Days of cheap power are over

By Keith Orchison

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

The biggest challenge for domestic energy supply in Australia in the decade ahead is expected to be the rising costs for consumers, particularly in electricity supply as the sector undergoes major change.

Resources Minister Martin Ferguson says Australia’s days of cheap energy are over.

Modelling undertaken for Treasury by consultants predicts a significant change in electricity supply and demand.

Treasury, in papers supporting the government’s “clean energy future” legislation, is pursuing a controversial view that growth in electricity demand will flatten over two decades, reaching just 300,000 gigawatt hours a year in 2030 compared with 250,000 GWh when demand peaked in 2007-08 before the impact of the global financial crisis.

Demand has fallen back to about 240,000 GWh in 2010-11 as domestic power prices have risen and the global economic problems affect business needs.

Consultants for the Treasury predict that the coal-fired generators’ share of supply will fall back as well. They forecast that black coal plants will be meeting between 38 and 44 per cent of production by 2030 compared with almost 50 per cent today – and they see the output of brown coal plants (currently meeting 20 per cent of supply) falling to between six and 12 per cent.

In the consultants’ scenarios, gas-fired power stations will push up their production from 18 per cent of supply today to between 20 and 24 per cent in 2030.

Renewable generation, they claim, will become much bigger suppliers, with wind farms more than doubling their output and possibly reaching 16 per cent and geothermal generation breaking through its present investment and technological impasse to deliver between three and eight per cent of requirements.

While the production changes will be considerable, a large question mark hangs over the other major factor in electricity prices – the amount of capital spent on networks and the charges passed through to consumers.

Network costs today account for almost half of end-user power bills.

Transmission and distribution businesses in eastern Australia, more than half of them still owned by governments, are in the middle this year of a $35 billion capital program to be completed in 2014.

The Australian Energy Regulator, which oversees their capital and operating expenses and what charges can be passed on to users, is seeking substantial changes to the rules under which it works.

While it is claimed that this will help reduce the upward trend of retail electricity prices, no-one is suggesting that they will not continue to grow because of the combined impact of higher wholesale costs (the price of electricity produced by power stations), the costs of renewable subsidies and the charges for network expansion and upgrades.

Edwin O’Young, a senior consultant with Port Jackson Partners, forecasts that retail electricity prices on the east coast – home to more than 80 per cent of electricity demand – will almost double between now and 2017.

O’Young says national retail electricity prices have risen by more than 35 per cent in the past four years in real (inflation-adjusted) terms before the incoming carbon charge is taken in to account.

“Cost increases unavoidable,” he says. “However, action needs to be taken to ensure that they do not rise more than is necessary, given the important implications for the cost of living pressures faced by Australians as well as for the competitiveness of our industries.”

O’Young says a comparative advantage in low-cost energy by world standards over several decades has contributed to growth opportunities for Australia’s economy.

He says wholesale power prices – the cost of energy from power stations sold in the east coast competitive market – could double from around $74 per megawatt hour today to $149 in 2017.

Network charges could rise from from $97 per MWh today to $169 while the combined cost of renewable energy subsidies and retail charges could rise from $33 to $45.

This may deliver an end-user price in 2017 of $363 per MWh, up from $204 today and $160 in 2007. 

For the average Australian home, using between six and eight megawatt hours a year, this represents a rise from as little as $1,224 today to $2,904 by mid-decade as more homes use air-conditioning, plasma television sets and other power-guzzling appliances.

One of the problems in estimating power bills later this decade is that fuel costs are unclear.

O’Young says coal prices on the east coast may rise as miners gain export options and power station contracts come up for renewal, especially in New South Wales.

Gas prices are also expected to rise substantially as east coast supply becomes exposed to the world market through the Queensland-based LNG export industry.

| to top of page |