Issue 45, November 2008
The Australian Energy Regulator says the national electricity market's nine transmission businesses have spent $3.2 billion on capital outlays over five years -- and their 2006-07 capex was 23 percent higher than forecast.
The new report says there is now $11.7 billion invested in the eastern States' high voltage networks.
In addition to capex, the transmission businesses spent $1.8 billion on operating and maintenance over the five years to 2006-07, according to the AER.
Its chairman, Steve Edwell, says service standards have been improved.
The regulator's review has been released as large energy consumers in New South Wales contest TransGrid's application to the AER for permission to spend $2.6 billion on capital outlays between 2009 and 2014.
The Energy Markets Reform Forum, which is affiliated to Major Energy Users Inc, representing 30 large energy consumers across Australia, protests that the TransGrid bid comes on top of applications by the three government-owned electricity distribution businesses in NSW for capex approvals totalling some $18 billion for 2009-14 -- and follows approvals already given to Victorian, South Australian and Queensland HV network operators to spend $3.8 billion. In addition, Tasmania's Transend is seeking a capex approval of $700 million.
Posing a "where's the money coming from" question, the Forum says the upgrading and augmentation programs will be hampered by supply constraints in equipment supply and materials sectors as well as constraints in the availability of skilled labour in Australia. The funds, it adds, will need to be raised in competition with capital being sought for power generation, gas pipelines and development of ports, roads, airports and telecommunications in the next five years.
The EMRF comments were submitted to the regulator before the full impact of the global financial meltdown became apparent.
The Forum warns the regulator that continuing approval of large increases in capex and regulated operating cost outlays "will take the cost of electricity beyond the capacity of competitive industry to pay."
The EMRF's opposition to AER approving the TransGrid application is backed by the Energy Users' Association, which describes the capex request as "excessive." The EUAA points to energy cost pressures from multiple fronts bearing down on large industry -- higher wholesale power prices, higher gas prices, the proposed Rudd Government carbon charge and the planned major expansion of the mandatory renewable energy target.
The EUAA argues that the prospective extra costs are having to be faced by industry in a "period of unprecedented uncertainty," which includes the new Australian carbon reduction regime, the international credit crisis and the ensuing global economic slowdown.
The NSW Government-owned TransGrid has told the Australian Energy Regulator that it needs a significant increase in its capital program to deal with ongoing load growth, the increasingly urgent requirement to replace aging assets and the rising demand for system reliability to serve the digital economy.
The nation's largest transmission service provider warns that parts of its network in NSW are now operating near full capacity.
TransGrid points out that the State's need for electricity has grown 63-fold since it began to be developed in earnest after the Second World War -- from a tiny 1,180 GWh a year in 1950 to 74,000 GWh in the 2006-07 financial year. Consumption has risen 50 percent between 1990 and the present. It notes that the Owen Review, called by the Iemma Government to investigate baseload development needs, has predicted that demand will reach 91,000 GWh in 2013-14.
"The challenge for (us)," TransGrid says, "(is) to deliver the potentially significant works required to develop the network to meet (new) generation developments in the lead time available."
The network business also highlights the problems it is encountering in undertaking timely routine maintenance. TransGrid says it has become increasingly difficult to schedule planned outages because high system demand has mover in to the "shoulder periods" of consumption in spring and autumn when there was sufficient supply leeway in the past to allow work to take place. The NSW periods of high demand now stretch from May to September for winter and November to March for summer.
TransGrid is also warning that the age of its assets is becoming a critical issue. It says that 40 percent of transmission lines in use today were commissioned in the 1960s or even earlier. Thirty-five percent of its substations and switching stations date back to the 1960s -- as do 25 percent of its transformers.
Snowy Hydro, which is jointly owned by the Federal, Victorian and NSW governments, has supported TransGrid's bid for a substantially-increased capex program for 2009-14.
In a letter to the Australian Energy Regulator, the hydro-electric generator describes the TransGrid plans as "balanced" and "prudent."
Snowy Hydro is particularly keen to press the AER to accept that the Bannaby to Kemps Creek 500 kV line that TransGrid has been trying for years to get built as a critical link in its network should be treated as urgent.
Snowy Hydro points out that the line will allow existing and new generation to the south of Sydney to deliver efficient, reliable power at a time when the peak NSW load is getting to levels that raise security issues. The 28 July cold snap, it says, produced a 14,411 MW record demand for generation -- against current planning scenarios that set 14,810 MW as the highest likely in 2009-10.
It adds that the aggregate 1,000 MW of new, gas-fired generation at Uranquinty, near Wagga, and Tallawarra, on the Illawarra coast, plus the proposed 600 MW of wind farms for the Marulan area will be most efficiently delivered to Sydney is the Bannaby/Kemps Creek line is in place.
