Issue 78, October 2011


Welcome to the tenth issue for 2011 in the month when, after a decade-long debate, Australia is expected to legislate a price on carbon. Dominating this issue are extracts from two differing federal parliamentary inquiries examining the legislation – and including comments only covered cursorily in the mainstream media. However, the past month’s most important news, broken by this website, is the forecast that Australian electricity prices will double between 2011-17 – read more below. This issue is also features the push by the ACCC and AER for network regulation changes and a report on the 2011 “Powering Australia” conference held in Melbourne in late September.

Record readership

The Coolibah website reached a new record readership in September – 8,864 readers, up from 7,500 in July and August and double the readership level of a year ago.

Treasury’s perspective

Fresh projections of electricity demand released by Federal Treasury on the eve of the “clean energy future” legislation entering parliament show the government expects a remarkable decline in consumption in 2030 from the assessment produced by Geoscience Australia and the Bureau of Agricultural & Resource Economics & Sciences for the national resource assessment it issued by in March 2010.

The GA/ABARES forecast, allowing for the impact of the Rudd government’s CPRS policy, was that demand in 2030 would be about 366,000 gigawatt hours a year – down from a 2009 assessment of 406,000 GWh without a carbon policy.

The government has issued a fresh perspective on the electricity sector, using modelling by ROAM Consulting, but the consultants make it clear that “all electricity demands have been supplied by the Treasury.”

The report contains an illustration indicating that demand in 2030 will be about 280,000 GWh compared with about 225,000 GWh in 2010-11.

The report notes that: “The clean energy future scenario shows a reduction in overall electricity demand from approximately 2025, with the primary driver for the difference being slower uptake of electric vehicles.”

The nature of the claim can be seen against the likelihood that demand in New South Wales and Queensland alone (currently about 120,000 GWh a year) will be about 160,000 GWh in 2020 and could exceed 200,000 GWh by 2030.

The current national load forecast issued by the Energy Supply Association in its 2011 yearbook shows system energy (which is production not consumption) reaching 273,000 GWh a year in 2020.

Warring committees

As the national carbon price debate reaches its climax, with the Senate voting in October on the “clean energy future” legislation, two federal parliamentary committees have tabled vehemently differing reports on the bills.

Arguing that the legislation is the “wrong policy for the wrong country at the wrong time,” the Coalition in a dissenting opinion in one report and in the second by a Senate committee in which it has the numbers has warned that, as designed, the government is introducing “a giant new bureaucracy with costs approaching $400 million over the forward estimates” to implement a new tax that will “drive up the costs of everything in Australia but not drive down emissions.”

The government, supported by the Greens in a joint select committee of both houses, has, via an introduction by its chair, Anna Burke MHR, re-asserted the deliverability of its plan to cut emissions by five per cent below 2000 levels by 2020 as well as talking up longer-term commitments to reduce greenhouse gases.

The policy is set out in 19 bills totalling 1,100 pages.

Even so, the legislation does not cover the entire government program.

Two more bills dealing with the Clean Energy Finance Corporation and the Australian Renewable Energy Agency have still to be presented to the parliament.

The joint committee report includes a strong defence of modelling by the Federal Treasury, which has come under sustained criticisms by opponents of the policy during both sets of hearings.

The Treasury modelling, says the Burke committee majority report is, “the most reputable and thorough research.” 

The volume and intensity of disinformation in public debate, Labor and the Greens complain, has “created a level of confusion, particularly among small and medium-sized businesses” that threaten their ability to sound investment decisions.

The Coalition claims the modelling is flawed. Its complaints include a view that the Treasury has “significantly under-estimated” the costs of the tax by not modelling its transactional micro-economic impacts and has not allowed public scrutiny of its full data-sets and specifications.

The Coalition, in its minority contribution to the joint committee report, condemns the review process as “abused from the beginning.” It labels the hearings “a farcical shotgun abbreviated inquiry.”

The Coalition claims that the government/Greens approach to the hearings “makes a mockery of any claims to undertaking an honest assessment” of the bills. It accuses the Labor/Greens dominated committee of opting not to accept the vast majority of 4,500 submissions on the legislation, merely receiving them as “correspondence.” 

This level of response, the Coalition says, demonstrates the level of engagement and depth of feeling Australians have in relation to the policy.

It points out that the joint committee declined to hold hearings in Queensland’s Mackay, the Illawarra region of New South Wales or Perth in favour of meetings in Canberra, Sydney and Melbourne.

