Issue 87, July 2012


Welcome to the first edition of the newsletter for the 2012-13 financial year at a time of turmoil for electricity supply, with governments and the industry struggling to come to terms with a range of issues. Whether or not this financial year sees a federal election remains to be seen, but emergence of the carbon price, the slump in power consumption, an impending review of the renewable energy target, the rewriting of regulatory rules for networks, changes in the ownership, structure and leadership of important supply assets and ongoing deep community angst about prices are all real factors weighing on stakeholders. This newsletter, which attracted a daily average of 741 pageviews in the second quarter of 2012, will continue to track developments.


Power plunge

Customer sales of electricity on the east coast have fallen back to the same level they reached in 2005-06, according to the latest data from the Australian Energy Market Operator.

The new AEMO market assessment shows estimated sales in 2011-12 at just under 186 terawatt hours, only 279 gigawatt hours above the result six years ago.

However, in its planning scenario, the middle of three reviewed, AEMO sees a slow sales recovery, with consumption in five States and the ACT surpassing the previous peak (192.6 TWh in 2008-09) by 2014-15 and reaching 206 TWh by 2017-18.

The market operator attributes the recent decline in consumption to (1) changes in the economy, (2) reduced manufacturing consumption in response to the strength of the Australian dollar, with cheaper imports impacting on local factories, (3) the uptake of rooftop solar PV systems as a result of federal and State subsidies, which are now being sharply cut back, and (4) commercial and residential consumer responses to high electricity prices and energy efficiency opportunities.

The AEMO data show that the largest slide in demand has occurred in New South Wales – where consumption peaked at 73.7 TWh as the global financial crisis hit (2007-08) and has fallen back to an estimated 68.3 TWh this financial year.

By comparison, Victorian demand peaked at 47 TWh in 2007-08, fell back to 45.5 TWh in 2011-12 and is expected to be about 46 TWh this financial year – while Queensland recorded a peak of 49 TWh in 2009-10, falling back to 47.4 TWh last financial year in the aftermath of the floods and is expected to be about 48.4 TWh this year.

If 2017-18 is chosen as a new horizon – on the basis that projections beyond the turn of the decade are stretching things in the present uncertain environment – AEMO’s central planning demand outlook is for an east coast total of 206.6 TWh or 7.2 per cent above the last peak in 2008-09.
In this scenario, NSW consumption will have reached 73.2 TWh versus 59.7 TWh in Queensland, 49.6 TWh in Victoria, 13.3 TWh in South Australia and 10.7 TWh in Tasmania.

It needs to be borne in mind that the five years ahead may or may not see the carbon price rescinded, will almost certainly see retail power prices continuing to be impacted by higher network charges while wholesale prices may or may not be affected by increased coal and gas costs, and will also reflect the fate of the beleaguered domestic manufacturing sector with metals processing under pressure from more factors than the carbon price.

An important demand factor in Queensland will be the requirements for electricity of the LNG trains being developed at Gladstone and a number of large coal mines in the Surat, Bowen and Galilee basins. As much as 5,000 MW of additional generation capacity could be required in Queensland during this decade.


Temperature plunge

Last summer was the coldest in New South Wales since 1983-84.

State government-owned transmission business, TransGrid, says it has deferred two major capital works projects following the AEMO review of summer peak power demand and annual energy use.

It is difficult to determine the exact drivers of recent volatility in peak consumption, it adds, and higher electricity bills, global economic uncertainty and mild summers all have to be taken in to account.

The business is Australia’s largest transmission operator, with 91 sub-stations and 12,800 kilometres of lines. It has connected 1,214 MW of wind and gas generation to the grid in the past three years.

Meanwhile, it and the Queensland government-owned transmission service provider, Powerlink, say a joint investigation of a possible upgrade of the main link between the two States, QNI, indicates that increasing its capacity 20 per cent could provide significant market benefits.

The upgrade could enable consumers in both States to access cheaper electricity supplies, they say.