Under a carbon emissions trading scheme, Snowy Hydro says, there is potential to develop another 1,000 MW of gas-fired generation south of Sydney -- and it holds out the possibility that it could contribute up to 500 MW of extra hydro-electric power from its Tumut and Murray power stations if the line was fast-tracked for development.
The State government-owned Western Power is asking for regulatory approval to increase its network charges by 40 percent next year and by 30 percent for each of the following two years.
In April the now-ousted Carpenter Labor Government announced that retail electricity prices would have to rise 10 percent and projected that there would be a 72 percent rise phased in over eight years from July 2009. The new Energy Minister, Peter Collier, has responded to the Western Power claim by acknowledging that higher network prices would require an even larger increase in retail bills.
Western Power's charges make up a third of WA consumers' retail power bills. Its system in the State's south-west provides 88,000 kilometres of power networks and the peak load it has to deliver has risen 46 percent in six years.
Demand for air-conditioning has placed particular pressure on the supply system. At the start of the decade 47 percent of residential customers had air-conditioning and the level is now 82 percent. The number of new homes connected to the WA system has risen from 22,000 a year in 2001 to more than 30,000 a year, reflecting the impact of the economic boom in the State.
Western Power CEO Doug Aberle says the network manager is spending record amounts upgrading and expanding its system. Last year's outlay was $1 billion -- four times the 2002-03 capex budget -- and he expects that the corporation will need to spend $2 billion annually for the next three years.
The application will be considered by the State's Economic Regulation Authority.
When your opponents come in to parliament bearing torches and candles, it is a fair chance that a government has a power supply problem.
This is the case in the Northern Territory, where the Country Liberal members have been mocking the Labor government's attempts to deal with a series of electricity failures. The government-owned Power and Water corporation has imported 47 diesel-fuelled generators to help deal with the problem and well-known Sydney power expert Mervyn Davies to review the supply system.
Darwin's 100,000 electricity customers have been plagued by power cuts since late September after failures at the Casuarina substation.
Essential Services Minister Rob Knight has conceded that it may take more than the $800 million to $1 billion currently allocated to Power and Water for new assets, repairs and maintenance in the Territory over the next five years to ensure reliability of supply.
The Greens' success in winning four seats, and the balance of power, in the ACT election in October has blown up a plan to build a $2 billion data centre and cogeneration power plant in the Territory.
A spokesman for the Canberra Technology City joint venture has said the project looks "dead in the water" after the election result.
Initially proposed for industrial land on the rim of the Territory, the project sparked substantial NIMBY responses when it was moved close to the fast-growing neighbouring Tuggeranong residential area.
The plan involved the power station providing electricity and chilled water to the data centre as well as power for the ACT householders and businesses and was designed to make Canberra a national centre for data infrastructure as well as boosting education opportunities and technology-based employment. Providing secure and scalable power supplies for the data centre was an important part of the concept.
The joint venture involved ActewAGL, specialist data centre investor Technical Real Estate and British-based design firm Galileo Connect.
There is a chronic shortage of purpose-built data centres in Australia and overseas as IT use continues to boom.
Fitch Ratings says the global financial meltdown will halve global credit growth in inflation-adjusted terms this year as risk aversion rises and the world economy slows.
Fitch predict that real credit growth will fall to seven percent at the year's end and to about five percent in 2009 after peaking at 16 percent last year. The slowdown in the Middle East and Asia is forecast to be less pronounced.
A joint venture of Macquarie Bank, AGL Energy and the American clean-tech developer Better Place has announced that it aims to raise $1 billion in Australia to fund introduction of electric vehicles for the mass market by 2012.
California-based Better Place is
already engaged in similar projects in Denmark and Israel and its
initial Australian focus will be on the Melbourne/Sydney region as well
Australia has the seventh highest per capita car ownership in the world and success here would give Better Place leverage in targetting the populous west coast of the US.
Macquarie Capital Group will act as financial adviser for the project while AGL Energy will undertake to provide renewable energy to fuel a targetted one million cars. In answer to a Coolibah query, AGL Energy has estimated that these vehicles could be requiring 2,400 gigawatt hours of electricity a year by 2020. This, says the company, would require supply from between 900 MW and 1,000 MW of wind farms, assuming average capacity factors for wind generation and commuting drivers travelling 60 kilometres a day 300 days of the year.
The project would need to deliver as many as two million recharging points as well as 500 battery swap stations, where drivers could exchange depleted batteries without waiting for a recharge when undertaking longer journeys.
The joint venture looks to benefit from the Rudd Government's $500 fund to support "green car" innovation.
Michael Molitor, a carbon management consultant at Pricewaterhouse Coopers, describes the project as "simple, practical, feasible, cost-effective and capable of achieving results on a scale meaningful to the problem."
