Issue 51, May 2009

Bringing solar to a boil

The Rudd government has opted to give solar power rather than hot rocks geothermal – or wave power – a big push in the May federal budget.

It has decided to provide $1.365 billion over six years to support four solar energy generation projects, starting with $315 million in 2009-10 for demonstration plants on an industrial scale.

The move follows on the support given by the Howard government ($75 million) and the Victorian government ($50 million) totalling $125 million for a solar power station now being developed  by Solar Systems and TRUenergy near Mildura. This 154 MW project is touted as the largest and most efficient solar photovoltaic power plant in the world, able to generate 270,000 megawatt hours a year – enough to earn some $17.5 million in renewable energy target subsidies annually under the proposals recently announced by Rudd. It is scheduled to be commissioned in 2012.

The government proposes to supply up to a third of each new project’s costs, suggesting that it expects solar developments to reach $4.5 billion in addition to the existing Mildura project.

The most likely other areas for developments are seen as northern South Australia, western NSW and south-east Queensland.

While the budget solar decision is winning environmental activist plaudits, they are angered by the government also deciding to increase its support for development of “clean coal” projects by $2 billion over nine years. Greenpeace celebrated a cut in the ration of government spending on fossil fuels and renewables from 28:1 in last year’s budget to 9.5:1 this time round. It labelled the government contribution of $2.4 billion to “clean coal” projects over nine years as “absurd.”

Clean Energy Council chief executive Matthew Warren said endorsement of clean energy, including solar project and energy efficiency promotion, would help to deliver new jobs, especially in regional Australia.

Meanwhile the government has also decided to establish an independent innovation agency to be called Renewables Australia, with a brief to promote the development, commercialisation and deployment of green energy technology, and to divert $365 million from the non-solar elements of the Renewable Energy Fund to RA’s use.


Networks unhappy

The Australian network service providers remain unhappy with the rate of return on investments allowed by the energy regulator, even though the Australian Energy Regulator caved in and increased the weighted average cost of capital from its initial 8.5 percent to 8.8 percent.

Energy Networks Association chief executive Andrew Blyth has responded to the rise by arguing that it is, in fact, a “severe cut” to investment returns in the midst of a global financial crisis that had already caused “capital rationing.”

The stockmarket apparently agrees because an early reaction was a seven percent fall in listed SP Ausnet’s share price in the wake of the AER decision.

Blyth argues that the regulator has not recognised “real world business conditions” and appears to be alone in a view that the cost of capital has gone down. He warns that setting inappropriately low rates of return will deter new investment in energy infrastructure over the next decade.

For his part, AER chairman Steve Edwell acknowledges “extraordinary conditions” in global financial markets but argues the decision takes a long-term perspective and that the regulatory regime will continue to compensate networks for the ctual cost of debt they incur at the time of the next determination.

The regulator has approved the largest network capital works programs in Australian history.  Over the five years to 2014, it has allowed $275 million of capex in the tiny Australian Capital Territory market for ActewAGL and $14 billion in outlays by the three government-owned distribution businesses in New South Wales, an 80 percent increase over the permitted spending in the five-year term now ending.

The AER has agreed to Country Energy spending $3,955 million, EnergyAustralia spending $8,435 million (including high voltage capital works) and Integral Energy spending $2,914 million – a total, including the transmission outlay, of $15.3 billion. It went on to agree to the government-owned transmission service, TransGrid, spending $2.4 billion on capital works over the next five years, a 72 percent increase over the $1.4 billion outlayed in the determination period now ending.

The AER approvals bring the total outlays for the wires businesses in NSW, including the Capital Territory, to just under $18 billion.

Some $800 million of the EnergyAustralia expenditure will be focused on the Sydney CBD, where the distributor has had three highly-publicised blackouts in recent weeks.

Looking at the distribution capex, Edwell comments that, in part, the need for increased investment is being driven by a greater use of air-conditioning. “Expanding the networks to keep air-conditioning running on a few hot days makes (them) more costly to build and operate as this capacity is then under-utilised for much of the year.”

