Issue 46, December 2008

Here’s hoping

Coolibah takes this opportunity of wishing readers a safe and happy Christmas and extending, albeit in all honesty not too hopefully, best wishes for a New Year that may see something resembling normal service resumed on the global economic front. Worth noting is this comment from Mark Dutton, chief investment officer of AXA: “We can expect markets to remain volatile for some time yet, but recovery may be much quicker than in previous financial crises.”  One of the important downside risks for electricity generators and networks businesses, as well as other energy infrastructure developers, is the fate of the Australian dollar, with growing concern that it may fall further in 2009.

Meanwhile, some petroleum records

Gas production on the east coast reached record levels in the September quarter, according to EnergyQuest’s Graeme Bethune, continuing a two-year trend that has seen supply climb 18.6 percent – while proved and probably gas reserves also rose sharply, having now climbed 38 percent in 12 months and standing at the equivalent of 32 years’ consumption at current levels.

Bethune reckons that, if higher risk reserves are taken in to account, there now is about 60 years’ supply of gas on the eastern seaboard, a solid base for both new electricity generation and proposed coal seam methane exports.

EnergyQuest reports that oil production in Australia also rose – up 8.6 percent – in the September quarter, reflecting improved output offeshore Western Australia, but the downside is that national oil and transport liquids imports achieved a record, too, reaching $12.5 billion.

Retailer shock

Victoria’s Commissioner for Environmental Sustainability has handed energy retailers a not specially welcome Christmas surprise by recommending that the State Government  introduce mandatory disclosure of their large energy contracts.

In his first report on the state of Victoria’s environment, Ian McPhail, has claimed that the focus on energy efficiency in the State could be boosted by requiring retailers to reveal their contracts along with the introduction of a process to collect and disclose energy consumpotion data.

McPhail notes that Victorian energy efficiency has improved since the 1990s, saying that the amount of energy consumed for every dollar of State GSP has decreased by 18 percent in the past quarter century – at the same time, he points out, consumption has risen 30 percent. On present trends, McPhail adds, State energy consumption will rise by 40 percent by 2030.

He says Victorian electricity use has risen by an average 3.8 percent a year since 1973 and total consumption has more than doubled in the past 20 years. Over the past decade growth has averaged three percent a year.  Power demand is currently projected to rise another 10 to 15 percent in the next decade.

McPhail says that the metals products sector accounts for a large part of the State’s power use – 30 percent of total consumption and 67 percent of manufacturing consumption. Eighteen percent of Victorian consumption is by two consumers – the aluminium smelters at Point Henry and Portland.

Ninety-five percent of Victorian power needs are met from brown coal generation and McPhail notes that the State – and Australia – has some of the world’s lowest electricity prices at present.

D-day for ETS

Climate Change Minister Penny Wong has announced that the Rudd Government’s white paper on carbon charges will be released on 15 December after she returns from the latest United Nations talkfest on global warming policies in Poznan, Poland. 

Wong and the Government came in for flak from the Greens and more than a few in the media when she departed for Poland without revealing what 2020 carbon abatement target would be pursued despite an earlier commitment to do so.  Fifty-four environmental lobby groups have published an open letter to Prime Minister Kevin Rudd calling for a target for 2020 of “at least 25 to 40 percent.”

The Sydney Morning Herald claims that a Rudd Cabinet sub-committee met “every second day” towards the end of the 2008 parliamentary term in search of what it describes as “one of the signature issues of Rudd’s first term.”

The Herald has also claimed that Rudd told a parliamentary caucus meeting before MPs went home for Christmas and New Year that it was “too late” to influence the decision.

The Australian claims that the Cabinet will offer higher than first indicated compensation to trade-exposed businesses and a “soft start” in targets.
A number of newspaper political columnists also assert that the Rudd Government strategy is to negotiate its plan through the Senate, where it is in a minority, next year by making a deal with the Coalition rather than the Greens and two independent senators, who hold the balance of power.

The Government is also said to be still working on the details of its legislation to increase the size of the mandatory renewable energy target in the face of concerns from industry and arguments from some quarters that the RET is unnecessary if there is emissions trading.

Coolibah has calculated that the cumulative cost of a 20 percent RET between 2010 and 2020, with a penalty charge of $43,000 per gigawatt hour, would exceed $12 billion, without taking in to account any allowance for inflation – with more than $7 billion of this cost falling on commerce and industry.

So far the Government has not indicated any intention of compensating consumers for the RET cost.

Wong has attempted to put the best face on the issue before departing for Poland by saying that Cabinet believes it will provide business with greater certainty by announcing the emissions target range and the design details of emissions trading at the same time.

Billions for capex

The Australian Energy Regulator has given provisional approval for the NSW Government-owned distribution businesses – EnergyAustralia, Integral Energy and Country Energy – to spend $15 billion on upgrading their networks over the next five years.  The AER’s decision will be finally handed down next May.