Research by management consultants McKinsey & Co has thrown up the large gap between the community's good green intentions and what people actually do about their environmental footprint.
In a new report, California-based consultant Sheila Bonini and Jeremy Oppenheim, a director in the firm's London office, say 87 percent of consumers surveyed in Brazil, Britain, Canada, China, France, Germany, India and the US professed concern about the environmental and social impacts of their purchases -- but no more than 33 percent of them actually buy green products.
The pair note that most of the green goods available have tiny market shares -- hybrid car sales, for example, amounted to two percent of the US market in 2007, as did green laundry detergents and household cleaners.
Some of the lag between "talking and walking" could reflect insincerity, posturing or laziness, say Bonini and Oppenheim, but much more stems from the failure of businesses to educate consumers and to create compelling marketing. Two-thirds of Americans and Britons in one survey, they note, could not name a single green brand.
One of the problems, they add, is that many consumers believe the quality of green products is lower than that of conventional ones. To increase sales, they argue, companies need to remove five barriers: lack of awareness, negative perceptions, distrust, high prices and low availability. They urge governments and environmental groups to also take up the cause of green education. They also accuse some companies of promoting their green credentials of highlighting a single positive product feature while ignoring the negative ones.
Awareness, however, does not necessarily add up to buying products. Bonini and Oppenheim say more than 90 percent of those interviewed in their survey knew about compact fluorescent light bulbs, but many thought them too expensive and of dubious quality.
A study released by McKinsey & Co in September says it could take 25 years for carbon capture and sequestration technologies to become viable for the power generation industry. The consultants call for governments to oversee an "aggressive roll-out" of CCS even to achieve 2030 commercial delivery.
The study assesses the cost of fitting coal plants with CCS at between $US44 and $US66 per tonne of removed carbon dioxide. Costs for early demonstration plants currently being pursued are almost double this target.
The willingness of governments to continue a commitment to expensive technology development in the new financial environment is an open question.
The European Union, for example, having agreed in principle last year that its governments would support construction of 12 large-scale CCS demonstration plants, has yet to make available of the 10 billion euros needed to fund the scheme.
Electricity supply business leaders from North America, Europe, Japan and Australia, meeting in Atlanta, Georgia, in October, have established a partnership to deliver advanced technologies to reduce carbon emissions. The meeting -- hosted by Edison Electric Institute, the American lobby group for investor-owned utilities -- has underlined the importance of a strong commitment from industry and government to deploy and encourage investment in low-carbon technologies, including CO2 capture and storage. The industry leaders also agreed on the critical role of public policy to enable security of supply, economic competitiveness and achieving environmental goals.
The Australian Energy Market Commission, in a discussion paper launching its review for the Council of Australian Governments of market changes needed to help deliver climate change policies, has warned of a higher risk for power supplies in the absence of new investment or demand reduction.
By historical standards, says the AEMC, existing reserves for generation in the NEM and the isolated Western Australian system are low. "In the absence of new investment, there is a projected shortfall of reserve generation capacity relative to demand in a number of NEM regions (between) 2011 and 2014. This does not mean that the reliability standard will necessarily be breached -- (but) the risk of breach will be higher at times of peak demand in the absence of new investment or new forms of demand reduction."
Commercial uncertainty about greenhouse gas policy over the past three years has been an important contribution to the drop in generation investment, the AEMC adds, as have changes to input costs and the availability of equipment and resources. Meanwhile, demand for electricity has continued to grow strongly.
There is a risk, the commission says, that the timing of investment for 2011-14 will not be fast enough and this is "a cause for concern."
It points out that investment in new capacity takes time to plan and implement, involving land use planning consents, securing network connections and ordering equipment. "Strong global demand for electricity infrastructure may further increase the risk of delays."
The risk will be
exacerbated, the AEMC notes, if some existing generators decided to
retire plants early in response to climate change policies.
The agency also points out that another risk issue arises where there is a large increase in wind farm development -- particularly South Australia and Western Australia -- in relatively small regional markets and private investment in conventional, back-up plant does not keep pace with this expansion.
Timely connection of wind farms and other renewable energy to transmission grids is also an issue, it says, noting evidence from Britain, where there has been a drive to build renewable energy, mostly wind, of problems in co-ordinating connections efficiently. Transmission connections for remote renewable generation may be very expensive.
The new Coalition government in Western Australia has despatched a
response to the emissions trading green paper calling on the Federal
Government to defer its implementation.
Importantly for the Rudd Government, the submission demolishes the coast-to-coast support it had from State governments for the carbon charge proposals.
