CARBON, COST AND CONTINUITY OF SUPPLY
2 | CONTENTS
POWERING AUSTRALIA VOLUME 6
ROLL OF HONOUR
List of supporting partners
What lies ahead for the electricity industry?
Fergusonâ€™s way forward
Pursuing a strategy for power
Fuel for the far future
Wrestling with residential problems
Strengthening the market backbone
The rise and rise of Queensland
Energising the booming West
Where will wind power blow?
Smart meters and dynamic pricing
Striving for high wire balance
Can the market still deliver?
An opening for nuclear power
The profile of power
4 | ROLL OF HONOUR
POWERING AUSTRALIA VOLUME 6
ROLL OF HONOUR
Platinum sponsor Conergy pp 34–41
major sponsor Australian Power Institute p 92–93
key sponsors Ausgrid p 74 Australian Coal Association p 17 ENERGEX p 47 energy solutions – ergon energy p 48 Eraring energy p 75 ERM power p 49 Gentrack p 66 Horizon Power p 57 Sentis p 67 western power p 56
Oakey power station, Queensland.
6 | FOREWORD
What lies ahead for the electricity industry?
Keith Orchison, Editor
Much of the comment in the public debate about electricity policy in Australia in the past several years has been about the need to create certainty for investors. This is not likely to change in the next 12–15 months as the nation goes to the polls to elect a new federal government. Public opinion polls in 2012 suggest that a change of government in 2013 is probable. If so, the electricity industry will be faced with still more significant shifts in the approach to policies following state governments changing hands with major swings in the two largest supply areas, New South Wales and Queensland. Some in the industry have estimated that up to $50 billion of investment is required in just the generation sector in the next 10–12 years, to which can be added a similar amount needing to be spent on network capex and on rolling out smart meters. While the investment issue is not easing – indeed, many in the industry will argue that it has increased in intensity – what has become apparent over the past 12 months is that creating certainty for electricity consumers is no less important. A number of years with large retail price rises, with no end to these spikes currently in view, has engendered considerable consumer concern. This, in turn, translates into political reactions and more issues for power suppliers to manage. In the six years since Powering Australia began publication, the domestic debate about national carbon policy, with its heavy focus on energy generally and electricity supply in particular, has become more and more polarised. This polarisation is not helped by the failure of governments globally to achieve a new agreement on reducing greenhouse gas emissions when the Kyoto Protocol expires at the end of 2012.
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For Australian electricity consumers, as has been revealed by a series of reviews at state levels, policymaking relating to energy supply has lacked discipline. There has been inadequate attention to program development and management, accompanied by complex and uncertain project approval processes. (Last year, one prominent power industry executive said he didn’t agree that uncertainty is the key problem for investors – rather, it is the fear of poor policy formation.) At the same time, energy-intensive companies, which account for a third of Australian electricity consumption, are declaring concerns. As Major Energy Users Inc put it in an energy white paper submission, “… there have been strategic failures in the performance of key institutions responsible for energy market development and policy formulation,” accusing them of “presiding over a period of substantially increased prices, a lessening of [supplier] performance and lower productivity, as well as creating a great deal of uncertainty regarding future price competitiveness, security and reliability.” In this environment, both existing and potential investors find it hard to implement plans to maintain the value of assets currently in operation or to finalise decisions on development projects with long lives. It is difficult to avoid the conclusion that, after a decade of debate about key issues, including two federal administrations (Howard and Rudd/Gillard) producing white papers, energy policy in Australia is in a mess. At least the energy policy presents a severe headache – some observers say a nightmare – for both investors and funders. The events at federal and state levels of just the past three years suggest that energy policy risk is now a negative issue for this country. Despite this, it is important to maintain a sense of perspective about Australia’s overall energy position.
