Issue 68, December 2010
Welcome to the eleventh and last issue for 2010. Coolibah takes this opportunity to wish all its Commentary readers the compliments of the season and good fortune in the year ahead. This issue canvasses a number of topics that have been high on the energy industry’s agenda in the past 12 months and will continue to be so in 2011, not the least of which are continuing lack of national, coherent decarbonisation policy and a parallel rise in public and media concern about spiralling power prices.
The year now ending has been one of the most politically turbulent in Australia since the 1970s, with the fall of the Victorian ALP government on the last Saturday in November the latest development, something of a surprise for most in industry, who, like the media commentariat, had been expecting John Brumby to win the poll with a reduced majority.
Ahead lies the March election in New South Wales, where the Keneally ALP government is confidently expected by all and sundry to suffer a massive defeat, and a major change to voting patterns in the Senate come July when the Greens assume the balance of power following last November’s federal poll.
Top of the agenda for the Greens and the environmental movement will be driving a carbon charge through Federal Parliament, a policy supported by Julia Gillard notwithstanding considerable disquiet in her own party about voter reaction to further pressure on their power bills.
The Gillard government is also expected to devote time to considering a mandatory energy efficiency target.
The outcome of the UN climate change summit at Cancun in Mexico will have a bearing on debate about whether the 2020 abatement target (five per cent below 2000 levels) is adequate. The Greens, important to the government in winning House of Representatives votes and essential from mid-year in the Senate, will push for a 40 per cent target.
Labor will become more focused in the second half of the new year on the survival of the Bligh government in Queensland, with 2010 ending with the ALP suffering substantial voter discontent in the State.
Should both NSW and Queensland fall to the Coalition in 2011-12, the major electricity-consuming regions in Australia – these two States and Victoria account for 79 per cent of national demand – will be in the hands of the Liberals and Nationals in the run-up to the next federal election.
Australian household utility bills, for all essential services, on average rose by 15 per cent in the 2009-10 financial year, according to Macquarie Bank, the sharpest annual increase in this component of the consumer price index since 1983. The bank estimates that the increase for 2010-11 financial year will be 11 per cent.
Macquarie says that the foreshadowed rise will add about $300 to average household utility costs, which were $2,700 in the past financial year. It compares this to the impact of a rise of 25 basic percentage points in the standard variable mortgage rate – which would add $700 a year to interest payments for a home-owner with a $280,000 mortgage – and points out that only 35 per cent of Australian home-owners actually have a mortgage.
The bank notes that the utility bill rises have been accompanied by increases in other non-discretionary costs such as rents, health and education.
The electricity component of the problem has been exacerbated in 2010 by one of the coldest winters in a decade, Macquarie says. In NSW, for example, energy demand between mid-autumn and mid-winter increased 20 per cent and it rose 15 per cent in Victoria.
Factor in this usage increase with the 11 per cent rise in charges from 1 July and many households will have seen a quarter on quarter increase of 30 per cent in their power bills in recent weeks.
Meanwhile Federal Energy Minister Martin Ferguson has said that electricity price rises are the “biggest cost of living issue” facing Australians today.
Engineers Australia, in its first review of national infrastructure since 2005, has found that little or no real progress has been made in the past five years despite attempts to make up for past under-spending.
The 85,000-member professional body says a large proportion of Australia’s infrastructure is nearing the end of its useful life. It complains that there is a lack of strategic and co-ordinated planning between layers of government and warns that expenditure on maintaining and replacing existing infrastructure – not to mention new infrastructure – is “well below what is necessary.”
It claims that there is a $700 billion shortfall in national infrastructure investments as a result of years of under-spending.
Looking at electricity, Engineers Australia argues that major changes are required to make supply infrastructure fit for its current and future purposes.
“Generation investment has been deferred and major improvements are needed in distribution and transmission,” it says. “The development of a renewable energy sector is not occurring as rapidly as it might if a carbon pricing policy was in place.”
Engineers Australia observes that a significant expansion of low-cost, reliable generation will be required to meet future demand. “The viability of novel, large-scale generation, specifically nuclear, geothermal and solar thermal power, needs to be examined from a technical, political, financial and environmental perspective by governments as this is unlikely to be undertaken by the private sector due to risk in the current carbon environment.”