The networks trio, who reticulate power to 4.37 million customers in the biggest demand area of the national electricity market, have received a 90 percent increase in their investment approvals compared with the current five-year term that will end in mid-2009.

According to the AER’s arithmetic, residential customers will pay almost $420 million a year more for electricity as a result of the new capex arrangements plus higher operating costs from 2009-10. Distribution charges represent about 40 percent of the average cost of final delivered energy.

AER chairman Steve Edwell attributes the need for greatly enlarged investment to the networks being required to replace aged asset as well as meet higher reliability requirements and cope with continued growth in peak demand, which is rising at a faster rate than overall energy consumption.  As much as 10 percent of networks is used only one percent of the time to meet peak demand.

The regulator has also approved an outlay of $163 million over five years by ActewAGL in the Australian Capital Territory and $2.4 billion in investments by the NSW Government-owned TransGrid, up 70 percent from the transmission firm’s current approved capex for 2004-09.  AER has also approved $615 million in investment by the Tasmanian Government’s Transend.
This follows earlier approval for the privatised Victorian transmission business, SP Ausnet, to spend $950 million on augmenting its system between 2008 and 2013, up from $600 million for the previous five-year period.

In a separate review of the market, AER has estimated that $8.3 billion worth of generation plant is currently under construction, adding 12 percent to supply capacity.

Steve Edwell says that market-wide expenditure on networks have been averaging $4.2 billion a year this decade.

Looking ahead, he forecasts that the replacement of lower-cost, high-emissions intensity generation plant under the Rudd Government’s abatement program with gas and renewable energy will see a possible rise in wholesale prices of 15 to 20 percent.

NSW assets to be sold in 2009

Departing NSW Treasury secretary John Pierce has told a State Parliamentary committee that the sales program for electricity assets – three retailers, the trading rights of its three generators and development sites for new power stations – is designed to see the process completed by the end of next year.  The full sales strategy will be in place by March, he says.

Wells of gold

The Productivity Commission says the Federal Government collected $4.2 billion in upstream petroelum taxation, crude oil excise and royalties in 2006-07.  The big money-spinner was the resource rent tax introduced by the Hawke Government in the 1980s – it garnered $2.9 billion.  The PPRT is a profit-based tax levied at a rate of 40 percent of net petroleum project revenues.

The commission is undertaking a review of upstream petroleum regulations for the Rudd Government.

In one of the submissions to it, the Australian Petroleum Production & Exploration Association points out that the total upstream oil and gas revenues obtained by three tiers of government – federal, state and local – exceed $8 billion a year out of a gross revenue stream of almost $23 billion.

APPEA and its members are arguing for a major streamlining of regulation affecting the industry.  The association points that project developers are required to negotiate through hundreds of decision points and approvals. Many regulatory processes are duplicated between jurisdictions, it says.  With about $100 billion worth of new petroleum developments currently under consideration, it argues, improvements in regulatory processes are vital to the industry.

WA gas challenge

The DomGas Alliance, representing West Australian gas consumers, has told the Productivity Commission petroleum regulation review that the State’s demand will rise to 900 terajoules a day in the next six years, requiring 650 TJ/day of new gas to meet consumption requirements.  “This is equivalent to the total size of the existing market,” it says.

The alliance notes that there are industrial projects worth $23 billion currently seeking gas for expansion or new developments.  They total 17 projects with a potential annual economic value of $9 billion.

Even without the recent Varanus Island crisis, the alliance adds, WA has been experiencing a serious domestic gas shortage since 2006. As a result wholesale gas prices have almost tripled in 18 months with local charges now almost three times eastern State prices on a delivered basis.

High gas prices, DA complains, have eroded industrial international competitiveness at a time when energy-intensive companies are experiencing high labour and material costs. In the recent past they have also been adversely affected by a high value Australian dollar and high interest rates.

One of the alliance’s gripes is the focus of the gas industry and the state and federal governments on building Australia’s LNG exports, with a target of achieving 50 million tonnes of annual sales by 2015. This disadvantages local industry, it argues.

Meanwhile the new, Liberal-led WA Government has said it will order an independent inquiry in to the role of the State regulators over the the Varanus Island crisis. The failure of supply – 30 percent of demand was lost -- after a gas pipeline explosion is claimed to have cost WA businesses $2.4 billion this year.

A Senate committee review of the incident has split on party lines, with the ALP senators finding that crisis management by the now-ousted Carpenter Government was “adequate” while Coalition senators said it was “grossly incompetent.”

The National Offshore Petroleum Safety Authority has found that the cause of the explosion was the rupture of a corroded pipe.

Partial supply from Varanus Island was resumed in August and lifted to two-thirds of capacity by October.  Full supply is scheduled to be available later this month.