Xenephon says no

Independent Senator Nick Xenephon (South Australia), in a commentary in the report of the Senate committee examining the government’s policy, says he cannot support the legislation as he does not believe it is an effective or economically responsible approach to reducing emissions.

Xenephon says that, while it is inevitable that the “clean energy future” package will be passed by parliament with the support of the Greens, he does not believe the legislation should be implemented until a federal election has been called and a mandate obtained for the introduction of the policies.

He points out that the government proposals will see domestic greenhouse gas emissions 18 per cent above 2000 levels by 2020 rather than five per cent below them, as claimed by the government.

Xenephon is advocate of a policy where emitters are penalised for emissions above a set standard and rewarded for achieving abatement. He believes this approach will deliver lower energy price rises and make the carbon transition more acceptable to consumers.

Gainsaying coal miners

The joint select committee examining the carbon legislation has rejected submissions from the coal industry that it will be damaged by the policy.

The committee, which has a majority of Labor and Greens members, argues back that the carbon price will be “a key incentive” for the industry to pursue technology to cut fugitive emissions and accuses the industry of seeking to inflate the effects of the legislation as a means of increasing government assistance.

Pain without gain

Coalition members of the joint committee argue that the legislation does not guarantee a reduction in domestic greenhouse gas emissions. They highlight the Treasury modelling showing that these emissions – which stood at 578 million tonnes last year – are heading towards 621Mt in 2020 under the policy.

The Coalition says there is cause for genuine concern about the reliability of credible international emissions permits in the future.

In the report of the Senate select committee, on which the Coalition had a majority, the Liberals and Nationals argue that the government has failed to provide “a cogent rationale” for imposing a $1 trillion cost – equal to the current total annual output of the economy – on the country over four decades. 

On the Treasury’s own modelling, they say, the cumulative costs alone of buying credits overseas between now and 2050 will be $791 billion in today’s dollar values.

“If global agreement is not reached, but Australia nonetheless imposes a carbon tax, the income loss could be three to four times greater than Treasury’s estimates suggest.”

They argue that the cost in “lower wages, restricted job opportunities, heightened budget risks, higher electricity prices and a less competitive business sector is simply not worth the illusory carbon benefits the government claims.”

Economy will grow

In assertions of special significance to electricity supply, the joint parliamentary committee report assessing the carbon bills – or at least the report agreed by the Labor and Greens majority – highlights Treasury modelling that gross domestic product will rise from $1.24 trillion today to $1.72 trillion in 2020 with the policy in place.

Gross national income, it is asserted, will rise from $55,800 last year to $64,800 at the end of the decade.

Total employment will go up from 11.4 million in 2010 to 13 million in 2020.

Under the carbon price mechanism, the report claims manufacturing output will rise by 5 per cent this decade and mining and energy output by 77 per cent.

Meanwhile the Senate report notes that the Federal Treasury’s modelling forecasts that emissions from electricity supply will rise by eight per cent between now and 2020.

What price power?

In a battle of the Treasury models, there is a major difference between federal and NSW estimates of the impact of the carbon regime on electricity prices in the largest sub-market on the east coast. 

Federal Treasury claims that the carbon regime will add nine per cent to NSW power bills between 2013 and 2017.

The NSW Treasury says the rise will be 15 per cent.

The Labor and Greens minority on the Senate select committee considering the legislation asserts that the discrepancy is the result of “partial analysis” by the NSW Treasury.

Meanwhile the Senate report, where the Coalition has a majority, has expressed concern about the impact of higher costs, particularly higher prices for energy and food, on low-income and middle-income families.

“Although households can be compensated for any initial prices increases,” the report says, “due to second round effects, the costs to families of a carbon tax can never be accurately calculated or compensated.”

The Senate committee warns that households in regional Australia “are likely to be worse off under a carbon tax.”

In regional Australia, it says, the greater the distance, the greater the cost.

“Treasury figures reveal that regional Australians pay anywhere from 10 per cent to 43 per cent more for electricity than those in capital cities. This disparity alone could wipe out the estimated 20 cents a week that Treasury estimates the average Australian will be better off.”

It adds that regional Australians will be hit again when the later inclusion of transport fuel in the carbon regime is added to the cost of groceries and other purchases.

Who’s liable?

The largest number of businesses liable to pay the carbon price are based north of the Murray, according to the Senate committee looking at the policy.

