Issue 13 January 2006

New year, but no new plan

The New South Wales Government, now under new management, has entered year three since it embarked on preparation of an energy policy statement without any indication when the white paper may appear and a growing suspicion in industry circles that Premier Morris Iemma now plans to withhold production of it until after March 2007, the date of the State election.

Left in limbo are decisions on whether there can be development of new coal-fired generation in NSW, how the State will manage its gas supply as the Cooper Basin fields decline, whether or not the three Government-owned distribution network service providers will be restructured, whether the Government will sell the DBs' retail arms and whether it will continue to operate the ETEF price balancing scheme.

The Government produced a green paper on energy in 2004, indicating that it would follow this with a white paper around April last year. The change in leadership from Bob Carr to Iemma, with the ensuing restructuring of portfolios, is one factor in the failure to deliver the white paper, but the key issue seems to be political -- Carr favoured an anti-coal approach to new generation development, but his successor's administration apparently is less dogmatic while obviously highly conscious of the electoral dangers, particularly in inner-Sydney seats, of opting to allow one of the Government-owned generators to build a new coal-fired plant as well as of the additional union dangers of opting to let the private sector develop a coal plant.

Iemma sought late last year to lower the pressure on his Government to come up with the white paper by re-announcing the regulator's distribution sector capital spending plans for the next five years and announcing that two peaking plants, one to be built by Government-owned Delta Electricity and the other by the private sector, would be constructed this decade.

One of the problems for the coal industry is that either or both of the gas plants could be relatively swiftly converted to combined cycle mode for intermediate and baseload generation from the initial open-cycle peaking mode. The availability of these plants to convert readily to CCGT would weigh against the ability of a new coal plant being viably developed in the national electricity market.

An issue to be resolved, if the gas plants manage to out-run a coal plant to the marketplace, will be the availability and cost of natural gas. The State will need an extra 70 petajoules of natural gas a year from sources other than the Cooper Basin to feed 1,000 megawatts of CCGT plant.

By far the largest user of electricity -- in NSW as elsewhere in Australia -- is the business sector. Some 67 percent of NSW power consumption falls to the commercial and industrial sectors. Projections of annual electricity demand growth in NSW from 2004-05 to 2011-12 by the industrial sector, the biggest generator of wealth in the State economy, are well below 2 percent compared with almost 4 percent for Queensland. Projections of commercial sector electricity demand growth for NSW for this period are lower (at 3.4 percent) than for either Queensland (5.5) or Victoria (3.6).

Electricity prices are among the key elements taken in to account by industrial and large commercial developers and the prospect that NSW could face price shocks later this decade as a result of baseload generation policy decisions (or indecision) will already be weighing heavily with business planners.  Operations in 2010 to 2012 will already be high on the agenda of these planners in 2006 and the inability of the State Government to come up with an energy plan, taken with numerous other deficiencies already impacting on business activity in the State, will increase their concerns.

Ironically, despite its ducking and weaving on energy policy, the Iemma Government runs the risk of power problems that could impact on voters immediately before the March 2007 election. Its biggest power weakness in the short term is not the lack of generation capacity (either peaking or baseload) but the twin threats of an increasingly overloaded NSW/Queensland high voltage link and an ageing metropolitan distribution network.

New South Wales already relies heavily on Queensland for generation capacity. The QNI interconnector carries in 11 percent of the NSW power consumption from Queensland coal-fired plant and the link is close to southbound capacity. Transmission sector plans to augment the QNI have been frustrated by the inability of the regulatory regime to deal with the realities of the marketplace, a running sore policy issue that is now in its fifth year of consideration, with NEM generators and transmission businesses holding markedly different views.

The Iemma Government is conflicted on this issue, too, because it owns the State's high voltage business, Transgrid, as well as its three baseload generators. A regulatory decision that favours stronger transmission links inevitably carries with it a threat to the State-owned generators' income, not least because of the inability of the NSW Government to approve construction of a new baseload power plant.

The most urgent need for augmentation of the QNI is for a southbound strengthening at the cost of about $200 million. Even if decisions are taken this year to allow this development, it will not be in operation before late 2009.