Bass boon

The extra-ordinary value of the Bass Strait oil and gas fields to the national economy is highlighted by ExxonMobil in its submission to the Productivity Commission regulatory review. 

The US company, joint developers of the original Gippsland Basin discoveries with BHP, says the Bass Strait operations since the 1960s have delivered about $300 billion  in tax revenue to the Federal Government in real (inflation-adjusted) terms – equal to 2.1 percent of all revenues the government has collected in this period.

ExxonMobil adds that the Gippsland Basin operations have stimulated about 50,000 permanent jobs in Victoria, including 14,000 in regional Gippsland.

The company uses its submission to continue its argument that the Rudd Government should not both introduce an emissions trading scheme and greatly enlarge the mandatory renewable energy target.  MRET will distort the emissions market and be counter-productive to the efficiency of the trading scheme, it claims.

Renewables meet credit crunch

Law firm DLA Phillips Fox says that, “despite a difficult market” as a result of the global credit meltdown, there is still investment capital available for quality renewable energy projects.

Partner Eugene Fung points to the ability of Brisbane-based geothermal power developer Geodynamics to raise $150 million in fresh capital this year – including $44 million in September – as an example of the trend. Fung says his firm has worked with a number of energy companies in the past year on renewable projects.

However, management consultants Ernst & Young say that uncertainty over the MRET targets – the Rudd Government has yet to announce how it will implement its election promise to increase the renewable share of electricity consumption to 20 percent – has “temporarily stalled” cleantech investment.

Partner Jon Dobell says the delay and increased finance costs due to the global credit crisis are issues for investors, with uncertainty over the target a critical factor in “holding back a flood of investment.”   Dobell estimates the need for renewable energy investment to reach a 20 percent target by 2020 at $23 billion – others have put it as high as $35 billion.

The initial Howard Government MRET has seen $3 billion invested in renewable energy developments over eight years, he adds.

He says planning of transmission grid expansion to cope with distributed renewable power sources and site access regulation will be other critical factors influencing where the new investment under the higher MRET is directed.

Dobell identifies Victoria as the hottest area for renewable investment at present.  While only 134 MW of wind farms are in operation, the State has 2,000 MW under development or construction, he says.  While South Australia has captured the lion’s share of renewable investment in the past seven years, he adds, this is unlikely to continue because of transmission grid constraints.  SA regulators have also been “quite conservative” in their approach to granting wind farm licences, Dobell says, creating extended delays and increased costs for project developers.

Meanwhile international energy research firm Platts says in a new report that, after years of boom during which money lenders bombarded small companies in the clean energy sector with credit, “the outlook has now turned bleak.”

Big renewables companies should survive and “slowly prosper,” according to Platts, “but smaller players will face the heat.”

It adds: “For the development of the next generation of ultra thin solar panels or the newest offshore wind turbine requires most companies to take up large sums of long-term project finance (but), with project financiers now going bust or being short on cash, the last thing they want to do is to hand out long-term credits to small companies with little equity and cash.”

Giants bounce coal project

Royal Dutch Shell and Anglo American Plc have shelved plans to spend $5 billion on a Victorian project to turn brown coal in to liquid fuel.

Roger Bounds, project director of Monash Energy Holdings, the joint venture for Europe’s biggest oil business and the world’s fourth-largest miner, says they have decided not to proceed past the pre-feasibility phase, on which they have spent $20 million, of the project that aimed to convert brown coal in the Latrobe Valley in to synthetic gas and then high quality diesel.  The proposal included capture and disposal of carbon dioxide emitted during the process. “Critical requirements are not yet in place to allow us to proceed to the next phase,” adds Bounds.

Victorian Energy & Resources Minister Peter Batchelor acknowledges that the partners have not yet found that the project “stacks up” economically and environmentally in situation of global credit crisis and where the Australian emissions trading scheme has yet to be finalised.

In several submissions to Federal Government policy reviews this year, Monash Energy has pushed for greater government funding to kick-start carbon capture and storage developments as well as for exemption from the emissions trading scheme.

The project is the third CCS scheme to come unstuck in the past 18 months – last year Santos and GE walked away from a low-emissions venture in Queensland while BP and Rio Tinto this year decided not to proceed with a $2 billion carbon capture power station in Western Australia.

Word of Rudd

Notoriously, Prime Minister Kevin Rudd writes his own speeches (or large parts of them).  So it pays to keep an eye on them for his personal perspectives on issues, such as global warming policy, rather than to see another distillation of Humphrey-speak from bureaucrats and advisers.

His recent speech to the APEC summit in Lima, Peru, provides a number of insights:

Perhaps it is a speech (on this issue) as interesting for what it doesn’t say as what it does.