QNI was commissioned in 2001, bringing Queensland generation in to the “national” electricity market. It has a maximum transfer capability today of 700 MW from NSW to Queensland and 1,078 MW in the opposite direction.

Capex need remains

In a briefing note for the media accompanying its new generation review, AEMO says that, despite a reduction in projected east coast demand over this decade, a need remains to augment ageing infrastructure, accommodate regional growth in some States and improve transmission interconnector capacity.

The market operator says that a key factor in the assessment is the failure of a range of large industrial projects mooted for the east coast to come to fruition – while other facilities have closed production or reduced their output.

In Victoria, for example, lower power demand expectations flow not only from previously anticipated higher requirements in aluminium smelting and steel production but also from the breaking of the drought having obviated a need for water desalination – considered a priority development at the height of the past decade’s drought.

On with the brawl

Queensland’s neophyte Premier, Campbell Newman, has launched a furious assault on Australia’s largest power retailer, Origin Energy, over end-user electricity bills in his State.

In a sustained outburst apparently stimulated by receipt of a letter from Origin in his household, Newman, who won the State election with a promise to curb householder costs for electricity, said the company’s notice of price rises was “completely unacceptable.”

Newman told media he “became crosser and crosser and crosser” when he read the letter – which Origin says has been sent to customers on market contracts rather than the regulated price, equating to “less than half” of its Queensland residential holding.

The letter signals price rises averaging about $400 a year for contracted residential customers.

Apart from finding a new supplier himself, Newman says he will enlist the Liberal National Party’s MPs to urge their constituents to find a new retailer if they are currently buying electricity from Origin – and he will write to the federal Treasurer asking him to request the ACCC to investigate the letter under the Trade Practices Act.

He is also threatening to make power contract break fees illegal in Queensland.

And he asserts he will escalate his feud with Origin Energy by cancelling 2,529 State government power contracts with it worth, he says, $26.7 million a year.

State Energy Minister Mark McArdle says the government is “less than impressed” with Origin

A spokesman for Origin Energy says the company structures prices to reflect the actual costs of supplying energy to customers, including the networks, the introduction of the carbon price and the wholesale cost of energy.

Origin is seeking a judicial review of the recent Queensland Competition Authority price determination, claiming it is “$60 million out of pocket” and the decision does not properly reflect the increased costs faced by retailers.

Meanwhile a review by the Australian Energy Regulator shows that a family of four in Queensland uses more electricity than same-sized homes in Victoria and NSW.

Much ado

The political and media hullabaloo over the carbon price inevitably reached a crescendo on the last weekend in June ahead of a 1 July starting date for the measure, the largest change to the tax system since 2000, although the vigor of debate in the Federal Parliament was substantially reduced by more asylum seeker boat drownings and the ensuing, ineffective attempts to find a new legislative approach to the refugee problem.

The Prime Minister, recently returned from another limp round of international negotiations on climate change policy in Rio de Janeiro, did her best to talk down the implications of the tax and paint it as the harbinger of a “clean energy future” – while the Coalition pledged to begin work to rescind the measure on its first day in office after the next federal election, which current opinion polls indicate it will win in a landslide.

According to federal budget documents in May, the government expects to garner $24.7 billion over four years from the tax and over the next three years to hand out $9.2 billion in free permits to business, $5.5 billion to power generators (but not the NSW and Queensland state-owned black coal power stations) and $14.9 billion through tax changes and benefits to the community.

Julia Gillard expressed faith that Australians will come to see the tax as “an important reform at the right time” while Tony Abbott, riding impact projections such as the claim by the Australian Railway Association that the measure will add $110 million a year to train travel and road freight costs, pledged to make the next election a referendum on a “bad tax based on a lie and which will go up and up.”

Opposition climate spokesman Greg Hunt said the carbon tax will hit Australian businesses at "the worst possible time." 

