Issue 84, April 2012
Welcome to the fourth issue of Coolibah’s newsletter for 2012. This edition highlights submissions being made about the investment environment in response to the federal energy white paper process, which is expected to be published in final form in mid-year. It also focusses on the huge opportunity for gas generation over the next 20-25 years and the issues confronting the rise of gas to be the leading power supply fuel. As well it draws attention to the debate about the role of gentailers in the market.
The independent expert panel examining Tasmania’s power industry has defended the controversial Basslink interconnector with Victoria and dismissed claims that the State’s non-contestable customers are paying for the line through their electricity bills.
The panel, chaired by Australian Energy Market Commission chairman John Pierce and including his predecessor, John Tamblyn, says Basslink has “proven to be an effective and cost-efficient means of securing Tasmania’s energy supply during times of drought” and has enabled State power demand to be met by a “materially lower wholesale energy cost” than any alternative.
Basslink, at 290km the second-longest undersea power connection in the world, has been under attack by the Greens and others since before it was commissioned in 2006 as a poor deal for Tasmanian consumers.
The interconnector was debated in Tasmania for almost 50 years before it was built.
Largely as a result of the major east coast drought, the panel says, government-owned Hydro Tasmania’s returns from Basslink have been around $134 million less than its costs. With the end of the drought, Hydro Tasmania has obtained positive net returns from the deal.
The generator has avoided costs exceeding $300 million since the link commenced operations because it has not had to use additional on-island gas generation nor buy back load from industrial customers to meet household and commercial requirements.
The panel modelled use of wind generation to meet Tasmanian needs instead of development of the interconnector and concluded it would have added $350 million to the generator’s wholesale energy costs between 2007 and 2011.
The panel, after 18 months of investigation, has proposed a reform package for State electricity supply. Without its acceptance, Pierce says, there is a risk consumer prices will be five to 10 per cent higher than they need to be.
The recommendations include the introduction of full energy retail competition in Tasmania with the break-up of Aurora Energy, the separation of Hydro Tasmania’s trading and generating operations and a merger of Aurora’s electricity distribution operations with the government-owned Transend transmission service provider. It also proposes sale of a gas-fired power station owned by Aurora.
Hydro Tasmania and public sector trade unions oppose the reforms.
The State’s Liberal opposition has called for a second Basslink line to be built.
Non-contestable customer power bills have more than doubled in Tasmania since 2000 and the panel says half of the price rises are due to higher network charges. However, the panel does not accept that the State government has been cross-subsidising major industry, which it is desperate to retain, from other users.
The AEMC has calculated that Tasmanian household power bills will rise from 22.7 cents per kilowatt hour this year to 25.95c in 2013-14, including the federal carbon price.
The Tasmanian expert panel has cautioned against the use of anecdotal evidence in judging power prices across States, a media habit, especially in Sydney.
The panel, chaired by AEMC chairman John Pierce, says a number of stakeholders had provided information, often based on the experiences of friends or family elsewhere in Australia, to demonstrate that power bills are substantially higher in Tasmania.
In fact, says the panel, Tasmania is “somewhere in the middle of the pack” for residential electricity bills.
The panel cautions that care needs to be taken in drawing conclusions from simple direct comparisons and “typical” electricity bills in each State.
“This is because average consumption and usage patterns vary markedly between States,” it says. “Tasmanians use more electricity than their interstate counterparts.” Reasons include the weather and the wider availability of gas on the mainland.
The panel says it found there are 40 power charge plans on offer from eight retailers in one area of Victoria and 50 from 12 retailers in another.
Supply charges vary from 64 cents a day to 87c – compared with 89c in Tasmania.
Energy tariffs range from 19.4c to 27.8c per kWh depending on consumption levels and go as high as 30c for “Greenpower” – compared with Aurora Energy’s flat rate of 25.1c.
“Arriving at meaningful generalisations about relative electricity prices between States for different classes of customers with differing usage profiles is a difficult, if not impossible, process.”
