Coolibah Commentary


Issue 106, February 2014

January provided a helluva start to the energy new year and there is ample evidence of lots more to come, writes Keith Orchison. This second issue of the newsletter for 2014 canvasses recent news and some of the key developments that are already raising ire and concern among electricity and gas stakeholders.

Price hassles

The Australian Energy Regulator says average energy costs rose faster than household disposable income in 2012-13, underlining why the issue remains a political hot potato.

In its annual “State of the Energy Market” review, the AER says electricity costs were highest in Tasmania, where average power consumption is significantly higher than elsewhere in the country. Gas costs were highest in Victoria.

The regulator reports that, for a benchmark low-income household receiving energy bill concessions, electricity costs accounted for between 2.9 per cent and 7.9 per cent of disposable income in 2012-13, up from 2.4 to 7.1 per cent the previous financial year.

The good news, says AER chairman Andrew Reeves, is that a combination of declining demand locally and greater financial market stability globally is translating in to “more stable retail electricity prices in most jurisdictions.”

Falling consumption, says Reeves, has led to surplus generation capacity and delayed the need for investment in power networks.

Hot & bothered

The fierce south-eastern Australia mid-January heatwave generated political fears, renewables sector hype and reminders of the importance of a resilient power network, of high voltage interconnection and of the role of gas generation.

Days of 40 degree and higher heat sent electricity requirements 32 per cent higher in South Australia than in the summer of 2013 and 19 per cent higher in Victoria – while peak demand was 100 per cent higher in SA than the previous summer and 67 per cent higher in Victoria.

In response, gas generators supplied 91 per cent of the extra power needed in South Australia.

In Victoria, gas tripled its market share briefly, delivering 46 per cent of the State’s increased power needs while hydro-electricity (much of its from Tasmania via Basslink, which was described as operating “flat out”) provided 28 per cent and coal plant 26 per cent (having worried dispatchers initially through unit problems at Loy Yang Power).

Setting the situation in context, EnergyQuest CEO Graeme Bethune points out that wind power delivered 19 per cent of South Australian requirements during the heatwave, but only five per cent of the increased need for electricity while wind was becalmed to an extent in Victoria and “provided a negative contribution to meeting increased demand.”

Bethune adds that the “heavy lifting” in the extreme weather was provided by gas, hydro power and coal in Victoria and gas in South Australia.

The Clean Energy Council argues that the contribution of renewables to power needs in the heatwave was “pretty much in line with their performance throughout the rest of the year.”  The CEC says that the renewable energy target is “not intended to tackle peak demand but to reduce the carbon intensity of electricity supply.”

Some $18 billion has been invested in unconventional generation under the aegis of the RET in the past decade.

Other analysis of the situation draws attention to the population of South Australia and Victoria having risen seven per cent since the last major heatwave (in late January 2009, notorious for the “Black Saturday” bushfires) while the latest peak demand fell slightly short of the past record.

Supporters of solar power argue that, in South Australia in particular, where nearly a quarter of households have PV arrays, the rooftop systems helped reduce peak demand and shifted maximum pressure on the State network to later in the day. They argue that “solar is now a critical component” of reliable generation.

The Energy Supply Association drew attention to past complacency in recent years about peak demand as overall electricity use in the east coast market declined.  “The demise of rising summer peak loads has been greatly exaggerated,” says ESAA chief executive Matthew Warren. “Recent investment in networks has made sure there is a reliable supply of electricity when people need it most. Now we appreciate that this (has been) prudent investment.”

Warren adds that mild summer weather in Victoria and South Australia spared the States heatwaves for three years. Now, even with more solar panels, increased demand from more widespread use of air-conditioners has seen a return to near-record consumption.

While the extreme heat in mid-January drew most attention, the earlier high temperatures in the last two weeks of December saw east coast market demand peak generation requirements exceed  30,000 MW for the first time in four years.

