No shortage of energy vexations

A new NSW government inquiry into the state's electricity needs coincides with a drought in investment, aggravated by policy and market uncertainty as well as financing difficulties.

In a surprise move, the O’Farrell government has launched a parliamentary inquiry into generation needs in New South Wales.

The NSW Parliament Public Accounts Committee has been tasked with inquiring into "the comparative economics of energy generation".

The PAC chairman, Sydney north shore Liberal MP Jonathan O’Dea, says the committee will examine the current mix of power sources in NSW, make comparisons with other jurisdictions and investigate "the possibility of sourcing energy interstate.”

The PAC terms of reference include a requirement to look at the potential for, and barriers to, development of alternative forms of generation, including tidal and geothermal power.

The committee has set a closing date of February 10 for submissions and plans to hold public hearings later in 2012.

Barry O’Farrell has already announced that his government intends to sell its generation assets and the PAC hearings will provide opponents with an additional opportunity to let off steam.

In line to be sold is Australia’s largest power producer, Macquarie Generation, plus what is left of the operations of Delta Electricity and Eraring Energy after the Keneally government’s controversial 'gen-trader' sales late in 2010.

It is unclear whether O’Farrell is also looking at the sale of Snowy Hydro, which the NSW government owns in a joint venture with the Victorian and federal governments.

At the time the Keneally government fell, Macquarie Generation was seeking regulatory approval to construct a 2,000MW power station at its Bayswater site in the NSW Hunter Valley – building either five 400MW combined-cycle gas plants or two 1,000MW ultra-supercrictical coal plants.

Consultants AECOM, who undertook the environmental approval study for MacGen, said in September 2009 that it was expected NSW generation output would need to rise from 80,430 gigawatt hours a year at the time to 92,000 GWh by 2015-16.

Without new baseload power, AECOM said, the existing state-owned generators would have to sustain a 17 per cent increase in output. "Given that the oldest of these plants will be 45 years old by then, this has implications for maintaining supply reliability,” they warned.

While the urgency of resolving a generation strategy for NSW has been a bit lessened by a small demand slump in the past two years, courtesy of the global financial crisis, it has not gone away – a point underlined by a study for the Australian Energy Market Commission by Ernst & Young, published late in December.

The AEMC is conducting an inquiry in to demand-side power options for the east coast market.

Looking at NSW, Ernst & Young say the state’s peak demand needs, now 14,595MW, if current trends continue, will exceed 16,000MW by 2020 and reach 20,380MW by the end of the ‘twenties.

This is broadly in line with the forecast of 2019-20 load by the Energy Supply Association in its annual yearbook..

ESAA predicts NSW will need system energy of almost 18,000MW to meet peak load at the end of the decade, a level that is expected to be a bit reduced when the next load forecast appears in mid-2012 because of the GFC-related decline.

While network capital outlays and the resulting end-user charges have been the big driver of consumer price rises over the past four years, a December AEMC report to the federal and state governments on the outlook for national power bills points out that 38 per cent of the projected rise in NSW tariffs between now and 2013-14 will come from wholesale energy costs, partly because of the federal carbon price and partly from an expected increase in gas-fired generation in the state.

Uncertainty over policy and market trends exacerbated by problems in obtaining finance for new projects has seen a drought in generation investment in the past year.

Only two projects were completed nationally in the year to October 2011, according to the federal Bureau of Resources & Energy Economics, compared with 11 in 2010 and 17 in 2009.

The only NSW project completed in the past year was a 47MW wind farm at Gunning near the ACT.

The only state projects BREE lists as "advanced” at present are the 240MW extension to the Eraring coal-burning units – and the business is pre-occupied at present dealing with the aftermath of a major fire – plus a little 29MW coal seam gas plant near Narrabri.

Waiting in the wings are proposals to build large gas plants by AGL Energy (500MW, the first of three stages of the Dalton project near Goulburn), Origin Energy (the 1,000MW Kerrawary project near Goulburn), TRUenergy (three stages of the Marulan project near the Hume Highway, 950MW, plus the 500MW second stage of Tallawarra power station at Wollongong) and ERM Power (a 660MW project near Dubbo).

The problem is that these are almost all open-cycle (peaking) plants and their output is much more costly than baseload production.

These projects are a reasonable guarantee that the lights are not going to go out in NSW as demand grows, but the cost of securing supply is another matter.

Rather more up in the air as a result of the hard line the O’Farrell government is taking on planning approval are 28 wind farms with a total capacity 3,543MW.

These projects were already confronted by the financing problems created by the federal RET certificate glut (a product of ill-conceived support for solar power) and tough rules about avoiding turbine impacts on rural communities may be a hurdle too far for many of them in the next few years.

There certainly will be no short of topics for O’Dea and his Public Accounts Committee colleagues to debate.

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