"From today,” he said on C-day, “ every time you switch on a light, the computer, the heating, the cooling or even make a cup of coffee, you are paying the carbon tax. For business, it comes at the worst possible time as manufacturers battle a high Australian dollar while their overseas competitors are given a further advantage by not having to pay the tax."

Business leaders warn that the impasse between Labor and the Coalition over carbon policy is increasing investment uncertainty.

Australian Chamber of Commerce and Industry economics director Greg Evans says adoption of a domestic carbon pricing mechanism places too large a cost on the economy and it should only be considered when there is an international commitment to abatement.

Australian Industry Group executive director Innes Willox says there is still a lot of confusion over the introduction of the tax. "We are going to have an uncertain political environmental around this issue for three to four years at least."

Meanwhile the federal Department of Climate Change is claiming that, under Coalition policy, if its “direct action” approach did not deliver the 2020 national abatement target, buying permits on the international market will cost between $23 billion and $28 billion

As members of the community and of the energy supply sectors struggle to come to terms with the carbon policy’s impacts, the single most important issue is whether or not the Coalition can win sufficient seats in the Senate at the election to be able to pass rescission legislation – if it can’t, a further double dissolution election in late 2014 or earlier 2015 can be expected and uncertainty over carbon policy will linger in to the middle of the decade, having started in earnest under the Howard government in 2006-07.

Leading Liberal senator Arthur Sinodinos accuses the Gillard government of sounding arrogant and out of touch when it asserts that, if defeated at the next election, it will not allow repeal of the carbon tax through combining with the Greens in the Senate to block legislation.

Not wanted

An Essential Report opinion poll late in June demonstrates that the Gillard government has gone backwards over 15 months in its efforts to persuade Australians to embrace a carbon pricing scheme that the Prime Minister promised before the 2010 election she would not introduce.

The Essential Report poll shows that 54 per cent of respondents oppose the measure it comes in to effect versus 35 per cent supporting it.

By comparison, a poll in March 2011 has the same level of support and 48 per cent opposing the policy.

Ironically, the latest poll also shows that one in five of those interviewed who say they will vote Labor at the next election are in the “no” camp. Only 28 per cent of Labor supporters are strongly in favour of the measure.

An indication of Julia Gillard’s problems in selling the policy is that Essential Report found 67 per cent of respondents expect energy prices to increase a lot as a result of carbon pricing, 53 per cent hold this view about transport fuel prices and 41 per cent see it occurring to grocery prices.

Even 48 per cent of Labor voters are in the “increase a lot” camp.

Where did they go?

When Senator Penny Wong, as Kevin Rudd’s Climate Change Minister, was spearheading the 2008 drive to convince voters of the merits of a carbon price, she assured Australians that the impact would fall on “the 1,000 big polluters.”

As the measure, much changed in the agreement between Labor and the Greens following the 2010 election, comes in to effect, the number of companies caught directly in the carbon tax net turns out to be 294.

The list published by the government includes 34 municipalities as a result of emissions from their rubbish dumps.

New carbon watchdog

The Coalition is promising yet another regulator if it wins office at the next federal election.

Opposition environment spokesman Greg Hunt says that, having rescinded Labor’s carbon price scheme, the Coalition will legislate its own emission reduction fund – which will impose as-yet undisclosed penalties on companies that exceed their deemed “business as usual” level – and will have a regulator to independently judge their emissions performance.

Hunt says the Coalition believes substantial emissions reductions can be achieved through pursuing energy efficiency opportunities.

Brix bail-out

The federal government is giving HRL subsidiary Energy Brix Australia a $50 million subsidy to prop up its operations during the first two years of the carbon scheme.

About 50 companies around the country, including abattoirs, horticultural and char producers, food processors and dairy product processors, use Energy Brix briquettes in their operations.

Energy Brix said the carbon tax would affect the viability of its use of steam from the 170 MW Morwell power station to make briquettes.

Energy Minister Martin Ferguson says the subsidy will enable these companies to look for an alternative fuel such as switching to gas.

