Issue 12 December 2005

Interconnection 'major NEM defect'

ACIL Tasman managing director Paul Breslin, a member of the Parer Panel that examined the national energy market earlier this decade, says the major defect of the electricity market is its inability to manage risks related to high voltage transmission.

Breslin has told the annual IIR "Australian Energy Reform" conference in Melbourne that, even after a decade of NEM operations, "interconnectors constrain and prices separate between regions, sometimes to an alarming extent."

While NEMMCO's settlement residue auction allows some of this price risk to be managed, he adds, this is only available when an interconnector is open. It still leaves market participants exposed to price separations occurring when HV interconnectors are downgraded or closed.

Breslin says inter-regional transmission constraints are having the effect of discouraging potential investors from building generation on the lowest-cost sites as they must consider their ability to win contracts in the markets around them. "Contracting across the interconnectors is still a risky business."

Policy uncertainty deters investment

ACIL Tasman's Paul Breslin says that some new baseload and peaking plant being considered for development in the NEM will not be approved by State governments. The approvals processes in the States are not clear, he adds, and "potential investors don't know what will be approved and what won't."

Breslin says that each State's approach to proposed new power station investments needs to be pieced together from their reactions to other new projects and their public statements.

"In New South Wales," Breslin goes on, "the government appears to have discouraged the State-owned generators from building more baseload plant. Proponents of a new (private) coal-fired power station have been discussing their project with the Government for almost two years."

He says that there are also a number of NEM government programs that confuse investment decisions, pointing out that the New South Wales ETEF acts to increase prices but is seen by most new investors as a way in which pool prices are manipulated, and it also reduces liquidity from the swaps market.

Breslin also cites greenhouse gas mitigation schemes as creating uncertainty for investors, not least because of the unclear general approach to the issue for the long term. "The conflicting position between the States and the Federal Government reduces confidence for investors. In addition, the lack of clarity around bona fide pre-existing investments (whether they will receive grandfathering) is a significant impediment to potential new investors in the more greenhouse gas intense technologies."

Raising barriers to coal-fired generation will allow development of more expensive gas-fired plant, he argues, although this will result in higher electricity prices for customers in the future.

Breslin says ACIL Tasman does not detect a shortage of new capital, either debt or equity funding, for investment in Australian electric generation. "Even companies and banks who invested in the British and US market, and suffered significant losses as those markets have fallen, are still investing in the NEM."

200MW upgrade planned for QNI

Powerlink Queensland chief executive Gordon Jardine says his government-owned organisation and its New South Wales equivalent, Transgrid, are working on a proposal to achieve a 200MW augmentation of the QNI high voltage line between the States, intended to be operational by late 2009.

Jardine, who has returned to running Powerlink after a year spent acting as CEO of the troubled Queensland Government-owned distributor, ENERGEX, says the key to whether the QNI upgrade goes ahead will be policy decisions made about the regulatory "economic test" for interconnectors. He adds that Powerlink and Transgrid expect to have completed a regulatory proposal for new development of the line by late 2006.

However, he pointed out to the "Australian Energy reform" conference in Melbourne, even if the 200MW augmentation goes ahead, the QNI will still be "moderately constrained" for supply southwards in the new decade. New South Wales at present obtains about 11 percent of its electricity needs from Queensland over the QNI.

Jardine says the key policy decision facing NEM governments is how strong a national grid is desired. The present situation provides a thinly connected NEM grid, he adds, with no flexibility for supply planners. "To achieve a relatively unconstrained grid requires a different policy setting and a different regulatory test." The decision the strength of the grid is one for ministerial policymakers not bureaucratic planners and has not yet been debated at the political level.

Iemma announces gas plants

While the NSW Government's energy white paper, originally proposed for production in April 2005, shows no sign of appearing, the new Iemma administration continues to make piecemeal energy policy statements. In the latest, apart from re-announcing the State regulator's earlier decision to permit $1.6 billion in augmentation of the distribution network over the second half of the decade, Premier Morris Iemma has also said that work will proceed on two new gas-fired power plants.

One plant will be constructed by international energy company TRUenergy, which operates in Australia from Melbourne, and will involve construction of a 400MW system at Tallawarra on the State's south coast, planned for commissioning in 2008, and the other will have 300MW capacity and will be constructed by the Government-owned Delta Electricity adjacent to its coal-fired power station at Lake Munmorah on the central coast.

NSW Energy Minister Carl Scully, meanwhile, claims that the State is "well-placed" to cope with extreme weather pressures on electricity supply in the 2005-06 summer. Echoing the Queensland Government, which is in year three of working to reinforce its distribution system to cope with strong demand and severe storms, Scully says his government is committed to "delivering a better safety net against blackouts."

Premier Iemma adds that the government will "secure electricity supplies from power plant to power point."

Finally, Basslink connects to market

The Basslink interconnector between Tasmania and Victoria is finally transferring energy in to the national electricity market, with 100MW being initially despatched in the National Grid Australia commissioning trials. NGA project director Mike Carter says the company is "optimistic" of the link being fully operational by the end of February.

This outlook is an improvement on the April 2006 deadline set for Basslink moving in to operation after transformers for the project were damaged at sea this year in a storm. At peak capacity, the line is expected to despatch up to 580MW and it is a key element for Victoria in reducing the State's peaking power problems during extreme weather.

Keith Orchison

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