Issue 31  July  2007

Going for gas

Gas-fired generation will dominate investment in new plants for the national electricity market over the next 10 years so long as a carbon price is imposed, Babcock & Brown Power has told the Owen inquiry in to New South Wales supply options.

The study by Professor Tony Owen is expected to report to the Iemma Government in late August. The review has drawn a strong set of submissions from private investors and government-owned corporations.

B&BP says modelling it has had undertaken by consultants Intelligent Energy Systems indicates that the "economically optimal" approach for NSW will be to develop 400 MW of combined cycle gas plant in each of 2013, 2015 and 2017. The State, it adds, will also need to increase its capacity with 250 MW of peaking plant in 2012 and 360 MW in each of 2014 and 2016, using open cycle gas turbines.

The projections assume that the 400 MW Tallawarra CCGT plant and 640 MW Uranquinty open cycle plant are commissioned as planned, a billion dollars worth of private sector investment, B&BP notes in an acerbic aside, that is being pursued on a merchant basis despite the NSW Government's electricity tariff equalisation fund, "which has long been identified by market participants as a policy that artificially dampens signals for new entry."

The infrastructure investor warns Owen that debt and equity markets will find it "extremely difficult" to bank a new coal plant using conventional supercritical technology, given the imminence of emissions trading. "Once investors price in such (carbon) costs, and make allowances for potential increases over time, this is likely to render any future coal-based investments uneconomic," it argues.

The modelling undertaken for B&BP envisages no new coal developments in the NEM out to 2017, allows for 1,060 MW of wind farms to be introduced in Victoria, encouraged by new legislation, and suggests that more than 4,700 MW of new combined cycle and open cycle gas plants will be built.

Meanwhile, Owen may be influenced in considering the gas-vs-coal argument by an announcement from AGL and Epic Energy that a 180 kilometre link will be built between the south-west Queensland gas network and the pipelines connecting Moomba to Sydney and Adelaide.. The companies say the project will boost gas supplies over the next 15 years at a capital cost of $140 million.

Coal comfort

In contradiction to the Babcock & Brown Power approach, the NSW Government's two large generation corporations, Delta Electricity and Macquarie Generation, mount an argument for investment in large-scale coal-fired units and warn that a failure to make policy decisions leading to commissioning of additional baseload generation by 2013-15 may lead to retail price rise of as much as 30 per cent and reliability concerns for existing power stations by driving them too hard.

Macquarie tells Owen: "The only viable and practical plan for NSW to meet its baseload needs from 2015 onwards at a reasonable cost for households and business is to permit coal-fired generation using the best commercially available technology."

The generator argues that there is insufficient gas or pipelines access to interstate gas supplies to sustain gas-fired baseload. Nuclear, it adds, is "not currently acceptable or in any way practical in the timeframes required."

Macquarie proposes building two 900 MW ultra supercritical, coal-fired units -- the largest in Australia -- at its Bayswater complex in the Hunter Valley, asserting that they would be "low emission, substantially dry-cooled plant" that would use only 10 per cent of the water required by a conventional coal-burning power station.

Delta, which is building a 667 MW open cycle gas plant at its elderly Munmorah power station, offers to either convert the Munmorah project to 1,000 MW of gas-fired combined cycle plant or to install two more units at its Mt Piper power station, burning coal. It also suggests that it could develop 870 MW of CCGT plants at two other sites.

Delta warns Owen that, without new baseload plant by 2014, "electricity prices in NSW will begin to rise significantly."

Unlike Macquarie Generation, Delta sees adequate gas resources being available from coal seam methane reserves in Queensland -- reserves, it says, which have "risen dramatically" this decade.

It points out that a transmission pipeline from south-east Queensland to Newcastle is currently being evaluated by investors. Upgrading the Moomba-to-Sydney and Eastern Gas (from Bass Strait) pipeline would enable more than 2,000 MW of gas-fired power plants to be established, it adds.