This country is still one of the most prosperous, politically stable and peaceful nations on the planet. Australians enjoy an energy bounty that is the envy of many others – the energy issues confronting Japan and South Korea, major economies with poor resources, are a good benchmark of how fortunate we are. Except in extreme circumstances, Australians have all the energy needed to operate their businesses and to power urban areas and homes. Enormous quantities of energy are also available to be sold overseas to the national economic benefit. The electricity industry is still continuing to deliver reliable supplies across the country, as it has done now for many years. Whether this will continue at ‘reasonable prices’ – a given in modern Australia – is open to vigorous debate, not least because of the carbon issues. Nonetheless, it needs to be remembered that electricity prices here are lower than what they are in many other OECD countries. This is predominantly due to 30,000 MW of coal-fired plant using vast, low-cost reserves delivering more than 70 per cent of power supply. Of course, this raises significant carbon dioxide questions. Greenhouse gas emissions, however, are not the sole or perhaps even the major issue confronting the industry, policymakers, regulators and consumers. Regardless of policy and regulatory decisions, current and future, a growing portion of Australia’s capital stock of electricity infrastructure is nearing, or in some cases has passed, its use-by date and will need to be replaced or enhanced between now and 2020. To this investment challenge must be added the requirements of managing power market growth. Demand can be expected to rise, even allowing for the trend that has emerged since 2009–2010, in part as a result of the local impact of the global energy crisis as well as the impacts of
8 | FOREWORD
large price increases, a more temperate weather pattern and the inroads at the margins of ‘solar bonus’ schemes. As consultancy firm KPMG pointed out in its submission to the federal government’s energy white paper process, whatever the ultimate size of the investment challenge, the financing challenge for investors will be considerable. Assuming money will be available in a timely fashion and at an affordable cost to ensure adequate electricity investment for the next 20 years could turn out to be one of the major mistakes of our current era. From KPMG’s perspective, “… the investment environment for Australian domestic energy projects
is uncertain and is potentially problematic in important respects”. Their conclusion rings true for whatever political and policy environment lies ahead: “The essential fluidity of energy forecasts and inherent uncertainties about future investor behaviour reinforce the need for a robust and regular process for reviewing energy policy.” However, even this perspective is open to challenge. The federal government proposes undertaking a white paper every four years, but the Energy Supply Association – while agreeing that another review in 2016 is probably desirable under the circumstances – is arguing that thereafter the exercise should be undertaken every eight to
FOREWORD | 9
10 years and involve not just the national government but state and territory jurisdictions, too. It needs to be said that energy policy by its nature cannot satisfy everyone all the time, so decisions have to be made and, once made, adhered to. As Tony Concannon, from International Power Australia (which produces about 11 per cent of all electricity delivered on the east coast), said in a speech last year: â€œIt all hinges on good policy and investor confidence being in place to encourage innovation, respect existing investments and allow the sector to compete for both global and domestic capital.â€?
Keith Orchison Editor
10 | OPENING PIECE
Ferguson’s way forward
The Hon Martin Ferguson AM, Federal Minister for Resources and Energy, Minister for Tourism.
Martin Ferguson is probably the most active Federal Resources and Energy Minister when it comes to talking to stakeholders about portfolio issues over the past 25 years. In speeches across the country and overseas, he has taken up the key energy issues of the day and sought to explain them in plain language against a backdrop of government policy to the widest possible audience. Drawing from these talks, this is an amalgam of some key points Ferguson has made over the past year: The government recognises that many companies face significant challenges in getting projects off the ground. Many are finding a generally risk-averse investment environment following on from the Global Financial Crisis. There is also private sector reluctance to invest in clean energy technology because it needs further refinement and greater efficiency before investors are confident of reaping sufficient returns. The result is that the industry is confronted with a ‘Catch 22’ situation. Companies are reluctant to invest in clean energy until it is technically and commercially proven, and yet it cannot be proven until investors are willing to take risks. All of which, Ferguson says, means that progress towards large-scale commercial demonstrations has proven slow, while the government seeks an ambitious level of investment in the clean energy sector in order to pursue its target for Australia to reduce greenhouse gas emissions to 80 per cent below 2000 levels by mid-century. The government’s aim through its policy program is to create a foundation on which clean energy investors can build. However, he says, the clean energy industry also needs to stand on its own two feet. New options for clean energy technology must continue to face market forces so that only commercially sustainable business models are developed.
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“There are two good reasons why we leave it to the market to determine the best technologies for Australia’s energy mix,” Ferguson says. “The first is that this approach will select which technologies are the most cost-effective, which is important for maintaining Australia’s economic competitiveness while minimising the cost of living pressures on households. “The second is because markets test how a technology operates in practice and then improves its utility through further research and development.” It is irrational, the Energy Minister adds, for governments to pick winners and to promote one technology over another, although it is willing to support demonstration projects to familiarise investors with new technologies. The government, he says, aims to support the transition to a lower emissions electricity generation sector through two market mechanisms – the renewable energy target and a price on carbon – and to support the research, development and commercialisation of emerging renewable technologies. Looking at the 2011 situation – in which only two generation projects, both wind farms, were completed – compared with 11 developments the previous year and 17 in 2009, Ferguson says investors were clearly showing that a lack of bipartisanship on climate policy was unacceptable to them. They demanded policy certainty from both sides of politics, he argued. “We need a mature approach from all serious political parties to ensure that sufficient projects in the pipeline are pulled through to commissioning to meet our energy requirements.” Late in 2011, Ferguson agreed on a set of priority issues with the state and territory energy ministers who sit with him on the Standing Council on Energy and Resources of the Council of Australian Governments.
