Saturday 8/11/2008 Page: 1
AUSTRALIA'S $120 billion domestic power and gas industry will go into 2009 in what is being described as "an unprecedented period of complexity, change and uncertainty".The industry, the most critical element in Australia's 21st century economic supply chain, is grappling not only the fall-out from the global credit crunch but also a three pronged local challenge of surging consumption, ageing asset replacement needs and policy moves to reduce its greenhouse gas footprint from current levels.
The sector produces more than 35 per cent of Australia's greenhouse gases, but employs 49,000 people directly while providing a vital service to energy-hungry industrial plants employing more than a million more, an eighth of the national workforce.
Politically, delivering voters a soft landing while reshaping the national approach to emissions and sustaining economic growth in a time of global financial turmoil is the Rudd Government's toughest task some see it as ''mission impossible", while the Greens and environmental activists, who will be an important factor in the outcome of future national elections, argue simultaneously for an even stronger approach to burning and exporting coal.
The degree of difficulty in devising a viable carbon control policy is harder in Australia than the European Union, where governments are in year five of struggling to introduce an emissions trading scheme, because 92 per cent of electricity here is generated using brown and black coal versus only 30 per cent in the EU, a large user of nuclear energy.
Most of the domestic power and gas industry's capital is invested in electricity assets $100 billion worth and it would be facing significant stress even without the carbon problem or the aftermath of the international market meltdown.
The Australian Bureau of Agricultural Resource Economics has predicted that national demand for electricity, which has risen six-fold since 1965, will go up 90 per cent between now and 2030. This will require billions of dollars to be outlayed on extra supply infrastructure, not only for power stations, but also transmission systems and distribution networks.
However, Engineers Australia, the professional voice of the discipline, is warning that the country faces an additional problem: the ageing of generation plants. EA believes there has been substantial under-investment in generation capacity and Australia is now "reliant on relatively large, ageing plants".
It says: "From about 2013 the demand for electricity generation begins to exceed supply capacity, indicating the onset of an energy security problem unless significant additional capacity, over and above what is planned, comes on line." Engineers Australia points, in particular, to ongoing surges in peak demand and calls for federal, state and territory governments to recognise that households and businesses face the real cost of electricity supply. Energy Supply Association forecasts indicate that peak load requirements in NSW, the ACT, Victoria and Queensland home to 80 per cent of national power consumption will be a third higher in 2016 than in 2006.
Moreover the capital spending needed, and the flow-on of costs to electricity bills, does not stop at the power station gate: half the costs of supply are caught up in the web of pylons, poles, wires, sub-stations and transformers that carried electricity to consumers.
Supply cannot serve community needs without network reliability which is only as good as its weakest link and billions of dollars of assets have been, and will continue to be, built for use only in extreme weather when loads peak. Sydney-based energy economist Margaret Beardow, writing in Powering Australia yearbook, claims that as much as 70 per cent of Australia's existing distribution network may need to be replaced over the next 20 years.
Assets installed around 50 years ago are approaching the end of their lives, she says. This perspective is supported by Lew Owens, chief executive of the privatised ETSA Utilities, the South Australia power distributor. He is currently seeking regulatory approval to spend $1.5 billion over five years to refurbish and expand the SA network, and says much of the system was installed in the 1950s and 1960s.
Most network assets," he points out, "have design lives of 40 to 50 years, at the end of which they need to be either replaced or refurbished. The SA network has a significant amount of equipment that has lasted much longer than originally intended." The pressure for refurbishment and augmentation to meet large increases in demand is most marked in three widely-separated areas: South-west Western Australia, where the network service provider, Western Power, is spending $1 billion a year at present and is seeking regulatory approval for a $6 billion outlay over the next three years.
South-east Queensland, where the network company, Energex, says it is spending $3 million a day as part of a $3.5 billion five-year project to meet soaring demand as well as to replace ageing equipment.
The country's biggest power market the Newcastle-Sydney-Wollongong region, home to a third of total national consumption. The two NSW government-owned distribution businesses serving the region, EnergyAustralia and Integral Energy, and the state transmission corporation, TransGrid, are currently asking the Australian Energy Regulator to sanction their spending some $13 billion on replacing older assets and meeting new demand growth and this is just for the five years from 2009 to 2014.