Fitch Ratings note that the unprcedented level of expenditure comes at a time when capex for water supply is also increasing rapidly along with the need to augment gas distribution – and they warn that the regulator needs to ensure that there is enough incentive for debt and equity providers to make available adequate funds to essential service sectors

They also note that IPART, the pricing regulator in NSW, has recently proposed increases in electricity bills of 18 to 20 percent, about half of which was due to network charge rises, and predict tariffs will need to rise further to cope with new capex outlays.

Meanwhile the Energy Users Association, which claims to speak for more than 100 companies, argues that end-user businesses are facing multi-faceted and substantial cost pressures and the new round of cost increases will impact on their competitiveness.

One network business breaking ranks on the cost of capital issue is Envestra, which has “cautiously welcomed” the AER decision.  Envestra has no electricity assets and is looking at the cost of capital decision in the light of its gas network capex applications to be made in 2011 for South Australianand Queensland assets and in 2012 for those in Victoria.  Chief executive Ian Little is pleased that the AER agreed to increase the allowable rate from its draft decision late last year, saying that this is recognition of the increased capital costs confronting infrastructure companies in the economic crisis.

Rudd backflip spurned

The electricity industry has reacted negatively to the Rudd government decision to make changes to its proposed emissions trading scheme compensation and to push out its introduction by a year.

The Energy Supply Association says the revised scheme has the same critical flaws as the first concept – it will just be implemented later.  What is proposed, it says, “could compromise efficient supply in the next few years.”

The association wants further changes to address the stranding of coal-fired power stations, to provide a firm 10-year emission cap and a further 10-year “rolling gateway,” to ensure that there are no additional working capital requirements for liable suppliers and to remove retail price regulation.

ESAA chief executive Clare Savage told the Senate select committee on climate change policies that its members would need to purchase 200 million one-tonne emissions permits a year, meaning that, with a $20 price, the industry would need to hold $10 billion worth at any given time.  The government now proposes to hold permit prices to $10 for the first years, with a transition to to full market trading from July 2012.

International Power Australia CEO Tony Concannon told senators that the Rudd government scheme “will provide a dislocation in the electricity sector.”  Coal-fired assets, he said, would find their cost base increased by 200 to 400 percent, depending on permit prices. “”That will result in insolvency or near-insolvency and certainly a reduced ability to do maintenance. In turn, this could lead to reduced energy security or energy supply.”

Savage added that the combination of the ETS and the renewable energy target could see retail electricity prices rise by between 40 and 50 percent by 2020.

Appearing two days later for the National Generators Forum, Concannon said power station owners were faced, on Treasury analysis, with having to spend $55 billion buying ETS permits by 2020 under the initial scheme. This, he argued, would “increase operational costs for some coal-fired plants by 100 to 200 percent and render a number insolvent by 2015.”

He warned that, because of the reporting requirements of the Corporations Act, the ramifications for some generators would become increasingly apparent in the next three to six months.

He rejected assertions that generators were asking for more compensation, saying they were calling on the government not to take so much money from them.

Not enough gas

In a riposte to environmentalists arguing for the closure of brown coal power stations in Victoria, International Power Australia CEO Tony Concannon has told senators that he does not believe there are adequate gas reserves to replace 7,000 MW of capacity in the state on a long-term basis. debaters of global warming policy would do well to read some Stern comments.

Too much uncertainty

Origin Energy CEO Grant King has told the Senate select committee on climate policy that the uncertainty the electricity industry now faced with a carbon pricing regime is beginning to exceed the gains that might accrue to a company like his.

In an uncertain environment, he added, less supply facilities will be built and this will lead to “an increased change in the supply/demand balance.” This would result in higher risk, higher market volatily and increased consumer prices.
“Uncertainty is becoming real,” he said, “and the outworking will probably be price outcomes of greater consequence than those caused by the (emissions trading) scheme itself.”

King said that Origin, however, is a strong supporter of the concept. “We very strongly endorse the fact that an emissions trading scheme is the best solution.”

ETS ‘too complex’

Dr Regina Betts, joint director of the Centre for Energy and Environmental Markets, at the University of New South Wales, has told the Senate climate policy inquiry that the proposed ETS legislation has areas of “enormous complexity” that will add to transaction costs.  The definition in it of “liable entity,” she points out, runs to 80 pages compared with one page with an annex in the European Union scheme. CEEM can see six areas where improvements could be made in the legislations efficiency.