In one of the quirks of the situation, Queensland, where heat and humidity far exceeded the discomfort levels in New South Wales, came within 700 MW of its all-time record level and briefly exceeded the load in the much larger NSW sub-market.

Meanwhile, market analysts also point out that an important feature of the mid-January south-eastern Australia heatwave was that the ability of large industrial and commercial consumers to reduce demand or to use stand-by generators, easing the overall load.

However, the Major Energy Users lobbying group is complaining that, because soaring spot prices in South Australia flow through to east coast consumer bills over time, 90 per cent of the market (in Victoria, NSW and Queensland) ends up paying a premium to ensure reliability for 10 per cent of the NEM’s customers.

Hot air

Although comprehensively ignored by Australia’s popular media, an international report has debunked the common theme of linking every extreme weather event with global warming.

Published by Britain’s Global Warming Policy Foundation, an antagonist of mainstream climate change thinking, the study by Madhav Khandekar, a former Environment Canada scientist, appeared as UN secretary-general Ban Ki-moon was declaiming that “people are feeling the wrath of the planet” and pointing to typhoon Haiyan, which devastated part of the Philippines, as evidence of a global warming crisis.

Khandekar, a former expert reviewer for the Intergovernmental Panel on Climate Change, says most scientists agree that the Earth’s climate is changing but the reasons why are still up for debate.

In a foreword to Khandekar’s study, professor Brian Pratt, a leading Canadian geologist, comments: “Emphatic pronouncements and predictions – always dire – are made and repeated so often that folks can be forgiven for assuming them to be fact; yet much of what we hear and read defies common sense.”

Khandekar adds: “The debate seems to get in to high gear every time an extreme weather event such as a heatwave, flood or drought occurs (with) weather and climate scientists issuing dire warnings that such events will occur more frequently in future.”

He argues that “a careful assessment of many well-publicised extreme weather events of the past 10 years suggests they are due to natural climate variability.

“The global warming/extreme weather link is more a perception than reality. (It) has been fostered by increased and uncritical media attention. (In fact,) the latest IPCC documents appear to de-emphasize the link by suggesting ‘low confidence’ in linking some of the events to recent warming.”

He also points to a recent report documenting how human fatalities from extreme weather declined significantly during the 20th century because improved food productivity and increased wealth in developing nations enabled them cope better.

Khandekar asserts: “Global warming and extreme weather pose no threat to humanity either at present or in the next 10 to 25 years.”

Fear & greed

Electric Energy Society president Robert Barr is urging governments, regulators and power suppliers to break the “unhealthy feast and famine” approach to network capital outlays.

Barr  comments: “While stock markets are driven by fear and greed, the drivers for network expenditure are not that different – and the community cost of the feast and famine cycle is particularly high.”

Barr argues that greed occurs in network regulation when capital outlays are cut below long-term sustainable levels to “drive the system harder.”

Fear occurs, he says, when there is the shock of some major blackout event usually triggered by a storm or failure of a small number of key pieces of equipment.

“On review, the true risks of under-investment become apparent and regulators and governments become terrified of what might happen in the future.”

Staff and other cutbacks during the long famine part of the cycle, he adds, results in diminished network project capability. Fear generates an over-reaction.

Barr argues that the lessons learned in the Somerville review of Queensland network underspending – the report appeared in 2004 – seem to have been forgotten.

“The most recent feast phase of 2006 to 2012 has come to an end and we are well in to a famine phase. Are we heading for major network failures in 2022 – or is 2022 just too far in to the future?”

Barr urges policymakers, regulators and the industry to look at network expenditure needs for the next 15 years and to spend a fifteenth of the capital each year.

“This is not rocket science,” says the EESA president. “The result will be improved value for each capital dollar spent, no network price shocks and better value for customers.”

In the dark

Power blackouts will occur around the world in the future with greater frequency and increased severity, according to British and New Zealand scientists in a new paper.

Hugh Byrd, professor of architecture at Britain’s University of Lincoln, and Steve Matthewman, an associate professor of sociology at Auckland University, assert that “security of supply is a pressing social problem.”