The Delta submission was made before AGL and EPIC announced their new pipeline deal (see above).

Water card

The proponents of gas-fired generation continue to hammer home their point about the huge thirst for water of coal-burning plant.

In its submission to the Owen inquiry, the Australian Petroleum Production & Exploration Association points out that a 1,000 MW conventional coal-fired power station operating at 85 per cent capacity -- the NSW coal burners operate at less than 70 per cent capacity -- uses about 11,000 megalitres of water a year compared with 74 megalitres by a similar-sized CCGT plant.

Not green

While the main competition for the next tranche of baseload in NSW is presented as lying between the coal and gas industries, conventional generators are being careful to talk down the existing renewable energy sector, too.

The ERM Group, which is building the 600 MW Uranquinty peaking power station near Wagga Wagga in partnership with Babcock & Brown, has told the Owen inquiry that renewable energy does not "present any prospect of providing a major baseload source of power for NSW in the near term."

ERM's chief executive, Trevor St Baker, points out that the Victorian Government is unlikely to obtain the 1,000 MW of renewable power plant it seeks through its new "VRET" scheme even when the penalty provisions boost production values to $80 per megawatt hour.

He adds that a $20 per tonne carbon dioxide equivalent carbon charge, which is what gas generators are seeking from the emissions trading schemes being proposed by both the Howard Government and the Federal Opposition, will deliver renewable energy investors only $18 per MWh.

It would be far better, he urges Owen, to follow Queensland's example and impose a gas use requirement on retailers.

Macquarie Generation tells Owen that wind and solar power have a supply augmentation role, "but are not feasible for baseload operations."

Reserve margins

Government-owned EnergyAustralia says in a submission to the Owen inquiry that it has warned the NSW Treasury that the State's electricity reserve margins are too low by prudential world standards.

The distributor/retailer argues that too much reliance is placed on the power NSW can access from Queensland and the Snowy scheme through high voltage cables.

EnergyAustralia forecasts that NSW demand will pass 80,000 GWh a year by 2010 and hit 100,000 GWh/year around 2025. The next tranche of baseload generation is needed by 2013-14, it says.

Big users worried

The Energy Users Association, voice of trade exposed, energy intensive manufacturers in Australia, says it is concerned about the "apparent lack of appetite" for generation investment in NSW and the lack of processes to ensure future load growth is met.

The EUAA has told the Own inquiry that the Iemma Government needs to do more to attract investors in generation, starting with a clear policy statement on ownership in the electricity sector.  The association frets about the situation encouraging "special deals" with investors to overcome the lack of market incentives.

It supports disaggregation and privatisation of the NSW generators, arguing that greater competition will lower energy prices in the State by "at least 20 per cent."

Meanwhile Roger Wilkins, former Director-General of the NSW Cabinet Office and now a senior executive with global bankers Citigroup, has told the Owen inquiry that there are three main reasons why private investors are reluctant to build baseload generation in the State:

Wilkins says there are no good reasons for the State Government to continue to own electricity assets. He adds that it is "virtually impossible" for the government-owned generators to position themselves for a carbon-constrained future because it will require capital outlays and speculative hedging "that any government should be reluctant to engage in."


Even a casual reader of the submissions to the Owen inquiry in to the next electricity generation developments for New South Wales will not find it hard to detect the concerns of investors about the State Government's approach to energy policy. What strikes home still more is the implicit lack of confidence being openly expressed by some of the government's own electricity corporations.

An important point in considering this situation is that the national electricity market, of which NSW is a substantial and significant part, has an established track record of delivering capacity to meet demand -- this, however, does not mean that performance couldn't be substantially improved in the customers' interests; nor should it be assumed that there are not, at least potentially, the seeds of future crises in today's unaddressed issues.

On the evidence of submissions to the Owen inquiry, the NSW Government has a prima facie case to answer that it is not doing enough to ensure an encouraging climate for commercially-driven power sector investment or efficient market operations.