Energy Brix, meanwhile, is one of the power stations bidding for closure funding under the government’s scheme to take 2,000 MW of older, emissions-inefficient generation out of the east coast system by 2020.

Ferguson has extended the deadline for decisions about participants in the scheme beyond 30 June.

$194m solar subsidy
The federal government has announced that it will contribute $129.7 million to the $450 million cost of building two solar PV power plants in rural New South Wales. The NSW government will chip in a further $64.9 million.

The power stations outside Broken Hill and at Nyngan will have a cumulative capacity of 159 MW and will be built by AGL Energy in a joint venture with the American manufacturer First Solar in which 2.5 million PV panels will need to be installed.

The projects are scheduled to be completed in 2015.

The subsidy decision is another stab at the federal government’s $1.4 billion “solar flagships” program announced by Kevin Rudd in May 2009, but which has had difficulty in getting started.

Rudd, typically, heralded the decision then as delivering 1,000 MW of capacity or “three times the capacity of the world’s current biggest solar plant” and aimed at “helping this country become a leader in clean energy.”

A proposal to build a solar power farm at Moree under the program was offered $306.5 million in subsidies last year but the proponents were unable to meet financing conditions.

Whether or not the largest proposed solar power station development, the $1.2 billion “Solar Dawn” project in southern Queensland, goes ahead remains an open question. Queensland Premier Campbell Newman has struck it a blow by withdrawing $75 million of State funding promised by the Bligh government. The federal government has an offer of $464 million on the table.

Meanwhile, as it does each time a solar development is proposed, the PV sector has opted to react with hyperbole to the Broken Hill projects. 

“This is a game changer,” says Australian Solar Energy Society. “Big Solar has arrived in Australia. Solar is now the rational economic choice. Big Solar is ready to compete with polluting power on price alone. Big Solar is on a roll. We will also see 210 MW in the ACT and 10 MW in Western Australia. This is just the beginning.”

The society now wants the government to use the balance of the “solar flagships” funding to “deliver a swathe of 10 MW to 50 MW solar PV projects right across Australia.”

Aiming high

The federal government’s lead adviser on climate change issues, Ross Garnaut, in a media interview has said the Climate Change Authority being established to advise on abatement targets should reach the status of the Reserve Bank with a standing that ensures future administrations would find it hard to overturn its recommendations. 

Carbon and garbage

Rubbish is a fact of human existence, nowhere more so than in wealthy countries like Australia – and the interaction between our garbage and the Gillard government’s carbon tax scheme could be a metaphor for the debate.

First the stats: Australia has 7.6 million households and they deliver 7.4 million tonnes of solid waste to landfill every year. There are 458 landfills across Australia and 190 of them each release more than 10,000 tonnes of carbon dioxide equivalent a year, catching them in the carbon policy net.

According to the Australian Landfill Owners’ Association, the carbon cost under the Gillard scheme is $35.70 per tonne of waste.

On the association’s arithmetic, the tax will add $34.76 to every household’s costs on average and impose a cumulate additional cost nationally of $264 million a year.

In correspondence with the federal parliamentary secretary for climate change and energy efficiency, Mark Dreyfus QC, the association members received a little lecture in April about what they could/should do.

“There are a range of activities that could substantially reduce landfill emissions,” Dreyfus wrote. “ (They include) capturing landfill gas to flare or generate electricity and diverting waste from landfill to recycling and composting facilities.”

Treasury modelling, he said, indicated that emissions from landfills could be reduced by more than tenfold by 2030 if municipalities and landfill operators took up abatement opportunities, delivering a 12.5 million tonne a year cut in national emissions.

Elsewhere, he points to Newcastle city council, which, he says, generates enough electricity from its captured landfill gas to power 3,000 homes.

One of the problems for the landfill operators is that, because methane is emitted from waste over decades, they have to calculate their carbon costs far in to the future in order to arrive at a cost-recovery charge at the time the garbage is dumped.