The gas supply sector, spearheaded by Santos, is pushing New South Wales policymakers, industry and householders to understand that the State faces a potential energy crisis that can be resolved by large-scale development of coal seam methane resources.
At present NSW consumes about 150 petajoules of gas a year, 95 per cent of it imported from Victoria, South Australia and Queensland. (This is a fifth of the total east coast gas consumption.) Eighteen per cent of the gas consumed fuels power generation.
In a report commissioned by Santos, consultants ACIl Tasman point out that the introduction of a carbon price will drive a switch from coal power to gas-fired generation between 2015 and 2030.
The Australian Petroleum production & Exploration Association, of which Santos CEO David Knox is current chairman, meanwhile has told the Federal Government in a submission on its proposed energy white paper that decarbonisation policy will drive the need for 10,000 PJ of gas to be used on the east coast to fuel power stations between now and 2030.
ACIL Tasman say that, while gas generation accounts for only eight per cent of NSW electricity supply capacity today, this will increase rapidly when combined cycle plant is used to provide new baseload power.
ACIL Tasman predict that power generation requirements for gas will rise from about 30 PJ a year today to 150 PJ annually by 2030.
The consultants warn that the State faces a substantial shortfall of competitively-priced gas if the local coal seam methane industry fails to develop because of environmental and rural community opposition and significant regulatory barriers.
They point out that the sources of gas that have supplied gas to NSW since the 1970s are located in mature production basins with declining reserves.
Currently established reserves in the Cooper Basin of South Australia (source of 69 PJ a year for NSW) are fully contracted. “There are currently no uncontracted reserves in the Cooper Basin available to replace the contracts with NSW when they expire.”
Victoria’s Gippsland Basin (source of 77 PJ a year for NSW) has about 15 years of reserves at current rates of production and a significant part of the resource is already contracted. However ACIL Tasman consider more reserves are likely to be discovered, although they warn future supplies can be expected to be “significantly more expensive.”
Continued importation of gas in to NSW is a “problematical” option, the consultants say, because conventional gas from Bass Strait and South Australia and coal seam methane from Queensland will be in high demand to supply generation in the both States and as feedstock for LNG exports from Queensland.
The situation, they argue, leaves NSW gas consumers, including power generators, in a vulnerable position. “At the least it exposes them to the risk of much higher gas prices; at the worst it could result in an inability to meet current gas demand and forecast growth,”
ACIL Tasman also warn against increased reliance on gas from Bass Strait as the sole source, exposing NSW to the risk of natural disasters or operational failures cutting supply. Use of coal seam methane from within the State, they say, will reduce such risks “very significantly.”
Santos vice-president eastern Australia James Baulderstone says the ACIl Tasman report highlights that NSW must either develop its own gas resources – which will generate billions of dollars of economic benefits for the State – or “confront the real prospect of constrained supply and consequently higher gas prices.”
The gas industry’s efforts to drive NSW government support for substantial exploitation of its coal seam methane resources are implicitly endorsed by the latest predictions from the federal Bureau of Resources & Energy Economics that the State’s system energy requirements for generation will rise from 75,000 GWh in 2009-09 (the peak supply year before the global economic crisis impacted on demand) to 96,000 GWh in 2019-20 and 110,000 GWh in 2034-35.
A government report produced during late last year for a State parliamentary inquiry in to coal seam methane development predicted that new gas-fuelled generation will start coming on line in NSW from 2017 and that the power industry’s need for gas will increase 12-fold by 2030.
It forecast that gas generation’s share of power capacity in the State will rise to 30 per cent by 2030 as black coal’s share falls from 62 per cent to 46 per cent.
At the end of 2011, regulatory planning approval had been given for 3,557 MW of gas-fired plant for NSW with applications for another 3,352 MW in the planning process.
