Issue 20 August 2006

$3 billion-plus to spend on HV upgrades

The New South Wales Government-owned transmission business, TransGrid, has signalled that it expects to see more than $3 billion spent over 15 years on upgrading its high voltage system.

Speaking at a TransGrid information forum in Sydney, Peter McIntyre, general manager -- network performance and development, has said that the $1.2 billion capital expenditure outlay approved by the regulatory system for 2005-06 to 2009-10 can be expected to be replicated in the following five years "and probably the next five too."

McIntyre and other TransGrid managers were providing the first public briefing on the organisation's 2006 annual planning report, released in July.

As an example of the tasks TransGrid faces, McIntyre has pointed to the rebuilding of the Yass substation, the oldest in the organisation's system, built in 1959 and now a key transmission hub in the national electricity market. The substation has been totally replaced over three years at a cost of $45 million and McIntyre says TransGrid proposes to undertake similar replacement projects for the Orange and Queanbeyan substations in the near future. The organisation is also about to commission a new substation in the high growth Port Macquarie/Coffs Harbour area at a cost of $30 million.

TransGrid's chief economist, Richard Hickling, reminded the Sydney forum that the network operator serves a critical third of the load in the NEM -- 10,000 MW required by the Newcastle/Sydney/Wollongong load corridor, a system that the organisation sees as being put under "particularly critical" pressure from 2008-09 as demand continues to grow.

The 2006 annual planning report points out that electricity generation (power sent out in response to demand and including line losses) in NSW has grown at 1,500 gigawatt hours a year over the past decade "despite a concerted effort by the State Government and the electricity industry to curb growth through demand-side initiatives." The load has virtually doubled over the past 20 years. TransGrid's most likely scenario in its economic modelling suggests the energy requirement will continue to grow at 1,380 GWh a year over the next decade -- and its high growth scenario projects that by 2015-16 there could be an increase in the requirement totalling 20,000 GWh, "which will need to be met by a combination of additional generation and demand management."

NSW announces Munmorah gas station

Delta Electricity is to spend $400 million building four 150 MW open-cycle gas plants alongside its Munmorah coal-fired power station on the NSW Central Coast.

Endorsement of the power station project, earlier foreshadowed by Premier Morris Iemma as part of the NSW Government's approach to deal with peak demand, was announced by Grant McBride, State Minister for the Central Coast.

The project is intended to be commissioned in 2008-09.

World's best hot rock resource, claims Geodynamics

Australia has a huge and high quality endowment of hot rock geothermal energy, Dr Adrian Williams, acting CEO of Geodynamics Ltd, has told the CoAG Energy Reform Implementation Group. A low estimate of the resource is equal to 420 years of current national power consumption.

Williams says the estimated power available from just Geodynamics' Cooper Basin delineated resource is equivalent to national consumption for more than 50 years. The resources across north-east South Australia and in the Eromanga Basin extending in to south-west Queensland are arguably the best in the world, he adds.

The submission to ERIG says that there are 11 companies pursuing geothermal energy in 87 tenements in South Australia, with more in the process of being awarded in Queensland.

"The power generated from hot rocks is expected to be very competitive (in the NEM) if there is some form of cost on carbon," Williams claims.

The Geodynamics project is currently at the appraisal and demonstration stage. Williams says the first plant is expected to be in production in 2009, with a 40 MW plant operating in 2012.  "From there it will be a matter of how fast," he adds. " Geodynamics (believes) there is an opportunity for 4,000 MW of installed capacity by 2030, generating 10 per cent of Australia's electricity."

The submission to ERIG highlights the transmission hurdle that needs to be cleared before the project can achieve its potential. Williams tells the Group that "a very significant" link will be needed to the NEM, possibly with 1,500 MW capacity. Work undertaken by the Centre for International Economics, he says, indicates a net national economic benefit from the power produced in the Cooper Basin of $10.3 billion by 2030 with an additional benefit from mining development in the Moomba-to-Adelaide transmission corridor of another $4.3 billion.

Investors decry State-owned generation

International Power Australia and Loy Yang Marketing Management Company have told the ERIG review that the national electricity market is "anything but competitively neutral" because of the way governments, particularly New South Wales and Queensland, have played their hand with State-owned generators.

