That sinking feeling still mires Pacific

Australian
Monday 3/12/2007 Page: 36

This week at the UN climate change negotiations at Bali, the tiny nations oft he Pacific will once again be paraded as the global poster boys of climate change campaigners. The emotional appeal is obvious: the first innocent victims of a warming climate as their low-lying islands lace the threat of eventual inundation from rising sea levels. But a far more immediate threat comes not from the burning of fossil fuels, but the cost of them. Oil prices have tripled in four years and if they stay above $US100 a barrel might produce Pacific economic refugees long before they are under water.

A recent UN report confirmed that these Pacific countries were among the world's most vulnerable to high oil prices. As small economies, they have weak negotiating power with suppliers, pay high transport costs, have limited indigenous alternative energy sources and no capital. While Australian motorists might complain each time they stop to refuel, their electricity is currently fuelled by some of the world's cheapest coal and gas. Water shortages caused a temporary price spike and there are more forecast, but most local energy is relatively immune to global oil prices.

While most of the Pacific states augment their electricity supplies with hydro power, around half of their total electricity comes from an ageing fleet of diesel generators. They were cheap to install but with the cost of diesel fuel doubling this year, they have become an increasingly unaffordable burden on economies already struggling with high levels of debt, political unrest, low foreign reserves and marginal balances of payments.

A conference of South Pacific energy companies last week reported that fuel now accounted for 70 per cent of their operating costs. They are under intense pressure. The cost of electricity varies across the region, but can be around three to four times that paid in Australia. Retail prices are still highly regulated. The cost of imports to exports has doubled in the past few years. Fiji's big non-tourism income earners such as sugar, gold and textiles are barely covering the rising national fuel bill.

The next tanker of fuel is scheduled to arrive tomorrow on the island of Saipan, the biggest of the Marianas chain. The local government-owned energy utility, the Commonwealth Utilities Corporation (CUC), is reportedly still scratching around trying to raise the $2.5 million needed to pay for it. In scenes reminiscent of EnergyAustralia's $10 million-a-week losses during, the wholesale electricity spike earlier this year, the local administration had already lowered the retail price of electricity below what it costs to generate it.

Typically the solutions are difficult and uncertain. The host of small public and private utilities think they can improve the efficiency of their networks by about 7 percent if' they can find the capital to invest in upgrading ageing distribution systems. They are also trying, to hand together to establish joint procurement of fuel to give them greater negotiating power with the major oil companies. It sounds easy, but it is complicated by the colossal regional geography and the different types of fuel used on tittering islands.

Suppliers such as Mobil and Exxon are aware of the strategy and have been signing up utilities on longterm contracts to protect their market power. If the joint procurement can get off the ground, here are moves afoot to try and hedge against price volatility. Macquarie Bank is about to start a 12-month simulation to test whether and how a collective hedge might help control costs. Ultimately, the solution lies in finding new sources of energy. Hydro is prevalent, but as in Australia most of the best locations have been exploited, as has energy from bagasse, the sugar by-product.

Fiji's first wind farm opened in October at a cost of around $25 million, saving about $2 million of diesel a year. That's still a long payback. None of the islands is far enough south to exploit the impressive wind assets at or beyond a latitude of 40 degrees, and no, cyclones don't count. The capital costs for renewables are still prohibitively expensive in economies where 70 percent of the population still don't have electricity. Most new investment comes from aid. The European Union has just put €11.3 million ($18.7 million) into solar homes across some remote islands in seven countries.

Two lights and a power point do wonders for the health and education of the occupants, but they don't provide the scale needed to help develop their economies and encourage value-adding that will lift them out of poverty. They have limited options but are under-utilising many of' those that they, to have. The Pacific islands control 60 percent of the world's tuna harvest but most of the licences are sold off to Japanese, Taiwanese and other foreign fishermen because the islands have not been able to develop domestic fish processing industries at scale.

The islands have a long list of failed canneries, resulting from poor management and planning those that survive are under constant pressure to remain competitive, and as the biggest energy users in the market, skyrocketing energy prices don't help matters.