Matthewman says: Infrastructure investment across Europe and the United States has been poor and our power generation systems are more fragile than most people think.”

He and Byrd point out that three-quarters of the US power grid was laid down more than 25 years ago – and 60 per cent of the system’s circuit breakers are older than 30 years

The study points out that, in US households alone, electricity usage increased 1,400 per cent between 1940 and 2001 and it notes that demand for electric cars is expected to rocket, along with even greater use of air-conditioning systems.

Countries like China and India are following a similar pattern, it says. Chinese household ownership of air-conditioning units has tripled in a decade and is growing at 20 per cent a year.

Byrd argues: “Western societies are becoming ever more dependent on electrical power, yet supply will struggle to meet demand, especially if you consider the current rate of population growth and the continuing sophistication and prevalence of electrical appliances.”

The pair contend that the West “needs to abandon the idea of uninterrupted electricity supply – supply will become ever more precarious because of peak oil, political instability, infrastructural neglect, global warming and the shift to renewable energy resources."

The study notes that global population is expected to reach 8.5 billion people in 2035 (up from 6.7 billion in 2008) and power demand is expected to be 80 per cent higher then (than in 2008) – it quotes the International Energy Agency as estimating that this will generate a need for 5,900 gigawatts of extra capacity.

The researchers say: “Power systems are taken for granted. The easier technologies are to use, the less they are reflected on and yet (their failure can) have devastating and far-reaching social as well as economic impacts.”

Byrd observes: “Electricity fuels our existence. It powers water purification, waste, food, transportation and communication. Modern social life is impossible to imagine without it and, where cities of the past relied on manpower, today we are almost completely reliant on a series of interlocking technical systems.”

The study wraps up by commenting: “Serious questions (need) to be asked concerning what is wanted and what is needed, balancing what is good for individuals with what is good for others and ultimately for the environment.”



Going down

Victorian residential power consumers will save a little over one cent a day on their power bill as a result of the latest Australian Energy Regulator determination – but network businesses will be eyeing narrowly the rate of return decision at the heart of the latest move.

In a determination for Sp AusNet, the principal transmission provider in Victoria, the AER has cut its allowed rate of return on funds raised from investors and lenders to 7.87 per cent – down from 9.76 per cent for the previous regulatory period (2008-14).

“Even a small difference in the cost of capital can have a big impact on revenues,” the regulator observes, “just as an interest rate cut can have a substantial impact on a home-owner with a large mortgage.”

AER says its cost of capital decision is “significantly less” due to lower interest rates.

The regulator has allowed Sp AusNet total revenue of $1.6 billion over the three-year period of the new determination. This, it says, will see a $4 a year fall in the power bill for an average four-person Victorian household.

(Transmission charges make up around five per cent of a typical Victorian residential electricity bill. When the distribution component is added, network charges make up 34 per cent of users’ costs.)

The decision rejects $40 million, or seven per cent, of SP AusNet’s proposed operating outlays and $29 million, or five per cent, of its proposed capital expenditure.

AER says the main driver of the capex it has allowed – totalling $513 million – is the need to rebuild major sub-stations across Victoria “because of their age and condition. “These replacements are necessary and will serve Victorians for decades,” it adds.

Gas row rolls on

The future price of natural gas on Australia’s east coast remains a bone of contention as the federal government girds itself to produce an energy white paper later in 2014.

The government’s own Industry Department, which has published a survey on the east coast market commissioned by the last Labor federal energy minister, warns that the resolution of the current situation may be “more prolonged and difficult than otherwise it might be” unless a host of present issues are resolved.

Worryingly for consumers, and especially manufacturers, the department also warns that it is possible the gas price will overshoot export parity “in a period of (supply) tightness.”

This implies that wholesale gas prices in eastern Australia, previously averaging $4 per gigajoule or less, could shift towards $12.  Recent deals have been made at around $8 per GJ.

