Issue 1 January 2005

Don't deter, adapt

The Australian Consumers' Association says the electricity supply industry needs to adapt to greater public use of air-conditioning rather than arguing for it to be deterred. The current atmosphere of crisis will dissipate as the industry rises to the demand challenge, it adds.

In its submission to the Productivity Commission inquiry in to energy efficiency, the ACA argues "Markets exist to serve consumers, not consumers to service markets," calling for the "excesses of economic purism" to be contained by an imperative to meet the needs of consumers. Close to a majority of households now use an air-conditioning unit, it adds, and, given the health problems posed by high heat, air-conditioning "does not deserve the moral excoriation sometimes visited upon it." Investment in networks to meet peaks is a general expense that "can legitimately be shared across all users," it says.

The Productivity Commission says it had received 67 submissions by the end of 2004 and now intends to publish a draft report in April 2005. It is due to deliver its final report to the Federal Government in August.

Plan long, says Environment Victoria

Planning for energy efficiency must adopt a 30-to-50-year time horizons in order to realise the full benefits for all sectors and the economy as a whole, says Environment Victoria, the peak State environmental lobby group. "To date," it adds, "energy efficiency policy has been characterised by fits and starts and the vagaries of fashion. Planning must be sustained by a stable policy framework that will foster, guide and reward uptake over the long term.

Environment Victoria has told the Productivity Commission inquiry that an energy efficiency policy requires the States and the Federal Government to pursue a broader sustainability framework that addresses resource use within complex,interdependent systems and appreciate that systems are not confined to infrastructure but include people and how they behave. Currently, it says, there are numerous policy arrangements that are "good at articulating platitudes and poor at setting hard targets."

Environment Victoria wants the Council of Australian Governments (Coag) to agree on mandatory efficiency targets for all administrations in order to lead by example. All government buildings and other assets to which energy efficiency can be aplied should have mandatory targets, it urges. Coag should also co-ordinate the national introduction of mandatory energy ratings for new and existing industrial, commercial and residential buildings.

Wilkenfeld points to six big failures

Consultant George Wilkenfeld claims that all markets for energy-using chracterised by one or more of the following: weak or incomprehensible signals of energy price and low buyer/user awareness of the price; a lack of awareness of the contribution of energy costs to the total lifetime ownership cost of products; an absence of consistent, credible and readily usable information on the relative energy efficiency of competing products; the frequent occurrence of split incentives (the "landlord/tenant problem"); excessive discounting of the value of certain or near-certain savings in energy costs -- even among aware purchasers; and supplier reluctance to offer or promote more energy-efficient products without government intervention to reduce business risk.

"The consequences," says Wilkenfeld, " are that the average efficiency of products is well below what the ideal level would be if all buyers made rational decisions based on energy prices and on the comparative energy consumption of products -- and if investment costs were fully recoverable."

NSW green paper

Close reading of the new State energy directions paper reveals a NSW Government in courageous mode -- in the Yes Minister context of that phrase -- and not because of the immediate knee-jerk reactions it elicited from the environmental movement.

In the paper the Government canvasses the following important issues:

It now sees the State needing to build about 6000 megawatts of new generation capacity to meet power demand by 2020 unless some way can be found to cut consumption. This is double the need for 3000 megawatts of new plant foreseen in the last energy paper issued by the State Government in 2001.

It states that up to 10000 megawatts of generation can be provided from NSW coal resources, but concedes such development will face considerable challenge on environmental grounds.

Shorn of many pages of rhetoric, the Government says that its next best bet is gas, but then gets round 17 pages later to acknowledging that supply from the main NSW source of natural gas -- South Australia's Cooper Basin -- "will fall significantly" in the next three to five years. Alternative sources of gas supply, it says, can be found via the Papua New Guinea pipeline (still not certain to be built), a pipeline from the North West Shelf in far-off Western Australia or a Queensland-to-Newcastle pipeline (which would open up the prospect of accessing large coal seam methane deposits in northern NSW).

