Issue 54, August 2009

Gas war of words

Gas suppliers and major users are ramping-up their dispute over the potential for the fuel to be priced at export parity on the eastern seaboard.

In the latest round of public rowing, the Western Australian DomGas Alliance and the Energy Users Association have accused the Rudd government of  skewing the focus of the important energy white paper – its precursor green paper is expected to be published in August – towards maximising Australia’s role as a fuel exporter rather than “ensuring energy security for Australian industry and households.”

The Australian Petroleum Production & Exploration Association has fiercely rejected user accusations that a “cartel” – which would be illegal – is operating in the WA gas market to drive high prices.

The suppliers, led by Santos CEO David Knox, claim that eastern domestic prices are not going to reach LNG netback values because there are sufficient gas reserves in the Gunnedah basin (NSW), the Cooper basin (South Australia), Bass Strait and the Queensland coal seam methane fields to keep supply below export parity.

Giving evidence to the Senate select committee on fuel and energy in Perth at the end of June, Stuart Hohnen, then chairman of the DomGas Alliance in Western Australia and executive chairman of the company owning the Dampier-to-Bunbury natural gas pipeline, said gas users had been confronted with a five-fold increase in prices, up to five times more than was paid in the eastern states. He warned that the West’s experience would be repeated in eastern Australia, “where the development of the LNG export industry will lead to significant price increases for consumers.”

In response Knox told analysts in a recent conference call that Santos believed there would be “a gentle move forward in prices as the gas market in the eastern states grows and becomes of increasing importance to baseload power generation.”

The users’ campaign flows from frustration at the escalation of WA prices to export parity despite the state’s huge reserves of conventional gas and from fear that the combined weight of proposed coal seam methane exports from Gladstone plus power generation demand in the wake of the emissions trading scheme will see the same market pattern emerge on the East Coast, where gas prices today average about $4 per gigajoule.

Electricity users on the eastern seaboard, home to more than 80 percent of national power demand, have expressed fears that a $8 or $10 per GJ gas price would effectively double the wholesale price of electricity – which makes up half the end-user retail price.

TRUenergy, owned by China Light & Power and operator of East Coast power stations as well as a large gas storage facility in western Victoria, has said in one of the 111 submissions to the government’s energy white paper process that increased CSM and more conventional gas resources flowing from further exploration and development in eastern Australia “should” ensure sufficient supplies “over the medium term.” However, it acknowledges “significant prices increase cannot be ruled out.”

TRUenergy has told the government, echoing the views of a number of submissions, that it is critical for energy price rises to be passed through to end-users and for the federal Trade Practices Act to be “robustly enforced” to ensure adequate competition in the upstream gas market.

Billions on table

Under pressure from state premiers John Brumby (Victoria) and Mike Rann (South Australia), the Rudd government has called in management consultants Morgan Stanley to assess the impact of the emissions trading scheme on brown coal generators.

The move puts the government in the bizarre situation of simultaneously demanding that the Coalition pass the ETS legislation when federal parliament resumes sitting in August and waiting on a report to find out if its proposals do constitute a serious threat to security of supply on the eastern seaboard.

Forcing the Rudd government’s hand represents – at least initially – a major lobbying success for the embattled brown coal generators (Loy Yang Power, TRUenergy and International Power in Victoria and Babcock & Brown in SA), who have complained all this year about “serious shortcomings” in the ETS.

In Victoria, the four brown coal power complexes, two owned by IPRA, account for 6,000 MW (about 70 percent) of the state’s generation capacity.

TRUenergy CEO Richard McIndoe has added to Victorian concerns about reliability of supply by warning that, under the circumstances, with $950 million in debt to be refinanced in the next 12 months, the company will not pursue maintenance programs for its Yallourn power station.

It is reported that Morgan Stanley are assessing the impact of the ETS on the generators’ ability to refinance debt and the risk that they could breach banking convenants, with serious implications for the national electricity market.  The Rudd government’s counter-argument is that any problems the generators are facing relates to the global financial crisis, not the emissions trading scheme.

