Issue 42, August 2008

Victoria demand concerns

A new government assessment of Victoria's infrastructure needs says the State will require an additional 2,300 MW of generation by 2016 -- and warns that the introduction of emissions trading poses a potential impediment to short- to medium-term investment in power plants.

The report, which forecasts that Victoria's maximum power demand will rise from 10,209 MW today to 12,174 MW in 2016-17,  has been delivered to the Council of Australian Governments' national infrastructure audit.

The Victorian Government says rapid economic and population growth is creating new demand for a wide range of infrastructure development. It forecasts that the State population will hit 6.2 million in 2020, ten years earlier than previously predicted, and says Melbourne's population is at its highest growth rate in 60 years and currently running 30 percent above earlier estimates.

Investor uncertainty about emissions trading, the report warns, could result in a gap in development, resulting in possible shortages of electricity supply for Victoria,  showing up first as a lack of capacity during summer peak demand periods.

The report is being made public at a time when the Federal Opposition is signalling that it will push for Australian emission trading to be held up until 2012 at least in order to establish global commitment to abatement while the Federal Government, obviously spooked by a business backlash to the Garnaut Report, has produced a green paper that indicates the initial ETS in 2010 will be little more than a nominal measure to meet an election commitment -- and that it may be the next term of government before the full impact of the measure is settled.

In the infrastructure audit, the Victorian Government also warns that its power supply developments could be challenged by national demand for construction resources, skilled workers and finance. Effective pursuit of greenhouse gas abatement measures, the report adds, will also require extensive infrastructure to capture and transport carbon dioxide to storage sites via pipelines.
Seventy-six percent of the State's power needs come from five brown coal-powered plants in the Latrobe Valley -- and their owners are warning that most may be closed in five years if they do not get relief from the burden of carbon charges under the ETS.

New generation developments highlighted in the government report are the 140 MW AGL hydro-electric Bogong power plant, the two-stage Origin Energy 1,000 MW gas-fired plant at Mortlake and a 400 MW "clean coal" demonstration power station HRL plans for the Latrobe Valley.

The Victorian Government also claims that it will see 250 MW of new wind power development this financial year and that there is 854 MW of additional wind capacity in the pipeline.

The report notes that gas-fired generation is expected to meet a greater proportion of Victoria's electricity supply under an emission trading regime and that additional gas pipeline capacity will be needed to cope with this demand.

The audit does not discuss the impact of higher development costs and a shift to gas and wind power on end-user electricity prices, particularly those paid by energy-intensive manufacturers, who are major contributors to the economic growth lauded in the report.

Meanwhile, the Energy Supply Association has published a consultants' report supporting the view that emissions trading could drive up the retail cost of electricity, in inflation-adjusted dollars, by about a quarter by 2020. The Rudd Government green paper suggests the ETS will result in a 16 percent electricity price rise.

(The Institute of Public Affairs asserts that generators are already having trouble closing forward contracts because they and retailers cannot calculate what future prices will be.)

However, Victorian Premier John Brumby has told The Age newspaper that he is "comfortable" with the looming rise in energy costs so long as the Federal Government protected low and middle income-earners. Energy price rises are inevitable, with or without an ETS, he added.

Cold comfort

Australians on the eastern seaboard turned to electricity for warmth as never before when the late-July cold spell swept across the country.

National Electricity Market demand soared three percent past the previous record to require 34,416 MW in operation. New South Wales demand peaked at 14,289 MW, nearly 500 MW more than the record set last winter.

While the NEM system still had 15 percent spare capacity at the height of the demand from 7.7 million customers, NSW wholesale prices reached $180 per megawatt hour and Queensland, which exports power south, reached $280/MWh. 

Victoria's peak price was $150, South Australia's $160 and Tasmania's $130.  Average wholesale power prices in Victoria and NSW in the past two years have been about $50/MWh.

Feed-in frenzy

The Clean Energy Council's acting CEO, Rosemary Warnock, has drawn attention to the "rail gauge" problem with establishing a feed-in tariff for solar PV power. She says Victoria, Queensland, the ACT and South Australia have all introduced different tariffs this year, most are net and one is gross. Some include allowance for businesses, others only for homes. All have different upper limits.  Warnock says the CEC wants a national gross feed-in tariff.

Survival key

Management consultants Deloitte Australia have warned business that "the clock is ticking" on adapting to a new carbon management working environment.