For the electricity sector, these include three priority issues: to develop a nationally consistent approach to clean energy technology; to promote efficient investment in generation and networks; and to build on Australia’s resilience to energy supply shocks. “Effective governance, sound regulation, competitive markets, safe development, new investment, environmental sustainability and energy affordability – all these will benefit the community,” Ferguson says.
Federal Resources and Energy Minister Martin Ferguson and IEA executive director Maria van der Hoeven convene the 2011 Ministerial meeting in Paris amid high oil prices and political and economic uncertainty, leading the effort to find secure, sustainable solutions.
12 | CHAPTER 1
PURSUING A STRATEGY FOR POWER
How far the decade ahead will be make or break for the Australian electricity supply industry remains to be seen. It may be neither. We may reach 2020 with much of the production and delivery sectors more or less how they are in 2012 – enlarged but not unrecognisably changed. Both policymakers and industry members know that they have a large task ahead of them, and there is considerable uncertainty about how to achieve new outcomes. Views about what the outcomes should be differ considerably – still more so when the urging of the environmental movement is taken into account. In a blurb to promote an American webinar forum about electricity issues early in 2012, the organisers also described circumstances here: “Billions of dollars of investments must be made today – while government policies shaping those investments may be accelerated, revised or even reversed. This affects the building of generation and networks as well as hedging commodity risks. Which is the smarter course – moving early to comply with tighter restrictions many view as inevitable? Or waiting until forced to act by known new standards?” Locally, the Energy Networks Association (ENA) summed up the situation like this: “Electricity businesses around the world are facing a challenge: to supply increasing amounts of electricity while meeting community and government expectations for more reliable, environmentally sustainable and affordable energy supply.” Consultants ACIL Tasman, looking at energy security and the introduction of greenhouse gas emission pricing,
take the view that the scale of investment needed and the rapid shift in technology to be deployed – as well as the type of fuel that will be used in electricity supply – is unprecedented in Australia. “The closest parallel,” the consultants say, “might be the World War II era in which rapid electrification occurred across Australia. However, even the resources that went into that period of expansion cannot be truly compared to what is expected over the next decade. This is because of the speed at which it’s expected to take place and the deep reliance of the economy and individuals on the reliable supply of electrical energy.” At the centre of dealing with this unprecedented investment challenge for suppliers is a triangular relationship between themselves, the policymakers, their regulators and the consumers – both householders (and therefore voters) and large businesses. The relationship revolves around politics in two ways: partly the pursuit of greenhouse gas emission abatement and increasingly strong consumer resistance to sharply rising power prices. Historically, Australia has had stable electricity charges, and it still has some of the lowest retail prices (residential and industrial) among the membership of the Organisation for Economic Co-operation and Development (OECD) But this country, as consultants at Ernst & Young point out, has a very high use of energy relative to its international peers, especially in industry, and consumption is growing at a faster rate than in other OECD countries on a per dollar of GDP basis.
CHAPTER A | 13
14 | CHAPTER 1
Electricity prices have been increasing since 2007. The federal government says prices have increased 38 per cent between 2003–2004 and 2009–2010, but some regional rises have been faster and sharper than this. In Western Australia, they have gone up 57 per cent in three years after a whole decade of being frozen by the now-defeated State Labor Government. The Australian Energy Market Commission (AEMC) is projecting that east coast prices will increase by another 19 per cent between 2011–2012 and 2013–2014. And consultants Port Jackson Partners told the Powering Australia 2011 conference in Melbourne late last year that residential charges could double between 2011 and 2017, taking into account the federal government’s carbon pricing regime. An exacerbating factor, as is pointed out by the federal government’s national energy savings initiative working
group, is that, while electricity bills have traditionally increased by less than the growth of household income, the opposite is now the case. For many households today, expenditure on electricity falls between two and three per cent of disposable income. For those with low incomes and those experiencing financial stress (for example, people encumbered with mortgage pressures), this share can be much higher. Households account for about 28 per cent of national electricity consumption. The highest share is held by the industrial sector – including resource processing, manufacturing and construction businesses – which accounts for 37 per cent and is continuously striving to balance domestic input cost pressures with fierce competition for markets from overseas. While a substantial part of the price rises flows from increased network charges in the midst of a five-year
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While electricity bills have traditionally increased by less than the growth of household income, the opposite is now the case.