This is in addition to approval given to proposals by Macquarie Generation and Delta Electricity for Bayswater B and Mt Piper 2 sites for 4,700 MW of coal or gas plant.
Meanwhile consultants Wood Mackenzie’s Craig McMahon, head of the firm’s Australiasia upstream petroleum research, told a conference in Brisbane in late March that the greatest challenge to east coast gas supply expansion is not technical or commercial but the growing local opposition to CSM and the uncertain and potentially burdensome regulatory environment.
Management consultants KPMG have warned the Federal Government that the investment environment for Australian domestic energy is uncertain and “is potentially problematic in important respects.”
In a submission commenting on the draft federal energy white paper, which is due to be finalised in mid-2012, KPMG says the government needs to “firm up the magnitude” of the domestic energy financing requirement for the next two decades. It thinks the overall investment need will be greater than the $240 billion government estimate.
KPMG argue that the draft paper “fails to anchor electricity investment in Australia in the broader local and international context,” saying it downplays the potential difficulty of meeting the required level of funding.
“This is a serious oversight,” the consultants assert, “because domestic electricity projects have to compete for capital with other energy and non-energy investment opportunities at home and abroad.”
KPMG call for a better electricity market framework to be established.
They say market regulation and governance is fragmented, partly as legacy of State government ownership and control of utilities.
“Current markets possess multiple points of potential policy and regulatory intervention. They are subject to policy objectives that often seem confused and sometimes inconsistent.”
Development of a more robust market structure is essential if Australia is to stand out as an investment destination.
KPMG note that the draft white paper expects most (if not all) future investments in the electricity generation to come from non-government sources.
“Is this assumption consistent with the fact that around 50 per cent of Australia’s existing generating capacity is still directly or indirectly owned by State and territory governments?” they ask.
“Should private investment provide insufficient capacity at some future point,” they add, “government will surely be compelled to keep the lights on.
“There appears to be an entrenched public expectation that government is responsible for maintaining reliable power supplies.
“Thus government has a strong self interest in maintaining an attractive investment climate in the electricity industry.”
Major energy users are voicing increasing concern about the rise of integrated generation and energy retail operations in Australia.
Major Energy Users Inc, which represents 20 medium to large energy-using companies across Australia, has made a submission on the draft federal energy white paper that notes there has been a “major shift to re-aggregation” in national markets “yet disaggregation was originally seen as the way to improve productive efficiency.”
It complains that “under the changes made over the past 15 years, we have seen government ownership reduce considerably to be replaced by a few very large players (with) profit as their primary motive whereas, at least, government ownership was intended to balance equity for consumers with the cost of the service provided.”
The MEU says that a fall in productivity in energy markets over the past decade has coincided with an increase in supply concentration, “much of which has been the result of governments seeking to maximize prices for assets being privatised.”
The lobby group argues: “That these assets have an increased value following re-integration implies that (it) will provide additional benefits to suppliers at the expense of end-users.”
The MEU complains that the draft energy white paper only proposes further monitoring of market to ensure participants become more productive. It says monitoring is insufficient and “action is required to prevent the supply side using market power to increase prices unnecessarily.”
Major Energy Users disagrees with the draft white paper view that energy market institutions have performed well. It says the institutions have “presided over a period of substantially increased prices, a lessening of performance, lower productivity and the creating of a great deal of uncertainty regarding future price competitiveness, security and reliability.”
It accuses the AEMC of introducing electricity rule changes that have resulted in “unbalanced and biased incentives for network investments.”
It complains that “there is no apparent appetite” in federal, State and territory governments for reform of the market institutions to improve their performance.
There is an echo of the MEU complaints about gentailers in the KPMG submission on the white paper. The consultants “note that the wholesale market design has led to considerable vertical integration.”
KPMG say that there is now a perception of uncompetitive markets, “perhaps through the over-zealous conduct of intra-company transfer pricing and the consequent reduction in overall market liquidity.”
The Australian Energy Regulator has also commented on the gentailer issue.