Deloitte chairman Wayne Goss, a former Queensland premier, says the Rudd Government's emissions trading scheme will "fundamentally change the economic environment." Companies need to understand how it will apply to their tax arrangements, supply chain management, corporate governance and environmental reporting, he adds.

Consultant Jon Stanford says businesses now recognise that the ETS will "introduce significant structural change in the economy -- and change relative prices and costs (while) demanding new structures and supply chains (and) presenting opportunities to some sectors (while) limiting others."

Some organisations will prosper, says Stanford, while others "will linger for a while and then disappear."

Swan drive

Federal Treasurer Wayne Swan is urging Australians to accept the need for "decisive, responsible action on climate change."  Early action to cut carbon emissions is the only economically responsible course of action, he asserts.  Delaying implementation will also mean that Australia will forego "significant economic opportunities," he adds.

Swan claims the emissions trading scheme will foster new industries that "we can export to the rest of the world," creating "millions of new jobs."

Nowhere, in a 1,000 word commentary for a Melbourne daily newspaper, does the Treasury canvass the impact on energy-intensive existing industries or mention that they currently employ 1.1 million Australians.

Meanwhile Federal Resources and Energy Minister Martin Ferguson has announced the establishment of a National Low Emissions Coal Council and a Carbon Storage taskforce to advise on the spending of about $1.5 billion in Federal and State government and industry funds on "clean coal" development.  The council will be chaired by one of Australia's leading industry association managers, Dick Wells, whose past roles have included being CEO of the Australian Petroleum Production & Exploration Association and of the Minerals Council.  The council membership will include representatives of the coal, petroleum and power generation sectors as well as union and NGO members.

Ferguson took the opportunity of launching the new bodies to assert that "in no way" would the Rudd Government endanger national energy security.

Softly, softly

However vehement the discussion behind closed doors, it was never likely that the special Ministerial Council on Energy meeting on 31 July to discuss emissions trading would tip a public bucket on the Rudd Government proposals, given that every administration in the Melbourne room was Labor.

The MCE communique blandly noted that ministers had agreed to "continue co-operative work on energy security and energy market reform in considering issues raised by the introduction of the Carbon Pollution Reduction Scheme, including investor confidence, retail price regulation, transitional assistance to coal-fired generators and regulatory and technological hurdles to implementation."

The scriptwriters of Yes Minister would have been proud.

Federal Energy Minister Martin Ferguson noted in a media statement after the meeting that the implementation of emissions trading and a much-enlarged renewable energy target scheme "will have significant implications for the operation of the national energy market."  The MCE, he announced, had set up a working group to analyse energy security issues arising from the measures.

One of the ministers in the meeting was Ian Macdonald, responsible for the energy, primary industries, mineral resources and State development portfolios in the Iemma Government.  Six weeks before the Melbourne meeting he told a forum of trade-exposed, emissions-intensive industries at Parliament House, Sydney,  that the introduction of the ETS, with its cost impacts on fossil fuelled power generation and on production processes (such as aluminium, steel and cement) directly emitting greenhouse gases, could "severely impact on exports and on businesses competing with overseas exports."

The NSW Government, said Macdonald, was concerned that companies in the State "may be forced to carry significant extra costs at a time when there are a number of (other) factors causing upward pressure on electricity prices.

Indicative results of modelling of the impact of ETS showed it would have a "a major impact" on the economy. "It could lead to doubling wholesale electricity prices in the NEM by 2020. If this is the case, I shudder to think how the wealth and job creating industries of NSW will cope." 

The impact of the enlarged MRET must also be taken in to account, Macdonald added.  This target should also include exemptions for large, trade-exposed industries, he said. "If it does not, it has the potential to become a silent assassin for industry."

In a briefing paper prepared for the Parliament House meeting, his State & Regional Development Department commented that "placing a price on the right to emit carbon, coupled with the increased energy costs from a higher MRET, could give rise to lower investment in Australian trade-exposed, emissions-intensive industries and increased investment in countries not subject to carbon constraints."
Money for Braemar The Arrow Energy/ERM Power joint venture to develop the Braemar 2 power station in Queensland has achieved its financial goals -- securing $335 million in project finance and a 10-year hedging deal with Origin Energy for 300 MW.

The 450 MW power station, being developed alongside the Braemar 1 plant 40 km west of Dalby and close to Arrow's Danadine and Stratheden coal seam gas fields, is scheduled to cost $546 million and to be in full operation by the middle of next year.