EnergyQuest chief executive Graeme Bethune says, if this occurs, manufacturers who have contracted gas at lower prices in the past year could find it more profitable to shutter their own operations and sell the fuel to LNG producers at Gladstone.

The Department of Industry report says east coast gas production will need to more than triple by 2016 to meet both domestic needs and the requirements of the three LNG projects starting up in Queensland.

Envestra chief executive Ian Little is quoted by “The Australian” newspaper in mid-January as saying east coast customers “will simply need to get used” to paying higher prices.

Little suggested to the newspaper that the “Bass Strait twins,” ExxonMobil and BHP Billiton, are playing a waiting game, “holding on to an enormous reserve until they get decent prices.”

Little added that he believed the gas crisis concerns for New South Wales are “being overplayed.” 

He queried the lack of data available on gas resources in key fields. “The real opacity in the gas industry is in reserves upstream,” he said.

Meanwhile the new ExxonMobil Australia chairman, Richard Owen, has told the newspaper that, after completion of the $5.6 billion Kipper-Tuna-Turrum development in the Gippsland basin, his company and BHP “will have to go in to development planning to look at what resources we have discovered and what exploration activity we may have to pursue to determine whether there is an opportunity for a further phase.”

The Australian Petroleum Production & Exploration Association continues to hammer away at the O’Farrell government in NSW for holding up development of coal seam gas resources within its borders.

Reacting to the latest NSW government decision on further restrictions for CSG activity, APPEA is warning that the State’s gas customers “will pay for this inconsistency.”

Paul Fennelly, the association’s chief operating officer in eastern Australia, says that, “despite knowing that a failure to develop local gas supplies will lead to higher prices, the government (continues) to turn its back on both the science and the industry’s track record” by “dreaming up another layer of arbitrary and politically-driven regulations for an industry the State needs desperately.”

Fennelly says the new regulations will “put a stranglehold on natural gas development, business investment, job creation, regional growth and small business opportunities.”

APPEA is calling on the O’Farrell government for an urgent reconsideration of its position.

Basslink x2

Tasmania’s beleaguered Labor government says it will consider building a second electricity interconnector across Bass Strait if it can win re-election on 15 March, the same day as South Australians vote in their State election.

State Premier Lara Giddings, who threw the Greens out of her governing coalition before calling the poll and who acknowledges Labor is an underdog in the election, says she wants the Department of Infrastructure to undertake a $1.5 million feasibility study, including linking King Island to Tasmania’s mainland.

State-owned Hydro Tasmania proposes to build a $2 billion wind farm on King Island.

Premier Giddings says that the State can be “a renewable energy dynamo” but the power sector “has now reached a crossroads.”

Opening the 56-turbine, $395 million Musselroe Bay wind farm in Tasmania’s north-east in mid-January, Giddings said two things needed to happen before Hydro Tasmania and its Chinese partner, Shinhua, could build more projects: the federal government must end uncertainty over the national renewable energy target and new transmission capacity must be provided.

Giddings’s Basslink 2 proposal is a backflip.

An $800 million development to provide a second link across Bass Strait was first mooted by the Liberal party in 2012 and was rejected by Labor as “not viable.”

The present interconnector can despatch can bear a 630 megawatt load to export energy to Victoria for a limited period. It ran “flat out” in mid-January to help feed electricity to Victoria during the heatwave.

State Deputy Premier Bryan Green says the federal government will hurt Hydro Tasmania “and cost Tasmanians million is foregone dividends” by abolishing the Gillard carbon price and add to the State damage is it “scraps or dramatically slashes the RET.”

Hydro Tasmania declared a $238 million profit for 2012-13, including about $70 million as a result of its hydro-electric advantage under the carbon price.

Hydro Tasmania’s new CEO, Steve Davy, says Basslink enables his business to generate far more electricity than is needed within the State and its opening in 2006 enables the generator to “fundamentally change its risk profile.”

Down to wire

The long-drawn-out process to sell Macquarie Generation, holder of a quarter of New South Wales power production capacity, is expected to move a step closer to completion this month when final bids are due to be delivered to the O’Farrell government.

