Issue 85, May 2012
The future of gas supply in Australia is a big ticket issue for electricity generation and the economy as well as for producers. This edition coincides with the 2012 APPEA Conference in Adelaide and focuses on an array of gas supply issues facing the east coast as well as on the ongoing debate about retail power bills and the chief driver of increases, network expenditure. It starts with a sensible suggestion for further addressing the problems high prices are causing low-income members of the community. Last word looks at manufacturers’ complaints about energy costs.
Claire Petre, the New South Wales energy and water ombudsman, has called for a national, industry-wide discussion on energy affordability and how it can be addressed.
In her submission to the federal government’s energy white paper process, Petre says the discussion could consider the relevance of establishing a benchmark for “energy stress” and also explore responses that have been proposed, including the value and structure of a social tariff.
She also proposes research in to the effectiveness of different community service obligations in the east coast electricity market.
She suggests a national energy affordability roundtable be convened.
Petre adds that a rising number of NSW energy customers are contacting her agency to discuss payment difficulties and their financial hardship.
Unrequested household energy disconnection rates in NSW are “unacceptably high,” she says, and the next round of power price rises will put further pressure on low income households – as well as on welfare agencies distributing emergency relief and offering counselling.
“Consumer protection and industry customer assistance measures need to keep up.”
One of the biggest electricity-related decisions this year will be delivered by the Australian Competition & Consumer Commission on 17 May when it announces whether it will allow AGL Energy to acquire the whole of Loy Yang Power, owner and operator of a 2,200MW Latrobe Valley power station and the adjacent brown coal mine that also serves the Loy Yang B plant of International Power.
Loy Yang Power provides a third of Victoria’s electricity and 10 per cent of the east coast supply.
AGL is limited at present to owning only 35 per cent of the company.
It wants to acquire the remaining shares from the embattled Japanese Tokyo Electric Power Company, Thai-owned Ratch Australia and three superannuation funds.
Adelaide briefly becomes the energy capital of Australia this month when some 3,000 delegates and exhibitors meet there from 13 to 16 May to participate in the Australian Petroleum Production & Exploration Association’s 52nd annual conference.
Participants will get an immediate heads-up about the key challenge facing gas developers in eastern Australia from one of the conference’s highest-ranking overseas speakers, Total’s global head, Christophe de Margerie.
De Margerie expects coal seam methane, shale gas and oil sands to take a strong position in future international petroleum supply, but he warns that the growth of these unconventional resources is increasingly taking the industry in to an environment where it must co-exist with farmers and other stakeholders.
“ Our industry must do its best to be accepted (by them) in order to retain its licence to operate,” says De Margerie. “Technologies such as hydraulic fraccing arouse misunderstanding and even distrust within (these) communities.”
Operators, he says, will need to meet the highest safety and environmental standards while clearly and openly explaining the impact of projects on the local environment – as well as talking up their contributions to local development.
A significant part of the Adelaide conference will focus on the emergence of conflict between CSM developers and private landholders and regional communities on the east coast.
The ability of the production industry to sustain its social licence is of major importance to Australian power generators, who are expected to turn to gas to an increasing extent – and to east coast policymakers relying on them both to provide energy security and help reduce carbon emissions.
The Energy Supply Association estimates that east coast consumption of gas over the next 20 years will aggregate 21,000 petajoules – with the power sector accounting for 10,000 PJ in total. By comparison, annual east coast gas consumption at present totals 700 PJ.
Using EnergyQuest projections, ESAA expects annual electricity generation gas requirements to rise from 331 PJ nationally in 2009-10 to almost 600 PJ by the end of this decade and 1,280 PJ in 2029-30.
This trend has major implications for NSW, the largest regional energy market in the country – where analysis of new generation investment suggests that gas consumption by the power sector could grow more than 20-fold in 20 years and account for at least a quarter of the national use of the fuel to make electricity by 2030.
The prospects for gas to fill the gap in electricity generation as coal-fired power production is reduced are not straightforward, according to a joint review by Standard & Poor’s and analytics firm RepuTex.
The study also forecasts that generation from renewables will not reach the federal government’s mandatory target of 20 per cent by 2020.
The key issue, the ratings service and RepuTex argue, is the gas price.