Meanwhile, in the distribution sector the State-owned businesses, particularly in metropolitan Sydney, are engaged in a continuous race against time to replace ageing network infrastructure and to build new extensions to cope with demand. The DBs have been engaged in vehement argument with the State regulator for the past five years over the level of capital that needs to be spent and the level of price increases that need to be imposed to finance these developments.

It cannot have escaped the attention of Iemma and his ministers that a similar approach in Queensland -- holding down DB capex outlays in order to hold down residential price rises -- led to a crisis for the Beattie Government that helped erode its public standing to a significant extent in Brisbane in particular. It will also be aware that the privately-owned DBs operating in Victoria are all challenging that State's most recent network regulatory determinations on the grounds that they are inadequate in the face of demand pressure on the systems.

As an example of the pressure in NSW, Integral Energy has recently told the media that it is confronted with 45 percent growth in demand on its network in the next 10 years with customer numbers expected to increase by 29 percent. This is being driven by both new home development on the affluent outskirts of Sydney and by commercial development in these areas to serve residential expansion as well as the need of large commercial firms to move out of the inner suburbs of Sydney.

Integral Energy says that more than 70 percent of its western Sydney residential customers now have air conditioners in their homes compared with 25 percent 10 years.

The threat for the Iemma Government lies in something over which it has no control whatever: the weather. If December 2006 and January to March 2007 bring extreme heat and humidity to Sydney, the ability of the network services to cope is an open question. The capacity of the overloaded QNI to serve Sydney is also open to question should any of the NSW generation units suffer mechanical breakdown.

An on-the-ball State Opposition would be demanding that the Government and the managers of the Government-owned electricity supply businesses give an unequivocal assurance that the State system will not fail in extreme weather. This may not be fair pool, but it would be politically clever because the electricity supply system can never give such a guarantee, given its technical complexity and its age. Such an approach has the additional merit that there are a number of areas of supply where the Government's failure to act could and should be subjected to severe criticism.

For a Government already overloaded with infrastructure problems, and no guarantee that the present relief over Sydney water supplies could escape turning to crisis yet again if 2006 does not continue to deliver adequate rainfall, being confronted with its policy weaknesses on electricity supply would be more than awkward.

Anyone with good knowledge of government can tell you that the gods of politics are wilful and vicious. They wrote Murphy's Law and apply it pitilessly. They are aided and abetted by the media, for whom any sign of government weakness is manna.

The problem for Iemma is that the combined failure of his administration, and that of Carr before him, over a decade to establish a strong and efficient electricity policy leaves him open to the "anything that can go wrong will go wrong" rule and that high summer, falling immediately before the next election, is the most likely time for it to apply.

Bearing in mind that 2007 is also a Federal election year, the rhetoric and the blame game could reach new heights.

Warning on gas

Writing in the Australian Financial Review, Duncan Seddon, a consultant to the oil, gas and petrochemicals industries, has noted the natural gas supply shortfall that Australian States face over the next few years as a result of the decline of the central Australian gas fields. He says the principal contender to fill this shortfall is imported gas from Papua New Guinea. "In a time of high international gas prices," he adds, "the cost of this gas, coupled with the high cost of transport through a 3,000 kilometre pipeline, will render gas prices to the Sydney and Adelaide markets considerably higher than today. As the gas supply across south-east Australia becomes more integrated, Victorian industry will also face an increase in price."  Seddon believes the price rises will mainly affect manufacturers and conjectures that governments "will sacrifice industrial output rather than face the wrath of the electorate from supply interruptions or gas price increases."

Queensland developments

The Energy Supply Association's annual "Electricity Gas Australia" publication indicates that almost 5,000 megawatts of new power station development is foreseen for Queensland under current plans.

ESAA includes in its list a 450MW Babcock & Brown gas turbine plant at Braemar, a 230 MW BHP coal plant at Peak Downs, the 750 MW Kogan North plant being developed by CS Energy, a 700 MW coal plant in the Western Surat basin proposed by Wandoan Energy, a 470 MW coal plant in the Surat proposed by Surat Dawson Development, a 766 MW gas plant at Townsville proposed by Stanwell and a 1,000 MW natural gas plant on the Durham Downs that Origin Energy has under construction.

ESAA notes in the report that Queensland's load forecast is projected to rise from just under 45,000 gigawatt hours in 2003-04 to almost 60,000 gigawatt hours in 2012-13.

Keith Orchison

| to top of page |