Sugar rush

CSR, Australia's dominant sugar refiner, sees strong prospects for conversion of more bagasse in to electricity under the Rudd Government's expanded MRET.

While the contribution from converting sugar cane waste and cane trash to power is relatively small -- CSR's current cogeneration capacity at seven mills is 175MW, producing 545 gigawatt hours a year -- the company can see opportunities under the measure to push output up to almost 2,000 GWh annually.  The prospect needs to be seen in the context of the Federal Government seeking about 35,500 GWh of extra renewable power a year by 2020.

"The outlook for a higher MRET and electricity prices" is "directionally positive," CSR adds in a presentation sent to the Australian Stock Exchange. The offsetting factor, as for other power developers, is the substantial escalation of capital development costs.

Meanwhile, the National Association of Forest Industries has argued in a submission to the Federal Government that wood waste utilisation under the expanded MRET could see $800 million in renewable energy investment and deliver about a 3,000 GWh a year. Regulations restricting the full use of wood waste, which apply under the existing MRET, would have to be removed, NAFI says.


Coal on fire

The Australian Coal Association reports that, in addition to the 16 new black coal mining projects completed in 2007 at a cost of $2 billion, there are another 19 projects with an estimated capital cost of $7 billion scheduled for completion in the short to medium term and 50 projects with an estimated capital value of more than $14.5 billion in various stages of planning.  The black coal industry currently delivers about $1.6 billion a year in royalties to the Queensland and NSW governments, delivering about 30 percent of world trade and earning export revenue of more than $22 billion annually.

The ACA notes that the industry contributes more than 30,000 jobs directly in Australia and firms servicing the black coal business employ another 100,000.

Meanwhile analysts Goldman Sachs JB Were are predicting that global thermal coal contract prices next year may rise to a record $US150 per tonne while hard coking coal could reach a peak of $US330 a tonne.

The US Energy Information Administration, in its 2008 review of the global energy outlook, predicts that coal demand will rise by two percent a year from now to 2030, with a 3.1 percent annual growth rate in coal-fired generation. The IEA also projects that global carbon emissions under a "business as usual" scenario will rise from 28 billion tonnes in 2005 to more than 42 billion tonnes in 2030. Non-OECD emissions, it adds, will exceed OECD emissions in 2030 by 72 percent compared with seven percent today.

  1. Meanwhile George Monbiot, one of the media icons of the radical environmental movement, writes in the London Guardian newspaper that "everything now hinges on stopping coal -- whether we prevent runaway climate change largely depends on whether we keep using (it); the more coal is burnt, the smaller our chances of future comfort and prosperity."


Wrong direction

Germany's Der Spiegel Online news magazine reports that, despite the introduction of the 2005 emissions trading scheme, the European Union's CO2 output rose by 1.1 percent last year.  It says many European companies believe that, if the UN negotiations in Copenhagen next year for a post-Kyoto treaty are unsuccessful, the extra financial burden of carbon charges could see a migration of factories from the EU to countries where governments do not impose charges for greenhouse gas output. European companies, it adds, fear the proposed rising cost of the scheme, currently under review in Brussels, will "add billions of dollars to operating costs and lead thousands of workers to lose their jobs."

More Gore

Maybe he felt the need to upstage Barack Obama -- former US Vice-President Al Gore was striving for the headlines again in July by calling for the country to embrace a goal of generating all its electricity from zero-carbon energy resources within a decade. For context, non-hydro-electric power production in the US currently meets 2.3 percent of national demand and is predicted by the Energy Information Administration to reach four percent in 2018. Hydro power provides seven percent. Forty-nine percent of US generation is coal-fired, 20 percent gas-fired and 19 percent provided by nuclear power stations.

The European Union has a policy of meeting 15 percent of energy requirements from renewables by 2020.

Hu's the leader now

One of the main reasons for Australia to adopt economy-denting carbon pain, according to the Garnaut school of thought, is to provide leadership to the really big emitters like China.

The problem with this thesis is that China is already in world leadership in areas such as solar cell production, wind turbine development and pursuing low-carbon technology -- as well, of course, as placing orders for 200+ coal plants, each the size of the 12 largest units installed in New South Wales.

The Climate Group, a coalition of companies and governments talking up solutions to global warming, has published a new report that claims China will become the leading exporter of wind turbines and the biggest manufacturer of solar cells next year.