“Higher prices,” they say, “could blunt the competitiveness of gas and (its ability) to displace coal for baseload generation.
“Australia is set to become one of the largest LNG exporters globally as a series of projects come on line in the next 3-5 years. However, the oil price-linked nature of many of the export gas contracts could hike domestic gas prices steeply.
“Further fuelling the uncertainty is the potential volatility of carbon prices once the fixed-price period (of the Gillard government’s policy) ends in 2015.”
The pair say that the window for investment in gas baseload power is quite narrow because, given the 2050 abatement plan, capacity constructed after 2020 will have an economic life well short of the normal 40-50 years today.
RepuTex executive director Hugh Grossman says that, while gas may seem to be the logical replacement for coal, the winner under carbon pricing may not be so clear cut.
“We anticipate gas generation will increase from 11 per cent of our total fuel mix – however, the extent of that win could be muted by the growth of export markets from 2014 and the expected increase in gas price levels.”
The review undertaken by RepuTex modelled three scenarios.
In the first, under a static gas price and a high carbon prices, gas rises to provide 31 per cent of national generation.
In the second, black coal continues to be dominant, but brown coal generation falls back and the gap is covered by gas.
In the third, the share of gas grows but at a much slower rate.
Grossman says: “Meeting carbon emission targets could hinge on renewables and more specifically the ability of renewables to provide baseload power. Should this occur, we may see renewable generation leapfrog gas.”
However, the analysts add that, in the current environment, where the renewables certificate market has been glutted by federal government solar subsidies, renewables may not meet the government target of 20 per cent in 2020 – reaching only 14 to 17 per cent of consumption at the decade’s end.
John Ellice-Flint, former Santos chief executive and now an executive director of coal seam methane company Blue Energy, believes the major needs of LNG trains on the east coast may result in a short-term shortage of gas for the domestic market.
Ellice-Flint told Sky Television that it will be “a challenge” to meet the gas demands of three LNG plants at Gladstone.
“You have six trains starting simultaneously. That is a huge challenge. I have a lot of confidence that the industry is going to meet the (supply) challenge, but does that leave enough for domestic demand? Probably not in the short term.”
Michael Fraser, managing director of AGL Energy, says the public conversation about energy over the past 12-18 months has been notable for “a smorgasbord of claims about many issues, sometimes at best ill-informed and in some instances deliberately misleading.”
Fraser says “the clock is ticking on Australia’s energy future.”
He adds: “If we don’t get on with the job (of supplying east coast gas), we’re going to have supply problems.
Current east coast gas demand, he points out, is 700 PJ a year. The Gladstone LNG projects, if the proposed fourth development goes ahead, will increase demand to about 2,500 PJ a year.
“Gladstone is going to be like a giant vacuum cleaner for the east coast gas market, hoovering up all the gas it can get its hands on. Even BHP and Esso, with their reserves in Bass Strait, are reported to be trying to sell gas in to the export markets.”
The gas supply issue will be most acute in New South Wales, Fraser argues, with more than a million households in addition to power generation and business consumption requiring the fuel for heating, cooking and hot water.
NSW, he says, produces only 4-5 per cent of its gas needs today, relying on South Australia, Victoria and Queensland for the overwhelming majority of supply. (AGL is the State’s largest gas retailer, supplying half the market.)
Fraser says that, while Esso/BHP have uncontracted, proven and probable reserves which could be used to supply NSW, “the reality is that there is not enough other gas being produced today to fill the shortfall the State is facing.”
He adds that the lead time for gaining approvals for new NSW developments is at least 2-3 years and it takes another two years typically to undertake project construction. “Supply issues could arise as early as 2014.”
The Australian Pipeline Industry Association has told the federal government’s energy white paper process that the role of gas in domestic energy supply, especially for electricity generation, needs to be encouraged.
It argues that there is a real possibility that the potential for greater use of gas domestically will not be achieved because, with the exception of the mandatory Queensland scheme, there are no State or federal policies or programs directed at encouraging use of the fuel. “This is in contrast with policy mechanisms that assist all form of renewable, clean coal and liquid energy fuels.”
APIA says that, without appropriate policy, Australia will face either higher electricity prices as renewables take a larger than anticipated role or the emissions intensity of generation will stay high because coal will remain the major source of power supply for longer than predicted.