Using the federal government’s “Securing a Clean Energy Future” website, the committee claims that 135 of the businesses operate solely in NSW and the ACT with 110 solely in Queensland. 

There are 85 solely in Victoria, 75 in Western Australia, 25 in South Australia, 20 in Tasmania and 10 in the Northern Territory.

Another 45 liable companies operate in a number of States.

The Senate report says that 60 of the 500 businesses are involved in electricity generation, 45 are natural gas suppliers, 100 are in mining, 60 in industrial processes such as cement, chemicals and metals processing, 190 in the waste disposal sector and another 50 in other fossil-fuel intensive businesses.

Write down

Queensland taxpayer-owned generation business CS Energy says the proposed carbon charge will have a significant impact on its asset base, a portfolio of mainly coal generation. The business has declared a loss of $614.6 million for 2009-10, including an estimated impairment cost of $541.2 million after tax on its assets as a result of the carbon policy.

The other government-owned generator in the State, Stanwell Corporation, which meets 45 per cent of Queensland’s peak power demand, has also included carbon-related impairment in recording a tax loss of $12 million for the financial year.

Black coal generators in Queensland and NSW, most of them owned by the two State governments, have been unsuccessful in lobbying the federal government for compensations for the carbon policy impacts.

In evidence to the Senate select committee scrutinising the “clean energy future” legislation, Ken Thompson, executive general manager of Loy Yang Market Management Company, citing the need for generators to have $10 billion in additional working capital to cope with emissions permit demands of the measure, warned that “this alone may change the dynamics of the hedging market and, as a consequence, the price of electricity.”

He pointed to a report by ACIL Tasman for the electricity industry that showed, without deferred settlement of permit payments to the government, resulting in less hedging and increased market volatility, there could be a 10 per cent increase in retail prices for small consumers and a 15 per cent rise for large users flowing from a five per cent drop in contracting.

Thompson said: “Forcing generators, who will already be heavily impacted by the carbon price, to pay for future permits upfront will be a massive impost on these companies and an added risk to energy affordability.”

The working capital issue for generators, he said, “is just horrendous.”

Tyranny of the market

In his evidence to the Senate committee, Loy Yang’s Ken Thompson pointed out that electricity prices on the east coast spot market have averaged $27 per megawatt hour for the past 12 months. “We are trading forward prices at the same (level) as in 1998,” he said, “so the company has had to look at a whole range of efficiencies and cost reductions just to survive.”

Thompson said Loy Yang Power is the most efficient generator in the Latrobe Valley, but it operates with 1970s technology. “There is a limit to what you can do – you cannot get significant reductions in emissions from that type of plant without spending probably billions of dollars.”

Immediate and damaging

NSW government-owned Macquarie Generation has told the federal government that the new carbon price scheme will have serious financial consequences for its business.

In a submission on the legislative package, MacGen CEO Russell Skelton has said the impact will be “immediate and damaging.”

Skelton says: “Our business currently spends $300 million a year on coal. The carbon price of $23 per tonne will mean an annual carbon bill starting at approximately $600 million and rising each and every year.

“No company can afford a near tripling of costs without taking a hit to its bottom line. This huge increase in costs will result in lower dividend payments to our owners, the community of NSW.”

Skelton says MacGen expects that customers will pay 60 to 80 per cent of the carbon price. “As the carbon price increases each year, our profits will fall even faster. What is not paid for by taxpayers through a lower dividend will be paid for by the community via increased electricity bills.”

Shocking news

For many in politics, the most worrying news of the opening weeks of October would have been the revelation in the “This is Power” blog on the Coolibah website (and a follow-up commentary on Business Spectator website) that the outlook for retail electricity prices on the east coast is for a doubling between 2011 and 2017.

Members of federal and State governments will have been hanging their hats on an amelioration of the “white hot” unhappiness in the community about power prices – which have risen by more than 35 per cent in inflation-adjusted terms in the past four years – through a hard-driving new approach to network capex outlays by the Australian Energy Regulator and its big brother, the ACCC, and via a lessening in public angst about the cost of carbon pricing with the legislation through the national parliament.

But now comes Port Jackson Partners analyst Edwin O’Young, a keynote speaker at the 2011 “Powering Australia” conference in Melbourne.

O’Young has street cred in the power price debate.

