Issue 37 February 2008
The world needs to spend $US22 trillion over the next 25 years to meet its energy needs -- and as much as $US7 trillion could be outlayed on renewable energy resources, a trebling of expenditure on clean fuels.
This is one of the key messages coming out of February's CERA Week in Houston, Texas.
CERA Week is the world's most prestigious annual energy conference, this year attracting 1,900 senior members of the global energy community.
The organisers, Cambridge Energy Research Associates, considered the leading adviser to governments and energy companies, described the current electricity industry environment as "very challenging."
($US22 trillion is the equivalent of half the entire annual American economic output.)
"This is not business as usual," added Lars Josefsson, head of the giant Scandinavian utility, Vattenfall.
"Critical decisions," said CERA vice-president Lawrence Makovich, "need to be made on fuel sources, technology and investment while the cost escalation in fuels, people shortages and (demand for) engineering capabilities play in to price increases."
Experts at the conference said it will become still more expensive to build power plants because cutting carbon emissions will add cost -- and they argued this would require governments and consumers to look much harder at energy efficiency.
While analysts and the media tend to focus on the impact of China on energy capex costs, the conference has pointed out that the United States will need build 200,000 MW of new capacity by 2020 -- equal to five times Australia's current generation capacity.
CERA estimates that the cost of power plant construction in the US has risen 130 percent since 2000 and 27 percent in the past 12 months -- construction costs for coal plants have risen 70 percent since 2000, wind farms 95 percent and gas generation 90 percent.
Petroleum data guru Graeme Bethune, principal of analysts EnergyQuest, reports that Australian gas production -- including natural gas, coal seam methane and LNG for export -- was a record 1,705 petajoules, six percent higher than in 2006.
To put the production in perspective, 70 PJ will fuel a 1,000 MW combined cycle gas turbine for a year.
Conventional domestic gas production was up 9.1 percent on the east coast, given a big helping hand by the drought, with water restrictions affecting both coal-fired and hydro power generation. While Cooper Basin production continued to decline (down 13.1 percent in 2007 against 2006), supply was boosted by the Gippsland joint venture, Otway Basin output and production from Bass Gas.
Bethune's forward analysis highlights why gas suppliers are striving so hard to capture a greater share of the power generation market. If only 25 percent of new generation capacity foreshadowed for 2020 on the east coast (the bulk of the power market) is met from gas and CSM, annual supply will be up 350 PJ from the expected 2008 level of 650 PJ and maintaining this quota out to 2030 would see demand at 1,220 PJ a year.
The penetration of gas in to the generation market, says Bethune, will depend what happens when emissions trading is introduced (in 2010 on present Federal Government plans), "but is likely to be closer to 100 percent than 25 percent."
The rather more than $64 million question is what will the gas price be as the gencos use more and more of it and the proposed east coast LNG developments, using CSM in Queensland, expose the market to international gas prices.
New South Wales Energy Minister Ian Macdonald launched the inaugural edition of the Powering Australia yearbook in Sydney on 27 February. Published by Focus Publishing Interactive and supported by a number of energy associations and companies, the annual survey of the national power industry will deliver its second edition in August this year.
Chris Nicholson, Deloitte global leader for energy and resources, says three key issues are currently affecting the energy industry: political risk, climate change and energy security.
Political risk, says Nicholson, is "very big" because most people have a political view about energy. North America and Western Europe, he adds, are faced with large issues about stable supply of energy.
On climate change, Nicholson notes that many companies around the world have yet to factor the cost of carbon in their budgets.
New Federal Environment Minister Peter Garrett declared himself "terribly excited" about the development of 640 solar panels on the Cadbury Schweppes factory at Sydney's Blacktown when he opened the array earlier this month -- a development flowing from the Howard Government's Solar Cities program, which he described as a "visionary energy concept" without any credit to the previous administration.
"This," Garret declared, "is what fighting climate change is all about."
Indeed? In a State where, under the Labor administration of Carr and now Iemma, burning coal has increased annual carbon dioxide emissions by about 13 million tonnes a year in just over a decade?
The solar array Garrett celebrated will save 140 tonnes of carbon dioxide a year -- that, in a statistic beloved by green power boosters, is the equivalent of taking 35 cars off the road, compared, of course, with adding more than three million of them to the road if you apply the same arithmetic to coal-fired generation emissions.
An early contribution to the Rudd Government's "never mind the quality, feel the width" file.
Meanwhile Climate Change Minister Penny Wong has described the task of cutting emissions as "a very challenging road." In a speech to the Australian Industry Group this month, Wong said the new government will focus, in its greenhouse gas policy, on three "pillars" : reducing emissions, adapting Australia to climate change and helping to shape a global solution.
The government, she claimed, will aim to "reduce emissions at least cost and with the greatest potential to drive new growth, create jobs and develop new industries." The policy, she added, embraces "making substantial cuts to domestic emissions." This, she acknowledged, "will result in challenges for some industries." Not least the energy-intensive manufacturers, who employ more than a million Australians -- a little reduced this month with the closure of the Mitsubishi car-making plant in Adelaide.