AER chairman Andrew Reeves says it is an issue the regulator is “closely watching.”
He has told a conference: “The previous State-owned all-in-one energy companies were vertically separated and corporatised as a precursor to the (east coast) market start. It had been envisaged that generators and retailers would manage their exposures to the compulsory gross pool by entering financial contracts. Over time the dominant business model emerging is that of the vertically integrated generator/retailer.
“While this model in and of itself,” says Reeves, “may not be a cause for concern, it is possible that vertical integration could have adverse impacts on competition with flow-on effects for consumers.”
The AER, he adds, will monitor and report on the gentailer developments.
The regulator takes on new responsibilities for oversight of retailer conduct from 1 July.
Meanwhile “The Australian” newspaper reports that AGL Energy is urging the Federal Government to push the States to privatise their remaining electricity assets. The paper says AGL’s submission on the energy white paper argues that “completing the privatisation process of both generation and transmission assets is essential to minimise government intervention, to preserve market integrity and to provide competitive neutrality between participants.”
AGL is also reported as emphasizing the need for deregulation of retail energy prices in Queensland, South Australia and NSW – Victoria is the only State to have done so – because the present situation is undermining economic growth as businesses are still being required to subsidise household power bills.
The Australian Energy Regulator, in its new review of transmission performance, says service standards continue to improve, with most networks in 2009-10 (the year scrutinised) outperforming historic trends.
“This reflects changing operating practices to be more attuned to customer and market needs,” the regulator says.
As a result the businesses have been rewarded with service standard incentive payments of $23 million for calendar 2010.
The AER also notes that capital expenditure has had to remain “strong” to enable the networks to meet increase demand and replace aged assets, with total expenditure over five years to 2009-10 exceeding $5 billion.
Aggregate profits of the networks in 2008-10 were $460 million, up from $388 million the previous financial year.
Meanwhile the Australian Energy Market Commission, in its latest discussion paper for its “Power of Choice” review for the federal, State and territory energy ministers, records that $53.5 billion has been outlayed on transmission and distribution networks in the east coast market between 2002 and 2012.
The AEMC says $11.5 billion of the expenditure has been on transmission developments.
The commission adds that meeting peak demand growth has driven $5.3 billion of transmission capex and $16 billion of distribution outlays, with about 75 per cent of this expenditure occurring in NSW (including the ACT) and Queensland.
Consultants Ernst & Young, in a report for the commission, have calculated that, if the top one per cent of peak demand could be removed between 2011 and 2030, about $3.4 billion to $11.1 billion could be avoided in network costs.
The NSW Independent Pricing & Regulatory Tribunal, in its white paper submission, says State-owned corporations’ productivity has declined significantly in recent years, with the biggest fall among electricity distributors.
While the NSW governance framework for these businesses – the key tool for promoting improvements in cost-efficiency and productivity – is based on sound principles, IPART says, there is now a large gap between how it was intended to apply and how it is being applied in practice.
The tribunal says there has been an imposition of policy requirements on SOCs without regard to the impacts on business value and broader economic efficiency. “Another result is poorly-defined expectations of, and accountability for, performance due to lack of clarity on the relative priority of the various commercial and non-commercial requirements.”
When governments own such assets, IPART adds, they have a conflicting range of objectives which makes governance for networks more complicated.
It argues that strengthening of governance arrangements and incentives for better productivity are needed to ensure that the situation does not result in higher power prices.
IPART has called on the Federal Government to consider the cost-effectiveness of the renewable energy target.
It says it has concerns about the scheme and particularly about the small-scale renewables program.
The so-called SRES, it asserts, is not achieving emissions reductions or even renewable energy production at least cost. “It is promoting very expensive abatement and relatively expensive production, which has a considerable impact on retail prices.”
The latest AEMC “Power of Choice” paper says the cost of wholesale energy will be the largest contributor to projected national retail electricity price rises between 2010-11 and 2013-14.