The coal-fired generators, black and brown, complain that the ETS will cut $10 billion from their balance sheets, but the government is offering only 130 million free permits, worth $3.5 billion,  in compensation. The difference between the asset valuation and the permits offered, they argue, will compromise their operations – not least because they have to buy permits at auction, increasing their working capital needs by about $10 billion.

The generators’ other big concern with the ETS is not financial, but structural.  Setting national targets for only five years from 2011 and then indicatively for the following 10 years, they say, is inadequate. They want the time frames doubled.

The Energy Supply Associated has reported that all generators across Australia need to refinance about $20 billion in debt in the next five years. The issue does not only affect investor operations – in Western Australia, state government-owned Verve Energy says capital constraints are a major hurdle for plans to add 700 MW of coal capacity to the islanded region’s capacity.

Rocky transition path

TRUenergy CEO Richard McIndoes, interviewed on ABC TV’s Inside Business program, says the key issue for power investors is how to transition from today’s high carbon-emitting generation assets to a point in time – he sugegsts in 2025 – when carbon dioxide can be viably captured and stored underground.

McIndoe’s company, a subsidiary of Hong Kong-based China Light & Power, is the owner of the Yallourn power plant in Victoria, which provides 10 percent of the state’s electricity, and also owns the Tallawarra gas-fired plant in New South Wales. It has interests in solar thermal and geothermal plant development and is the co-owner of the Roaring Forties wind farm development firm.

McIndoe says the Australian electricity industry supports efforts to reduce greenhouse gas emissions, but is concerned about the emissions trading transition process. At Yallourn, he adds, the company has deferred $150 million in 2009-10 maintenance work until the carbon policy arrangements are settled.

He warns that, as proposed, the ETS will result in less investment in Australia in power generation, “which is going to undermine the reliability of the sector, leading to potential interruptions in supply going forward.”

McIndoe also says that uncertainty over the final form of the ETS has increased market volatility, making it harder for generators and retailers to negotiate long-term supply contracts.

Talking up coal

Federal Energy Minister Martin Ferguson was deep in the heart of coal country when he addressed the Queensland Resources Council at Rockhampton in mid-July and made sure he talked up the Rudd government’s support for the embattled industry.

The fact that the federal government has mandated that 20 percent of Australian electricity consumption should come from renewable energy in 2020 only underscored the importance of finding ways to reduce emissions from the other 80 percent, he told the QRC forum.

Coal underpinned the security, reliability and low cost of Australia’s electricity, he said, and “in turn, this supports the competitiveness of Australian industry.”

While the use of renewable energy would increase, he added, coal and gas would continue to produce the bulk of Australian electricity – and reliance on coal “is set to increase dramatically” in the rest of the world.

In the next decade, he said, China would bring on line about 1,000 average-sized coal power stations, equal to 34 times Australia’s grid-connected, coal-fired generation capacity.

Technology to reduce carbon dioxide emissions from coal substantially had to be found, Ferguson said, and he pointed to the federal government’s commitment in the 2009 national budget to spent $2.4 billion on coal technologies, including $2 billion towards development of an industrial-scale carbon capture and storage project.

Huge aspirational gap

The Rudd government has revealed the size of the gap between the carbon abatement it is willing to legislate now and what it might pursue if the Copenhagen sumitt delivers a “meaningful” agreement on a treaty to succeed the Kyoto agreement.

Martin Parkinson, secretary of the Department of Climate Change, told a forum on Australian carbon policy that the current target, contained in the ETS legislation before the Senate, to reduce domestic emissions to five percent below 2000 levels by 2020 would deliver abatement of 138 million tonnes a year by the end of the next decade. 

If the government embraced a 25 percent target, as it has promised to do if there is an acceptable Copenhagen deal, the abatement delivery will need to rise to 250 million tonnes a year.

The size of the bigger commitment is shown up by the fact that current emissions from all forms of national power generation is about 200 million tonnes a year.

Parkinson all threw cold water on one of the populist proposals that gets most attention in the voter focus groups pursued by the political parties. 

Placing solar panels on every household roof in the country, he said, could only reduce emissions by 16 million tonnes a year and would require $200 billion in capital outlays.