The association warns that a $23 per tonne carbon tax will not drive a shift from coal to gas. “In order to create a genuine move from coal-fired generation to gas-fired power, a carbon price of approximately $50 to $70 is required, depending on the gas price.”
It says that only five CCGT projects have been publicly announced for the east coast market for the decade ahead and none has passed the announcement stage. “This supports our contention that the current policy settings do not encourage the use of gas.”
APIA says the increased linkage between gas and electricity markets forecast in the draft white paper is not assured and “efforts must be made to ensure that gas plays its appropriate role.”
It says market arrangements should recognise that gas both competes with and is an input to electricity generation.
APIA says it is unlikely that uncertainties impacting on a potential shift from coal to gas for generation will be resolved “until at least the end of the decade.”
The Clean Energy Council complains that the level of ambition, enthusiasm and optimism for natural gas in the draft energy white papers exceeds that for clean energy and is at odds with the federal government’s aspiration to achieve a clean energy future.
While it recognises the transition fuel role that gas can play, says the CEC, Australia’s energy future lies with renewables and it is concerned that the white paper “appears to position gas as being more important than renewable energy.”
The council argues that gas-based power supply solutions “may not be the least-cost option in the short or medium term, given their exposure to rising international commodity prices.”
It claims that renewable technologies will “provide a hedge against rising prices” as their costs “are continually falling and marginal costs are zero or comparatively low for key renewable energy resources.”
The CEC complains that the renewable energy sector in Australia has been “crippled by policy instability and uncertainty” and warns that, if this continues, national clean energy aspirations will be “severely compromised.”
Problems, it says, include past (and potentially future) uncertainty about a price on carbon, changes to the RET, the treatment of feed-in tariffs for solar PV and positions regarding clean energy funding.
“Renewable energy policy in Australia is at best tenuous, fragile and uncertain,” CEC adds, with highly-politicised decision-making processes, “including short-term decisions, stop-start developments and policy U-turns.”
It expresses qualms about the two-year review of the RET that the Gillard government has legislated.
The Australian Conservation Foundation has attacked the federal government’s energy white paper as “archaic, outdated and insufficient.”
The ACF says the white paper is inadequate to achieve the necessary transformation of the energy system. It “overstates the importance of polluting fossil fuels to our energy security and systematically undervalues the role and future of renewable energy resources.”
The foundation accuses the EWP process of “systemic bias” against renewable energy technologies.
The ACF wants the federal government to (1) re-instate the commitment to an emissions performance standard for all new energy generation, (2) reform the east coast market to include an explicit greenhouse gas abatement objective; (3) reform network investment rules to “allow cost and risk sharing with the government “ in construction of transmission links to renewable energy zones, (4) roll back fossil fuel subsidies and redirect the money to clean energy development, (5) develop a “planned, fair contraction of fossil fuel extraction,” and (6) set up a clean energy co-ordination body to include all departments and agencies.
Eight of Australia’s major private sector generation businesses have sent a submission to the energy white paper process sceptical about assertions that the federal government is not in the business of picking winners.
The “Combined Generators” – AGL Energy, Alinta Energy, Energy Brix, Intergen, LYMMCO, NRG Gladstone, Origin Energy and TRUenergy – say in their submission: “While there is a view that the climate change and renewable energy policy is not about picking winners, with up to $17 billion in assistance available, it is growing to look like this is actually the case.”
Specifically, say the generators, the role of bodies like the Clean Energy Finance Corporation and the Australian Renewable Energy Agency – and the maintenance of complementary climate change policies within specific jurisdictions, despite carbon pricing – raises a number of concerns and challenges for government and industry.
They add: “It is clear that in recent times some energy policy developments have been ad hoc in nature and that, while developed to deal with specific policy goals, have broader long-term implications that have not been taken in to account.”
They want “a holistic, transparent and robust policy development process” to increase productivity, maximise competition, attract private capital and support markets.
The NSW government claims that the federal carbon tax coming in to effect on 1 July will impose a $46 million annual cost on the State’s public hospitals and public schools.
State Treasurer Mike Baird claims that the tax will add to the input costs of 220 public hospitals and 2,177 State schools and complains that $2 billion is going to Victoria in compensation (through payments to privatised brown coal generators) and nothing to NSW (where taxpayer-owned generation businesses fall outside the carbon intensity cut-off point set by Canberra).