The commission attributes 40.2 per cent of the projected rises to wholesale energy costs, driven by changes in generation sources, higher capital and operational costs, higher financial market hedging costs and the price on carbon from 1 July.
Distribution network expenditure will contribute 33 per cent to the anticipated price rises.
The AEMC says electricity prices are expected to rise by 37 per cent out to 2013-14, the equivalent to an addition of 8.34 cents per kilowatt hour for average Australian residential bills, taking them to 30.75c.
The popular media are full of reports about the pain caused by power price increases – described recently as “crippling” by the NSW government – but to what extent do they dent householder hip pockets?
In its latest “Power of Choice” paper, the AEMC says electricity bills represent just below two per cent of average weekly earnings and projects that they will grow to 2.5 per cent of household income by 2015.
“It should be noted, however,” says the commission, “that electricity bills can represent a much higher percentage of (some household) weekly income.” For pensioners, on average, it could be around seven per cent.
The AEMC notes that research by the NSW Independent Pricing & Regulatory Tribunal finds that four per cent of the State’s households face bills representing more than 10 per cent of their disposable income. Eight per cent of NSW households face bills between six and 10 per cent.
Meanwhile Victoria’s Consumer Utilities Advocacy Centre tells the Federal Government that social policy processes are not generally well-aligned with changes to the energy market.
“Often,” says CUAC, “energy market reform can be made without appropriate consultation and inclusion of requisite social policy decisionmakers to ensure (the mitigation) of decisions.”
It is important for the government, in expressing support for a competitive retail model with price deregulation, to understand that the design and policy it will be critical to its success. The centre calls for a more clear focus on increased consumer benefits.
Australian Energy Regulator chairman Andrew Reeves says that the energy sector is now encountering significant pressures not faced since the mid-1990s.
Speaking to the “Australian Financial Review” national energy conference, Reeves says the cost of inputs in upstream markets is coming under pressure from the potential for export parity prices for gas and the impact of carbon reduction policies.
In the network sector, he says, peak demand is continuing grow while average energy consumption, which drives prices, is falling.
“At the same time, the electricity assets that were installed in the 1950s, 1960s and 1970s are now reaching the end of their lives and require replacing.
“This leaves a large investment task to be funded over a smaller amount of consumption, leading to significant network price increases.
“It is a storm that is culminating in very real cost pressures in a sector that should deliver one of Australia’s comparative advantages.
“To constrain these pressures will require genuinely competitive wholesale markets, efficient networks and well-informed consumers actively participating in competitive retail markets.”
Reeves emphasizes that Australian energy market reform over 15 years has been internationally recognised as a major success, delivering substantial investment and continuing high supply reliability. The gas sector, he points out, has created a network of pipelines on the east coast from Tasmania to Queensland, establishing basin-on-basin competition that “was a dream only a decade ago.”
He adds: “The gas and electricity markets are becoming increasingly linked and we need to be aware of this when confronting the objectives of security, reliability and efficiency.”
Reeves notes that a low carbon environment will change the pattern of investment over the next 20 years in both the competitive and monopoly segments of the electricity market. The AER, he says, is concerned that the two segments should have aligned incentives to ensure the most efficient investment mix, providing least-cost energy for consumers.
Electricity supply is frequently in the news in Western Australia and seldom more so than at present.
The State government has a series of issues on its hands, including the need to find new chief executives for its two largest electricity corporations, Verve Energy, the major generator (CEO Shirley In’t Veld is not renewing her contract after five years in charge), and the networks business, Western Power (chief executive Doug Aberle has retired).
More painfully, it has received a recommendation from its Economic Regulation Authority that residential power bills in the south-west integrated system should be increased by 23.1 per cent – equating to $353 extra a year for a typical household.
The Barnett government has been wrestling with community unhappiness about power costs after increasing bills by 57 per cent since 2008 to start making them cost-reflective after a decade of being frozen under Labor regimes.
