG operations from Gladstone this picture changes.

Fitch comment: "Gas-fired baseload generation emits considerably less carbon than coal-fired plants and is seen as an interim solution to the reduction of greenhouse gases until such time as carbon capture and storage and more economic renewable options are developed. The volume of generation switched from coal to gas will be driven by the difference in the long-run marginal cost of the technologies as well as fuel cost, which is the key driver of the LRMC. Coal is considerably cheaper per unit of energy at present as feedstock for Australian electricity generation."

It adds that existing gas-fired power stations, and those under development at present, with long-term gas supply agreements in place are provided with some protection from any upward pressure in the market price of east coast gas.

Coal ash

One of the unlovely side-effects of burning coal is the production of fly ash. Worldwide more than 65 percent of fly ash is dumped in landfills and its presents a large problem because of its volume.  In India alone, the UN reports, fly ash landfills now cover an area of more than 160 square kilometres.

Fortunately, it was discovered some 30 years ago that this residue of coal combustion has some commercial uses -- notably in cement making -- but there is still a long way to go in getting it out of the environment, even in countries like Australia.

The Co-operative Research Centre for Coal in Sustainable Development's Colin Ward, a professor at the University of New South Wales, has issued a call for Australia to stop treating fly ash as a waste and to give it proper regard as a resource.

Ward says that Australian power stations produce up to 13 million tonnes of fly ash a year, but only a sixth of it is going to economic use, mainly in cement and concrete. Most is going in to landfill.  "This," says Ward, " is both a cost and a lost opportunity. There is a lot more we can do with fly ash."

He argues that the ash is suitable for the improvement of acid or sandy soils, production of synthetic zeolites, assisting in the management of acid mine drainage and as backfill to stabilise worked-out underground and open-cut mines.

Most Australian fly ash is currently dumped in dams or used as landfill close to power stations. Its greater re-use, says Ward, is being held back by a mindset and a regulatory environment which just sees it as waste. "Correctly handled, it presents little toxic risk and considerable value."


Australian policymakers for global warming mitigation should switch their reading from Nicholas Stern to Jeffrey D.Sachs.  The latter is one of the world best known economists and head of the Earth Institute at Columbia University, where he is a professor.

Writing in the magazine Scientific American,  Sachs has warned that technology policy must lie at the core of greenhouse gas abatement.  "Economists," he says, "often talk as though putting a price on carbon emissions -- through tradable permits or a carbon tax -- will be enough to deliver the needed reductions in emissions. This is not true. Europe's carbon trading system has not shown much capacity to generate large-scale research or to demonstrate and deploy breakthrough technologies. A trading system might marginally influence the choices between coal and gas plants or provoke a bit more adoption of solar and wind power, but it will not lead to the necessary fundamental overhaul of energy systems."

He argues that genuine change requires more research, important regulatory steps, appropriate infrastructure, public acceptance and early high-cost investments.  Maybe a statement of the blindingly obvious to some of us, but examine government programs here and abroad against these parameters and the failure to deliver a holistic approach also becomes very clear.

Above all, he says, the task needs a huge commitment to fund R&D.  Airplanes, computers, the Internet and new medicines, to name a few, he adds, received crucial public financing at their early stages of development and deployment. It is "shocking and worrisome" that public financing of energy innovation remains so slight "because these technologies' success could translate in to trillions of dollars of economic output."

The American annual  contribution to energy R&D, he points out, has declined 40 percent since the early 1980s -- eight years of which, I add, were on the watch of Bill Clinton and Al Gore -- and now equals what the US spends on its military every 36 hours!

Sachs  demonstrates rather better ability than Stern and others to state the over-riding challenge in plain language.  "If rich nations continue to grow income and the poor ones narrow the income gap with successful development," he comments, "by 2050 the global economy might increase sixfold and global energy use roughly fourfold.

"Today's anthropogenic carbon dioxide emissions from fossil fuel combustion and industrial processes are 29 billion tonnes annually and another seven billion tonnes are the result of tropical deforestation.