Now a blogger

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


While we wait for Climate Change Minister Wong to re-appear from the ancient Polish regional capital of Poznan to announce both the emissions target(s) for Australia in 2020 and the structure of the emissions trading scheme, the media are making merry with claims and counter-claims about the potential impact of carbon charges and with reports from the UN summit of the kind that essentially impart no addition to knowledge and understanding (with a few, honourable exceptions).

Back in the real world, however, a substantial part of Australian business will be living on its nerves, contemplating a far more uncertain future than even the global financial crisis and adjunct issues such as the future value of the Australian dollar have to offer.

Some of the writing by political correspondents in Canberra suggests that they could do with getting out more – perhaps they could spend the parliamentary holidays visiting some large factories and power stations.

A classic of the type was a commentary in the Sydney Morning Herald that noted that the “most dramatic effect” of the Rudd Government adopting a 25 percent cut in greenhouse gas emissions by 2020 would be a 37 percent increase in household electricity prices.  The writer, apparently, could not envisage what that level of power price rise might do to the country’s energy-intensive manufacturers, who employ more than a million people, with perhaps a similar number employed downstream in companies servicing the major users.

Meanwhile, the same paper heralded the Australian Energy Regulator’s draft determination for the New South Wales distribution businesses – approving their spending $15 billion on capex in the next five years (see above) – as a “price shock” for residential customers, for whom the increased charges would be considerably less than a 37 percent rise in final retail bills.

Wong and the Government are being lambasted by critics and headline writers for not embracing a 25 percent (even a 40 percent) abatement target for 2020, but how, one wonders, could this occur without a significant burden for trade-exposed industry? These are companies, after all, that account directly and indirectly for 200 million tonnes of greenhouse gas emissions a year and whose emissions are projected to grow, without intervention, at one percent a year.  They also account for 65 percent of Australia’s total exports and $550 billion worth of avoided imports per year.

Presumably, the awakening of at least some ministers – see above – to the impacts to flow from a unilateral Australian carbon charge are what has kept the relevant Rudd Cabinet sub-committee “meeting every second day.”

Possibly what has also given the Prime Minister and his colleagues some additional food for thought are recent confidential Government public focus group responses: it has been claimed to this writer that those quizzed now have daylight between their chief (economic) concerns and climate change, having had the latter at the top of the list for much of the past two years.

It reminds me of the old Soviet era joke about the good communist peasant who dutifully answered all official questions about his willingness to share things with his neighbours positively until the official asked “And if you had two pigs, would you give one of them to your neighbour?”  No, was the emphatic reply – and why not?  “Because,” said the peasant, “I have two pigs.”  Insouciant local willingness to see financial sacrifices – even a small weekly impost on their bills – stops abruptly when what is at issue is whether the interrogated will have jobs in the current climate.

Real pain now is much harder to bear than supposed climate change pain by others far down the track.  “What,” you may recall,  asked Marx (Groucho, not Karl), “has posterity ever done for me?”

Low, a brilliant Australian cartoonist of times long past, pictured two men falling off a scaffold with the bottom one, clinging to his mate’s trousers, eyeing the top fellow’s ever-stretching braces (yes, it was that long ago) and yelling “For God’s sake, stop laughing – this is serious.”

Yes, this – today’s climate change policymaking -- is serious and it is commendable that Cabinet is treating carbon charges seriously now that policy push has come to shove. It is also good, if the reports (see above) are correct, that the Government intends to try to establish agreement with the Coalition to get the policy through the Senate rather than putting itself at the mercy of the Greens.

A considerable part of the propaganda embraced by the Greens, and their eager acolytes in NGOs and elsewhere, is built around the concept that, if the focus is kept on 2050, the painful impacts in the shorter term can be played down to a gullible public.

 A stoush between the Climate Institute, pushing this perspective, and the Australian Industry Greenhouse Network, warning of substantial pain in the nearer-term, has kept the media amused in the latter weeks of November. 

Reading 28 pages in to the consultants’ report for the Climate Institute, one notes the following acknowledgement of the limitations of their modelling: (1) demand reductions were not modelled – but “it would be expected” that demand would fall in response to higher prices, to which I would add that most such demand would be industrial not residential; (2) gas price forecasts had been assumed to remain the same in all scenarios modelled – which is not what other reputable economic consultants believe; and (3) costs of upgrading networks to accommodate new renewable generation had not been modelled.

As AIGN’s Mike Hitchens noted – and I have extrapolated from his comments -- you don’t need a model to tell you that the higher and faster abatement is driven and the less co-ordinated it is with the rest of the world, the greater will be the consumer pain in the next decade or so.

The bottom line is that the first half of the year ahead, as the Government stance is announced and legislation is negotiated, will be of critical importance to all Australians. Felicitations to at least the sensible majority of us all for the new year………….

Keith Orchison
8 December 2008

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