Issue 30  June  2007

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There has been a dramatic surge in Australian energy executives' hunger for government subsidies.

The 2007 PricewaterhouseCoopers annual global utilities survey shows that Australian managers interviewed are more concerned about subsidies to support new investment than they are about removal of market distortions or increased regulatory certainty.

PwC says it finds the new attitude "concerning" as it calls in to question the fundamental effectiveness of a key aspect of Australia's market-based approach to energy supply.

The highest concerns of Australian executives, however, in considering what needs to be done to encourage more investment in infrastructure are the need to privatise government-owned assets and the availability of capital.

PwC notes that this year's survey in Australia -- part of interviews with 114 power companies in 44 countries -- throws up increasing angst about the attitude of the Australian Competition & Consumer Commission towards market concentration and market structure, reflecting, the management consultancy comments, the regulator's views on vertical integration and horizontal concentration of assets.

Australian managers rate the lack of inter-jurisdictional co-operation, ad hoc government interference in markets and regulatory decisions, "energy only" market rules and the price and availability of fuel as their top of mind concerns when considering the current impediments to an efficient national electricity market.

PwC says concerns about security of supply have intensified across the globe since it carried out the 2006 survey. More than 70 per cent of respondents internationally expect to have to deal with conditions that are "significantly or immensely challenging" in the next five years.  These fears are higher (76 per cent of respondents) in Australia and New Zealand than in North America (62 per cent) or Europe (70 per cent).

Drought impact

Fitch Ratings agency  says the introduction of full retail contestability in the Queensland market on 1 July is likely to be "a fizzer" as a result of the drought.

Fitch says very high wholesale electricity prices will make it difficult for new entrants in the Queensland retail market to source supply at a reasonable price. Significant competition is likely to be limited until the drought breaks and the State Government completes construction of the Western Corridor water pipeline. It notes that water-related restrictions on coal-fired plant have increased reliance on gas-fired generation, pushing up wholesale gas prices and further raising the competitive barriers for new supply players.

Year-to-date wholesale electricity prices have risen 196 per cent in Queensland and 182 per cent in New South Wales, with similar rises elsewhere in the national power market, adds Fitch. The price surges have been driven by water restrictions on 1,000MW of capacity from the Tarong, Tarong North and Swanbank B generators in Queensland as well as lower supply from the drought-struck Snowy Mountains scheme and Southern Hydro in Victoria.

Fitch says the hedge market suggests the effects of the drought will be long term with forward prices substantially higher for 2008 and 2009 despite the 750 MW Kogan Creek power station in Queensland due to come in to the market in September.

Green power

The environmental movement has moved to hang out its shingle for the forthcoming federal election with the Australian Conservation Foundation calling for a massive increase in renewable energy subsidies -- bringing with them a 30 per cent plus increase in retail power prices.

The ACF is calling for a 25 per cent mandatory renewable energy target for 2020 as part of a policy to cut national emissions by 30 per cent by that year.  This would be accompanied by a ban on new coal-fired power stations.

The lobby group says the new MRET would require $33 billion in new generation investment to provide 15,000 megawatts of new renewable power plant by 2020. It claims the move would cut greenhouse gas emissions by 69 million tonnes a year, the equivalent to the total emissions from road transport.

While acknowledging that, at the current rate of demand for power, the proposed new MRET would push up annual household power bills by $234 (or 30 per cent above the current national average cost of $1,017), the ACF makes no comment about the impact of the measure on energy-intensive manufacture as well as other business users.  It claims that a 25 per cent MRET will provide 16,600 new jobs by 2020 -- which high-use manufacturers will no doubt set against their employment of 1.1 million Australians.

Strand risk

Origin Energy Managing Director Grant King says Australia will need to build between 1,000 megawatts and 2,000 MW of new generation capacity for 10 to 20 years from 2010-12 to meet growth in power demand -- and he wants the next Federal Government to impose a carbon charge of $20 to $30 a tonne under the proposed emissions trading scheme to support non-coal-fired new investment.

King, in an interview on ABC Television, has warned the Howard Government and the Federal Opposition that setting carbon prices too low will result in generation investment using technologies "that are still relatively carbon inefficient."  A carbon price of $20 to $30 per tonne, he argues, will bring about a change in the pattern of new investment.  However, he warns also that a much higher carbon price will create "a significant strand risk" for both existing generation plant and the manufacturing sector.

Origin Energy has announced meanwhile that it will spend $780 million to build a 630 MW power station on Queensland's Darling Downs, using coal seam methane for fuel. The plant is scheduled to be in operation in 2010 and will burn 44 petajoules of gas a year when fully operational.

With an eye to the impact of coal-fired power stations on water supply, King points out that the new power station will require 200 million litres a year versus 8,000 million annually for an equivalent-sized coal burner.