Premier Colin Barnett told Perth media only last month that his government had “broken the back” of electricity problems. He ruled out a double-digit rise in the next State budget.
ERA says residential tariffs should rise by 12.2 per cent to continue the cost-reflective catch-up, by 8.4 per cent because of the federal carbon charge and by 2.5 per cent to reflect inflation.
Averaged out across all electricity customers, including business, the regulator says, the increase should be 15.8 per cent from 1 July, including a 5.1 per cent rise as catch-up.
The regulator suggests that, if the government wants to stick to its recent promise about the 2012 level of price rise (five per cent for households plus the carbon cost), it can average the increases over three years.
ERA has also recommended that the subsidy from SWIS customers
through network charges to reduce regional power costs should be removed
from bills and paid out of general taxation revenue. It says the levy
will add more than $900 million to SWIS household bills between 2012 and
2017.
ERA has rejected the often-repeated claim by Barnett and energy
minister Peter Collier that the price problems flow from the unpopular
(at the time) Labor disaggregation of the original Western Power (the
renamed State Electricity Commission of WA).
The regulator says the 57 per cent rise since 2008 was inevitable regardless of how the old Western Power was restructured.
The government is considering remerging Verve Energy and its retailer Synergy.
Meanwhile the ERA has issued a draft determination on Western Power’s bid for expenditure between 2012 and 2017 which will reduce its capex outlays by almost a billion dollars to $4.13 billion and its operating budget by more than a half billion dollars.
The regulator argues that there has been a 70 per cent real (inflation-adjusted) rise in network charges over the past six years and that the need for a catch-up on costs in this area is now finished.
A final decision on Western Power’s capex and opex allowances will be made in four months.
As well, Western Power has announced, after a trial in Perth’s eastern suburbs, that it will cost $880 million to roll out smart meters across the SWIS.
The Energy Supply Association is challenging federal Energy Minister Martin Ferguson’s proposal to institutionalise a four-year review of national policies, starting with the publication of a white paper this year and repeating the process in 2016.
ESAA says it considers that the a 2016 white paper is warranted to assess the impact of the introduction of carbon pricing, given the significance of this for the energy sector.
(Of course, if the Coalition wins office federally next year, Tony Abbott is pledged to abandon the carbon price and other aspects of the Gillard government “clean energy future” policies, an exercise that may require a second, double dissolution election to overcome the combined resistance to change of Labor and the Greens in the Senate.)
ESAA says rolling four-yearly white papers represent too much additional work for industry and may create unncessary regulatory risk.
(The last federal white paper was produced by the Howard government in 2004.)
The association also reminds the Federal Government that energy policy is a shared activity between it and the State and Territory governments. It argues that, beyond 2016, white papers should be long-term strategic documents with buy-in from all jurisdictions. They should be a collaborative exercise of the Council of Australian Government’s ministerial energy committee every eight to 10 years, it proposes.
One of the most controversial aspects of current energy policy, despite it being supported by the main federal political parties, is the renewable energy target. Energy-intensive industry, in particular, wants the program junked with the introduction of a carbon price and then emissions trading.
However, a leading renewable energy company, Pacific Hydro, is concerned by what it sees as an attempt in the draft federal energy white paper to “downplay the ambition and opportunities in renewable energy” for Australia.
The company calls for continuing efforts to promote “clear market signals” for renewables through the carbon price legislation, the RET and energy market reform.
It identifies three market barriers that, it says, have the effect of delaying and increasing the costs of renewable projects or lowering the returns for projects already under way. They are the difficulty renewables companies have in negotiating long-term power purchase agreements with the retail companies (who have an over-supply of RECs), regulatory uncertainty on the long-term price of power incorporating carbon charges and the RET, and the risks around the funding of merchant energy power plants.
Pacific Hydro says that while these issues delay and increase the costs, or lower the returns, of renewable projects, a bigger problem is the issue of transmission line access and grid constraints – which can “delay projects for many years even when they are otherwise commercially viable.”