The city of Greater Bendigo in Victoria has estimated that it will need to increase municipal rates 1.7 per cent to meet its estimated $1.2 million annual carbon bill.
There are 34 municipalities around Australia with landfill emissions large enough to make them liable for the carbon tax.

Chasing cleaner coal

As Australia embarks on a politically risky “clean energy future” path, a leading American commentator on sustainable development is urging governments and utilities around the world to pursue a cleaner coal power agenda.

Writing in the American journal “Foreign Affairs,” Richard Morse, director of research on coal and carbon markets at Stanford University’s Program on Energy & Sustainable Development, says that replacing old coal plants with start-of-the-art power stations could deliver “massive” global abatement benefits.

Morse estimates that, if the average efficiency of all coal plants around the world could be boosted 50 per cent, emissions from burning the fuel to make electricity would fall a “whopping” 40 per cent – achieving abatement of three billion tonnes a year or half of what the US overall releases annually.

Morse argues that building more efficient coal plants makes long-term economic sense.

He says a 750 MW ultra-supercritical plant costs around $US200 million more to build today than a conventional unit but, by saving on coal consumption, generators can save the cost over its lifetime “and carbon dioxide reductions end up paying for themselves.”

Morse says cash-strapped utilities in the developing world don’t have the funds to pursue these gains over the course of several decades. “But multilateral development banks do,” he argues, “and they should step in to finance the additional capital costs.”

Morse suggests that an alternative could be the creation of tradable green securities for sale to private investors, functioning like bonds.

As for carbon capture and storage, Morse argues that a lack of a price on carbon will make pursuit of the technology harder. However, he adds, slashing emissions from coal doesn’t require a price on carbon “and there is no reason to wait on one.”

Meanwhile the “Rio + 20” summit in Brazil attended by Julia Gillard and 129 other world leaders, but not Barack Obama, Angela Merkel or David Cameron, dodged discussion of the launching of a carbon development fund, starting at $US30 billion a year, by industrialised nations to help developing countries pursue abatement.

Wind leads investment

Power generators and market analysts say a key outcome of the reduction is east coast electricity demand now being forecast for the decade’s end – it will be about 240 TWh according to AEMO’s new review – is that the dominant generation development will be wind farms.

As Cameron Garnsworthy, a TRUenergy business development manager, told the “energy and utilities” conference in Sydney in late June, it could now be expected that the renewable energy target will drive construction of some 7,000 MW of wind capacity by 2020 at an estimated cost of $20 billion – versus only 1,500 MW of new baseload plant and about 3,000 MW of peaking plant at a combined capex of $5.5 billion.

Garnsworthy commented that planning policy in some States presents a barrier to timely and efficient wind farm development, being likely to delay projects, push up costs and make the RET harder to attain.

Big link opportunity

TransGrid says that development of a high voltage link between NSW and South Australia could deliver significant renewable energy benefits.

AEMO and the investor-owned ElectraNet, which runs the South Australian transmission network, have undertaken a joint study of extending high voltage lines to carry SA’s large wind potential to the east coast market.

In its annual planning report, TransGrid says a link in to NSW could bring renewable power to the State and enable baseload energy to be transported west.

It adds that the line could also enable large-scale wind projects near Broken Hill to be brought to the grid as well as opening access to “vast tracts” of an area suitable for solar power.

The interconnection could be developed as a 500 kV AC line or an HVDC link or both.

Falling back

Retiring Ausgrid managing director George Maltabarow told the “energy and utilities” conference that average household electricity consumption in the franchise area of the NSW government-owned distributor had receded more than 10 per cent in 10 years.

Maltabarow said the residential average use in NSW peaked at 7,200 kilowatt hours a year in 2002, dropped to 6,900 kWh in the Ausgrid region by 2010 and was 6,434 kWh in calendar 2011.

He attributed the decline to greater energy efficiency – including the efficiency of modern electric appliances – and to the penetration of gas supply and use of solar PV power as well as the recent very mild weather.
Maltabarow said the biggest factor affecting household power consumption was probably price, although he pointed out that the current controversially high charges are the same in real (inflation-adjusted) terms as 30 years ago.