ENERGEX in multi-billion bid

The Queensland government-owned distribution business, ENERGEX, has applied to the Australian Energy Regulator for authority to spend $6.46 billion on network building in the state’s south-east between 2010 and 2015.

This the corporation’s first review by AER since the Council of Australian Governments approved a shift to national regulation. Previously the network operator’s capex requirements were assessed by the Queensland Competition Authority.

In seeking the second largest network outlay in the country – exceeded only by EnergyAustralia’s $8 billion plan approved earlier this year – and is based on commitments to increase the system’s capacity by 40 percent, building 60 new sub-stations, and to improve reliability by 12 percent.

ENERGEX says in its submission to the AER that the key drivers of electricity demand in south-east Queensland are population increases, changing customer needs (with more relian ce on energy-intensive appliances) and increased use of air-conditioning. SEQ receives 60 percent of people moving in to the state and Queensland’s population is growing by an average 2.5 percent a year. Its network supply area includes two of the country’s fastest-growing areas, the Gold Coast and the Sunshine Coast.

Because SEQ is not a highly industrialised area, ENERGEX’s customer profile has 39 percent residential users compared with 27.8 percent on average across the country. Commercial customers make up 44 percent of the total versus 22.4 percent on average nationally and it has only 15 percent industrial users versus 46 percent nationally.

The ENERGEX franchise covers 25,000 square kilometres and includes 11 municipalities. It has more than 1.3 residential, commercial and industrial customers, served by 50,000 kilometres of power lines and 250 substations.

A substantial component of the large capex program will replacing aged assets. ENERGEX says many of its assets were constructed during the 1980s, followed by the need to service the 1980s construction boom on the Gold Coast. More than $1.1 billion of the capital works proposals will go towards aged asset replacement compared with $2.6 billion needing to be spent to serve new growth.

Its submission throws up the fact that one of the larger weather problems with which it must deal is lightning.  Brisbane has highest lightning strike rate in the country, after Darwin. Throw in the notorious summer storms, where wind gusts in excess of 80 kilometres an hour are common, and physical protection of the system is a substantial issue.

ENERGEX tells tha AER that it has had to cope with not only 10 years of high growth but also a change in the “shape” of demand.  A decade ago south-east Queensland was a winter peak power area. Now it has to cope with a summer peak along with higher growth in winter evening demand, reflecting the impact of reverse cycle air-conditioning. 

Its summer peak record at present is 4,593 MW versus 4,270 MW for winter.  By 2014-15 it can see peak demand pushing up towards 6,500 MW with the region’s total energy requirements rising from around 22,000 GWh now to almost 26,000 GWh.

The corporation says that more than 65 percent of franchise households now have air-conditioning and nearly 30 percent of them have multiple air-conditioning units.

The other modern factor in the summer peak is pool pumps, with 24 percent of SEQ households now having a swimming pool.

ENERGEX claims that its capex program plus other cost rises – but not the carbon-related ones – will see customer bills rise by 10 percent in 2010-11 and be followed by four percent a year rises in each of the following four years.

Road to Copenhagen

The Rudd government’s pressure on the federal Opposition to pass its emissions trading scheme legislation in the Senate this month has been undermined by the head of the United Nations climate change agency, Yvo de Boer, who, asked if it mattered that Australia arrived at Copenhagen without the measure in place, responded: “Quite honestly, no.”

De Boer told ABC Radio that what mattered in the international negotiations was the willingness of governments to take on targets for abatement.

Climate Change Minister Penny Wong has claimed that Australia’s ability to participate meaningfully at Copenhagen will be undermined if the Coalition does not pass the legislation.

Opposition Leader Malcolm Turnbull quickly leapt on de Boer’s comments to say that “there is no question that the emissions trading scheme should have its design finalised after Copenhagen.”

Senator Steve Fielding, whose independent vote could be crucial to the passage of the legislation, said it would be “economic suicide” for Australia to act without knowing the outcome of the Copenhagen meeting.  “I can’t believe that the Prime Minister wants to put at risk thousands of jobs and our economy so he can stand on his soapbox at Copenhagen to say look at me, look at what I have done,” he added.