Departing Verve Energy managing director Shirley In’t Veld says the federal carbon price is too low to drive a shift from coal-fired power to gas or renewables.
In’t Veld had previously claimed that the carbon tax would add “at least $160 million” annually to the West Australian government-owned generator’s costs but now says that the figure is being remodelled because Verve may be able to pass on some of the bill to customers.
Verve is in the top 12 largest emitters of greenhouse gases in Australia.
In’t Veld told the Australian Financial Review that the carbon price would have to be $60 to $70 per tonne of emissions to force Verve to shift from coal to natural gas.
Matthew Warren, chief executive of the Energy Supply Association, says that new increases in NSW electricity prices are being driven by “once-in-a-generation changes in energy use and supply.”
Warren acknowledges rising bills are hurting many families but says the increases are driven by the need to repair ageing networks and by big changes in the way energy is being used and generated.
“We have started investing in cleaner generation to reduce greenhouse emissions. We are also spending billions of dollars to ensure that we have enough electricity on a few hours a day and a handful of hot and cold days each year when demand peaks.
“These are big changes and they cost more. We can’t make them go away with short-term fixes like price caps. The best solution is to be smarter in the way we use energy.”
Warren calls on householders to take control of their bills by taking steps to reduce consumption. They should talk to retailers about what they can do and should shop around for the best deals.
Meanwhile Peter Boxall, chairman of the NSW Independent Pricing & Regulatory Tribunal, says pointing the blame for price rises at energy retailers or the carbon tax alone “is to miss the point.”
He notes that network prices in NSW have increased by more than 90 per cent over the past five years and make up about half of the price rise to take effect on 1 July. The other half, he says, results from the introduction of the federal carbon price.
Boxall argues that future price increases can be limited by streamlining the multiple, and sometimes competing, energy policy objectives that State and federal governments pursue. “There is also the opportunity to consider the rules and laws that guide investment in the sector, especially in networks and low-emission technologies.”
Boxall says IPART believes the framework for regulating networks can be improved “to ensure expenditure is efficient and is valued by customers.”
Current movements in network charges are a legacy of previous regulatory and policy arrangements that suppressed investment and tariffs, says Ausgrid, the largest east coast distribution business, owned by the NSW government.
In a submission to the Australian Energy Market Commission, which is examining proposals to change regulatory rules, Ausgrid says that customers would be facing a lower price impact in 2009-14 if networks had been allowed to start asset replacement programs earlier.
“Customers did not pay cost-reflective prices in 2004-09,” Ausgrid argues.
The distributor says it had to increase capital expenditure in the current regulatory determination period because its system was suffering a high rate of failures due to the condition of equipment and over-utilisation of key assets.
It says the situation caused it to operate transmission feeders and substations above their standard life.
In its 1999 regulatory submission, Ausgrid says, it pointed out to regulators that 12 per cent of sub-transmission substations were operating beyond their normal rating and another 25 per cent were at 90 per cent of utilisation. Thirty per cent of zone substations were at or above 90 per cent utilisation.
In the summer of 2005, it adds, the system had 108 sections of 11,000 volt cables or feeders that were over-used in Sydney and on the NSW Central Coast.
Ausgrid contends that it should have been allowed to pursue a higher level of asset replacement in the late 1990s and that this would have avoided the present price shocks for customers.
It argues that permitted replacement expenditure through the 1990s was less than $100 million a year for a network that would cost $30 billion to rebuild today.
A network of this size requires, on average, a continual renewal expenditure of $700 million annually, assuming a 42-year life, it claims.
It points out that, under the previous regulatory set-up, the Australian Energy Regulator cut its distribution capex by eight per cent below what it bid and the ACCC cut its transmission capex by 19 per cent.
Ausgrid has modelled what network charges would be if the regulators had not suppressed its capex and opex outlays and claims that the 2009-14 increases would be 47 per cent instead of 58 per cent, leading to a reduction in end-user prices of 19 per cent.
The business also points to a range of service improvements that have followed the recent higher outlays. The average number of blackouts from equipment failure has been cut 12 per cent between 2003-04 and 2010-11. Last year there were two major failures at large substations compared with eight in 2001. The number of 11kV feeders operating at over-rated capacity has been cut back to 44. Maintenance costs have been reduced four per cent.