However, the Government goes on to repeatedly make it clear that it is unwilling to provide the capital for this new generation plant. By my estimate, about $9 billion would be needed to build 6000 megawatts of new capacity -- and the paper acknowledges that the private sector may be none too keen to be involved if the Government goes ahead with proposals to vertically integrate its generation and retail operations and retain them in State ownership.

What the paper doesn't say is that concern about greenhouse gas policy may be another big reason why the private sector might not be willing to invest.

An early opportunity to test the market may be taken in 2005 -- the Government indicates that it is willing to put up for sale a gas-fired power station project that Macquarie Generation has been developing at Tomago.

What if the private sector won't play along? Well, the paper reveals, the Government intends to come up with a Plan B, but it reckons it doesn't need this strategy "until mid-2008 at the earliest," that is until well after the March 2007 State election. "Care needs to be exercised in the development of a back-up strategy," the paper says. (Here one can imagine Sir Humphrey's trademark smirk.) "The demand and supply outlook and progress on new generation investment both need to be monitored. Practical difficulties need to be allowed for." Quite.

Now there are more jokers in this pack than are likely to be easily spotted by busy journalists, company managers (whose firms consume 70 percent of the State's power) or families in the hot western suburbs.

For a start, although it never says so, the paper is obviously working on a "business as usual" power demand trend, that is the economy motoring along at its present growth rate. But what if the economy picks up far more strongly than anticipated? This is what happened in California in 2000-01, a central cause of the power crisis there that led to Arnold Schwarzenegger now sitting in the governor's mansion in Sacramento. What if the need for 6000 megawatts of new generation capacity in NSW arrives in 2015 rather than 2020?

Messing around with Plan B in 2008 becomes an interesting exercise in policy and project management when one considers that a large coal-fired power station needs about six years to be progressed from concept to producing electrons.

The sharp rise in demand of recent years is not yet putting heat on the State Government because NSW is sourcing more than 10 percent of its power needs from Queensland and 14 percent overall from interstate.

The discussion paper is curiously ambivalent about beefing up the NSW/Queensland transmission interconnector. "The potential benefits to NSW of expanded interconnection need to be balanced against the costs and risks of relying on links to other States for our power supply," it says. Quite, again. Put another way, demand in Queensland, which is growing at twice the rate of NSW, may reach the point where it is more profitable to keep the power north of the Tweed River.

The paper is also cute on the subject of end-user cost. The State Government's commitment, set out in the executive summary, is "to ensure that vulnerable (my italics) consumers continue to receive electricity at a reasonable price." You have to wade through to page 50 to discover that the Government is considering ditching the present retail price safety net for small customers, the controversial Electricity Tariff Equalisation Fund, in June 2007 (after the election).

I think the real context for this is that the wholesale price of new coal-fired plant is about $30 to $35 per megawatt hour while combined cycle gas plants (the kind needed for other than peaking supply) require market returns of $40 to $50 per megawatt hour to be commercially viable. What is relevant here, as the Americans are in the process of discovering, is the actual price of gas delivered to the turbine -- and that depends on where it is coming from; the delivered price of PNG or NW Shelf gas will be quite a lot higher than gas from the Cooper Basin. And all this is before any carbon costs are factored in -- the paper mentions in passing that a tax of $20 per tonne of carbon dioxide is needed to put coal and gas on an even environmental playing field.

Just publishing this paper is "courageous" for the State Government because it opens the door to a great deal of speculative analysis and because the Government doesn't control any of the "oh shit" factors that make electricity supply such a challenge -- like lots of hot weather, an unexpectedly strong economy, ageing plant failure, long time delays in delivery of new plant from manufacturers at times of strong global demand, environmental lobby opposition to projects and a reluctance of private investors to spend capital in a high risk marketplace until government and consumers are begging for it.

Plan B had better be good.

Keith Orchison

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