He warned that, even as the impact of higher network charges declined, NSW consumers still faced an increase of another 60 to 65 per cent in their power bills between 2012 and 2015, driven by higher wholesale prices (40 per cent), higher green charges (including the carbon tax) contributing 10 per cent and network tariffs (another 10 to 15 per cent). 

Meanwhile gas prices could be expected to double in this period, he added.

Portal on power

Electricity supply companies are starting to pursue Internet opportunities to help household customer chase greater consumption efficiency and lower costs.

In Victoria, both Origin Energy and Jemena have launched Web portals for customers who have smart meters.

The portals enable customers to track their usage of power online and to plan consumption.

Jemena, which has a distribution franchise area in Melbourne’s north-west, says its “Electricity Outlook” program will allow customers to compare their current usage with previous periods and with average consumption in their neighbourhood. It will enable them to set consumption targets and measure performance – and to shop around to ensure that they have the retail offer that best matches their consumption behaviour.

The program has been hailed by the Moreland Energy Foundation, a local ginger group, as “an exciting step in demystifying electricity usage.”

Jemena says it has installed 107,000 smart meters in homes to date and expects to complete the roll-out to all 315,000 households in its franchise area by the end of next year.

Hasten slowly

Unlike the crew of the Starship Enterprise, the SCER voyagers do not want “to boldly go” in to a new realm of smart meters, not least no doubt because they can see what happened to the adventurous Victorians.

Proponents of the technology may claim that it is the go-to method for enhanced energy management for utilities, businesses and home-owners, but politically, as the Victorian experience has shown, it is a minefield.

SCER is the latest acronym for federal, State and Territory energy ministers meeting under the banner of the Council of Australian Governments.
At their June meeting in Darwin, the ministers took another peep at the future of smart meters and once more shied away.

The SCER communiqué notes that no jurisdiction other than Victoria is expected to mandate a smart meter roll-out “in the next few years” even though ministers  “consider that smart meters, related technology and the products and services they support will be an important part of the transformation of the energy sector over the coming decade.”

They also want to “ensure that consumers can have incentives to manage their demand and information about the cost of their consumption and options.”

The flipside of this story, and reason for politicians running a mile from making a commitment, can be found in typing “smart meters” and “anger” in to Google Search: it throws up 118 million results from round the world.

Not a few of them are from Victoria. And a large number from around the world are about community and customer adverse reactions.

The root cause of the Victorian problem is another example, as with pink batts federally and solar subsidy schemes, of an inability on the part of politicians to plan and executive programs efficiently.

The State’s Auditor-General in a 2009 report condemned the approach of the Labor government at the time for “a lack of governance and central oversight” and, since the last State election, the Baillieu Coalition government has been in salvage mode.

An investigation it launched found that the most responsible option was to soldier on with the roll-out as it had reached 900,000 installations against a target of 2.5 million homes.

In the face of an increasingly hysterical campaign on the health effects of smart meters, an independent inquiry in Victoria has found they are safe and fall well within the requirements for electro-magnetic and radio frequency emissions.

Another inquiry by a State agency has scotched claims that they cause fires.

An important political part of the new Victorian deal is that the introduction of time-of-use charges, an essential demand management element of the concept, has been delayed “until at least 2013.”

The State government is also embarking on a $20 million “stakeholder engagement plan.”

The SCER ministers’ reluctance to join Victoria on the smart meter voyage, therefore, is understandable – until it is weighed against the multi-billion problem of rising peak power demand across eastern Australia and the West.
Sooner or later the energy ministers will need to sign on for this voyage. For the moment, other than in Victoria, their pose is an Augustinian “not just yet.”

No easy exit

In easily the world’s biggest example of a government acting in haste on energy policy for political reasons, the administration of Germany’s Angela Merkel, battered and bruised by the European financial crisis, is encountering increasing problems in making good its decision to abandon nuclear power after the Fukushima disaster in Japan.