He did the analysis for the Business Council in late 2009 that underpinned its warning to the Rudd government that retail bills looked likely to double between 2008 and 2015, something the ill-fated Prime Minister comprehensively ignored as he drove on down his own carbon road (and over the proverbial cliff) and something that the then-leader of the opposition, Malcolm Turnbull, did not wish to highlight as he strove to produce a me-too policy on carbon.

As a result, the “double by 2015” perspective only gained mainstream media attention when the Australian Industry Group embraced it in its federal budget submission earlier this year.

Now, however, PJP’s O’Young has more and disturbing news for politicians, householders, small and medium business and energy-intensive companies.

As he sees the situation, using New South Wales residential prices as the example, bills have risen from 16c per kilowatt hour in 2007 to 20.4c today – as a result of a 2.2c increase in network costs plus a further 2.2c in retail costs and margins, renewable energy costs and a minor shift in the cost of wholesale power.

Where they are now headed, he asserts, is to 36.3c per kWh in 2017.

The drivers, he says, are likely to be a doubling in wholesale electricity costs (to 14.9c per kWh), a large increase in network prices (to 16.9c), a further small lift in renewables costs and a rise in retail costs and margins to 3.6c (almost triple what they were in 2007).

After years of stagnating wholesale prices, O’Young sees a number of factors pushing them up.

These include increases in coal prices as longstanding contracts end and export values reach the Australian market, the exposure of gas prices to export parity as the east coast LNG exports come on stream and, of course, the Gillard government’s carbon price.

He also warns that wholesale market price volatility could increase markedly as intermittent generation, mostly wind power, comes in to the mix – and with a possible increase in the market cap from today’s $12,500 per megawatt hour to $16,000 per Mwh, as it being mooted.

In the renewables area, O’Young also sounds a warning. If the large-scale renewable energy target is not reached towards 2020, and a major increase in project development will be needed beyond 2014 to meet the goal, then the LRET cost potentially could reach penalty level of $93 per MWh on a tax-effective basis, shoving up its share of generation to about $1 per kWh.

The impact of small-scale RET – the federal government scheme to encourage rooftop solar power – is a further factor.

If the small-scale scheme continues at anywhere near the levels seen today, O’Young says, “the cost of meeting renewable liabilities could be much higher.”

If you factor in to this scenario that there could be a federal election in 2016 – assuming the present government clings to power until 2013 – and State elections in key areas between 2015 and 2016 (Victoria, then NSW, then Queensland, between them accounting for three-quarters of households and voters), then the politics of power prices are not to be lightly dismissed and suppliers are left to worry about what knee-jerking governments may do.

Sims and AER push rule changes

The ACCC’s new chairman, Rod Sims, is sustaining his push for changes to regulation of electricity supply.

In an otherwise unreported speech in Melbourne late last month, Sims declared that network prices have risen by more than they should.

“I have recently been voicing my concerns about some of the rules in place for regulating the energy market,” he told a forum on competition. “The poles and wires used to deliver energy for consumers make up 40 to 50 per cent of the retail price and are current the main source of rising electricity prices.

“While network costs rose because of the need to replace ageing infrastructure and to meet rising peak demand, they have risen more than they should have.

“It is, of course, essential to provide commercial returns to network businesses to fund the investment needed to meet energy demand, to replace equipment that has reached the end of its life and to maintain reliable networks. But we also need to be sure that consumers pay the minimum necessary to meet the costs of safe and reliable supply.”

Sims said the Australian Energy Regulator, having examined the rules under which the networks are regulated and having concluded that they do not strike an appropriate balance between efficient investment and fair charges for consumers, is proposing a rule change to the Australian Energy Market Commission to “redress the imbalance.”

He added: “It is the role of the independent economic regulator to seek to encourage the regulated business to provide the services that customers want at a price that reflects the cost of producing them as efficiently as possible. This is the AER’s rationale for proposing a rule change.”

AER chairman Andrew Reeves has told media that the proposed rule changes will switch the focus of regulation from promoting investment to ensuring the efficiency of expenditure.

Reeves argues that the AER is restricted in its ability to set network charges based on an objective assessment of the efficiency or necessity of proposals.

The rule changes, he says, will enable the regulator to “determine the forecast of efficient expenditure needed for reliable electricity supply.”

The AER is also proposing that it be given power to determine the rate of return on investment “at least every five years” with the outcome applying to all subsequent revenue decisions.

