The Enron effect
The 2001 California energy crisis that elevated Arnold Schwarzenegger to power contains sage lessons for local policymakers about to embark on a new era of regulation.
Say "California" in the context of energy to most Australian politicians and all they can think of is the Governator and the voter attraction of solar power. But there's an older, darker aspect they should also contemplate as they prepare to press forward with radical policy changes.
The 2000-01 energy crisis that wracked California – and eventually brought down Governor Gray Davis – is usually dismissed as "Enron's fault".
In fact, while feral traders and market manipulation by independent generators helped make a bad situation very much worse, the core problems were poor policymaking and inadequate regulatory management – mirroring the current global financial crisis.
California's crisis, which rocked one of the world's top eight regional economies, grew out of botched environmental policies, a failure to match generation capacity with demand and to resolve serious power transmission bottlenecks and the desire of politicians to avoid passing on the real costs of electricity deregulation to consumers.
In the 20 years to 2000 hardly any generation capacity was built in California and 80 per cent of the available capacity was more than 35 years old. It was incapable of being cranked up to meet a larger demand. When a drought undercut critical hydroelectric imports, and opened the gate to market gaming, the whole mess collapsed – and the price-capped retailer utilities ran up $US12 billion in losses in six months.
The heavy impact of the two-year crisis on the state budget, and clever politics by Arnold Schwarzenegger, undid Governor Davis, who rushed through authorisation of 14,000 MW of desperately-needed capacity before being forced out of office in 2003. But the legal suits over costly emergency-driven power contracts continue to roll on through the US court system. Some are before the Supreme Court, seven years after the blackouts ended. Californian consumers, of course, continue to pay high power bills.
All of which, in an Australian context, should serve to remind policymakers that if you set a system in place which is bound to drive up energy prices to achieve your environmental purposes, and try to hide this impact from voting consumers, you are running a big economic risk and gambling with your own political future.
Like the US, Australia doesn't actually have a "national" power system. South-west Western Australia and the Northern Territory are islanded and the "national" market on the eastern seaboard breaks down into South Australia and Victoria, Victoria and Tasmania, Victoria, the Snowy Scheme, the ACT and New South Wales, and, under load stress, NSW and Queensland.
Books could be written on the complexity of all this and on the local issues various regions are now facing because of market and environmental policy change. Some of it rarely reaches the public eye. Who knows, for example, what is going on between John Brumby in Victoria and Kevin Rudd over whether, as claimed by generators, the emissions trading scheme will wreck the Latrobe Valley's brown coal power supply and the state's manufacturing base?
Where the Californian experience – the real as opposed to the mythical – could have particular resonance is in New South Wales and Queensland.
These two states already account for more than half of Australia's electricity consumption. This decade Queensland has overtaken Victoria as a power user and, on some modelling, could overtake NSW in 10-12 years.
There are a raft of potential problems confronting the two states over the next decade on the electricity supply front. The impact of drought and of emissions trading on black coal generation, the shambolic condition of generation planning in NSW, a lack of adequate interconnection, the need for massive infrastructure investment in networks to meet demand growth and deal with the deterioration of aged systems, a likely surge in the cost of gas under the twin pressures of new generation demand and exports of liquefied coal seam methane, the impact of renewable targets on prices and the perils of retail price capping.
The big underlying issue is demand. Both the NSW and Queensland governments, who still own most generation and all network systems plus a large part of power retailing in NSW, are seeing a surge in consumption, not only because of business growth and increasing population, but also because commercial and household power use is expanding. In the new issue of Powering Australia yearbook, ENERGEX's chief executive points out that average residential electricity use in Brisbane and the Gold Coast has grown in a decade from about 7,000 kilowatt hours a year towards 12,000 kWh.
This places a strain on baseload capacity, on peak generation, on transmission systems and on suburban distribution networks. The electricity industry is predicting that NSW peak load, which was 13,300 MW two years ago and hit 14,300 MW this winter, will be beyond 17,000 MW by 2016. It sees Queensland peak demand rising from 8,600 MW two summers ago to nearly 13,000 MW in the next eight years.
Trying to pick the actual levels of total future demand in these states is not quite secret engineers' business but it requires some complex maths. Low economic growth in NSW matched by high growth in Queensland could see the latter emerge as the largest consuming region by 2020, a challenging planning scenario even if federal policymakers were not about to make radical market changes through environmental policy.
Ross Garnaut chose to use California in his final report to talk up what can be achieved in energy efficiency. The "golden state," where unemployment is currently pushing eight per cent and a sixth of the population lives on or below the poverty line, can also be used to demonstrate the supply dangers in bad resource planning and poor regulation. California's industrial power tariffs are 50 to 100 per cent higher than those of the big US manufacturing states.
Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.
The 2000-01 energy crisis that wracked California – and eventually brought down Governor Gray Davis – is usually dismissed as "Enron's fault".
In fact, while feral traders and market manipulation by independent generators helped make a bad situation very much worse, the core problems were poor policymaking and inadequate regulatory management – mirroring the current global financial crisis.
California's crisis, which rocked one of the world's top eight regional economies, grew out of botched environmental policies, a failure to match generation capacity with demand and to resolve serious power transmission bottlenecks and the desire of politicians to avoid passing on the real costs of electricity deregulation to consumers.
In the 20 years to 2000 hardly any generation capacity was built in California and 80 per cent of the available capacity was more than 35 years old. It was incapable of being cranked up to meet a larger demand. When a drought undercut critical hydroelectric imports, and opened the gate to market gaming, the whole mess collapsed – and the price-capped retailer utilities ran up $US12 billion in losses in six months.
The heavy impact of the two-year crisis on the state budget, and clever politics by Arnold Schwarzenegger, undid Governor Davis, who rushed through authorisation of 14,000 MW of desperately-needed capacity before being forced out of office in 2003. But the legal suits over costly emergency-driven power contracts continue to roll on through the US court system. Some are before the Supreme Court, seven years after the blackouts ended. Californian consumers, of course, continue to pay high power bills.
All of which, in an Australian context, should serve to remind policymakers that if you set a system in place which is bound to drive up energy prices to achieve your environmental purposes, and try to hide this impact from voting consumers, you are running a big economic risk and gambling with your own political future.
Like the US, Australia doesn't actually have a "national" power system. South-west Western Australia and the Northern Territory are islanded and the "national" market on the eastern seaboard breaks down into South Australia and Victoria, Victoria and Tasmania, Victoria, the Snowy Scheme, the ACT and New South Wales, and, under load stress, NSW and Queensland.
Books could be written on the complexity of all this and on the local issues various regions are now facing because of market and environmental policy change. Some of it rarely reaches the public eye. Who knows, for example, what is going on between John Brumby in Victoria and Kevin Rudd over whether, as claimed by generators, the emissions trading scheme will wreck the Latrobe Valley's brown coal power supply and the state's manufacturing base?
Where the Californian experience – the real as opposed to the mythical – could have particular resonance is in New South Wales and Queensland.
These two states already account for more than half of Australia's electricity consumption. This decade Queensland has overtaken Victoria as a power user and, on some modelling, could overtake NSW in 10-12 years.
There are a raft of potential problems confronting the two states over the next decade on the electricity supply front. The impact of drought and of emissions trading on black coal generation, the shambolic condition of generation planning in NSW, a lack of adequate interconnection, the need for massive infrastructure investment in networks to meet demand growth and deal with the deterioration of aged systems, a likely surge in the cost of gas under the twin pressures of new generation demand and exports of liquefied coal seam methane, the impact of renewable targets on prices and the perils of retail price capping.
The big underlying issue is demand. Both the NSW and Queensland governments, who still own most generation and all network systems plus a large part of power retailing in NSW, are seeing a surge in consumption, not only because of business growth and increasing population, but also because commercial and household power use is expanding. In the new issue of Powering Australia yearbook, ENERGEX's chief executive points out that average residential electricity use in Brisbane and the Gold Coast has grown in a decade from about 7,000 kilowatt hours a year towards 12,000 kWh.
This places a strain on baseload capacity, on peak generation, on transmission systems and on suburban distribution networks. The electricity industry is predicting that NSW peak load, which was 13,300 MW two years ago and hit 14,300 MW this winter, will be beyond 17,000 MW by 2016. It sees Queensland peak demand rising from 8,600 MW two summers ago to nearly 13,000 MW in the next eight years.
Trying to pick the actual levels of total future demand in these states is not quite secret engineers' business but it requires some complex maths. Low economic growth in NSW matched by high growth in Queensland could see the latter emerge as the largest consuming region by 2020, a challenging planning scenario even if federal policymakers were not about to make radical market changes through environmental policy.
Ross Garnaut chose to use California in his final report to talk up what can be achieved in energy efficiency. The "golden state," where unemployment is currently pushing eight per cent and a sixth of the population lives on or below the poverty line, can also be used to demonstrate the supply dangers in bad resource planning and poor regulation. California's industrial power tariffs are 50 to 100 per cent higher than those of the big US manufacturing states.
Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.
Share this article and show your support
Call 1300 880 160
Start a chat
Schedule a call