While 75 percent of China's power comes from coal, the Climate Group points to the government's goal of improving Chinese energy productivity by 20 percent in two years have achieved a 92 percent improvement between 1980 and 2006.  The country aims also to increase its use of renewable resources for power production from 16 percent today to 23 percent by 2020.

The Climate Group says China spent $US12 billion on renewable energy development in 2007 and it calculates that another $US398 billion needs to be outlayed between now and 2020 to meet the national target -- that's $US33 billion a year. Germany spent $US14 billion on renewables last year, the world's largest outlay.

For the Chinese, observers point out, the biggest environmental issue remains urban pollution -- highlighted this month by the extreme measures being taken to clean the air for the Beijing Olympics. Twenty of the world's 30 most polluted cities are in China.

Downer Doha insight

Writing in the Adelaide Advertiser, former Foreign Minister Alexander Downer says the collapse of the Doha round of talks on world trade signals that the largest developing countries "won't be bullied by Europe or the US to adopt targets to reduce carbon dioxide emissions and to introduce a raft of new anti-competitive climate change taxes." Nations that want a deal on climate change had better start thinking about a model different from the Kyoto treaty, he adds. If not, he predicts, negotiations for the next greenhouse gas abatement agreement are heading the same direction as multilateral trade negotiations -- nowhere. Massive carbon tax hikes, says Downer, will only serve to send businesses from Western countries to China, India and Brazil where they will not face such charges.


We are now in a period of maximum uncertainty for Australian energy consumers on reliability and cost of future supply -- the first stage of this waiting game involves the Rudd Government's proposed white paper, which could be available by December, and then the hiatus will continue until the Senate has voted on the emissions trading and expanded MRET legislation.

Some political observers are suggesting that the uncertainty could roll on well in to next year if the Government is unwilling or unable to reach a landing on the emissions trading legislation with either the Coalition or the Greens and the two independent senators.  If this occurs, it is being suggested, the Government could opt for a double dissolution of Parliament and run for re-election on its global warming policies.

Psephologist Malcolm Mackerras, writing in the Crikey electronic newsletter, asserts that a double dissolution is now more likely than not, that the 8th such election in Australian history -- including double dissolution polls in 1974, 1975, 1983 and 1987 -- will lead to Labor retaining hold of the House of Representatives and to the Senate numbers ending up being Labor 33 (one gain), the Coalition 34 (three losses), the Greens seven (two gains) and two independents.  How such an outcome  would produce an ETS Bill that addressed the concerns of industry is an open question.


Against this background, it is interesting to note the questions posed by Robert Pritchard, managing director of ResourcesLaw International and a consultant to lawyers Piper Alderman: "What is a realistic, cost-effective scheme for a comparatively small developed country like Australia -- how can such a scheme be framed so as to be cost-effective in global environmental terms and without penalising particular industries?"

One of the few facts that can be stated in response, is that, after almost a year in office and after the initial Garnaut Report as well as its own green paper process, the Rudd Government has not produced satisfactory answers to Pritchard's questions.

Nor did Federal, State and Territory energy ministers, having sounded a warning in June that they were concerned about the ETS outcomes,  produce an exactly ringing endorsement of the Rudd Government's direction at a special meeting on the topic in Melbourne on 31 July (see above).

Reading Federal Treasurer Wayne Swan's contribution -- "We can't afford to wait," published in the Melbourne Herald-Sun on 14 July will not help ease business uneasiness. As an exercise in "Yes Minister" word-spinning it may merit a small tick, but it did not even address the impact of what the Government proposes on trade-exposed, energy-intensive industries, one of the critical parts of the economy Swan is oversighting.

Swan, and his Cabinet colleagues, would benefit from reading US economist Jeffrey D. Sachs on the topic: Sachs, recently in Australia, makes the point that attempting to manage global warming is not a morality play -- policy should focus on correctly meeting the practical and solvable technological challenges while growing the global economy.  Given what the Chinese government is doing and is aiming to do -- see above -- is it or the Rudd-ites doing more to address the challenge posed by Sachs?

Core facts for this country include:  (1) Emission reductions of the magnitude posed by the Federal Government (at least in long-term concept) and the Greens (who want it all to happen now) will require early imposition of substantial costs on industry and the community and (2) Australia needs to maintain its economic competitiveness and reach its development goals as well as achieving a smaller environmental footprint.
Nothing put forward by Garnaut or the green paper offers anything other than rhetoric to address these issues.

