Filling Australia's power capacity gap

By Keith Orchison
(Published in The Weekend Australian, September 2006)

Australia's electricity generation industry, which is caught between the pincers of major increases in demand and rising environmental concerns, needs to invest some $11 billion by 2020 to cope with national power consumption -- and this is only the first instalment of a massive capital outlay required over the next quarter century.

The Federal Government's chief resources economic advisory agency, the Australian  Bureau of Agricultural and Resource Economics, says it expects electricity demand to grow by 70 per cent between now and 2030. ABARE sees a need for 8,140 megawatts of new plant to be in operation by 2020 and says the overall infrastructure outlay on new power network, which includes high voltage transmission and lower voltage distribution systems, will need to reach $30 billion in this time frame.

The major challenge for the supply industry and for governments is to balance meeting this demand with the growing policy pressure to reduce the growth of Australia's greenhouse gas emissions. The electricity generation industry is responsible for about 35 per cent of national emissions, mainly from black and brown coal-fired power stations, which supply 77 per cent of consumption.

ABARE projects that lower-emitting natural gas will fill a large part of the capacity gap -- with its share of the generation capacity rising 50 per cent between now and 2030 -- but coal will still be by far the dominant fuel for power, with an estimated 68 per cent of the plant in the market.

Massive amounts of coal are burned today in Australia's power stations -- more than 55 million tonnes a year of black coal are used in New South Wales, Queensland and Western Australia while 66 million tonnes a year of brown coal are consumed in Victoria and South Australia. The ABARE 2030 market share forecasts show that, despite the "dash for gas" that now appears to be under way in the electricity industry, very much larger amounts of coal will burned annually over the next 25 years.

Conscious of the environmental pressures it faces, the Australian coal industry -- miners and generators -- has committed to spend $300 million over the next five years on research to find ways to reduce its emissions.  Australian Coal Association chief executive Mark O'Neill says the primary technology that is being investigated is capturing carbon dioxide when it leaves fossil-fuelled power stations, pressurising it and putting it deep underground in to geological formations.

The ACA's "Coal21 Fund" will raise the $300 million through a voluntary levy on coal producers based on their production levels. "While most of the technological solutions for reducing and eliminating emissions are known," Mr O'Neill says, "demonstration is necessary to accelerate their implementation. A number of potential demonstration projects are now being assessed for funding support."

Black and brown coal currently contribute more than 180,000 gigawatt hours a year of the 213,000 GWh sent out by Australian power stations.  This is 20,000 GWh a year more than is consumed by Australian householders and businesses -- the difference is the energy used by the power plants themselves and the energy lost during high voltage transmission through heat transfer.

The generation businesses are constantly playing catch-up with the trend in power demand. Electricity consumption in Australia more than doubled in the past 20 years and ABARE expects it to increase another 50 per cent out by 2020.  While the much-publicised increased uptake of power-hungry air-conditioning systems and other electrical appliances in homes, offices, hotels, schools and hospitals is responsible for some of the growth, the largest rises in demand come from heavy industry, which accounts for just under half of consumption.  Energy-intensive industry, where power bills represent as much as a quarter of operating costs, consume a third of all electricity sold in Australia.

The major uncertainty for investors in generation is whether or when governments in Australia will opt for a "carbon price signal" -- a tax on greenhouse gas emissions aimed at encouraging lower emitting or non-emitting technology at the expense of existing fossil fuelled plants.

In a keynote address on energy to the Committee for Economic Development of Australia Prime Minister John Howard, answering a question, summed up the Federal Government's approach: " The European Union (emissions trading) scheme doesn't work. My view relates more to the lack of a unified, global treatment rather than to principle. There needs to be a completely effective, world-wide scheme. To sign on (to a carbon cost scheme) without a world-wide approach would do great damage to the Australian economy."

However some state governments and the Federal Opposition, along with environmental advocates and some leading businesses, remain strong supporters of a move to introduce carbon trading in Australia by 2010.

The Federal Minister for Industry and Resources, Mr Ian Macfarlane, says Australia needs to deploy new technologies in traditional energy areas to make a real difference to greenhouse gas emission levels. He argues that the Government's focus on developing new low emission technologies while encouraging energy alternatives is the best path forward. "There is no silver bullet solution," he says. "It is economic folly to advocate a stand-alone carbon trading scheme in Australia."

In support of his argument Mr Macfarlane points to a recent ABARE study on the economic impact of climate change which, he says, demonstrates that a 50 per cent reduction in Australian emissions would require a carbon charge that would double the price of petrol and push up electricity and gas prices by 600 per cent.

What ABARE also says is that, under its modelling, in the current policy environment the coal-fired generation share of Australia's electricity output will rise from its current 180,000 gigawatt hours a year level to almost 230,000 GWh in 2020 and more than 250,000 GWh in 2030.

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