Wong commented that design of the emission trading scheme the government will introduce by 2010 will "address the competitive challenges facing emissions-intensive, trade-exposed industries in Australia." There was no point, she said, in imposing a carbon price domestically that results in production and emissions being transferred internationally for no environmental gain (another pillar of the Howard Government environment policy in the past decade).
Wong promised "careful assessment" of the impact of emissions trading on energy-intensive industries. Elsewhere, in a radio interview, she commented that "the whole point about an emissions trading scheme is to utilise the power of the market to get the lowest cost abatement for the lowest cost shift to a lower carbon economy."
Importantly, Wong made it clear to the AIG that, although the government has high regard for Ross Garnaut, the economist undertaking its trading scheme impacts study, it will "come to its own judgment" about right policy. This was reinforced later in the month when she immediately rejected a proposal from Garnaut that the government set a 2050 target of cuttings emissions by 80 percent rather than its election-promised 60 percent.
The government, she added, intends to have the design of the scheme finalised by the end of 2008 and to pass the legislation through Parliament -- where it will lack a Senate majority, being strongly beholden to the Greens for support -- during 2009.
Legislation to introduce a new, enlarged renewable energy target, she said, will also be introduced in 2009. The government will also continue the Howard Government policy of promoting renewable energy technologies and clean coal.
The media treatment of US President George Bush is so heavily oriented to dissing him that any positives tend to get buried -- one such is that the $US2 billion he proposed in his last State of the Union speech, delivered this month, as a three-year commitment to establish a global energy fund to slow the growth of greenhouse gas emissions will bring his administration's outlays to $US18 billion for R&D on clean energy.
These funds attract bigger spending than the government dollar commitment because they leverage private sector spending as well. (The Australian generation sector estimates that the Howard Government $400 million spend on low emission technology development leveraged commitment of $1.6 billion by industry.)
The US, in fact, has spent the Bush years becoming a world leader in investment in clean energy -- in 2007, according to renewable energy groups, investment in America in this area came to $US20 billion, creating 6,000 MW of new capacity.
Wind power in the US, Bush said in his State of the Union address, has grown 550 percent since 2001, photovoltaic power has grown 525 percent and overall investment in renewables has doubled. The US leads the world in geothermal power development -- with 3,000 MW currently under development in its Western states.
Bush also pointed out that his 2006 "Solar America Initiative" has doubled US investment in solar energy development.
The Washington-based Pew Trust, which has seldom been a Bush booster, describes the president's proposal for a world-wide clean technology fund as a "major landmark in addressing global warming" -- and that also didn't get a run on the ABC or in other Australian media that love to demonstrate their contempt for the US president.
NSW Premier Morris Iemma says development of the energy sector will "make or break" the State economy.
In a fighting speech to the Committee for Economic Development of Australia, the embattled premier, under intense pressure from unions and elements of his own party over power privatisation among a number of policy fires burning close to out of control, said the core fact of the debate is that NSW needs to source an extra 10,500 gigawatt hours of supply in 2014 -- the equivalent to the current annual output of Mt Piper.
"This is no time for mucking around," he argued. "Uncertain energy supplies mean an uncertain economic future. NSW needs new power stations. I want industry to build them because that frees up (investment) in other priority infrastructure. We are already pushing our boundaries on borrowing and to borrow more with capital market uncertainty will risk the State's economy. When there is a choice of plunging up to $15 billion in to electricity (development) or being able to invest it somewhere else, the choice practically makes itself."
He cited recent polling that shows 93 percent of the State community believe the government should take action to secure future energy supplies and claims 64 percent of those polled back private sector involvement.
"The NSW economy needs power to grow, to generate jobs and to stay strong," he added.
Iemma pointed out that 21 power stations have been built across Australia by the private sector in the past eight years, but only two are located in NSW and they are small gas-fired peaking plants.
Two major credit rating agencies have jumped in to the NSW privatisation row to support the Iemma Government's plans to lease its generation businesses.
Standard & Poor's and Moody's have highlighted the benefits for the State budget if the sales go ahead.
Moody's in New York have noted that income from the sales process, which includes privatising the retail operations of the three government-owned distribution companies, "could ease the State's capital requirements, thereby significantly reducing fiscal pressures.
However Standard & Poor's is also warning of the risks for investors, citing uncertainty over the future price of carbon, carbon capture standards for existing plants, the costs of refurbishment and the level of investment needed in new generation capacity.
Meanwhile State Treasurer Michael Costa has branded as "ludicrous" calls from the environmental movement for the existing coal-fired power stations, which meet nearly 80 percent of supply, to be "bulldozed" and replaced with gas-fired turbines. Costa says this would cost about $10 billion.
The Energy Retailers Association has told the committee reviewing the NSW Government's power privatisation plans that regulated retail prices in the State do not reflect real costs and that they must in order to attract necessary investment in generation capacity.
ERAA says: "Only with cost-reflective prices will it be possible to get new generation investment in the middle of the next decade" by sending a price signal on tightening supply and demand and giving investors the incentive to justify new development. This, it adds, will have to happen whether the new capacity is built by the private sector or government-owned businesses.
