Lights off: Part II

This article follows on from Part I, which you can find here.

Causes of cost shocks

Although I don't agree with its arguments or conclusions, there is an interesting analysis of energy cost factors in a 2010 AGL Applied Economic & Policy Research Working Paper The Boomerang Paradox: how a nation’s wealth is creating fuel poverty - and how to defuse the cycle.

The authors note that the actual cost stack which makes up an electricity tariff includes power generation, transmission, distribution, retail and other regulated cost components such as metering, renewable energy and government taxes, and make observations on our present energy situation including:

• Australia’s great wealth of energy resources, which have historically been sold to energy utilities at a margin above extraction cost, are now being developed at such scale for export that if they link with global energy indices Australia may suffer a fuel cost shock.
• Power plant costs surged materially over the past decade, as did the cost of money after the financial year 2009 global financial meltdown.
• Network infrastructure is now expanding at record rates to keep pace with rapidly rising peak loads.
• Environmental demands of a comparatively wealthy developed economy have led to community demand for the tightening of performance standards which will cause a technology shift in power generation investments from low cost coal to lower CO2 emitting gas, and increased higher cost renewable capacity.
• The main contributions to the price shocks they envisaged come from the unit cost of gas, network charges and generation plant costs.
• Continuously rising household income and low cost power led to rising residential floor-space and vast increases in use of electric appliances including air conditioners. Peak demand has risen exponentially.

The official line: The Auditor-General’s Review and Reports

In 2008 then Premier Morris Iemma asked NSW Auditor-General Peter Achterstraat to review the privatisation plan after the opposition said it would oppose the sell-off unless that scrutiny was carried out.

The Auditor-General examined a model that would see the sale of electricity retailer Energy Australia by the end of that year, and included a proposed public share offering of a combined entity made up of Integral Energy and generator Eraring Energy in the second half of 2009. The other retailer, Country Energy, was to be sold off, while generators Delta Electricity and Macquarie Generation would be leased out under long-term agreements.

The Auditor-General recommended the NSW government set a reserve price before selling or leasing out its electricity retailers and power generators, saying that no transaction should proceed unless that reserve price was met. He also said the NSW government should look at selling individual retailers and leasing out its individual generators all at the one time, rather than sequentially as had been proposed. Did Roozendaal consider those recommendations?

A new report from the Auditor-General last year noted significant uncertainty about the value of the power-station sales because of the potential future introduction by the federal government of a carbon pollution reduction scheme (CPRS). The Auditor-General said, "I did note significant uncertainty that may affect the value of power-station assets due to the unknown impacts of any future carbon pollution reduction scheme and the government's proposed electricity industry reforms".

Roozendaal obviously didn’t worry about those concerns when he did the deal!

The official line: Roozendaal’s midnight special

Although in its death throes in December 2010, the NSW Labor Government pushed through its notorious late night sell off that prompted mass resignations from the boards of corporations involved and is now the subject of an Upper House inquiry.

TRU energy paid $2.035 billion for retailer Energy Australia, the right to trade the output generated by Delta West and access to three development sites (Mt Piper extension and two of the Marulan development sites).

Origin Energy bought smaller retailers Integral Energy and Country Energy and the electricity trading rights for Eraring Energy for $3.25 billion.

The next phase involves the output from Macquarie Generation and Delta’s Central Coast power stations being sold early this year.

Roozendaal conceded that although the sale is worth $5.3 billion the proceeds have to pay for the $2.3 billion Cobbora Coal Mine, which the private sector demanded so the sale would go ahead. It is designed to prop up the “currently state owned” power generators whose electricity trading rights were sold.

It was reported that

“…one of the big risks was the issue of liquidated damages payable by the companies if they failed to supply the required amount of electricity when it was demanded by the traders, sometimes with less than one day’s notice. By one estimate the damages could amount to $200 million over the life of the 30 year contract for a single generator.”

Does $6-7 million per year sound like much of a risk in the scheme of things, given the sums being bandied about?

So the end result of the fire sale seems to be that our assets have been sold at a price that may leave a paltry $3 billion to disappear into consolidated revenue, the State has lost a substantial source of recurrent revenue and the people of NSW have been left with public ownership of the ageing assets - existing power stations and electricity transmission and distribution networks (the poles and wires) that still need to be upgraded or replaced. According to Premier Keneally the NSW Government is investing more than $9 million every single day in maintaining and upgrading the state’s power supply, and over five years the NSW Government will spend $17.9 billion on electricity infrastructure to support our growing population and to secure the NSW power supply for the state’s families. Where’s that money going to come from now?

The official line: The coal mine

The NSW government last mined coal in NSW through its Powercoal entity in 2002. But an unincorporated joint venture between State owned Macquarie Generation, Delta Electricity and Eraring Energy recently bought up 25,753 hectares of land in the Cobbora and Lahey’s Creek area to launch mining at Cobbora for 21 years. It aims to produce 30 million tonnes of run on mine coal and 20 million tonnes of thermal coal a year to ensure the cost of coal for the state’s electricity generators is capped.

The mine site is to include a coal handling and preparation plant, ancillary infrastructure and a 25 km rail spur line connecting it to the existing rail network. Two water pipelines, 25 and 50 kilometres long, will link the site to the Cudgegong River and the Ulan Coal Mine respectively. An estimated 4 GL of water from multiple sources will be required by the mine each year, with negotiations under way to obtain high security water licences on the open market for some 1.5 GL of water.

In May 2009 the then Minister Ian MacDonald said that the Cobbora resource would deliver security of coal supply to the generators and affordable power for NSW homes and businesses. Yet in December Treasurer Roozendaal said it is not for the government to stay in that business, and once the business is developed the government will on sell it.

The mine was intended to supply state-owned power generators with coal at $35- $40 a tonne, well below the export market price of $60-$70 a tonne. In November last year The Australian reported that

“…sources close to the deal say that the State has promised 17 years of supply from Cobbora at prices of about $32 a tonne, rising to $35 a tonne when transportation costs are included. That compares with recent published estimates by Merrill Lynch of a spot export price of about $US95 a tonne, a long-term export price of $US74 a tonne, and a long-term domestic contract price close to $60 a tonne….”

Sounds like a good deal for the generators, or those who own their output!

The Nature Conservation Council has enlisted the support of the Environmental Defenders Office to look at potential breaches of the Trade Practices Act. Critics also say that by subsidising coal the NSW government is undermining a federal price on carbon, as well as distorting the national electricity market - through which more than $10bn is traded across the eastern states - because subsidised power from NSW could be exported interstate.

The Cobbora Coal Mine consortium acquired two high security licences totalling 2371 megalitres (almost 2.5 billion litres) from Warren, downstream from Burrendong Dam. Many residents naturally are extremely concerned about the environmental impacts of this mine. Although the Final Report has not yet been published the Preliminary Environmental Assessment justified their concerns by noting the high risk ratings for each of surface water, groundwater, ecology, heritage, air quality, and noise and vibration.

The official line: the future for energy consumers

The 2010 AGL “Boomerang Effect” Working Paper suggested that rising wealth is driving substantial increases in peak energy demand, which causes the power grid to require vast amounts of incremental generating and network capacity. Its authors considered it predictable that fuel poverty – a situation where the combined energy costs of a household exceed 10% of income – would emerge in Australia for the first time amongst low disposable income households.

Earlier this year the NSW Government extended rebates, and now one in three households in NSW are eligible for assistance with their energy bills.