Far left: Households account for about 28 per cent of national electricity consumption. The highest share, however, is held by the industrial sector. Left: Smoke billows from a chimney stack at BlueScope Steel’s steelworks at Port Kembla, south of Sydney. The industrial sector accounts for 37 per cent of national electricity usage.
regulatory period (2009–2014) – where transmission and distribution businesses are authorised to spend more than $42 billion on capital outlays – the ENA points to other cost pressures. These cost pressures include government schemes to promote renewable generation, energy efficiency and carbon emissions reductions, along with the impact of general economic conditions pushing up suppliers’ fuel and wages bills. The Australian Energy Regulator (AER) is seeking AEMC approval for changes to the framework under which it determines east coast network capital and operational outlays. The AER argues that the present rules were introduced six years ago when governments realised that Australia was living off a legacy of past over-investment in energy infrastructure and need to stimulate development. Now, says AER, it is restricted from making “holistic assessments” of how much of current expenditure is efficient
or necessary and consumers are paying more than they need for safe and reliable supply. The AER stance, which has the support of the Australian Competition & Consumer Commission (ACCC) and lobby groups such as the Energy Users Alliance, representing the 100 biggest industrial consumers of power, is being fiercely resisted by the network organisations. The networks argue that, while there may be opportunities for fine-tuning the regulatory system, the case for major change has not been made. They say the current price shocks for consumers are the “cruel result” of poor past regulatory regimes resulting in under-investment for more than a decade. The networks also say that they are now having to catch up to deal with urgent replacement of aged assets, with soaring peak demand, with large increases in new connections and with state governments imposing more stringent reliability requirements.
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The two keys words that may decide how the supply industry looks in 2020 are ‘confidence’ and ‘certainty’. The federal government’s new national energy security assessment acknowledges that uncertainty about carbon policies has affected investor confidence and has resulted in delayed or sub-optimal investment in generation capacity in recent years. The assessment also notes that “some uncertainties and perceived risks remain concerning the orderly retirement and replacement of emissionsintensive generators”. It adds: “At least 10 to 15 years of forward clarity will be needed to develop new generation capacity and [for investors] to have confidence in future revenue streams for assets with a 40-year life.” While current modelling assumes that east coast wind capacity will need to increase substantially to meet the renewable energy target by 2020, depressed market demand in 2012 and weak wholesale prices suggest little conventional capacity will be built this decade other than open-cycle gas plants. This is an outlook supported by
assessments of the new Federal Bureau of Resources and Energy Economics (BREE) in a febrile environment. BREE’s review suggests that, if east coast gas prices rise over the decade, as many predict they will, national electricity production in 2019–2020 could be 288,000 GWh compared with 245,000 GWh in 2008–2009. It sees the output from black and brown coal plants hardly changed and gas-fired generation production much the same as well. The substantial difference, on this outlook, would be wind farm output increases nine-fold to 37,000 GWh. As the cliché asserts, time will tell.
A group of turbines at a large wind farm near Albany, Western Australia.
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Australian Coal Association
Coal is powering Australia, and the Australian coal industry makes a significant contribution to the national economy. This is not limited to its ranking as Australia’s second largest export earner, but also by fuelling our comparative advantage of low cost, reliable energy. Australia is the world’s largest coal exporter, worth $44 billion last year and estimated to be valued at $49 billion in 2011–2012. Coal-fired power has helped to underpin the competitiveness of Australia’s energy intensive industry, an employer of one million Australians. Today, coal provides 77 per cent of total energy generation in Australia. There is no other fuel – fossil or renewable – that can perform this vital competitive role in the power generation mix. Coal will continue to be the largest single source of Australia’s power for the foreseeable future. There is a healthy pipeline of coal mining projects for future
development, with $14 billion of investment already committed and nearly $40 billion under consideration. Another $10 billion has been committed for coal infrastructure projects such as ports, with a further $7 billion under consideration. The coal industry is proactively investing in solutions to reduce emissions from coal use, including the coal industry’s voluntary $1 billion Coal 21 fund, which is supporting the demonstration of low emissions technologies. Responsible development of our energy resources is providing enormous benefits in terms of wealth creation for Australia, and this will do so for generations to come.
The Australian Coal Association is focused on policy development and advocacy for the long-term future of an environmentally sustainable, safe, profitable and efficient coal mining industry.
www.australiancoal.com.au See page 94 for details
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