Integral Energy, for example, states  that government-owned retailers have largely focused on managing NEM trading positions with government-owned generators -- hardly the competitive approach business customers want -- and warns that they will face "considerable challenges" in providing affordable prices where construction of a large amount of new generation is required.

EnergyAustralia, as reported above, points out that it has been warning the State Treasury that NSW reserve margins are "lower than prudent standards."

High voltage network operator TransGrid says  that its network "over the next few years will approach the limit of its technical ability to meet increasing power flows." And it adds: "Appropriate consideration of the environmental, physical, timing and resource requirements" associated with network development is needed.  Lead times for major transmission line projects can be as long as 6-7 years, it says.

What is one to assume about the mindset of policymakers  from the Macquarie Generation submission executive summary in which it feels the need to emphasise "it is not feasible to delay the planning process for the next baseload power station in the hope that a technical solution with negligible emissions will emerge that is also capable of delivering electricity at the same cost and reliability levels of (existing) coal-fired generation"?

Then there is  its revelation that its "main concern" is the ability of some of the oldest existing plant "to achieve consistently high levels of performance."

The corporation goes on to point out that uncertainty regarding the mix of government and private sector investment in generation could cause delays in new project development. "Existing and new entrant generators should be encouraged to immediately commence the development consent process," it urges.

Delta Electricity warns that high reliance on imports of electricity from other States comes with "significant risks and costs" and that further high voltage interconnection is not an adequate substitute for new baseload plant in NSW -- and TransGrid says it would need to spend about $2 billion on augmenting the system if the next tranche of baseload power is sourced from interstate.

An important private investor in Babcock & Brown says  that there needs to be a "dramatic improvement" in NSW planning approval processes for major developments. It calls the existing processes "excessively expensive and excessively time consuming" compared with South Australia and Queensland.

ERM Power, which is building a 600 MW peaking plant near Wagga Wagga, says the installed plant mix in NSW between baseload, intermediate and peaking capacity has become "inconsistent with market principles."  It, too, sees planning processes as "problematical" for fast-tracking substantial power investments. The State's greenhouse gas abatement certificate scheme (NGAC) "has not produced gas exploration investment levels" that are needed.

ERM says the problems it has had getting substantial gas-fired generation developed because of planning approval process difficulties has left NSW "critically exposed to higher than forecast peak demands and/or generation outages."

The comments (see above) made by Roger Wilkins, for most of the past decade the most senior bureaucrat in the State Government, highlight the risks faced by the public power corporations (and therefore by the taxpayers of NSW).

If the Owen inquiry was the start of a general review of NSW electricity policy, these perspectives would be worry enough -- but it is not. Owen is not charged with examining electricity policy overall.  The fact is that official consideration of what is needed in NSW energy policy has been underway for six years and more. The Government's energy department produced a detailed review of the issues in 2001-02 and the Government published a green paper on energy at the end of 2005.

Having Owen offer advice on a new generation pathway in the light of greenhouse gas abatement issues and the economic impact of pursuing higher-cost plant is one thing; having companies use his inquiry as a vehicle to publicly send messages to the Government  about  major policy problems  in the terms outlined above is another entirely.

This is a government that has been in office for more than a decade. The comments being made to the Owen inquiry suggest that, as with water supply and rail service management, it has created a situation that is, to be mild, capable of causing serious problems in the foreseeable future  and hardly conducive to giving NSW an edge in the tough competition for business investment. The Government cannot say that it has been unaware of these issues for at least the past six years. It cannot blame the situation as described in these submissions on anyone but itself.

From the perspective of taxpayers and customers, it is a scandal that the obviously serious problems in NSW electricity policy were not dealt with openly in the 2007 election campaign.

It is clear from these submissions to Owen that Premier Iemma and his Cabinet need to be put under pressure to provide a detailed policy statement on electricity supply in the very near future -- and that they need to be held to account  now for resolving the problems that have been identified, not in four, six or eight years time when customers are confronted with a crisis.

Keith Orchison

20 July  2007

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