There are few more dogged than a tabloid newspaper when pushing a particular point of view, however misleading it may be.
A high performer in the tabloid tendentiousness stakes in Australia is the Daily Telegraph/Sunday Telegraph stable in Sydney, not least when seeking to make points about electricity prices.
Thus, on the last Sunday of April, the Sunday Telegraph had an editorial in which it asserted that “the average NSW household (electricity) bill will be as high (in the next financial year) as $2,544 per annum, depending on the area.”
This number is to be found in the IPART report on proposed changes for household and small business power users from 1 July – but it refers only to Essential Energy (formerly Country Energy) customers.
The taxpayer-owned network business does cover three-quarters of NSW and parts of southern Queensland but only has 700,000 customers out of some three million in the State.
As IPART points out in the same table from which the Telegraph draws the highest number it can find, indicative annual bills for residential customers with average electricity usage in 2012-13 will be $1,946 (Endeavour Energy, formerly Integral Energy) and $2,101 (Ausgrid, formerly EnergyAustralia).
As the regulator’s report says, Endeavour Energy customers face the largest bills (and the largest increases) because the sprawling rural area has higher network costs and typically its customers use more electricity than in other NSW households.
Meanwhile, millions of Telegraph readers in urban areas have been told something incorrect about their electricity bill benchmark.
Lawyers Maurice Blackburn say that the Victorian Supreme Court will start hearing a class action on 29 January against SP Ausnet and contractors Utility Services Corporation arising from the February 2009 “Black Saturday” bushfires in which 119 people died in the Kinglake area outside Melbourne and 1,242 homes were destroyed.
The lawyers are acting for 1,497 people claiming compensation for injuries and losses.
Meanwhile the Baillieu government has announced that it is suing the two businesses for $22 million for alleged failure to maintain a power line that it claimed to have caused the Kinglake fire.
The O’Farrell government has appointed businessman Roger Massy-Greene to chair a new State-owned corporation that will oversee all three of the taxpayer-owned distribution service providers.
The Canberra Times reports that ACT householders are paying $8.37 million a year for power generated by 10,566 rooftop solar PV arrays, which contribute less than one per cent of the electricity consumed in the Territory.
The households with PV systems are being paid about $800 a year each in feed-in tariffs.
They contributed nothing to peak winter demand, which occurs in darkness.
The newspaper points out that the solar scheme is outperformed by ActewAGL’s “Greenchoice” program which attracted 20,000 household customers in 2011 and contributed 2.54 per cent of the Territory’s consumption.
The Independent Competition & Regulatory Commission has approved a 17 per cent increase in ACT residential power bills from 1 July, adding $244 a year to the average account.
Carbon dioxide emissions from the power sector fell 3.2 per cent during the year to September 2011, according to the latest report of the Australian National Greenhouse Accounts.
The Clean Energy Council points out that supply from hydro-electric power stations rose 10 per cent in the period after good rainfall in catchment area while output from coal and gas plants declined.
Alinta Energy has announced that it will temporarily close its 50-year-old Playford B power station and only operate the Northern power station – both are based at Port Augusta in South Australia, burning brown coal – for six months of the year.
The two plants have provided up to 30 per cent of South Australian power supplies in recent years. They have a combined capacity of 780 MW.
The news of a new approach to the Port Augusta operations has triggered, on the one hand, a call by a backbench MP for the Australian Energy Market Commission to undertake an urgent audit of South Australian energy security and, on the other, a bid by Beyond Zero Emissions for the coal plants to be replaced by wind power and solar generation.
BZE claims that six solar thermal power towers, using molten salt heat storage, and 90 wind turbines can fill the generation gap and asserts they can be commissioned so cheaply that South Australian customers would only have to pay one cent more per kilowatt hour of electricity consumed.
Last year, it was estimated that $150 million would need to be spent on a gas pipeline from the Cooper Basin to Port Augusta to enable the two coal plants to be replaced with gas generation.
A lobby group has been formed in Western Australia to oppose the mooted re-aggregation of the State government-owned Verve Energy and Synergy.
The move is also opposed by the WA Chamber of Commerce & Industry.