TRUenergy, which is building the 400 MW Tallawarra gas-fired plant in the Illawarra region, has told the committee -- chaired by a former premier, Barrie Unsworth -- that the State's generation and retail sectors need to spend $12 billion to $15 billion over the next 10-15 years on ensuring reliable supply and this is in addition to the $10 billion the government-owned networks will need for new capital works.
"The only sustainable model for the industry is for customers to pay prices that reflect the efficient costs of providing the required energy infrastructure," TRUenergy adds. It also points out that the carbon pricing regime to be introduced by the Rudd Government -- "even on optimistic estimates of the costs of addressing climate change" -- will result in substantial costs increases for consumers.
The University of New South Wales Centre for Energy and Environmental Markets has told the privatisation inquiry that the State is facing a "sustainability emergency."
CEEM argues that the process of reviewing the industry undertaken by the government has paid insufficient attention to the massive changes now needed to tackle climate change action, oil price pressures and the associated societal pressures.
The row over privatisation, the centre points out, is distracting policymakers and energy market participants from focussing on more important sustainability issues.
CEEM says the generation assets owned by the government are responsible for most of the greenhouse gas emissions associated with power consumption in the State. It urges their demolition in staged sequence and a ban on new coal-fired plants unless they incorporate technology for capture and storage of carbon dioxide.
Such plan can only succeed, it argues, if the government also radically improves end-use efficiency by consumers, enhances access to natural gas (especially coal seam methane) and pursues competitive deployment of renewable power.
Leasing the generation businesses and privatising the networks' retail operations, says CEEM, can only complicate and delay the major changes needed to enter a low-carbon economy.
The debate that is now going on in New South Wales has resonance for energy supply and demand well beyond State borders -- and not only because NSW is the largest sector of the national energy market and what affects it has repercussions elsewhere.
The war between Premier Iemma and Treasurer Costa and important segments of their own support base in the unions and the ALP makes for good theatre, but it is only the most recent act in a drama that has been rolling out for more than two decades in Australia, well before the last occasion when a NSW premier and treasurer took on the unions over power privatisation -- Carr and Egan, who lost badly in 1997.
This saga actually had its first airing in the 1980s when business became irritated beyond endurance by what was regarded as the arrogance and incompetence of the large State power utilities. It seemed at the time that the drama reached its grande finale in the mid-1990s when federal and State policymakers agreed to disaggregation of the electricity behemoths, aggregation of the myriad municipal and regional power service businesses and the establishment of competition on the eastern side of the continent. (There has been a sideshow since in the reform of the West Australian electricity system, but that is another story.)
However, as much the participants may have hoped that the reform play had run its course by the end of the past decade, this is anything but the case. The current decade has seen, in fact, two dramas being played out side by side -- with the participants criss-crossing the adjoining stages. The other, of course, has been the whole issue of carbon emissions management.
As the UNSW Centre for Energy and Environmental Markets is pointing out (see above) the State government is caught between the hammer of achieving future power supply reliability and the anvil of genuinely beginning to reduce greenhouse gas emissions.
There is, in fact, another hard place for the government, too -- as retailers are pointing out (see above) and as Iemma and Costa themselves concede -- and this is voter unhappiness when power price start their inevitable rise, driven by higher wholesale prices, the charges flowing from a multi-billion investment in networks and the impact of carbon pricing. Inevitable power prices rises, moreover, occurring at a time of higher interest rates, higher petrol prices, higher public transport bills, higher public service charges and higher food prices.
If all this is not enough, it also seems to me that one of the more interesting aspects of the power supply situation is just when new capacity will be built. It is a little hard to understand why the Iemma Government is so sure that the private investors to whom they lease the generation businesses will then immediately rush off to spend between another $1.5 billion and $2 billion -- and perhaps a lot more (see above on where power construction costs are headed) -- on building more capacity.
Generation investors faced with meeting interest payments on debt as well as rising fuel costs in an environment where the government is trying to sit on retail prices to avoid a voter backlash (and where the fate of fossil-fuelled power stations under the Rudd Government's carbon charge regime is anything but clear) may not be so eager to increase the State's capacity -- and this is before account is taken of any moves to increase inter-state transmission capacity, something manufacturers are demanding ever more loudly, or of the impact on the NEM of a very large increase in renewable capacity, driven by the Rudd Government's inflated MRET.
Just how long it will take to get a sales process completed -- assuming Iemma and Costa can bulldoze their way to achieving privatisation -- is open to question. It could be well in to next year. After all, who will want to buy aged and middle-aged coal plants until the federal carbon legislation is crystal clear?
The frequently forgotten players in electricity development are the banks. If projects aren't "bankable" they don't get built -- and the economic credit crisis combined with all the local uncertainty factors will come together to decide what is "bankable."
Nor should sight be lost of the political arena -- both nationally and in New South Wales. There will be federal elections in 2010 and 2013 (or thereabouts) and a State election in 2011. Would-be investors in the next NSW baseload plant -- and their bankers -- will be decidedly nervous about what policies affecting their plans might suddenly emerge from those elections.
Keith Orchison
29 February 2008
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