Investment surge indicates a

more confident approach in the states

By Keith Orchison

(Published in The Weekend Australian special report on Energy & Mining, 3-4 December 2011)

The federal government hopes to see almost $5 billion outlayed on new electricity generation in the next 12-18 months, demonstrating a bounce back in investor sentiment after one of the lowest spending years on recent records.

Resources & Energy Minister Martin Ferguson acknowledged that policy certainty is a major issue for investors when he announced in mid-November that only $488 million had been spent in the previous 12 months on building power stations during a period of angry political debate about carbon pricing.

Just two wind farms were commissioned.

By comparison, in the 24 months from November 2008 to October 2010 the industry spent $7,634 million on constructing 28 power plants.

The outlook is brighter for the period from now to mid-2013 because industry has 19 projects at advanced stages of development. Construction on them is already under way or at advanced planning.

According to the Bureau of Resources & Energy Economics, which is part of Ferguson’s portfolio, Victoria and Western Australia are the states that will deliver a large part of the impending development.

BREE, in a review of Australian generation just published, says investors are looking at spending almost $2 billion in Victoria and $1.36 billion in WA.

In Ferguson’s home state of Victoria, the outlays will go on a gas-fired power station and two wind farms. In WA the fossil-fuelled investment is being overseen by the state government-Verve Energy and involves refurbishing a gas plant and two coal-fired units. The private sector is at work on two wind farm projects with a total cost of $950 million.

South Australia, where two more wind farms are in the pipeline, will see $668 million in expenditure.

Little is in the “advanced” stage in the two states with the largest demand for electricity, New South Wales and Queensland.

The biggest NSW expenditure is being undertaken by government-owned Eraring Energy, which is also battling to recover from a major transformer fire in October. The business aims to complete upgrading its coal-burning units by 240MW in the next 12 months at a cost of $245 million. The rest of the state outlays involve $102 million on a new wind farm and Snowy Hydro spending $48 million upgrading two of its Tumut units.

Ferguson says that the 2,688MW of capacity on BREE’s “advanced” list along with many of the 167 generation projects the agency reports are under consideration by investors for future development are necessary to secure national electricity supply as demand continues to rise.

“A reliable supply of electricity is fudamental to our standard of living and economic well-being. Australia’s energy security depends on (such) new investments.”

However, BREE cautions that the “less advanced” projects are still undergoing feasibility studies, and in some cases pre-feasibility investigation, or lack definite decisions to proceed following completion of a feasibility study. “Some of these projects may not proceed for several years,” it says. “Others may confront changes in economic conditions.”

It adds that some of the investors may be targeting the same emerging market opportunity and only one can proceed. “Some less advanced projects may fail to materialise if the developers failure to secure adequate financing,” it says.

Building new power stations is not the only issue confronting investors in generation.

All four of the Victorian brown coal businesses, sold to the private sector by the state government in the 1990s and providing a quarter of the electricity produced on Australia’s east coast, and the investor-owned Millmerran coal plant in Queensland must refinance their operations in the next 12 months.

The refinancing requirements are estimated to be between $4.5 billion and $6.5 billion.

In total, the Energy Supply Association claims that the electricity and domestic gas sectors – including power stations, networks and pipelines – will have $94 billion in capital requirements between 2011 and 2015 with the sector reliant on foreign banks for 58 per cent of financing needs.

Ferguson says that these investment needs require “a mature approach from all serious political parties” to ensure that the sufficient projects “are pulled through to commissioning to meet Australia’s energy requirements.” 

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