The Barnett Government points out a key difference between the current ETS plan and the scheme concept agreed by all State and Territory governments before last year's federal election: the relatively small decline in gross State product estimated in the earlier modelling, it says, was predicated on 100 percent compensation for energy-intensive, trade-exposed industries and wider eligibility for compensation.
The claim opens up a serious issue for other State governments: does their modelling of the Rudd Government proposal also show that there will be a heavier impact on their economies than was initially envisaged? If so, why are they not speaking out?
The Barnett Government says implementation of ETS as now proposed could cause a slowing of investment in existing and planned industrial projects in the West. It points out that the State's top 10 exports account for a third of total national exports by value.
The WA response to the green paper also raises another politically sensitive issue: the State government's modelling indicates that remote communities will be disproportionately disadvantaged by the proposed scheme, exacerbating the already high costs of stand-alone generation as well as adding to transport fuel costs.
Federal Resources & Energy Minister Martin Ferguson, launching the 2008 edition of Powering Australia, a yearbook published by Focus Publishing Interactive and edited by Keith Orchison, has described energy as "front and centre" in public policy debate.
Cheap, reliable energy dominated by coal has been one of Australia's competitive advantages for much of the post Second World War era, he said at the launch in Parliament House, Canberra, on 7 October. "That has underpinned the development of internationally-competitive iron and steel, alumina, aluminium, cement, chemicals, pulp and paper, non-ferrous metals and a host of other manufacturing industries. It has also meant that Australian households have enjoyed among the lowest electricity prices in the developed world."
Ferguson added that the Rudd Government's climate change policies would require more gas and renewable energy, a race to clean up coal-fired power generation and a greater focus on energy efficiency.
He highlighted the government's $500 million low emissions coal initiative, the $500 million renewable energy fund and the $150 million energy innovation fund as key contributions to facilitating electricity supply change.
Ferguson welcomed Powering Australia as a "valuable contribution" to the debate on energy security and cleaner energy solutions.
According to the regulators -- the ACCC and the AER -- more than $10 million a day is now being spent on Australia's energy networks.
This is made up of $700 million a year outlayed on high voltage transmission missions and $3 billion annually spent by distribution network service providers.
If this average was maintained until 2020 we are looking at a cumulative expenditure on the networks of about $44 billion in today's money values -- but we already know that expenditure is going to be increased. In New South Wales alone -- representing a third of the eastern seaboard load -- the three government-owned distribution businesses and TransGrid are currently seeking regulatory approval to spend $18 billion on capital development of their systems between next year and 2014. In south-west Western Australia, the fastest growing power market in the country, regulatory approval is being sought to outlay $6 billion on capex in the next three years. Add in what is proposed elsewhere and the outlays will be closing on $40 billion by the time the next decade is half over.
Add to this the estimated $30 billion needed to fulfil the Rudd Government's plan to build enough renewable generation to provide 20 percent of power consumption. Also to be included is the estimated $4 billion it will cost to augment the transmission system to deal with greatly expanded use of renewables. Then add whatever it will take to both deliver new conventional generation to meet consumption growth and to replace coal-fired power plants displaced by the proposed emissions trading system, perhaps another $33 billion according to the energy industry.
Toss in the roll-out of "smart meters" to change the way the residential consumers use electricity. This could be another $5 billion -- it has been officially estimated at $600 million in South Australia alone, a sum deemed to be too expensive by the authorities.
In sum, this represents a phenomenal spending program to keep up with power demand and to begin the task of reducing the electricity consumers' environmental footprint, overall a far greater effort than the sector has achieved in the past.
Factor in the business environment -- described by ETSA Utilities CEO Lew Owens as "an unprecedented period of complexity, change and uncertainty for the energy sector" -- and take note of the supply constraints in industries providing the equipment and materials the power business will need to buy as well as the constraints on supply of skilled labour; the task starts to take on herculean proportions.
And at the end of the line, of course, wait the retail power bills. It is hard to see how the current Australian advantage in power charges can possibly be maintained under the circumstances described here.
Set out in this manner, the electricity supply investment challenge for the next 10-12 is formidable and has to be set against the demonstrated inability of policymakers at State, Territory and federal levels to cope with large, but lesser, challenges in delivering adequate rail systems, water management, health care infrastructure, education services............the lamentable litany of problem areas goes on and on.
The big problem with electricity supply is that, when it becomes unreliable or too expensive, the wheels start falling off the rest of our society -- electricity generation and reticulation really is the engine room of modern Australia.
The Federal Government has so many priorities on its agenda now that they must be on to at least the second white board in the Prime Minister's office, but Kevin Rudd would be unwise in the extreme to allow electricity supply security to slip out of the highest category for attention -- or to think that his ambitions with respect to greenhouse gas emissions are the only part of this task worthy of his attention.
28 October 2008
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