IPA and LYMMCo say the mixed government/investor ownership in the NEM threatens the achievement of reasonable returns for private generators.  Sovereign risk approaches they identify include:

International Power and LYMMCo accuse governments, including Tasmania through the promotion of Basslink, of achieving lower market prices that are "effectively subsidised by shareholders in private electricity business."

Utilities face 'revolutionary changes'

The 2006 global utilities survey by PricewaterhouseCoopers says two-thirds of the executives interviewed in 43 countries believe the industry is facing its biggest challenge in modern times. A majority of the interviewees believe the industry needs to adopt a 10-year focus on reducing environmental impacts, developing new technology, finding new fuel sources and improving customer service. They believe the pace of change needs to be stepped up.

PwC's Australian resources leader, Derek Kidley, says customer choice is becoming a reality in markets around the world and global utility leaders are seeing pressure from customers as a more significant force for change than technology, the competition and the growth in demand.

While the study highlights the need for the industry globally to focus more on cutting environmental damage, utility executives predict that coal-fuelled plant, along with gas, will make the biggest contribution to meeting power demand growth in the next five years.

Kidley says that senior executives in Australia recognise that the NEM is still not giving a clear signal to investors when and how much to spend on new power generation. " Investors look for stability and consistent national arrangements when making investment decisions. Hidden subsidies and use of indiscriminate retail price caps can act as investment disincentives. They make it hard for investors to understand how and when they will recover the full economic cost of supply."

Kidley also comments that the pressure on gas prices resulting from increasing global demand "undoubtedly will have implications on the long-term generation fuel mix in Australia." He says that the current local supply situation is "just one indicator why it is unlikely that Australian gas prices will be isolated from upward global pressure."

Kidley considers that the "double whammy" of increasing gas prices and uncertainty over climate change policy will be key risks for Australia's generation fuel mix.


Jim Gallaugher, one of the key utility technocrats involved in electricity deregulation in the early 1990s and now a consultant, makes a telling point in his submission to CoAG's Energy Reform Implementation Group, which is charged with reporting back to the Prime Minister and premiers by the end of the year on a range of critical market issues.

After upwards of 15 years of research, policy deliberation, market operation and a multiplicity of reviews of the rules government of transmission access arrangements, he says, why does ERIG in its issues paper still feel compelled to ask such fundamental questions as "what is the appropriate role of transmission in the NEM?"

Gallaugher comes to the conclusion that the current mixture of regulated transmission and competitive generation in the NEM is fundamentally flawed and sees the efforts to refine it to overcome the obvious deficiencies as "never-ending."

His solution is to urge ERIG to bite the bullet and recommend to the Prime Minister and premiers that a properly-resourced research effort be undertaken to develop a much more market oriented access regime for transmission services, one that can co-exist with, and compete with, the provision of generation and related services in the NEM.

As someone who spent more than 12 years engaged in the NEM development debate as chief executive of the national electricity supply association, I think Gallaugher is right. The NEM is in danger of being tinkered in to a corner by inadequate policy and regulatory manoeuvres, mostly flowing from the ongoing unwillingness of the States to allow a genuine market.

As Gallaugher points out, the States still own some 70 per cent of the installed generation capacity in the NEM.  To which I would add that they also still own six of the market's distribution businesses, six retail operations and three of its high voltage networks as well as co-owning the Snowy Mountains scheme with the Australian Government. Gallaugher argues that the government ownership (of generation) should decline over time; I am afraid that the cold hard truth is that any form of government ownership and a competitive electricity market are incompatible and the NEM will never be truly efficient so long as the States cling to their holdings.

The politics of selling State power businesses, of course, are horrendous as the union humiliation of Carr and Egan over privatisation and various election outcomes have demonstrated.

The fact is, however, that what the governments, and their voters, most crave -- security and reliability of supply at affordable prices -- can only be delivered in the long run by a market where governments do not own a substantial part of the assets.

Gallaugher's trenchant conclusions are worth hearing by everyone with policy power: "Competitive power markets around the world have proved to be rather fragile and highly susceptible to failure when compromised by inadequate or inappropriate public policy and/or poor regulatory oversight combined with adverse market conditions. Three such markets -- California, Ontario and Argentina -- have failed already and most of the others are still at risk. The NEM is no exception and it is highly doubtful that, in its current form, it would be capable of surviving a major catastrophic event, the odds of which may be quite small but nevertheless finite."

Keith Orchison

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