"Roughly speaking, every 30 billion tonnes of emissions raises carbon dioxide levels in the atmosphere by another two parts per million. "  Allowing that the current atmospheric concentration is around 380 ppm and should be held to 440 ppm by 2050, according to scientists, to deliver a "safe" level of climate change consequences, the world's governments are challenged, he says, to limit cumulative emissions from now to the middle of the century to 900 billion tonnes, or roughly 21 billion tonnes a year.

"This," Sachs points out, "can be achieved only by ending deforestation (on a net basis) and by cutting current fossil-fuelled emissions by a third.  Can the world economy use four times more primary energy while lowering emissions by a third?"

Stripped of all the apocalyptic hype used by the radical Greens and their political fellow travellers, this presents an understandable goal for any educated person and at the same time highlights the importance of an early start in bringing on the necessary new technology.

Issues of blame, allocation of costs and choice of control mechanisms are less important, Sachs argues, than rapid technological development and effective deployment. Greenhouse gas abatement, he adds, "is not a morality play -- it is mainly a practical and solvable technological challenge."

The radical Greens and their political urgers should be made to recite the last point ("greenhouse gas abatement is not a morality play") daily -- a bit like the requirement on Catholics to recite the Nicene Creed.

Sachs ends up pointing out that producing low-emission technologies that work at acceptable cost levels will build business confidence and feed back in to political acceptance of tighter permit systems or higher emissions taxes.

This is the real problem with what is going on in Australia at present: what we need is not the perfect emissions trading system (and canonisation of Garnaut as its inventor to the greater glory of the nation) nor Australian world leadership in going green (one of the aspirational outcomes of the Rudd Government's "2020 summit"), but an appropriate set of steps to scale back domestic emissions in line with what Sachs proposes: doing our share to keep cumulative global emissions to 900 billion tonnes between now and 2050.

We could make an immediate and substantial contribution by deciding to increase our exports of uranium so that they displace a million tonnes of carbon dioxide a year instead of 400 million tonnes annually as they do today. That adds up to 25 billion tonnes extra abatement between now and 2050 for a start.

We could use our apparent lust for world leadership to help create a coalition that achieves a genuine slowing down (and eventual elimination) of tropical deforestation. After all, the worst example in the world is on our doorstep in Indonesia.

And we could contribute still more by devoting enough time and effort to working out what we really need to spend on viable energy innovation -- in the areas of clean coal, geothermal and solar power, for example, if we insist on not embracing nuclear power supply at home -- to have it making a real contribution here and internationally by 2020 instead of dribbling out inadequate budgets to give the political impression of being green while introducing economically  self-defeating burdens on our generation and energy-intensive manufacturing sectors.

We could also devote at least as much time and effort as is going in to perfecting emissions trading to producing a regime, especially for buildings, that drives end-use energy efficiency in Australia and, as some argue, eliminates the need for massive new generation development except to replace emitting plants with commercially viable non-emitting ones at the earliest opportunity.

If Rudd and Co want an important aspiration -- and for 2012 rather than 2020 -- why can it not be to be breaking ground somewhere in Australia on a coal capture and sequestration demonstration  plant?  My friends in the geothermal industry, of course, will not forgive me if I don't add here that, for the same capital outlay, we could link the large hot rocks resources of central Australia to the eastern seaboard grid.  And for the same funds, have a large concentrated solar thermal generator on the grid at, say, Broken Hill.

It can hardly be argued that the Federal Government doesn't have the money -- or that it couldn't raise as much as is needed by, say, an increase in GST, thus spreading the cost burden across the whole community without wrecking the economy.

This wouldn't make the Dark Greens happy, of course, because what they want is to punish the generators, punish the large industries like aluminium and, generally, to punish capitalism.  But, as they are, in reality, a small minority of Australians, why should we let them have their way?

Keith Orchison
10 May 2008

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