Winds of climate change blow in many directions

Australian
Monday 27/8/2007 Page: 36

For six years there has been much prevarication in NSW on the future supply of electricity. ON Friday the NSW Government is expected to receive Professor Tony Owen's report on the future of electricity supply in the state. How quickly the report is made public and what the Government does with it will be critical indicators of the direction of energy and climate change politics in Australia.

Underpinned by a suite of state-owned coal-fired power stations, NSW enjoys some of the cheapest electricity in the world. Both the Carr and lemma governments have been prevaricating since 2001 on the future of electricity supply in the state. Back then, the Ministry of Energy and Utilities issued its Statement of System Opportunities, which dealt with most of the same questions put to Professor Owen. And in six years of indecision, the state's capacity surplus has been eaten up by growing demand on the back of continued economic growth.

As the National Generators Forum flagged last week, the removal of this buffer in the national electricity market has increased price volatility and amplified exposure of generators to short-term events such as water shortages in a drought. Solid rains have brought wholesale prices almost back to normal after they skyrocketed in June, but the warning is clear: the good times of stable, cheap electricity prices are over.

Former premier Bob Carr came very close to announcing a ban on new coal-fired power at the ALP's 2005 state conference. Morris lemma is more equivocal, but the politics and economics only get harder over time. In a speech this month, he said the Government faced the choice between new coal or gas base-load investment to avoid future supply shortages.

New coal-fired power will keep a lid on prices but could seriously undermine Labor's image as being more trusted to deal with climate change. Backing gas will push up wholesale prices by almost 30 per cent, well in advance of any future price on greenhouse emissions, make business hostile and send them looking elsewhere. Results from government-owned generators Delta and Macquarie Generation, via Professor Owen, have told Mr lemma to stop being a wimp and build a new coal-fired power station. They argue new coal will be more efficient and cheap enough to cope with a price on emissions. New coal generation can also be air-cooled, reducing its exposure to water shortages but also reducing its efficiency.

Gas will be better placed to handle a rising price on greenhouse emissions because it generates them at about half the rate of coal, but as base-load it will significantly drive up the dispatch price for all electricity. With the imminent decline of the Moomba gas fields, there are questions about supply that may be allayed by exploiting coal seam methane reserves in Queensland, linked by a $140 million pipeline being built by AGL and Epic Energy. Mr lemma said the choice between coal and gas would depend on a future price of greenhouse emissions, which would be determined by the scale of short-term emissions targets to 2020, set in a national emissions-trading scheme.

Although Mr lemma took a swipe at the federal Government for failing to set these targets, he knows a Labor government has promised the same process and timetable. The spin of climate change becomes more brazen every day. Base-load power may be the star of the Owen Review, but NSW Treasurer Michael Costa will not be surprised to discover the review has triggered heated debate about market privatisation and deregulation. The energy industry and its customers have vented more than a little spleen over the unworkability of existing constraints on electricity markets across Australia.

Retail prices are still fixed by governments, and governments still own almost all generating capacity in NSW and Queensland, and much of it in Western Australia. Already one small electricity retailer has hit the wall, squeezed between hot wholesale and fixed retail prices. At one stage, government-owned retailer EnergyAustralia was losing $10 million a week. Hedging should minimise the problem, but the industry believes the risks are unnecessary and act as a disincentive to new entrants in the retail sector and new private investment in generation.

The introduction and gradual increase of a price on greenhouse emissions will make life tough for renewable generators early on, and tough for coal later. The lowest risk and lowest cost solution is to allow energy companies to manage the transition by owning a portfolio of generation assets (some coal, some gas, some renewables) and adjusting its investment over time

Although untenable on principle to the unions, this would mean selling remaining government-owned power utilities and allowing the market to do what it does best: sort out the detail. This would serve also to reduce unhelpful and increasingly devious policy competition between energy sectors, and accelerate the eventual clean-out of different renewable-energy targets and other schemes that have flourished in the political vacuum of a national strategy on energy and climate change.