In its argument to the AEMC, the regulator has said the experience of the past five years has “exemplified” the restrictions on its discretion and “in turn suggests that concerns about inflated forecasts are well founded.”

It adds: “While it is difficult to quantify the extent to which price rises have exceeded efficient levels, inflated forecasts have been a factor.”

Under the existing rules, the AER cut almost $5 billion from the network’s capex bids for 2009-14 while allowing claims of $34 billion.

Meanwhile South Australian Energy Minister Michael O’Brien has accused network companies of taking expensive infrastructure options to inflate prices, over-stating project finance costs and spending on unauthorised emergency works."

He says a rules change will provide “the transmission and distribution upgrades we require but not quite the price hikes we have had in the past.”

Scare tactics

The Alternative Technology Association has accused network businesses of pursuing scare tactics over the proposed changes to regulatory rules.

The body was reacting to John Devereaux, acting CEO of the Energy Networks Association, who told Channel 9 News that keeping prices rises down must be balanced with providing safe and reliable energy. “If we are not allowed to make the required investments to maintain networks, the lights will go out,” he said.

The ATA retorted that electricity distributors “will always be able to pass on the costs required to maintain reliability and minimise blackouts.” It said the changes put forward by the Australian Energy regulator deserved support.

Ausgrid managing director George Maltabarow told The Australian newspaper that the existing rules are “working well.”  He said about 48 per cent of appeals against AER decisions related to rates of return “so there may be some merit in looking at this aspect.”

Maltabarow said the Australian Competition Tribunal had found in favour of networks in 22 other appeals and in favour of the AER in 12 cases. Another 11 issues were resolved before a tribunal hearing was needed. “This shows the present rules are working.”

S&P sees risk

Standard & Poor’s Ratings Services has reacted to the proposed network regulation changes with a warning that, while each of them may have a minimal impact in itself, overall they could “weaken the network sector’s business risk profile.”

S&P added: “Historically, the highly-leveraged sector’s investment-grade credit profile has been supported by our positive view of the predictive regulatory framework underpinning high cash flow stability. However, this stability may be over-run if rule changes result in capital expenditure cost over-runs not being incorporated in to company asset bases, particularly when added to changes in the calculation methodology for asset return.”

A regulatory regime that periodically introduces changes is likely to b a feature of a weaker industry and business risk profile, the agency said. “

New networks voice

Malcolm Roberts is switching from power stations to sub-stations and networks.

The chief executive of the National Generators Forum has been appointed CEO of the Energy Networks Association from 31 October.

Announcing the appointment, ENA chairman Shane Breheny said Australia currently faces policy issues which will fundamentally shape our energy future for the next 30 years or more.

“Networks have a critical role to play, not just in delivering energy but also in contributing expertise to the policy debate.”

Meanwhile John Devereaux, who has acted as ENA chief executive for the past four months, has argued in a review of the energy price debate that continuously rising housing costs have been the main source of pressure on household budgets rather than hikes in power bills, allowing that average consumption has increased considerably over 25 years.  Domestic fuel and power costs have actually diminished as a percentage of total household expenditure, according to ABS data, he points out.

“However,” adds Devereaux, “energy costs are seen to be more discretionary and attract much greater media and public scrutiny.”

He says change is needed to give customers much greater control and visibility in their energy purchases.

Powering Australia

The 2011 “Powering Australia” conference in Melbourne at the end of September saw federal Resources & Energy Minister Martin Ferguson pointing out that this country is likely to need $240 billion in investment in stationery energy between now and 2030.

Ferguson, who launched the “Powering Australia” yearbook for the fourth year running (describing the new edition as “a thought-provoking overview of the trends and challenges facing the sector”), said gas-fired generation could be expected to account for more than a third of national power supply by the end of this decade – more than double its role in the mix today.

“This increase in domestic gas demand, combined with the development of east coast LNG projects, will affect Australia’s gas market,” he told the conference. “As yet, the ultimate consequences are unknown, but we need to be honest and recognise that change is coming.”

Ferguson said energy prices are often the most headline-grabbing aspect of the market and he acknowledged that “the short to medium outlook is for continued price rises over the next few years,” with rising network charges a major driver of the increases.

He said there are “no easy fixes for the issues around investment and prices – it is a matter of getting the balance right.”

Among other presentations, Energetics director Jon Jutsen said it was amazing that the energy industry had spent so little to date on pursuing demand management. He called for supplier revenue to be decoupled from the volume of electricity sold and incentives to be put in place to allow charging for demand management measures.