Merkel decreed a year ago that the 17 nuclear power stations supplying 23 per cent of German electricity – without carbon emissions – would all be shut by 2022 and replaced with renewable energy generation. Eight closed immediately.

In an international economic environment where manufacturing could scarcely be more stressed, Merkel’s economics ministry has now bowed to business pressure and set up an independent process to monitor the nuclear U-turn.

The prospect that dare not speak its name ahead of next year’s federal election is that another U-turn may be required when the scale of the Merkel decision becomes unbearable.

The Merkel administration’s numerous problems in pursuing it anti-nuclear stance include ensuring that German lights stay on under extreme weather conditions. 

Peter Terium, the new chief executive of RWE, the country’s second-largest power producer, points out just how tight the situation became in the past winter.

“The system was almost brought to its knees during the week of February 9,” he says. “There was little wind, little sun and we hardly had any reserves.

“Some oil-fired power plants in Austria had to be connected to the grid to guarantee the security of supply.”

Shutting down nuclear power plants is initially going to be a step backwards for carbon abatement, Terium says.

The Merkel government is also confronted by a huge need to build new power infrastructure to cope with the change.

Germany lacks the power lines it needs to bring electricity from the north to the industrial south and it lacks power plants to satisfy demand when the wind isn't blowing and the sun isn't shining.

The latest estimated costs of the necessary infrastructure expansions range between $US195 billion over the next 10 years, according to the market research firm Trendresearch, and almost $US400 billion by 2030, according to Bavaria's VBW industry association.

Official estimates calculate that Germany will need at least 3,800 kilometres of new power lines by 2022 just to transport the wind energy generated in off-shore farms installed in the North Atlantic Ocean to the highly industrialised southern regions of the country, especially Bavaria and Baden Wuerttemberg.

In addition, at least 4,400 kilometres of the existing grid must be upgraded in that same period.

In all, high voltage grid developments alone are costed at $US40 billion.

The implications of this capex requirement seem an increasingly fearsome prospect for Germans whose power prices, already some of the world’s highest, have risen by more than 10 percent since the current coalition took office under Merkel’s leadership.

"Approximately every tenth German household currently has problems paying for rising energy costs," says Holger Krawinkel at the Federation of German Consumer Organizations.

The federal economy ministry calculates that prices will increase by between three and five euro cents per kilowatt hour this financial year in order to finance renewable energy subsidies and grid expansion.

These increases will amount to an additional annual burden of $US130 to $US220 for a family of three.

The solar splurge in Germany so admired in Australia by the environmental movement comes at a heavy price for local consumers.

The latest estimate is that energy consumers will pay more than $US120 billion over the next 20 years to subsidize photovoltaics installed before the end of 2011.

The country’s economics minister is openly canvassing a discontinuation of the policy of forcing consumers to subsidise solar after 2013 in favour of letting utilities choose the cheapest abatement opportunities available to them.

Meanwhile, the government’s anti-nuclear decision must look increasingly odd to much of its population when viewed against the fact that, despite Fukushima, 61 nuclear reactors are under construction around the world today, half of them in China and India.

Last word

According to independent federal MP Rob Oakeshott, the east coast electricity market is “the greatest market failure in Australia today, sending cost of living pressures through the roof.”
Of course, the market on the east coast is the wholesale power pool.

As readers know, generator production is dispatched for five States and the ACT by the independent market operator based on an ascending order of bids from least cost to highest cost until trading requirements are met.

Generators and retailers use a hedge market to cover the risks in a volatile pool.

Most of the rest of supply comes via the network delivery system, a mix of investor-owned and State-owned monopoly transmission and distribution businesses, not a market.

At the end of the supply chain, energy retailers compete with each other for customers and buy the energy from the wholesale market to meet demand.

There are two key points about Oakeshott’s mouthing off at the market that he either doesn’t understand or chooses to ignore.