‘Marking time’ on $1.8bn projects

Trevor St Baker, executive chairman of ERM Power, the largest power station developer in the country for the past four years, says the company is “marking time” on the development of $1.8 billion worth of projects because of the “sovereign risk threat” of the emisisons trading draft legislation.

St Baker, who has overseen the investment of $2.5 billion in 2,500 MW of joint venture, gas-fired power stations in New South Wales, Queensland and Western Australia since the middle of the decade, has told the Senate inquiry in to climate policy that pushing ahead with a unilateral policy to impose carbon charges and the imposition of trading from the start of the emisisons trading scheme, is affecting the credit worthiness of the electricity sector.

He also told senators that there is no immediate or near-term alternative to gas-fired generation for carbon emissions reduction for the bulk of Australia’s electricity needs over the next decade. This means, he said, that any scheme to lower emissions must encourage investment in new gas-powered plant. At least 1,000 MW of new generation is required every year over the decade at a cost of $1.5 billion to $2 billion annually, he added.  “The proposed (legislation) will not achieve this.”

St Baker said the power stations on which ERM is “marking time” are proposed for development in regional NSW and regional Queensland. “They are required for security of supply three years from now. Construction needs to be committed within a year. The $1.8 billion of finance needed will not be obtainable unless lenders and investors are re-assured that the Australian electricity sector can maintain its high credit rating.”

With a greatly shrunk global banking sector from which to source debt finance, he said, the remaining international lenders are sensitive to country risk. “The certainty that the Australian industry needs is that Australia will not legislate for a scheme prior to a global scheme design being decided and implemented.”

St Baker pointed out that lower-emission power development has been pursued in Australia throughout the decade. “There has been no new coal-fired power generation approved for the NEM since 2001. More than 5,000 MW of gas-fired generation has been built or commenced over the past five years. There is an ample gas resource in Australia to continue as a transitional low-carbon emissions source until lower emission baseload technologies are invented and commercially rolled out.”

He argues for a gas generation incentive scheme to be introduced nationally along the lines of the Queensland requirement, which is credited with driving the development of the state’s coal seam methane business. Retiring coal plants and replacing them with gas power stations could achieve a reduction in carbon dioxide emissions to 12 percent below 2000 levels by 2025, he claims.

Taken as a right

In a talk this month to a joint forum of the Netherlands and American chambers of commerce in Melbourne, Russ Caplan, chairman of the Sehll companies in Australia, has called for changes in behaviour across the energy supply and consumption chain.

Caplan said: “Today, in much of the world, we take energy for granted. We treat it as a right and we’re careless in its use: consuming ever more energy-demanding gadgets, enjoying hot buildings in winter and freezing ones in summer, and driving gas-guzzling cars.”

He added: “Today the economics of energy use encourage this profligacy. For example, a consumer may buy a television that uses more energy rather than a more efficienct, but also more expensive, model. In order to meet that greater energy need, multiplied by millions of consumers who turn on the TVs at peak times, power companies have to invest in additional capacity which is unused for much of the day.”

He set out an argument for introduction of emissions trading in Australia to promote efficiency in consumption, but acknowledged the critical issue of how this country manages the competitive disadvantage of applying a carbon price before its trading partners.

Permits, but no benefit

Australia’s largest transport fuel supplier, Caltex, has told the Senate inquiry in to carbon policy that the proposed emissions trading scheme will impose $20 billion worth of cost on refiners to buy permits over the next decade, but the compensatory excise reduction for consumers means that there will be no reduction in greenhouse gases from vehicles “and absolutely no environmental effect whatsoever.”

Caltex government affairs manager Frank Topham told senators that the excise reduction will actually see petrol prices fall for several years below what they actually otherwise would be, with emissions from petrol going up. “It will take about 15 years to recover that increase,” he argued.

Caltex is calling for private motorists and smaller commercial vehicle users to be removed from emissions trading compensation – as well as moves to provide cash back for purchase of high-efficiency vehicles, better consumer education, improved public transport and grants for R&D of alternative fuels.

