Issue 65, August 2010



Welcome to the eighth edition for 2010, the first since the extra-ordinarily challenging outcome of the federal election on 21 August.  This issue covers power price issues in several ways, plans to build a number of wind farms and the critical issue of how investors will handle the need to build billions of dollars worth of new power stations as well as other topics.


Consumers of essential services are facing a “come to Jesus” moment this decade as utilities seek to rectify the underpricing of infrastructure.

This warning in a newspaper interview by Origin Energy chief executive Grant King comes as the post-election media analysis reveals that rising electricity bills were a “white hot” issue in the focus groups run by the ALP shortly before the Gillard government called a disastrous poll.

King says the underpricing issue affects energy and water infrastructure, including desalination plants.  He warns of the political paradox that end-user bills are rising while wholesale energy prices are currently falling because suppliers are confronted by higher costs for replacing old assets or building new ones.

King told The Australian newspaper that he suspected Australian policymakers, including state governments, also “didn’t truly know” the cost of measures, such as the renewable energy target, that they have introduced. 

Suggestions that end-user power prices will double this decade are “possibly conservative.”

Tassie touch

Tasmania has just over a quarter of a million residential and business electricity customers and about one in four of them is being paid a subsidy by the state government to help with his or her power bill.

Tasmanian Treasurer Michael Aird has claimed “the best electricity concessions system” in Australia, revealing that almost 80,000 households receive $337 annually – and he is going to give them another $100 a year to cope with the next round of electricity price increases.

The Tasmanian handouts far exceed those in South Australia ($150), the ACT ($214) and New South Wales ($145), according to Aird.

He says the government is committed to minimising price shocks for electricity consumers, concessions that will cost $12 million in 2010-11.

The government’s latest largesse is a reaction to a draft decision by the state’s Office of the Economic Regulator that electricity prices should rise 10.6 percent from December after a six percent increase implemented in July to cover higher network charges.

Riding high

South Australia had the highest average  wholesale electricity price in the eastern seaboard market last financial year.

Data accessed from the Australian Energy Market Operator’s website show that the SA price averaged $55.68 per megawatt hour in 2009-10 compared with $44.14 in New South Wales, $36.36 in Victoria, $33.45 in Queensland and $29.38 in Tasmania.

It was the second financial year in a row that the SA price exceeded $50/MWh – it had been $50.98 in 2008-09, although not as high as drought-stricken Tasmania’s ($58.48) that year.

Strung out

Australian voters delivered a hung House of Representatives in the 21 August election, leaving energy investors with no clear picture of policy directions and confronted by the prospect of a second federal poll in 2011 or even earlier.

As the voting count neared its close a week after the election, the seat tally stood at 72 each for the Coalition led by Tony Abbott and the ALP led by Julia Gillard after a 33-day campaign that was widely criticised for its lack of quality.

Voters re-elected three independents in New South Wales and Queensland, an independent in a previously safe ALP seat in Hobart, a Greens MP in a long-held Labor seat in inner Melbourne and a National Party member in a regional Western Australia seat who asserts he will not sit in the Coalition caucus.

The election also returned three more Greens senators and delivered the balance of power to the party in the upper house from next July.

The election outcome indicates that there is no prospect of a carbon pricing regime or emissions trading scheme being introduced in Australia in the next 12 months and suggests that, if another poll is held in 2011, resulting in a Coalition victory, that the prospects for this policy are dim until mid-decade at least.

The polling results suggest that the long-serving ALP state government in NSW is doomed when it goes to the polls next March and that Anna Bligh’s state government in Queensland is in trouble, but that John Brumby’s ALP government in Victoria should be returned in November.

Electricity privatisation and new generation developments in NSW are perceived to be in limbo as the government of Kristina Keneally reels under voter disapproval.

Gerry Grove-White, former managing director of Geodynamics, has accused the main political parties in a media commentary on prospects for investment in renewable energy of failing to take a clear set of policies to the election, instead offering “a series of ill-conceived, cherry-picked handouts that will be hugely expensive and/or largely ineffctive in driving the structural changes to the economy required to meet greenhouse gas reductions.”

$1 billion in wind

A 50:50 joint venture between AGL Energy and Meridian Energy, owned by the New Zealand government, has committed to developing Australia’s largest wind farm.