NSW Energy & Water Ombudsman Clare Petre said Australia did not yet have a major fuel poverty problem but many consumers are facing “fuel stress” as they juggled weekly budgets. Older customers on low incomes, she said, had a “fierce pride” in paying their bills on time and many went without meals and sometimes their medication in order to do so. Policymakers needed to focus on keeping essential services within consumers’ reach.

She called for a national debate on fuel stress and attention to the most cost-effective way of delivering assistance to those in need.

South Australian Renewable Energy Commissioner Tim O’Loughlin said the State had wind resources that could enable it to deliver 30 per cent of the east coast’s 2020 renewable energy target, approximately 10,000 gigawatt hours a year. The key limiting factor is the lack of adequate transmission.

Clean Energy Council CEO Matthew Warren said there are now 129 wind farms under some form of development in Australia, 46 of them in Victoria and 35 in NSW. However, he said, the wind industry is encountering difficulties with its social licence to operate, faced by opponents who are “highly motivated, resourced and organised.”  The sector needs to better engage the community and needs to be more transparent.

As a result of changes to planning rules introduced by the Baillieu government, some proponents of Victorian wind farms may need to resubmit their developments for planning approval. (In comment elsewhere the CEC said companies with 358 turbines and 712MW of proposed capacity held expiring permits on which they must start work by March or re-apply for development approval.)

ERM Power senior executive Andy Pittlik said the current grid limit (to avoid technical delivery problems) for wind power in Victoria, South Australia and Tasmania was 5,270MW.

Wind cannot be expected to contribute more than eight per cent of its rated capacity to the east coast market to meet annual peak demand, he added.

The gas industry, Pittlik said, is concerned that the current state of demand growth in the market and the requirements on retailers to use renewable energy could result in new gas generation being squeezed out. Energy growth for the market is estimated to be 22,340 gigawatt hours annually by the decade’s end.

Pittlik called for “a more orderly migration to a low carbon economy over time as a prudent management strategy” rather than the present policy directions.

Energy Retailers Association CEO Cameron O’Reilly told the conference that one of the largest problems in implementing carbon policy efficiently remains State government interference in full costs being passed on to end-users. South Australia and the ACT have ignored Australian Energy Market Commission recommendations to deregulate pricing this year, he said. NSW will face making a decision on this issue next year.

The University of Adelaide’s professor Barry Brook presented a case for nuclear power development, arguing that, if heavy dependency on fossil fuels is to change, the choice comes down to nuclear energy or hydro-power “or one of the other, currently barely visible technologies.” 

Brook sees a timetable for nuclear energy in Australia that involves the public debate heightening around 2020, first reactor contracts being used by 2025, about 3,000MW of nuclear power being commissioned by 2030 and between 30,000MW and 50,000MW of nuclear capacity operating here by 2050.

Go for gas

South Australian Coalition leader Isobel Redmond has declared that the State should stake its immediate energy future on natural gas.

Redmond says nuclear power is not a viable option for SA and renewable energy could not provide the necessary baseload power.

Redmond, who faces the next State election in 2014, says that, in government, she will instigate a feasibility study in to the use of tri-generation across Adelaide. Gas-fired tri-generation plants produce electricity and harness the heating and cooling by-products of the system for host buildings. (The City of Sydney has announced that it wants to have 330MW of tri-generation plants installed in the CBD municipality by 2030.)

Meanwhile SA Energy Minister Michael O’Brien has acknowledged that the State government’s solar feed-in tariff scheme is making household power bills 2.7 per cent more expensive than they would otherwise be. This has added $41 a year to bills.

O’Brien says the take-up of rooftop solar power has far exceeded the government’s estimate when the policy was introduced: reaching 100,000 installations instead of 9,000.  The government has now slashed the feed-in tariff for new entrants to the scheme from the original 44 cents per kilowatt hour to 22c.

Solar policy need

AGL Energy says it is concerned about the lack of over-arching policy on the development of feed-in tariffs across Australia.

In a submission last month to the NSW Independent Pricing & Regulatory Tribunal, which is examining the issue for the O’Farrell government, AGL says a lack of coherent policy is the “main driver of the poor outcomes” experienced with the State’s solar bonus scheme.

AGL says the key policy issues should include ensuring that a FiT does not increase power prices or cross-subsidies, that a program should be administratively simple and that the program supports a competitive electricity market.