Engineers Australia joins the chorus warning governments that baseload generation development is inadequate. “Gas-fired plants are being built because they are quicker and cheaper to construct and less subject to carbon pricing. However, their cost of generation is sensitive to gas prices, which are likely to become more volatile due to internationalisation (of the market). Providing economic baseload generation will become increasingly important as existing coal-fired plants reach their technical end of life. All options should be considered.”
It also comments that power networks are ageing and that a large pool of labour resources will be needed to support a significant rise in upgrades and renewal of network infrastructure.
“The costs of the components of providing electricity are all increasing,” the organisation says. “Given that significant investment is required to meet rising demand, artificially holding down power prices will result in under-investment leading to reliability and quality of supply problems.
“The challenge is to establish an electricity cost that ensures sustainability of infrastructure and is still affordable to our communities.”
Without further policy action, Australia’s emissions will rise to 121 per cent of 2000 levels at the end of the decade, according to Martin Parkinson, Secretary of the federal Department of Climate Change.
This means that the Rudd/Gillard government’s target of reducing emissions to five per cent below 2000 levels by 2020 will require a cut of 144 million tonnes a year by the end of the decade.
Increasing the target to 25 per cent below 2000 levels, which Rudd foreshadowed before he was sacked as Prime Minister if there is a global agreement on abatement and which is still well below the 40 per cent target demanded by the Greens, will require an annual abatement achievement of 250 million tonnes, Parkinson says.
Meanwhile the Fairfax media have revealed that Kevin Rudd went to the Copenhagen climate change summit this time last year ready to promise that Australia’s 2020 target would be increased to 10 or 15 per cent below 2000 emissions levels if other countries agreed on a new global abatement plan.
Australians want action on climate change and this inevitably will involve “a gradual shifting away” from carbon-intensive power generation, says Prime Minister Julia Gillard.
Writing in the Fairfax media in mid-November, Gillard says: “The question is how we do this in the most effective way to ensure costs are minimised.”
The electricity sector, she points out, contributions more than a third of national emissions and relies for 82 per cent of supply on coal, with 10 per cent coming from gas and eight per cent from renewable sources.”
One of the key drivers of current electricity price rises is continuing carbon price uncertainty, she argues. A carbon price will allow industry to make investment decisions to effect a transition to a low-carbon economy “smoothly, efficiently and in the cheapest possible way.”
She adds: “If we continue to do nothing, we will pay a heavy cost – electricity prices will spiral, big investment decisions will remain on hold, our power supplies will begin to run short and clean energy jobs will be lost offshore.”
Meanwhile the head of the International Energy Agency, on a visit to Australia, has warned that this country will face major adjustment costs in decarbonising the economy by 2050 if it does not include nuclear energy in its generation mix.
IEA executive director Nobuo Tanaka said in Canberra in late November that, if carbon capture and storage proves to be unviable, and if Australia opts not to use nuclear power, it will find going totally to renewable energy “very, very expensive.”
The most recent Federal Government energy paper on the costs of electricity generation technology, released during Tanaka’s visit, ranks nuclear power as cheaper abatement technology than solar but more expensive than coal-fired or gas-fired plants with carbon capture and storage.
Energy Minister Martin Ferguson, who published the paper, acknowledges that it will take another five to 10 years to establish whether CCS is viable.
A new research paper by Martin Nicholson, Tom Biegler and Barry Brook, an Adelaide University professor, meanwhile argues that, when a carbon price high enough to drive a generation technology switch in Australia is put in place, only nuclear power can maintain supply security, keep costs down and meet long-term abatement targets.
Only five technologies currently qualify for use as low-emission baseload generation, the trio say. Of these, nuclear power is “the stand-out solution.” Only one technology is renewable: solar thermal with heat storage and gas plant back-up, but its is not cost-competitive. Replacing coal plant with solar thermal power, they claim, will require a carbon price of more than $150 a tonne.
The financial viability of low-carbon electricity generating technologies needed to achieve carbon abatement will require electricity prices to rise substantially over time and a carbon charge that escalates as targets are tightened, according to the Australian Academy of Technological Sciences and Engineering.