To be built near Hamilton, 260 kilometres west of Melbourne, the Macarthur project will have a 420 MW capacity and is budgetted to cost $1 billion. It is scheduled for commissioning in 2013.

The project is the largest wind development initiative since the enlarged renewable energy target legislation was passed by the federal parliament earlier this year amid ongoing concerns that the surplus of RET certificates created by earlier policy would hold up zero emission investment until mid-decade.

The Danish manufacturer Vestas has won the contract to supply 140 turbines of 3 MW capacity, with the increase in unit size enabling the developers to reduce their order from 174 turbines.

AGL is also planning to build a 63 MW wind farm across eight sheep and cattle farms near Glenthompson, close to the Grampains mountain range. The $200 million development will contribute power to a $3.5 billion desalination plant to be constructed near Wonthaggi.

The Victorian government has also approved development of a 172 MW wind farm, to be built by Pacific Hydro, 25 kilometres north-east of Ararat.

Pacific Hydro told media that a recent public poll it had commissioned in Victoria found more than 80 percent of respondents supported more wind farms being built in the state versus 25 percent who supported building more coal-fired power stations.

$10 billion business

Consultants Marchment Hill have estimated that Australian electricity transmission and distribution businesses are spending more than $10 billion a year buying external services. Although the opportunities are large, they say, the playing field is crowded, with a diverse range of players in competition, ranging from major national and international companies to small-scale local businesses engaged on contracts ranging from weeks to years in duration.

Chasing gas target

The gas industry is urging a federal gas energy target of 25 per cent by 2025 in addition to the renewables target of 20 percent by 2020.

Speaking to a forum in Sydney, ERM Power chairman Trevor St Baker said Australia needed to act in the wake of the deferral of an emissions trading scheme in order to pursue greenhouse gas cuts.  He claimed gas-fired generation is the only viable option, absent any new coal-fired developments, for meeting a 25 percent growth in demand for baseload and intermediate load power over the next decade.

St Baker argued that the proposed GET would attract a $20 billion investment between now and 2025 in addition to $10 billion needing to be spent on open-cycle gas plants to back up large-scale wind farm development.

Queensland already has a scheme that requires 18 percent of state electricity consumption to be sourced from gas.

ERM Power has constructed 2,500 MW of gas-fired plant in the past five years in three states, investing more than $2 billion in generation and pipelines. It is currently investigating a 900 km pipeline to link its central Queensland operations to a site at Wellington in NSW on which it seeks to build a 640 MW open cycle power plant.

Gas and carbon price

The level of gas needed by the power generation sector is the key variable for the domestic upstream petroleum industry in the next two decades, says Paul Balfe, executive director of consultants ACIL Tasman.

Speaking to a Sydney conference on gas and generation, Balfe said a carbon price designed to achieve the bipartisan goal of reducing national emissions to five percent below 2000 levels in 2020 could see a market of 1,000 PJ a year in supplying fuel to power stations by 2030 – but, without a carbon charge, this could be as little as 400 PJ a year.  He said overall domestic gas demand could reach 1,800 PJ a year if a carbon price supported large-scale development of gas generation, but 1,200 PJ/a without it.

He also predicted that the expanded renewable energy target will see 9,500 MW of wind generatiuon installed by 2020 – wind capacity stood at 1,337 MW last year – and this would need 6,650 MW of open cycle gas generation to backstop it.  With the majority of wind farms expected to be built in South Australia and Victoria, he suggested about 5,000 MW of open cycle gas plant would need to be built in the two states.

The ability to run on demand will be critical to success for the OCGT operators, he added. They will need to manage “very peaky” fuel requirements and, in turn, this will lead to provision of unconventional gas pipeline services.

Wave of the future

Research by CSIRO oceanographers claims that southern coast wave energy could be a substantial source of Australian electricity generation in the future, but the technology has a long way to go to become commercially viable.

A complex modelling exercise of waters 20 metres deep between Geraldton in Western Australia and the southern tip of Tasmania has suggested that the southern coastline could have the potential for 1,300 terawatt hours of power delivery a year – six times current demand – but the project leader, Mark Hemer, acknowledges that wave energy is not a quick fix for Australia’s renewable energy needs and “is still a decade or two away from being a real force as an alternative energy.”