Garnaut himself -- although it takes him until page 382 of his report to say so -- at least acknowledges: "A potential distortion arises if an Australian scheme is introduced in the absence of an international arrangement that results in similar constraints or carbon pricing among major trade competitors -- the concern is that some firms may reduce their level of production too far and once productive capacity is lost the effect may not be reversible at a later stage."

And the prospects for an international agreement, in the opinion of Alexander Downer, Australia's most experienced foreign minister, are not good (see above) in the wake of the collapse of the Doha round of talks on global trade.

In a recent commentary, the Wall Street Journal said this about the Australian situation:
"Trying to take the lead on fighting climate change before other countries do is tricky -- and potentially disastrous -- business. In a nutshell, Australia's government (faces)  big risks with its plan unless it treads carefully."

American economist Sachs, while in Australia, ventured the view that the Rudd Government ETS plan was "messy, complicated and bound to be unpopular."  The proposed scheme, he added, would be hard to implement, hard to monitor, was not transparent and was "highly manipulative -- which is why the banks love it."

Ian Macdonald, the NSW energy minister (see above) called the enhanced MRET scheme a potential "silent assassin" for business in his outspoken address to trade-exposed, energy-intensive companies in Sydney in June. 

In the fact, the real "silent assassin" could turn out to be the impact of coal-burning plant closure on demand for gas and on gas prices.  Modelling by ACIL Tasman for the energy industry -- and therefore tested with the sector's CEOs before publication --suggests the ETS could drive up demand for gas for electricity generation from 140 petajoules a year now to between 375 PJ and more than 500 PJ annually. This scenario raises the spectre of both potential eastern seaboard supply shortfalls in the next 10 years and steep increases in gas prices towards world parity at a time when global demand is sending gas chasing oil on the price curve.

Matthew Warren, noted in his "Greenchip" column in The Australian on 21 July that a Morgan Stanley review of the green paper predicted that a carbon price of between $50 and $100 per tonne would be needed to stimulate $60 billion worth of investment to drive a low-carbon Australian economy.

This presages a doubling in the wholesale price of electricity to which could be added a trebling in the wholesale price of gas.

How it is good policy to make Australian major energy users uncompetitive and to drive surrender their business to overseas rivals, thereby adding to our balance of trade problems at a time when our oil imports are predicted to quadruple because of declining local production,  while  also driving up domestic inflation because of massive local energy price rises as well as adding to Budget outlays to meet the social consequences of sudden unemployment in an environment where there is no global commitment to curb greenhouse gases would make for major election debate, supposing Mackerras is right about the double dissolution -- but this would also require the Coalition to be able to sort out both its leadership problems and its stance on greenhouse gas policies, something Rudd is no doubt relying on not to happen, thereby allowing him to muddle through to a second term.

None of this is an inviting prospect if you are running a major industrial business in Australia -- and one of the inconvenient truths hidden from us at the moment is what impact this situation is already having on domestic and international investors. There are numerous large prospects for development in Australia that have been under consideration for some time -- how many of them have already slipped down boardroom tables to the point where they are lost to this country because of the current carbon policy situation and investor fear about the future policy?

A Federal Opposition doing its job would be out there demanding that the Government gets its policy process in order -- that it subjects the Treasury modelling currently awaited to rigorous scrutiny (how can it be considered independent if the bureaucratic leaders of the new Department of Climate Change were its chief architects?), that it ensures delivery of an up-to-date review of Australia energy security (the last one was delivered by Howard four years ago) before the ETS decisions are handed down and that it addresses in detail how it sees the risks for energy-intensive manufacture of moving on carbon taxes in the absence of a global agreement, acknowledging publicly that more than a million direct Australian jobs are at stake.

The Opposition could be strongly aided and abetted in this approach by the NSW, Victorian and South Australian Coalition parties getting off their backsides and raising the same questions for each State.  The government leaders of these States can get away with playing Jim Hacker on this issue so long as their opponents lack the ability to challenge them strongly in the public gaze.

The Liberals in particular seem to have totally forgotten that Fraser brought down Whitlam at the polls -- in two elections by massive majorities each time -- as much because of the concerted efforts of Coalition State governments as his own campaigning.

It is politically axiomatic, surely, that, if you wish to concentrate the minds of, say, the people of New South Wales, you focus on the 320,000  jobs at risk in the State's energy-intensive industry rather than the million across Australia.

Keith Orchison
5 August 2008

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