Topham said that, even with the company compensation proposals of the Rudd government scheme, Caltex would find itself spending $25 million to $40 million a year on the ETS.

Caltex, he added supported the concept of emissions trading and its introduction in Australia when rival refiners overseas faced similar carbon costs.

Message from Geelong

Smart politicians are forever on the lookout for the hidden traps in feel-good policies. “Unintended consequences” is a phrase that sends shivers down the corridors of power – and more and more federal Labor MPs must be wondering about the timing and impact of the Rudd government’s carbon policies as the Senate moves towards making a decision on emissions trading.

The Senate committees looking at carbon policies – three of them no less: the standing committee on economics (which has rubber-stamped the ETS legislation) and the select committees on fuel and energy and on climate change – have drawn one of the largest assemblies of opinion on an issue for many years.

One of the problems for the ALP is that its approach to the carbon policies is strongly oriented to its constituency in the capital cities – with the Greens hovering at its elbow, waiting to snatch electoral advantage – but the areas likely to take the biggest hits are over the metropolitan horizon in rural and regional areas.

The extent of this challenge is highlighted in a submission to the Senate from the Geelong Manufacturing Council.  The Geelong region, as the GMC points out, is one of the most carbon-dependent in the country, with industries engaged in aluminium smelting and rolling, petroleum products, cement manufacture, fertilisers, chemicals, automotive manufacture and carpet production, along with the firms that service their needs, accounting for half its economy and half its employment  -- and viable in global markets because of the low cost of brown coal-fired power.

With a population of 240,000, the region currently has around 14,000 people directly employed in the manufacturing sector.

The way in which these industries affect their community base is demonstrated by the council pointing to manufacturing being a major generator of R&D in the tertiary institutions in the area.

The GMC is willing to support emissions trading “providing it strengthens the economy and preserves the jobs and social benefits that accrue from Australian manufacturing and export industries.”  Feedback from its members, it says, indicate a “high level of concern” about the policy. “Several industries are concerned that the scheme may make them uncompetitive.”

The council also joins the major energy user chorus complaining about the government’s proposed much bigger renewable energy target. “More realistic” transitional measures need to be pursued to reduce reliance on carbon fuels, it argues.

The litany of “don’ts” that accompanies the Geelong submission will be familiar by now to senators.  They are hearing it from across the business sector.  The underlying message, as Peter Coates, chairman of Xstrata Australia, put it to the select committee on climate change in mid-April, is: “Even if the Copenhagen meeting fails, Australian firms will start paying $8.5 billion in carbon costs every year from 1 July next year. None of our competitiors will confront any such costs.”

Coates, who also chairs a Minerals Council of Australia committee focusing on climate change, accused the government of “making one fundamental mistake” – it decided that raising revenue was more important than a sensible, measured transition to an ETS, he said. “In its first year the Australian scheme will impose a cost burden on the economy about 200 times that imposed on the 27 nations of the EU in the first three years of its scheme.”

The MCA argues for a phased approach to auctioning permits “to establish a price signal without putting the economy in to reverse.”  This, Coates told senators, would reward firms that reduced emissions, raise revenue to avoid disadvantage to low and fixed income earners and do away with the need for special treatment of certain business sectors.

It is hard to believe that this continuous drumbeat of concern across much of the business community is not starting to drown out the noises of climate crisis alarm – especially for MPs in marginal seats.  Some will be reminding themselves of the lessons of ’96 when marginal took on a whole new meaning for the Hawke/Keating era MPs.

And the economic downturn preceeding that political disaster compares with the present crisis like a bad cold to swine flu.


Coolibah’s Keith Orchison now has a blog, entitled PowerLine, on the Business Spectator website at

Debate in Australia about decarbonisation policy is becoming increasingly dysfunctional. 

As an example, complaints about “big polluting industries rent-seeking” protection from heavy carbon costs vie for media space with widespread political and public concern about the impact of the Great Financial Crisis on employment in manufacturing.  These are the same businesses – directly employing about a million Australians and wide open to the global backwash of the GFC because they are trade-exposed.