The WA Independent Power Association says the key to addressing rising energy costs in the State is to have more competition and an open market.
The association’s members are Alinta Energy, the APA Group, Collgar Wind Farm, ERM Power, Griffin Power and NewGen Power. They have invested $2.6 billion in West energy market since 2006.
Verve’s share of State generation capacity has been wound back from 80 per cent to 60 per cent over the past five years.
In a report commissioned from Frontier Economics, the main cause of the under-utilisation of Verve Energy’s generation capacity is attributed to the age of its power stations and their high operating costs rather than the 2006 break-up of the original Western Power (previously the State Electricity Commission of WA).
The current Western Power, which provides power network services, is not being considered for the re-merger.
Frontier Economics claims that bringing Verve Energy and Synergy, which is the State-owned energy retailer, back together would achieve savings of less than 0.4 per cent of a typical residential power bill or about $5 a year.
The consultants say a four-fold increase in gas prices and substantial increases in network charges are key factors in the big rises in power bills after the previous Labor government froze tariffs for almost a decade.
Bills have risen 57 per cent since 2008 and are due to rise by another five per cent on 1 July before the federal carbon price is taken in to account.
WA Energy Minister Peter Collier says making prices fully cost-reflective will require a further 30 per cent increase in tariffs. He says the government is still subsidising residential power costs by $367 million a year because of the “irresponsible” tariff freeze.
Meanwhile the dimensions of the challenge policymakers are facing in meeting future electricity demand in the booming West have been set out by the State’s Chamber of Minerals & Energy in its submission to the federal government’s energy white paper process.
CME says electricity consumption in Western Australia could rise by 6.9 per cent a year over the decade ahead and the south-west integrated system’s capacity requirements in 2030 could be 6,000 MW higher than today – the current capacity is 5,000MW. CME says this will need $12 billion in generation investment.
The association points out that peak power demand could rise 90 per cent between now and 2030 and require the investment of another $7.5 billion in supply assets.
It adds that a significant factor for planning future WA power supply is the growth of demand from the resources and energy sectors outside the populated SWIS grid. CME says demand from the sectors is expected to be 18,800 GWh per year higher than today by 2015, with 66 per cent of the growth in the Pilbara and 22 per cent in the State’s Mid-West region.
The new Queensland government has confirmed that it will keep its election promise to freeze the State’s standard domestic tariff for 2012-13, but householders will still pay higher bills because of the imposition of the federal carbon tax – although most will receive compensation from the Gillard government.
New Energy Minister Mark McArdle says the freeze will save average household’s $120 in 2012-13.
Premier Campbell Newman says that McArdle will be given the power to set electricity prices – a role currently held by the Queensland Competition Authority – pending a review of the supply industry. He says the review will include “a long, hard look” at network expenditure – although the defeated Bligh government had the sector examined by an independent panel chaired by Darryl Somerville within the past year.
“There’s a view from experts that the networks have been goldplated,” Newman said – although the Somerville inquiry found that the outlay of $12 billion since 2004 was justified to improve network quality of service.
Danish-owned Vestas, the leading world supplier of wind technology, says it has supplied 665 turbines in Australia since 2001 when the Howard federal government introduced the renewable energy target.
Vestas Asia Pacific says the turbines have a total capacity of 1,261 MW.
The company has secured a five-year extension to its service contract with Infigen Energy four three wind farms in South Australia and one in Western Australia.
Australia now has 1,211 operating wind turbines across 58 wind farms with a total capacity of 2,224 MW. Together they supply about 6,400 gigawatt hours a year, equal to just over two per cent of national power production and 50 per cent more than in 2008-09.
Five new wind farms were commissioned in 2011, adding 234 MW of capacity. A further seven projects, with a combined capacity of 1,060 MW, are under construction – and about 13,000 MW of wind projects are proposed for development.
At present, the Acciona Waubra wind farm (192 MW) in Victoria is the largest in the country but it will be overtaken this year when the 420 MW Macarthur project (being developed by AGL Energy and New Zealand’s Meridian Energy) is commissioned.
The federal Bureau of Resources & Energy Economics predicts that, under existing federal policies, the wind sector will be delivering 36,000 GWh by 2019-20 and 49,000 GWh in 2034-35.