Hemer points out that global wave power capacity at present totals just four megawatts compared with 200,000 MW for wind farms.  “Wave power is a long way behind on the cost learning curve,” he told the ABC. “Wave energy is really a baby at the moment.”

Can NEM deliver?

Paul Simshauser, chief economist of AGL Energy and adjunct professor finance at Griffith University’s Business School, says regulators and policymakers now have to ask themselves a crucial question about any proposed change affecting the eastern seaboard electricity market: “What does this change do to the credit rating of those who will underwrite our next power station?”

Simshauser, in a paper on regulated energy pricing and in a talk to a gas and generation conference in Sydney, points out that government involvement in direct investment in the east coast market has ceased after having been responsible for a 73 percent share of generation investment from the NEM’s start in 1998 to 2007. “One hundred percent of new power projects will require private sector funding for the first time in the NEM’s history.”

Competitive, energy-only markets struggle to remunerate investors, given reliability constraints and market price caps, he says, and the east coast market faces an increase in peak load from the current 36,000 MW to 43,000 MW by 2020 while also needing to meet the mandatory requirements of the renewable energy target.

The investment task for NEM capacity in the decade ahead, Simshauser adds, has risen, with the RET legislation, to $32 billion.

The investment invironment, however, he warns, has reached a point where, given the construction lags of 18 to 40 months in power station development, it is possible that companies will mis-time their developments, “leading to transient price shocks and load shedding events – far more than a theoretical possibility.”

The primary issue, he says, is not that generation plant won’t be built, but whether it will arrive on a timely basis to maintain reliability of supply in a market where generators are paid only for what they produce and do not receive capacity payments to cover the heavy fixed costs of investing in power stations. Capacity payments have been considered and rejected a number of times by NEM policymakers.

Competitive energy-only markets, Simshauser points out, are only really remunerative for investors if the power grid is virtually on the edge of collapse, “which,of course, is politically unpalatable.”

To enable 100 percent cost recovery by generators, he says, the market price cap recently lifted to $12,500 per megawatt hour should be lifted to $24,500, given the NEM’s reliability criteria.

Fire response

The Victorian government has rejected the recommendation of the Black Saturday royal commission to underground power lines.

Announcing the government’s response to the report of the inquiry in to the fires that claimed 173 lives, Premier John Brumby said the commission’s recommendation that all single wire and 22 volt powerlines be put underground would be too expensive for householders, farmers and business.

“The reality is that the cost of doing this would be huge,” Brumby added.

The commission did not simply recommend undergrounding. It called for overhead powerlines to be replaced with aerial bundled cables, underground cables or other technology to deliver a greatly reduced bushfire risk.

Brumby told Melbourne media that it must be appreciated that powerlines were not the only cause of the Black Saturday fires.

There is controversy over the cost of the commission’s powerline recommendations.  Brumby has put the undergrounding cost at $20 billion but public service advice to the inquiry put a cost of $4.7 billion on undergrounding 28,000 kilometres of single wire lines in regional Victoria. Opposition Leader Ted Baillieu, seen by opinion polls to be badly lagging Brumby in the lead-up to November’s state election, has accused the premier of inflating the costs, which he describes as “modest.”

Brumby has committed to spending $2 million on further research in to the issue.

Rising prices

St Vincent de Paul Society has released a survey claiming that Victorian household energy bills have typically risen by $300 over the past two years, but also pointing out that high consumption home-owners can save from $350 to $550 a year by switching to the best market offers from competing retailers.

Annual power bills for Victorian homes using both electricity and gas have risen by more than $200 since July 2008, a 25 percent increase, the charity says. Households with average gas consumption have had to deal with a $150 rise in bills.

Shares slump

Investors in clean energy companies in Australia took a battering last financial year.

The ACT Australian Cleantech Index of 78 stocks says that the value of these shares dropped 31 percent in the year ending 30 June compared with a six percent rise in the benchmark S&P/ASX 200 companies.

Australian Cleantech maintains analysis of 420 cleantech companies and says that, as a sector, they employ 13,000 people, almost half of them working in the waste management area, and had a combined revenue of $9.2 billion in calendar 2009. They raised $2.3 billion in new funds last calendar year.