Coolibah’s Keith Orchison now has a blog, entitled PowerLine, on the Business Spectator website at


The Rudd federal government’s energy white paper process is one of the most important tasks of its first term. The fact that the review has been over-run by Rudd’s personal ambitions to posture on the world stage about global warming policy, aided and abetted by Penny Wong, is one of the biggest blots on this first term record. The problems this may create may come back to bite the ALP should, as expected, they win the next federal election, but the real pain will be felt by energy consumers and potentially by the nation’s workers in manufacturing.

The fierce row going on at present among suppliers and end-users over eastern seaboard future gas prices, as reported in this and earlier issues, is one manifestation of the many cart-before-horse issues that arise from the government thrusting on with its emissions trading scheme legislation without first completing the critical work on the energy outlook to 2030.

Just how vain this activity is was underscored in the Sydney Morning Herald on the first weekend of August by an article written by 15 prominent scientists, who emphasised that the global warming measured thus far will result in climate change that cannot be reversed for many centuries.

Even if global carbon dioxide and other greenhouse gases were stabilised in the atmosphere at their present levels, they said – and this is not an  ambition that any major governments will take to Copenhagen in December – a further warming of six-tenths of a degree would “inevitably” follow on the eight-tenths of a degree observed since 1850.

The Herald used this article to exhort “we must act now,” but it is manifest from what these scientists say that passage of a piece of weak and complex legislation in Canberra in August is not the proverbial flutter of a butterfly’s wing in the jungle with long-term planetary effects.

Close examination of some of the opinion poll results being brandished at present, carefully timed to add pressure to the Coalition to pass the ETS this month, of course, shows that very few Australians have a clear picture of the measure’s economic consequences – and those that claim to have believe that energy prices will not rise to uncomfortable levels.

Underpinning this confusion and naiviety – a large majority of those polled want government to “act” to “prevent climate change” – is a lack of understanding of the importance of the energy supply chain to Australia’s economy and lifestyle.  This is exemplified by the moaning that goes on, and was again evident in the media in June and July, over the increases in end-user power prices that flow from the rise in their peak electricity demands, fuelled by their ever-increasing purchases of air-conditioning units, swimming pool motors, plasma television sets and so on.

The Howard government went through an energy white paper process at the start of this decade and the conclusions drawn informed much of its approach to policymaking right up to the panic months ahead of the 2007 election.  Howard and his cabinet, however, made a complete hash of ensuring that the lessons to be learned from the energy review were conveyed to the community at large.  The Rudd government, on the other hand, has spent the first two years of its time in office feverishly seeking to obfuscate about the effects of a radical change in the cost of energy as a result of carbon charges.

Between them, these governments have lost another decade where a major effort could have been made to drive end-use energy efficiency, to claw back the rise in peaking power requirements and to ensure that Australians fully understood the consequences of their energy thirst by requiring them to pay in full measure for it.

Back in 1991 the peak loads in the major demand areas were 9,736 MW (New South Wales), 5,850 MW (Victoria) and 4,220 MW (Queenland). The latest data to be published by the Energy Supply Association will appear towards the end of this month, but in round terms the peak loads now exceed 14,000MW (NSW) and 9,000 MW (Victoria and Queensland). On recent projections, they will pass 17,000 MW in NSW in 2016-17 and reach 13,000 MW in Queensland and 11,000 MW in Victoria.

Overall power consumption is forecast to be 50,000 GWh (roughly a quarter) higher in 2017 than it was in 2007.

The main constributor to meeting the higher peaks and the higher energy demand is, and will be, fossil-fuelled generation. The demand trend will see greenhouse gas emissions rise by another 40 to 50 million tonnes a year, not diminish, and tens of billions outlayed to provide the necessary infrastructure.

Setting in train policies to pursue a target plucked from the political ether without understanding the consequences of doing so is worse than foolish – much worse.

Publication of the energy white paper, with proper communication to the community of what it tells us,  and a sensible pause in legislating carbon policy until the outcome of the Copenhagen summit is known would be a wise approach. A federal election where energy policies for the next 20 years, based on reality not dreams, was a main area of debate is, regrettably, almost certainly a wish bridge too far.

Keith Orchison
5 August 2008

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