The Canberra-based Global Carbon Capture and Storage Institute has pointed our four key factors influencing development and deployment of CCS in Australia “over the critical period 2015 to 2020.”
In its submission to the federal government’s energy white paper process, the institute says there are four themes in the document that could “profoundly affect” the technology’s future: (1) Australia’s energy markets are entering a lengthy period of transition, (2) a continuing major role for gas and coal in the national energy mix to 2050, (3) the fundamental role of carbon pricing to provide an incentive framework for clean energy technology investment decisions and (4) the government proposal for a framework to identify strategically important technologies and deciding whether or not they receive ongoing support.
It says it considers targeted support for CCS especially important because of the risks affecting a key mitigation solution identified in Federal Treasury’s 2050 modelling.
Publication of a report by a panel chaired by Jillian Broadbent on the establishment of the proposed Clean Energy Finance Corporation, which will need federal parliamentary approval this year, has triggered fierce debate on the value of “Bob Brown’s Bank,” as the Coalition has labeled it.
The Coalition is committed to killing the concept along with the carbon tax if it wins office at the next federal election.
Broadbent says she offered briefing on the CEFC to Liberal finance spokesmen Joe Hockey and Andrew Robb but they have ignored her.
Opposition climate action spokesman Greg Hunt says the CEFC will force taxpayers to put their money on line for projects in which the private sector will not invest.
The panel, which comprised a trio of former Bankers Trust executives, argues that the CEFC is needed because Australian banks do not have a role to act as “frontier lenders” and are reluctant to take risks on new technologies or invest in scaling up technologies to commerciality.
The federal government aims to give the CEFC $10 billion to spend over five years. Media report that the Gillard government will attempt to “Abbott proof” the CEFC by appropriating the full $10 billion, five-year budget in the legislation it puts to the parliament.
In a commentary on the proposal, Andrew Macintosh, associate director of the ANU Centre for Climate Law & Policy, and Richard Denniss, executive director of the Australia Institute, say: “the great fear with the CEFC is that it will ultimately prove to be yet another underspent, under-performing renewable/climate slush fund, as previous programs like the Greenhouse Gas Abatement program and the Low Emissions Technology Demonstration Fund were.”
Macintosh and Dennis warn that the government runs the risk of creating two policy instruments – the RET and the CEFC – potentially pulling in opposite directions.
Strident environmental supporters of the CEFC argue that “losing the renewable energy race isn’t an option” – echoing the claim by Broadbent that “Australia risks being left behind in the global shift towards renewable energy and carbon reductions” – and warn that $13.2 billion funding under the “Labor/Greens clean energy future package” is doomed if Tony Abbott becomes prime minister.
Climate Spectator editor Tristan Edis says the reason there are only a small number of wind farm projects proceeding at present has nothing to do with failures in the financial market. He says the cause is that the energy price available under the RET is around $70 per MWh today when wind farms do not become viable in present market conditions until they can sell power for $90 to $110 per MWh.
The Grattan Institute says clean energy projects are being financed in Australia. “There is not essentially an endemic problem of capital availability – but of projects that meet the financial return hurdles of investors.”
The institute comments that policy mechanisms like the RET deliver outcomes consistent with their design. While these outcomes may not be what the designer intended or may not align with the objectives of a range of commercial or political interests, the CEFC should not used to address such issues.
No-one has been making a bigger fuss over the past 3-4 years about Australia’s rising electricity prices than the nation’s manufacturers and they have not been slow to draw a line between their declining fortunes and power input costs.
Thus the Major Energy Users Inc, in its submission to the energy white paper process on behalf of some of the largest consumers in the country, asserts that competitively-priced power in the past has enabled the preservation of an Australian manufacturing sector “that would not otherwise have been viable in the light of many other factors such as scale, high labor costs, distance from markets, lower tariffs and (reduced) industry assistance.”
The MEU claims that since the release of the last energy white paper – by the Howard government in 2004 – Australia has lost its competitive advantage in electricity and is poised to do the same in gas. This has been accompanied, it points out, by many manufacturing plant closures and substantial job losses.
While the appreciation of the Aussie dollar has been a significant factor, it argues, recent electricity price increases are a major cause, too.
Companies, it claims, have seen price rises of more than 50 per cent in a single year “and no company faced with international competition can absorb increases of this magnititude.”