The first is that there are many factors impacting on household cost of living pressures, including petrol prices, mortgage rates, council charges and so on. To blame electricity prices for “sending pressures through the roof” is tabloid politicking.

The second, as readers know, is that electricity price pressures are driven in the main by network charge increases and the imposition of various green charges, including from 1 July the carbon tax Oakeshott supports.

In broad terms, the wholesale power market – “the greatest market failure in Australia” – contributes a third of the end-user’s costs today and, fuelled
mainly by brown and black coal, east coast wholesale prices are among the lowest in the developed world.

For a range of reasons, they are also severely depressed at present. 

Federal Energy Minister Martin Ferguson says they are “roughly speaking, half what they were five years ago.”

Price spikes in the so-called NEM – it isn’t really a national electricity market because it doesn’t include Western Australia or the Northern Territory although it does serve the needs of nine million household and business customers on the east coast – result from a shortage of regional supply, perhaps from an unexpected outage or a sudden surge in demand (usually extreme weather).

The spikes manifest as spot market prices – and these are currently at their lowest number since the middle of the past decade, the bulk of them recently delivered by the three-day heatwave that struck the east coast early in 2011.

Surging peak demand, in fact, has seen the maximum east coast capacity needed to satisfy supply rise from 26,000 megawatts in 1999 to 35,000 MW today, a 35 per cent rise in generation requirements.

Far from being a terrible failure, the market’s signals have driven some $12 billion worth of generation investment and added about 12,000 MW in new power station construction, reflecting investment signals.

Equally, in the face of much lower prices today, there are few signals for generation investment except in open-cycle gas turbines to take advantage of peak spikes.

The biggest generation investment on the east coast over the rest of this decade now looks likely to be in wind farms, driven by the RET’s requirements and thought to need outlays of about $20 billion.

This will add to end-user prices, of course, but, despite the hype in some sectors of the media, wind farms are not a large cause of retail price rises. However, they are a factor in these increases and one supported by Oakeshott.

(The federal government has provided a new power price breakdown in which it says that the components of every $100 paid by residential end-users are networks $51, making electricity $20, the carbon price $9 and retail, customer services and programs for energy efficiency and renewables $20.)

So what the heck is Oakeshott talking about when he attacks the “NEM” as a failure?

A market is deemed to have failed when it does not provide goods and services in an economically optimal manner.

Contrary to Oakeshott’s assertions, overall this is a market that is delivering energy security and (at the wholesale level) customer-friendly prices. 

Equally interesting is the fact that newspapers publishing his “greatest failure” claim made no attempt to ask him to explain why he held this view, still less to challenge it as being a nonsense.

Ironically, a possible threat to the security of the eastern market is now claimed to be emerging from the big policy move that Oakeshott, his fellow independents and the Greens have enabled Labor to introduce.

Fairfax’s Australian Financial Review has published a survey of generators pointing to financial problems created by the carbon tax and leading Matthew Warren, CEO of the Energy Supply Association, to warn: “(This) is becoming an energy security issue. The combination of having uncertain and falling aggregate demand, rising peak demand, uncertainty over the future of a carbon price and no or inadequate compensation means (power) businesses are in various stages of escalating threat.”
The National Generators’ Forum CEO, Tim Reardon, adds that generators are caught in a bind of rising coal and gas prices, driven by the domestic impact of export markets, and lower wholesale prices due to declining power demand.

Now the Greens and others, of course, will argue that the NEM is a failure because the wholesale power prices do not reflect what they deem to be the full social costs of producing electricity – they don’t reflect the environmental impact of carbon emissions.

This is why the Greens and independents have leveraged their status in a hung parliament to bring about the carbon price and other measures, all of which must contribute to rising power costs because of their impact on the wholesale market.

So Oakeshott supports adding to the cost of power in a market he claims is a big failure because he believes it delivers unnecessarily high electricity bills – which it isn’t because the bulk of the increased costs come from the non-market network system.

Keith Orchison

4 July 2012

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