The company points to a network charge problem with solar PV.

It says: “Under net metering, less energy is imported from existing grid infrastructure. Regardless of any change in capital expenditure, this results in a deterioration of network utilisation and revenue recovered by distribution businesses is reduced. This will eventually result in higher network prices for all customers in the medium to long term when the price path for networks is reset in subsequent regulatory determinations with or without PV installations.”

Abbott sticks with RET

Federal opposition leader Tony Abbott says that the Coalition, in government, will not walk away from supporting the current renewable energy target despite a call by National Party senator Ron Boswell for the scheme to be reviewed as a matter of urgency because of its impact on consumer power bills.

$500m gas plant for WA

ERM Power has received planning approval to build a 330MW open-cycle gas plant and a 60km gas pipeline at Three Springs, 270km north of Perth.

Managing director Philip St Baker says the power station will serve a growing demand for electricity in the mid-west mining province in Western Australia.

The plant will be the third gas-fired power station to be built by the company in the West, following $400 million Kwinana (420MW) and $435 million Neerabup (330MW) generators. It is also working on a feasibility study for a second 330MW installation at Neerabup.

CopperString unravels

The hopes of promoters of the CopperString transmission line and a claimed 1,000MW development of renewable generation in north-west Queensland have been quashed by a decision by mining giant Xstrata to support a far more modest gas generation development near Mt Isa.

The 1,000km power line planned between Townsville and the remote mining centre was estimated to cost between $1.5 billion and $2.4 billion. The project included 210km of spur lines to remote communities.

Xstrata Mt Isa Mines, which is developing huge copper and lead zinc resources in the area, was a key component in its prospects.

So, too, was a promise of $335 million in subsidies by the federal government.

Instead, Xstrata has opted for supply from a $500 million power station at Diamantina, fuelled by coal seam gas from an existing Surat Basin pipeline. The plant will be built by AGL Energy and APA Group without the need for government subsidies.

(Mt Isa needs are currently met by the Mica Creek power station. When Diamantina is built, the area will have 440MW of combined supply capacity.)

Diamantina will be a combined-cycle operation with two 121MW Siemens units. The first unit will be commissioned in 2013 and the second in 2014.

Environmentalists, independent MHR Bob Katter and proponents of renewable energy developments along the CopperString route are lamenting the decision.

Katter, whose brother-in-law is chairman of a company involved in the development, has tongue-lashed Xstrata as “enormously selfish” and railed at a decision “made by gnomes in Zurich.”

Federal Treasurer Wayne Swan, who has been prominent in the Gillard government’s support for CopperString, is “disappointed” and says the energy future of north-west Queensland, where there are wind, solar, geothermal and bio-energy prospects, will need to be re-assessed.

Queensland Premier Anna Bligh acknowledges that “there has always been a risk” that Xstrata would choose a less costly option and says she “remains optimistic” a power line can be built between Mt Isa and Townsville, the nearest point on the east coast grid, which ends at Cairns.

Windlab chief executive Roger Price, whose proposal to build a 750MW wind farm at Hughenden, 290km from Townsville, depended on CopperString, says the decision will have a direct impact on the State government’s ability to meet its 2020 renewable energy target. (The Bligh government is committed to delivering 9,000 GWh of renewable power by 2020.)

Tale of two countries

In early October two reports appeared in the media. One in the Fairfax newspapers is summed up by the headline “For Australia, nuclear is the power of last resort.”  The other, in international coverage, says that South Africa is considering investment of the equivalent of $126 billion in development of six nuclear power stations by 2030.

In the Fairfax coverage it is reported that federal Climate Change Minister Greg Combet “declined to even respond to requests for comments” on the prospect of atomic energy.

It quotes George Dracoulis, emeritus professor of nuclear physics at the Australian National University, as saying that, with a carbon price of between $20 and $40, nuclear power could become viable in Australia.  (Others argue that it would require at least $50 per tonne of carbon dioxide to shoulder aside black coal generation.)

The Fairfax papers quote Dracoulis as saying: “Nothing can or will happen until it is shown (as it might be) that carbon capture, geothermal, solar thermal, wind etcetera fail to deliver fully. The question is how long do you give them?"

In South Africa, it is reported, the country’s energy department has been consulting with Areva and EDF of France, Toshiba of Japan, Westinghouse Electric of the US, China Guangdong Nuclear Power Holding Corporation, Korea Electric Power and Russia’s Rosatom Corporation over the roll-out of  9,600MW of nuclear generation. 