Then there is a public view, shared by Prime Minister Kevin Rudd and leading members of the federal government, that global warming merits strong action because the situation is at a crisis point.  This is the rationale for the emissions trading scheme – which is planned to have the cumulative effect over 10 years of reducing Australian greenhouse gas emissions by 250 million tonnes. But the government cannot bring itself to change uranium mining policy to deliver a potential one billion tonnes of abatement a year to the global effort to curb emissions.

Also, the government proposes through the emissions trading scheme to impose domestic costs on liquid natural gas production that, the developers say, will result in local projects being disadvantaged in competition with rivals whose host nations embrace no carbon cost, thus denying Australia desperately-needed new investment for no discernible benefit – the LNG plants will exude the same volume of greenhouse gases and contribute to replacing coal emissions regardless of where they are built.

And again: while preaching the need for all Australians to make every effort to reduce greenhouse gas emissions, the federal government is shaping the emissions trading scheme so that the initial impact on petrol prices will be wholly eliminated by a simultaneous reduction in the fuel excise.

There are numerous other examples of dysfunctionality, not just in politicians and their advisers but in the community at large.  One prominent public poll asked people back in October whether, in the light of the GFC, which was just beginning to bite at that point, the introduction of emissions trading should be delayed. More than four our of 10 respondents said it should.  In February, by which stage the GFC was much more severe, the same poll, this time eliminating the reference to the economy, asked the same question in the context of “beating climate change” and less than one respondent in 10 favoured a delay.

The local euphoria over the “success” of Earth Hour – an Australian idea – can be set against the fact that only some 817,000 householders have embraced GreenPower, paying extra for their electricity to assist use of renewable energy, notwithstanding years of vigorous campaigning and all the publicity about global warming, while another 7.3 million have not, mostly on the grounds that they lack information or because of its extra cost.

Media commentary, blog contributions and public polls demonstrate an almost complete inability to link the impact of higher energy prices, as a result of carbon policies, with loss of employment and higher retail costs for most things Australians buy.  The “they” who should bear the cost – the “big polluters” – are almost universally not seen as “us,” the consumers of what the manufacturers make.

This situation is exacerbated by the thousands of Australians who work in “polluting” jobs living in places like Gladstone, the Latrobe Valley, Mt Gambier and the Hunter Valley rather than Sydney’s Marrickville or Melbourne’s Fitzroy or Canberra, where there has been vociferous opposition to the siting of a gas power station needed to fuel and cool a large IT data centre, the very type of “green job” provider the environmental activisits argue should replace “dirty factories.”

A wind farm developer can drop a media release about his project creating 300 jobs and expect national media coverage, especially from the ABC.  An aluminium developer can tell a Senate committee that it is concerned that a $4 billion project, offering 3,500 full-time jobs and 15,000 construction jobs, may be in jeopardy under the carbon policy and the submission goes unreported.

Huge public support – in the abstract – for wind farms and solar power does not connect their large-scale introduction with large increases in electricity costs.  Attempts to point out that the Rudd government’s proposed renewable energy target will add nearly $20 billion to consumer costs – if, that is, the full 35,500 GWh is taken up in the market at $65,000 per GWh, a situation complicated by the latest unclear proposals to shelter energy-intensive industries to some extent from the scheme -- appear of no interest to journalists and the community at large.

Academics who want to talk up the latest modelling about melting ice, rising seas and more drought are virtually guaranteed a media hearing. Scientists, like the Academy of Technological Sciences & Engineering members, who argue that the long-term cost of addressing emissions abatement can be halved with better policy, struggle to be heard.

Nicholas Stern and Ross Garnaut can attract political and media attention at will. Australian media ignored Todd Stern, Obama’s special envoy on climate change, when he delivered a hard dose of reality at the Bonn UN meeting on climate policy about what can be expected from America’s new administration. No white horse. No magic wand, he said.  And no coverage in Australian media at all.

To steal a line from the Friends of the Earth, we seem to be at Code Red in this debate, but I’d suggest the alarm bells in Australia should be ringing for the dangerous unreality of the discussion rather than “dangerous climate change.”

Keith Orchison
16 May 2009

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