The company says that State and federal governments have been reluctant over the past decade to build infrastructure that they believe could crowd out more efficient private investment.
“This stand-off has resulted in continual under-investment in grid maintenance, upgrades and expansion, particularly in new transmission and interconnector capacity,” it argues. “The current structures are likely to drive renewable energy investors in to areas with lower value resources with the possible outcome that the highest value and largest capacity resources may not be deployed for many decades to come.”
Pacific Hydro is calling for regulatory reform of the objectives of the electricity market and for alignment of national policy with the “clean energy future” package along with “a long-term and strategic approach to funding shared infrastructure.”
Ken McAlpine, director of policy for Vestas Wind Systems Asia Pacific and a former Victorian government advisor, says the current east coast market rules make it hard for investors in new renewable energy projects to get connected to the electricity grid and are a major barrier to pursuit of the 2020 renewable energy target.
Writing in the magazine “EcoGeneration,” McAlpine says the current set of transmission rules continue to push renewables investors to sites with lower quality resources but close to existing networks or load centres. “This means that these projects will also be closer to population centres – which has its own set of problems,” he adds.
AGL Energy has bought the development rights to the proposed Silverton wind farm 25km north-west of Broken Hill.
The purchase amount has not been disclosed by AGL or the sellers, a joint venture of Germany’s Epuron and Macquarie Capital Windfarms.
The project has environmental approval for the first stage (300MW) and is claimed to have a capacity capability of 1,000 MW.
AGL has told media that, subject to market conditions, construction of the initial stage could begin in 2013.
Meanwhile the company and its joint venture partner, New Zealand’s Meridian Energy, are working towards completion of the Macarthur wind farm, a $420 MW development costing $1 billion near Hamilton in Victoria’s south-west.
Completion of the 140 turbine towers needed for the Macarthur project in May will also mark a turning point for Portland-based engineers Keppel Prince. It has announced it will need to cut its work force because orders for wind equipment has temporarily dried up.
Keppel Prince says five new wind farms have development approval from the Victorian government but it does not expect to receive any new orders until late 2013.
Keppel Prince is Portland’s second-largest employer with 450 workers and has worked on 20 wind farms across Australia in the past 10 years
The Clean Energy Council has appointed David Green, founding chief executive of Britain’s Business Council for Sustainable Energy, to succeed Matthew Warren, who became chief executive of the Energy Supply Association in mid-January.
Meanwhile the CEC has told the NSW government, in a submission to its review of wind farm planning guidelines, that the State could see $6 billion worth of wind investment if it can strike the right regulatory balance
Federal Energy Minister Martin Ferguson says the Australian geothermal industry is faced with a catch-22 situation: investors are reluctant to support it until the technology is proven and it cannot be proven unless they are willing to invest.
Ferguson says his Bureau of Resources & Energy Economics expects the geothermal sector to deliver four per cent of total national generation by 2035, equal at that stage to the output from long-running hydro-electric power.
Ferguson says he expects the geothermal business to “turn the corner” in 2012, pointing to the introduction of a carbon price as well as immediate tax deductions for geothermal exploration from 1 July. He adds that the advent of the Australian Renewable Energy Agency in July, taking over $3.2 billion of existing subsidies, may also assist the sector because it still has $1.7 billion in grants to disburse.
The Australian Industry Greenhouse Network says that, “contrary to popular opinion and the energy white paper’s use of energy intensity data, energy-intensive companies here are already at the forefront of the OECD in energy efficiency in many industries.”
In aluminium smelting, for example, says the AIGN, only Africa and more recently China outperforms Oceania, which is dominated by Australia.
The lobby group argues that it is probable that many Australian industry groups compare “very well” against competitors in energy efficiency terms.
It questions the existence of a significant industrial energy efficiency gap as perceived by the Federal Government.