The country already has two nuclear reactors of 1,800MW capacity, in operation since 1984 and producing five per cent of supply.

The South African government says it aims to have 22 per cent of supply nuclear by 2030.

In the Fairfax story, writer Michael Bachelard quotes the Coalition’s energy spokesman Greg Hunt as saying that the opposition is “not opposed” to a debate on nuclear energy but argues that it will only be viable with bipartisan support. Effectively, observes Bachelard, this gives Labor and its anti-nuclear majority a veto.

Last word

Speaking over two days at the “Powering Australia” conference in Melbourne and also at the University of Sydney at the end of last month, federal Resources & Energy Minister Martin Ferguson commented each time on the need to strike the right balance for our national energy policy settings.

We have to fundamentally change the way we produce and use energy, he said, while ensuring that we do this in the most cost-effective way.

No sensible person can argue with this perspective, but the issue of whether the right balance is being achieved in energy policy today is open to considerable question.

I chaired the conference and was conscious, while listening to Ferguson officially launching the yearbook, that I had in my briefcase a commentary by consultants Marchment Hill that goes to the heart of this issue.

In opening, it says this: “The government’s clean energy future (program), while providing a forward plan for decarbonising the economy, is limited in articulating a comprehensive risk management plan to (1) mitigate the substantial technology risks associated with baseload renewable generation systems and carbon capture and storage, (2) alleviate the commercial and economic viability risks of having gas-fired generation systems as an intermediate fuel, (3) understand the likely impacts on affordability and contingent liability risks associated with abatement options, and (4) assure the market that further regulatory change will not occur as future governments look to adapt legislation to respond to these risks.

The policy, the consultants add, seems to lack a clear and coherent strategy to manage the inherent risks embedded in the government’s approach.

To achieve within Australia the emissions reductions envisaged by the Gillard government, the consultants say, will require electricity generation and direct fuel consumption that is completely driven by renewable power sources or by a technology that does not emit greenhouse gases.

They argue that the policy should be supported by a detailed risk assessment and mitigation plan.

“Such a plan,” they say, “would demonstrate that the government has considered the limitations (of its policy) and addressed, at a minimum, direct and indirect costs. For market participants and heavily affected businesses, the lack of risk assessment and a mitigation plan can only mean one thing: the increased likelihood of more legal and regulatory change.”

The commentary, and others dealing with energy issues, are on the firm’s website. They are worth reading.

In the aftermath of the “Powering Australia” conference, while trapped at Tullamarine airport with thousands of others by a bad storm, I read an interesting second essay by Marchment Hill on our fixation on rising costs. 

Extracting briefly from it, the consultants observe that, apart from Victoria, politicians claim to be able, through regulatory agencies, to ensure that the final electricity bill reflects an efficient or least cost of supply. “It is a claim to control energy bills which is, by and large, illusionary.”

Marchment Hill make some suggestions about how to address consumer power pricing angst that are also worthwhile reading, but the wind-up comment applies more generally. “Making energy bills less of an issue for consumers and politicians, as with most challenges,” the consultants say, “requires foresight, a reasonable time horizon and a reasonable and coherent plan to inform change.”

Apply this template to our energy policy overall and ask yourself if you feel that the federal and State governments (and the two Territories) have come close to achieving the right balance?

This is not for want of effort in at least some quarters.

The relatively new Western Australian government is working away on a 20-year energy strategy and Martin Ferguson and his department are engaged – for the second time as a result of the political upheaval of 2010 – on attempting to write an energy white paper for Australia.

The new government led by Barry O’Farrell in New South Wales may or may not have a game plan. We will have to wait for the Tamberlin report and O’Farrell’s reactions to it to find out. Certainly, what happens in NSW and in Queensland is integral to Australia achieving a balanced approach to electricity supply over the next quarter of a century at least.

Unfortunately, politics – and especially the high level writhing that passes for strategic management in the Gillard government – keep intervening.

Looking at the present situation, I am reminded of that long-standing Australian joke about the fellow who fell off a building. When he is halfway down another fellow sticks his head out of a window and yells “How’s it going?” – to which the falling one responds “So far, so good.”

As we all should know, but seem so often to overlook in policymaking, it is not the falling that does the damage – it is hitting the ground. Adjusting balance on the way down is rarely useful.

Keith Orchison
10 October 2011


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