Carbon storage bid

Oil and gas producer Santos is seeking Federal Government subsidy support to build a $700 million demonstration carbon sequestration project in central Australia, using its depleted and depleting oil and gas reservoirs in the Cooper Basin.  The company's goal is to make the basin a carbon storage hub for more than 400 million tonnes of carbon dioxide produced in Queensland, South Australia and New South Wales. The demonstration project would enable it to sequester about one million tonnes a year. 

The Greens immediately moved to dismiss the concept on the grounds that clean coal technologies are "unproven, energy-hungry and expensive." Taxpayer funds, they said, should be directed to renewable energy, energy efficiency programs and development of biofuels.


Queensland Premier Peter Beattie, whose government has approved the building of more than 2,600 MW of conventional coal-fired power stations (including Kogan Creek) since 2000, says coal-based energy sources will continue to be a significant part of the State's energy mix as it moves to a lower-carbon future. 

He points to the $300 million his government will contribute to the development of clean coal technologies along with $600 million to be spent by the State's coal industry over the next decade as evidence of the push for innovation.

"Over the next few decades" new coal-fired power stations built in the State will be required to deploy carbon capture and storage technologies along with more efficient water use.

Queensland, adds Beattie, has 250 years worth of coal reserves supporting an industry that employs 13,500 people and earns $15 billion exports for the country annually.

On a global scale, he says, Queensland's total greenhouse gas emissions contribute 0.4 per cent of the worldwide total.

The mandatory gas requirement his government introduced in 2000 to support the coal seam gas industry, Beattie says, will reduce Queensland's power sector emissions intensity from 0.917 tonnes per megawatt hour to 0.794 tonnes by 2012. He plans to increase the gas requirement to 18 per cent by 2020.

His policies, he claims, will reduce the amount of carbon dioxide emitted in Queensland to 50.9 million tonnes in 2020 compared to 63.7 million tonnes under a "business as usual" scenario.


While the local political debate continues to run hot on the relatively tiny Australian level of greenhouse gas emissions savings that can be achieved in the near and medium term without breaking the economy, ominous numbers are emerging in the rest of the world.

The latest report from the World Bank covers 2003, the most recent comprehensive data available, and shows that global greenhouse emissions then were 16 per cent above 1990 levels. 

Emissions, the bank points out, are growing fastest in the middle income countries and two rich countries, the US and Japan (20 and 15 per cent respectively). The huge increases are in China (up 73 per cent or 1,700 million tonnes) and India (up 88 per cent or 700 million tonnes).

{By comparison, Australia's 24 coal-fired power stations emit about 190 million tonnes of carbon dioxide a year.}

According to calculations by British Petroleum, total carbon dioxide emissions in China last year were more than 5.7 billion tonnes, almost as much as the output in the United States (5.9 billion tonnes).

On BP's estimates, total world consumption of fossil fuels in 2006 reached 9.6 billion tonnes, oil equivalent, compared with 9.3 billion tonnes in 2005. China and India now account for nearly half the world's consumption of coal, the greatest carbon dioxide-emitting fuel, and their combined share rose by more than two per cent in 2006 over 2005. This growth outdoes the rate of energy efficiency improvements achieved in the same period in the developed world.

Global energy consumption in 2006, adds BP, grew by 2.5 per cent, just above the average for the past 10 years, although slower than the 3.2 per cent growth rate "achieved" in 2005.  This is occurring despite a period of high and volatile energy prices. China's energy consumption rose eight per cent in 2006 over 2005 and its share of global energy consumption now stands at 15 per cent.

The information services company Enerdata estimates that hydrocarbons will account for 70 per cent of the growth in world energy consumption between now and 2020. It forecasts that global consumption will be the equivalent of 14.5 billion tonnes of oil by then (it was 11 billion toe on in 2005), with natural gas accounting for 40 per cent of increased supply, oil 30 per cent and coal 15 per cent.

The bottom line is that energy use is shifting away from the OECD countries, where concern about global warming has escalated dramatically in the past two years, and is becoming more carbon intensive when considered on a global basis, driven to a substantial extent (but not exclusively) by the Chinese industrial revolution.

Installed wind power capacity around the world remains stuck at under one per cent of global electricity production.

The Australian Environment Minister, Malcolm Turnbull, provided some context to the debate last month when he pointed out that, if the rate of global deforestation could be only halved, annual greenhouse gas emissions worldwide could be cut by three billion tonnes a year.

The major steps in abatement that are being demanded left, right and centre are certainly not going to come globally any time soon from a dramatic cut in burning fossil fuels around the world.

Ironically, Australia, despite the trenchant opposition of the environmental movement, will be in a better position to contribute to global abatement in the next decade as a result of the ALP's recent decision to allow more uranium mining here. Existing exports of uranium, by displacing coal burning in power stations abroad, already compensate for this country's entire 600 million tonnes a year of greenhouse gas emissions.

Keith Orchison

17 June  2007

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