A new study, overseen by John Burgess, formerly BHP’s head of research, says Australia faces a long period of heavy investment in low-carbon energy technologies, especially for generating electricity. “National economic well-being has been underpinned by relatively cheap energy supply in the past half century,” the report says, “and the transition to low-carbon generation will have a critical impact on the economy and on Australian living standards.”
ATSE adds that the combined application of new generating technologies in the market will require serious attention to the size of power units, the intermittent availability of wind power and some other renewable resources and the additional transmission costs necessitated by the remote location of wind, solar and geothermal plants.
The Australian Conservation Foundation says $100 billion needs to be invested in low-carbon technology to deliver the Rudd/Gillard government target of emissions being five per cent below 2000 levels by 2020.
The ACF points out that this goal requires emissions to be no more than 523 million tonnes a year by 2020 and they were just under 550 million tonnes in the financial year ending 30 June.
The ACF says measures to drive the investment of $100 billion could include government loan guarantees to clean energy developers, co-investment in projects by government, the issuing of climate bonds to attract community investment, tax concessions and guarantees of revenue certainty to project developers.
There is a question mark over the pace of future wind farm development in Victoria following the defeat of the Brumby government.
Through the Clean Energy Council, the wind generators campaigned strongly against the Coalition, claiming that Opposition leader Ted Baillieu’s plans for change development rules for wind farms would lead to a situation where it would be easier to dig a coal mine in the State than to erect a wind turbine.
The CEC said in advertisements that Labor policy would attract 3,000 MW of wind farm investments worth $9 billion to Victoria over the next five years and the Coalition’s approach would see development lost to other States.
The CEC published research it commissioned from consultants Carbon Market Economics, one of whose principals is Rob Jolly, the former State Treasurer in the Bracks government, claiming that between 50 and 70 per cent of wind farms currently under consideration for development in Victoria would not go ahead under Baillieu’s rules. Capitals outlays would fall by between $2.6 billion and $3.6 billion from the levels to be expected if Brumby was re-elected.
Carbon Market Economics also drew attention to the Brumby government’s intention to ensure that 500 gigawatt hours a year of large-scale solar plant generation was brought in to production by 2014 and 2,500 GWh by 2020.
Meanwhile Infigen Energy managing director Miles George has told the company’s annual meeting that he expects the federal government’s renewable energy target to drive national investment in about 1,000 MW of new wind power capacity annually over this decade.
The company, which operates the largest wind farm in Australia (278 MW at Lake Bonney in South Australia) as well as the most visible one (the 140 MW Capital Hill project near the Federal Highway between Goulburn and Canberra, the route from Sydney in to the ACT), told media after the annual meeting that it is in talks with potential partners on projects that may involve outlays of $500 million a year on adding 200 MW annually to capacity.
The NSW government has published a survey claiming that eight in 10 people in six regional areas support the development of wind farms.
The study canvassed 2,022 people and 300 businesses on the New England and Central tablelands and in the Upper Hunter, Cooma and South Coast regions as well as on the NSW/ACT border.
The survey claims that 60 per cent of residents interviewed were comfortable with wind turbines operating within one or two kilometres of their homes.
Japan whipped the rug out from under the UN climate change negotiations at the Mexican holiday resort town of Cancun before the talks even got under way.
The underlying agenda for the Cancun meeting, involving 193 nations a year after they achieved very little in Copenhagen, is thought to be a move to extend the Kyoto protocol beyond 2012 to give negotiators more time to find a successor treaty.
But the Japanese government signalled in Tokyo before the talks began that it would not accept this arrangement. Simply extending the agreement that covers 40 nations, but not China or the United States, would be “meaningless and inappropriate,” the government said.
Meanwhile, in keeping with the traditions of the UN talkfest, a British scientist has called in one of a series of papers published by the Royal Society to co-incide with the meeting for a 20-year moratorium on economic growth in the developed world.
Kevin Anderson, director of the Tyndall Centre for Climate Change Research, says policymakers should introduce World War 2-style rationing in rich countries to limit the amount of electricity people can use, to turn down heating in cold weather, to impose limits on food being sent across the world and to proscribe energy-intensive manufactured goods.
“The concept of rationing needs to be seriously considered to address the scale of the problem we face,” he said. “I am not saying we have to go back to the caves, but our emissions were a lot less 10 years ago and we got by okay then.”