The Australian Competition & Consumer Commission has announced it will not oppose acquisition of the MacGen assets by ERM Power, thought to now be one of three bidders left standing – the others are said to be AGL Energy and Marubeni Corporation – after China’s Shenhua withdrew from the process.

NSW Treasurer Mike Baird is hoping to raise $2 billion from the sale but even this value is in question in the very difficult east coast market conditions.

In the 2012-13 financial year MacGen recorded revenues of $1.08 billion, earnings before interest and tax of $208 million and a net profit of $41 million.

The company’s main assets are Liddell and Bayswater A power stations – the former now 43 years old with an accounting useful life to 2022, the latter was commissioned in 1985 and has an accounting life to 2035.

Part of the sale is the site earmarked for Bayswater B power station, for which State planning approval was given in 2010 for a 2,000 MW project using either coal or gas.  MacGen also has development approval for a gas-fired power plant of up to 790 MW at Tomago, north of Newcastle.

Sale of the business is strenuously opposed by the trade union movement, led by the Electrical Trades Union, which opposes purchase by AGL Energy because it is too big (and its ownership of MacGen will, it claims reduce competition) and by ERM Power (because, it says, the firm is too small and will struggle to compete in the market “under the burden of massive debt.”)

The ETU declares that “this is nothing more than a fire sale driven by ideologues and merchant bankers.”



Last word

There is, as you may, know truth and also “truthiness” – the latter being assertions one wishes to be true as opposed to demonstrable facts.

There is a lot of truthiness around in the energy/global warming space – an excellent example from this summer is the assertion that wind power or solar power, or both, “saved” south-east Australia from a serious electricity supply crisis. (“Solar PV was a heatwave saver,” read one headline.)

The facts, as shown by analysts EnergyQuest, are that the increased generation requirement, flowing from a public search for comfort in searing heat, was met in the main by gas plant (91 per cent in South Australia and 46 per cent in Victoria), by hydro-electricity (28 per cent in Victoria) and by coal-fired plant (an extra 26 per cent).

Solar contributed one per cent of increased generation in each State during the heatwave.

In the same vein, truthiness prevailed in the public (mainly media) discussion over almost three years of relatively mild weather to the effect that very high peak demand would not come again and that the network businesses had “gold-plated” their infrastructure for profit, knowing this to be so.

As the Energy Supply Association drily observes, the demise of rising summer peak loads has been greatly exaggerated and “now we appreciate it (the derided outlays of capex) is a prudent investment.”

Truthiness can be found at work also in the many claims about new renewable technology being cheaper than fossil fuels – when reality rests in what it actually costs overall to deliver electrons to consumers’ places of work and homes relying on large numbers of small, remote wind, solar and other units.

Lest I be accused of one-sidedness, let it also be said that truthiness is at work when the federal Coalition makes statements about the cost of the renewable energy target for individual householders.

The reasons for reworking the RET are real enough, including the impact the scheme is having on the resilience of the east coast wholesale market, but a simplistic scare story is the political weapon of choice.

Truthiness is being relied on by those who assert that every extreme weather event is a manifestation of an impending global climate disaster – and here the habit runs all the way up to the Secretary-General of the United Nations.

A report in this issue (headlined “Hot air” above) canvasses a new academic study that shows a different picture.

Truthiness also abounds in the discussion of increased use of renewable energy around the world, especially with respect to China.
It’s a fact that in 2013 the Chinese government trumpeted installation of nearly 8,000 megawatts of new wind farms and 3,600 MW of new solar PV installations.

You could hardly miss this news here – the green media have had a field day pointing it out.

But here’s the rub: when you adjust for capacity factor (the amount of energy each MW of plant puts out annually), the Chinese investment in conventional fossil fuels in 2013, mostly coal, is six times higher than wind energy and 27 times higher than solar.

So watch out for truthiness!

Keith Orchison
3 February 2014



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