The MEU points its finger at policymakers and regulators as well.
It complains that clean energy interventions by federal and State governments are adding unnecessarily to the cost of doing business in Australia and creating an investment issue threatening energy security and reliability.
It is particularly unhappy with the Council of Australian Governments’ ministerial energy committee and the Australian Energy Market Commission – the first for its failure to contain clean energy policies (“many devoid of cost-benefit evaluations”) and the second for presiding over the introduction of rules “unprecedented in their bias in favour of incentivising network investment.”
It is certainly true that many in politics, the media and the broad community fail to understand the nexus between electricity supply, manufacturing and the million direct jobs the manufacturers provide as well as a large number of indirect jobs.
This is not new – it is a debate that goes back in to the 1990s to earlier than the Kyoto treaty negotiations on carbon abatement.
The significance of manufacturing in our electricity supply story is well illustrated by consultants Ernst & Young in their report for the AEMC “Power of Choice” inquiry currently under way.
They point out that, in an environment where national power consumption rose from 70 terawatt hours a year in 1973-4 to a peak of 242 TWh in 2009-10 (before the global financial crisis impacted here), demand by the manufacturing sector rose from 24.3 TWh annually to 66.9 TWh.
At present manufacturing comprises 28 per cent of national power use versus 26 per cent by households and 25 per cent by commerce and public services.
Embedded in the Ernst & Young data is the fact that our energy consumption per capita over a quarter century has become the highest in the OECD and our electricity consumption as a proportion of GDP has risen 36 per cent.
Today we consume 487 megawatt hours of power per million dollars of GDP compared with an OECD average of 352 MWh.
In this context, the publication in late April of a paper by the professional services firm Deloitte and the World Economic Forum (“The Future of Manufacturing: Opportunities to Drive Economic Growth”) makes very interesting reading.
The report’s recommendations include the need for manufacturers to seek more energy efficient methods through their entire value chain – from product design to production and logistics.
Affordable clean energy strategies and effective energy policies need to be a top priority for manufacturers and policymakers, the authors say.
“Collaboration is an imperative to solving the energy puzzle.”
Collaboration, of course, has been in short supply in Australia since 2008 as the present federal government, and its siblings at the State level, have sought populist solutions to pursuing a “clean energy future” and large businesses, environmentalists and politicians have hurled rocks at electricity suppliers over price rises.
The drumbeat federal rhetoric – gleefully echoed by environmental activists and the media – about “big polluters” as the carbon tax was designed, failed to win parliamentary support, was redesigned and finally pushed through Federal Parliament (in a deal with the Greens that the Prime Minister, in the light of the opinion polls, must regret more each day) has echoed round the nation, although it has fallen silent in recent months as the Gillard government is confronted by failing factories, closing retail and service firms and job losses.
As the Energy Networks Association, representing the supply sector under continuous attack by manufacturers, has pointed out, governments have spent years chasing conflicting policy aims: simultaneously wringing their hands over rising electricity prices – and joined this past month, as reported above, by the new Queensland premier, setting up yet another inquiry and fretting about networks “goldplating” – while inventing ambitious new policy positions that can only put upward pressure on prices.
The Australian manufacturers’ claim that local energy prices are robbing them of a global export edge needs to be read against the Deloitte/WEF report that worldwide the cost of oil grew at four times CPI in 2010 and that gas and coal prices have also outpaced inflation.
Deloitte/WEF point out that, as energy costs escalate, reducing consumption is particularly critical for companies with greater than 20 per cent of energy costs per dollar of value added.
This, too, is not news.
Oil refineries internationally, for example, have cut energy use by 30 per cent in 40 years and steelmakers have reduced use by 45 per cent since 1975. Aluminium smelters claim to have achieved “steady improvement” in energy efficiency since the 1950s.
Deloitte/WEF cite the recent advances in detergent power compaction with significant transportation and storage space benefits as an example of today’s steps to cut energy costs – a move that also has proved a hit with North American and other customers, not least because the new formula enables the use of cold water, saving residential power bills.
There is a lesson here – and it is not that energy suppliers are money-grubbing villains.
Collaboration rather than confrontation is the path forward as the era of cheap energy ends, but it is a message that has still to be heard in many quarters.
Keith Orchison
1 May 2012
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