Two of Deloitte Australia’s leading consultants, Michael Rath and Stephen Reid, made a trenchant point in a commentary on national energy security recently published by the advisory services firm.
“It is not an over-statement,” they wrote, “to say that the issues and the uncertainty facing the energy sector – not just power generation, but transmission and retail as well – are extra-ordinary.
“While $43 billion may be considered a comment-provoking sum to spend on a national broadband network to take Australia in to a new economic future in the long term, this figure pales in to insignificance against the sums involved in powering the existing and projected economy in to even the near mid-term.”
Deloitte’s point is that time is running out in providing energy investors with greater certainty in an environment where the need for programs to deliver both carbon constraint and affordable electricity remain very much unfinished business.
By my estimate, we are now faced with the need to spend about $130 billion over this decade on the electricity supply chain -- $20 billion on renewable generation (mostly wind farms), $20 billion on baseload and intermediate power to meet rising power demand, $20 billion on upgrading and expanding the transmission systems (partly to bring remote renewable energy to the markets) and about $70 billion on the distribution delivery systems.
The relatively short-term effect of this expenditure plus an anticipated carbon price and other additional charges is expected to be that end-user electricity bills will be at their highest level in real (ie inflation-adjusted) terms in a half century by 2015, probably double what they were just two years ago in nominal terms.
How this scenario plays out politically is a very big question.
Did it play a part in the defeat in late November of the Brumby government in Victoria?
Will it play a part in the NSW election (March next year) and the Queensland poll (early 2012)?
How will the federal ALP leadership react to further disasters at State level, one of which appears a racing certainty?
We can be sure of this much: electricity supply, electricity prices and greenhouse gas emissions from power stations are now very much “in play” on our political stages – and how politicians react to this will impact, in turn, on what investors are willing to do to provide energy security and reliability this decade.
A major feature in the Australian Financial Review at the end of November saw members of the supply industry commenting that it would be “very, very brave” to ask financiers to support a new coal development at present, that it was “very, very brave” for Ross Garnaut to claim that no power shortages would result from a refusal to compensate coal-fired generators forced out of business by a carbon price and that suppliers “cannot wait forever” for policymakers to come to a decision on the new rules of the game.
Rod Sims, adviser to the Gillard government and chairman of the NSW independent pricing regulator, commented “There’s no free lunch here.”
Economist Jon Stanford, who has been my speaking partner at a series of stakeholder lunches across Australia organised by Deloitte, makes a strong point about the national attitude to electric power.
“Australians are having an undeclared love affair with electricity,” he says. “We now build the largest new homes in the world and probably the most power hungry. We gorge ourselves on air-conditioners, flat screen TVs, home cinemas, computers and ever more electrical appliances that get cheaper and cheaper. And guess what will take the place of the internal combustion engine for our must-have personal transportation if we abandon petrol products?”
This is the background to a terrible political dilemma because, as Stanford says, policies designed to reduce consumption or promote energy conservation will not succeed without unacceptable power price increases. To say, as he does, that significant increases in electricity prices are politically and socially very difficult is an under-statement indeed.
As befitting his English antecedents, Stanford, a former senior federal public servant, says present policies shaping investment in power generation are, to be polite, sub-optimal.
As he points out, these policies at present include the RET, no carbon price nationally, a raft of different measures at State levels, massive subsidies to householders for solar power, the least cost-effective generation technology, and a blanket ban on use of the only widely-available, cost-effective, zero emissions baseload option, nuclear power.
Federal Labor has had three years in which to address this policy mish-mash and, if anything, has made the situation worse, jettisoning a prime minister en passant and replacing him with one no less addicted to spin and committees in “going forward.”
Programs, such as the insulation scheme, the Green Loans scheme and the initial structure of the enhanced RET, have been managed appallingly badly.
On the cusp of a new year, it bears repeating with emphasis that Australia needs an energy white paper because investors can have no confidence in building low-emissions power generation without it.
Investment in the power business has a long gestation period and investors need to understand both the future pathway for carbon prices and the government’s attitude to the use of future technologies.
The public, too, has a right to know what costs it faces and the implications of decarbonisation policies for employment.
It is a source of regret and of considerable grounds for concern that, after three lost years on this road, Australia still has no clear sense of energy direction. We cannot wait forever.