Large as these outlays are, they are still less than the costs the electricity industry and eventually Australian consumers through tariffs will be called on to handle if the Rudd Government's climate change policies are pursued. Whether the new policies will be put on hold because of the massive impact on the domestic economy of the global financial crisis remains to be seen.
Meanwhile, both government-owned and investor-owned generators are wrestling with how to deal with the core element of the plan: driving them away from burning coal and to using natural gas or coal seam gas and renewable energy.
The electricity industry claims that just building conventional plant to meet growing demand will cost it about $13 billion in the next 10-12 years, while constructing low emission power stations to replace the older coal burners initially stranded by carbon charges could push this up to $33 billion.
A carbon charge big enough to deliver 5 or 10 per cent cut in actual Australian greenhouse gas emissions by 2020 as opposed to slowing their growth could require the closure of about quarter of the eastern seaboard's coal burners, the electricity industry claims. This, it argues, would require providing perhaps 6700MW of new, lower emitting generation, the equivalent of adding a new South Australia and Tasmania, in terms of capacity, to the supply system.
Meeting the Rudd Government's renewable energy target intended to deliver a fifth of the nation's electricity needs by 2020 will be expensive, too. Estimates of $27 billion to $35 billion are being put forward for investment in wind farms and other forms of renewable generation between now and 2020 to meet the target.
The key word that comes up now in every industry discussion is uncertainty. The range of questions for which there can be no clear answers at this stage is large and growing. They include: Will the Government actually go ahead with emissions trading? Trying to get banks to finance projects without clarity on this point would be close to impossible even without the terra incognita that is the post meltdown finance sector.
If carbon charges are introduced and they drive large-scale investment in gas generation at the same time that the eastern seaboard is being exposed to international gas prices as a result of coal seam methane exports, what will happen to domestic gas prices? Analysts' forecasts of the impact on eastern seaboard gas prices range from doubling to trebling.
What will happen to fuel prices for the remaining domestic black coal generators? Until the past two months, it was a given that these plants would have to meet far higher coal prices than they are paying under present long-term contracts, some about to expire, because of the sharp rises internationally in the past two years.
What will happen to the development costs of new projects, both renewable and conventional, in an environment where the Australia dollar's value is far below what is was a year ago? But, as with those steak knife adverts on television, wait there is more: Ross Garnaut, the Business Council and the electricity industry all agree that introduction of a large amount of renewable energy plant will require a big outlay on transmission networks. New technologies, Garnaut says in his final report, delivered at the end of September, will require the plants to be sited far from the existing grid and will need major changes in network links. Industry estimates set the price tag just from now to 2020 at about $4.5 billion.
Garnaut in his final report sees a need for government intervention in transmission planning and possibly subsidies for links to important remote renewable sources. A move like this would have a major impact on the national electricity market operations and would be greeted with howls of indignation from existing conventional generators, as well as being yet another adverse signal to capital lenders.
Achieving all these changes in an orderly fashion in just a dozen years presented power suppliers and government with a raft of social as well as development challenges before the financial crisis. Whether or not emissions trading goes ahead, new skilled workers will have to be found by the emerging renewables sector and by the networks businesses, who have almost as big a problem today with replacing ageing workers as they do with replacing with ageing equipment.
Meanwhile, the other vital social and economic service sector the water industry is going to be in the financial and skills marketplaces in competition with the domestic energy industry. The Water Services Association, in its new annual review, says the major urban utilities will need to outlay $30 billion in the next decade to replace old assets and meet new consumption needs presented by a bigger population and an expanding economy.
A critical factor for the Rudd Government will be the approach other regimes around the world adopt to embracing a replacement treaty for the Kyoto Protocol. The local politics are awkWard here, too the vital UN meeting in Copenhagen at the end of next year will impact on the scheduled 2010 federal election while the Kyoto agreement expires in 2013, when the subsequent election is due.
Already commentators around the world are saying that the replacement treaty is DOA dead on arrival because the developing nations and very probably a financially-devastated US will not be prepared to embrace any other major impacts on their economies. Rushing ahead with a carbon policy that succeeds only in disadvantaging the domestic economy because other nations won't follow this path could create an enormous backlash for Kevin Rudd.
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