Every stakeholder in the energy debate has his or her pet issue, but the over-riding factor in the future of supply is the investment climate and the key point may be whether policymakers understand sufficiently well just how difficult it will be to raise the funds needed to realise Australia’s resource development dreams for the next 20-25 years.
Consultants KPMG (some of whose views on this issue are reported above) make a telling point in their submission on the draft energy white paper: capital markets operate on a global basis, there is a lot of competition for funds and the needed investment in energy infrastructure worldwide between now and 2035 is estimated to be as high as $US38 trillion, with electricity needing up to $US17 billion of this funding.
As they say, much of the infrastructure underpinning our current prosperity was built using foreign investment and we will rely on it heavily to fund the outlays required to both sustain our ability to trade in Asia and to meet our domestic energy needs.
“Our attractiveness as an investment destination, however,” they say, “is threatened by rising costs, regulatory uncertainty, complex project approval processes and skills shortages compounded by restrictive labour arrangements.”
KPMG sum up the financing challenge in Australia for the electricity industry like this:
“Primary investment decisions are made by established and would-be generators, distributors and retailers. Separate secondary decisions about whether or not to finance particular projects are made by lenders and equity portfolio investors.
“Both sets of decisions are influenced by perceptions of risk and reward and the degree of uncertainty attached to these perceptions.
“Decisions are also predicated on the cost and availability of capital – which varies over time.”
They point out, very reasonably I think, that the introduction of carbon pricing and emissions trading, the federal renewable energy target and the programs trying to kick-start preferred renewable, abatement and energy efficiency technologies – not least through the proposed Clean Energy Finance Corporation – add a further layer of complexity to decisions about investment an financing for the Australian power business.
And they remind the Federal Government and the rest of us that investment in new generation capacity since the start of the east coast market (the “NEM”) in the late 1990s stands at $12 billion. “This is less than the average investment of $13 billion that will be needed every year between now and 2030 to satisfy necessary increases in generation and network capacity.”
Ominously, they point out that there is no track record in Australia that demonstrates an ability and willingness to provide the required financing.
They challenge Resources & Energy Minister Martin Ferguson and his department to recognise in the final energy white paper – due to be published mid-year – that there is a possibility of an investment shortfall.
It is worth pointing out, I think, that we already have a large
straw in this wind in the shape of the renewable energy target. Whether
the 2020 target will be met as a result of past poor policymaking
creating a REC glut is an open question. The forward strategy for the
RET is yet another issue that the Gillard government has re-opened to
inquiry, with a review due to take place later this year and then every
second year.
This, and many other aspects of current policy, including the
programs of State governments, does not add up to what the Energy Supply
Association, in its white paper submission, is seeking: an enduring
approach, especially for the treatment of greenhouse gas emissions, that
will give investors confidence in the governance framework as well as
the commercial drivers for new development.
A wave of uncoordinated government processes will not facilitate investment.
In proposing the CEFC, the Federal Government, in Ferguson’s words, knows that the financing challenge is especially acute at the large-scale, first-of-a-kind demonstration stage. He understands, as he told the Energy State of the Nation forum in Sydney last month, that, more broadly, Australia needs investment across a range of technologies to deliver its energy future.
What KPMG and others are putting forward more and more urgently is the need for the whole of federal cabinet to get its collective head around the fact that the investment environment for domestic energy projects is “uncertain and potentially problematic” (to quote the consultants).
Unfortunately, because of the inability of the Rudd administration to produce an energy white paper two years ago, time is running out on this government to produce real encouragement for today’s investors.
Already minds in the energy industry are turning to the prospect that the whole white paper exercise may need to be re-run, as Ferguson has already suggested, in 2015-16. Only this time by a government of a radically different hue.
It is one thing entirely for this process to review and fine-tune the foundations laid down today to attract massive investment – but it is another entirely if we have to wait another four years for a re-invented policy wheel to emerge.
There is a very real risk that this is what is confronting us.
Keith Orchison
11 April 2012
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