The sector includes a large number of unlisted companies with an estimated revenue of $1.72 billion in 2009, employing 4,400 people, mostly working in the energy efficiency, water, waste management, solar power and wind areas.  Australian Cleantech says these firms raised more than $240 million in new capital last year.

John O’Brien, who compiles the company’s cleantech index, says Australia “lacks the vision” needed to stimulate the renewable energy industry.

Wrong way

The International Energy Agency says global government action to cut greenhouse gas emissions is heading in the wrong direction and, if current trends are sustained, will deliver a doubling in carbon output my 2050.

Publishing its “Energy Technology Perspective” report, the agency, which is the energy advisor to 28 developed countries, including Australia, has warned that what happens in the next decade is “critical” to achieving the large-scale abatement recommended to curb greenhouse gas impacts on planetary temperatures.

The IEA adds that global governments will need to spend an extra $US46 trillion over four decades to halve emissions from present levels, but argues that the outlay will achieve $US112 trillion in cumulative fuel savings.

The agency has also expressed fears that a “severe skills shortage” is about to become a major hurdle to deployment of decarbonising technologies. It calls on governments to take urgent steps to assess their national skills needs and to develop plans to deliver them.

Zero plan criticised

A group of engineers and scientists led by Professor Barry Brook, director of climate science at the University of Adelaide, and engineer Martin Nicholson has published a critique of the Zero Carbon Australia $370 billion plan to abandon all fossil-fuelled power generation by 2020.

The group says the ZPA plan contains inadequate reserve generator capacity margins to ensure supply reliability and “would almost certainly lead to increased blackouts and brownouts.”

It says that the ZPA estimates of capital outlays are “overly optimistic” and claims that the real cost of the plan is almost five times higher at $1,079 billion.

This would lead, it adds, to wholesale electricity prices rising nearly 10 times above current levels and add about $2,600 a year to household power bills rather than the $516 claimed by the zero emission proponents.

The blueprint’s implementation timeline is unrealistic, the critics say, arguing that it it is unlikely that any large-scale solar thermal plants proposed could be on line before 2020.

The groups says the ZPA blueprint substantially under-estimates the wind power and solar power capacities needed to meet demand.


The alleged ancient Chinese curse of “May you live in interesting times” applies in full measure to the political situation now confronting Australians as a result of their own actions (or lack thereof in the case of those who voted informally on 21 August in the federal election or did not turn up at the polling booths).

As I wrote in Business Spectator, that Saturday was “fright night” for investors in the energy industries and there are at present no grounds for supposing that the situation will improve until the country returns to the polls  – whether before the year’s end or more than a year from now.

What this situation means for the security of electricity supply and its cost can only be a matter for conjecture.  Paul Simshauser of AGL Energy (see above) has set out very clearly that, for the first time in its history, this country (or at least the vast bulk of the community living on the eastern seaboard) cannot look to state governments to build the power stations required.

While the renewable energy segment has been mandated by federal parliament and should result in almost $20 billion worth of investment, mainly in wind farms, what really matters is when, where and by whom the baseload, intermediate and peaking generation capacity will be delivered.

As quoted above in the note on Simshauser’s views, the prospect now cannot be ruled out that this development will not be delivered in time and that “transient price shocks” and “load-shedding events” will be visited on eastern seaboard communities for the first time since the early 1970s when New South Wales stuffed up its generation construction plans and Premier Neville Wran reacted by building more capacity than the state would need for another quarter century and more.

If you assume, as I do, that we are likely to have another federal election next year, then the ensuing national polls (allowing for us not shooting ourselves in the foot again) could be expected to be held in 2014, 2017 and 2020 (or thereabouts).

If you overlay this timeline with the likely price shocks residential and business customers can expect as this decade goes on – see Grant King’s comments above – and factor in the impact of a fast-rising trade deficit in transport fuels (predicted officially to rise from $16 billion a year now to $30 billion in 2015), then add in any form of insecure electricity supply on the east coast, the public’s reaction can be expected to be many degrees north of the “white hot” views on power bills that the ALP’s focus groups allegedly delivered in the run-up to this election.

As I pointed out in Business Spectator, we now live in an era where the over-riding political dictum is “There go the people. I am their leader. I must follow them.” What policy responses we may get from future political leaders reacting to voter outrage over the energy issues canvassed here hardly bears thought.

Keith Orchison

31 August 2010

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