Three four-letter words for O'Farrell

The biggest electricity-related challenges facing the new O'Farrell government in New South Wales fall into two categories: the politically difficult (the impact of ever-rising consumer prices) and the dangerous (the threat to security of supply if new baseload power is not built by mid-decade and/or existing generation falters under demand pressure).

Dealing with the power price issue is actually mostly beyond O'Farrell's grasp because the rises relate predominantly to higher network charges (overseen by a national regulator), a much lower impact of the renewable energy target (set by federal parliament) and the proposed carbon tax (for which he can and will blame Julia Gillard).

There is now broad agreement that, including the carbon charge, end-user prices in New South Wales by 2015 will be double what they were in 2008.

O'Farrell is promising help to residential consumers of $250 a year, but who will get it remains to be seen. Gillard is promising compensation for the carbon tax, but to what extent and who will get it remains to be seen.

The really difficult issue for O'Farrell in this area is whether he pushes on with the roll-out of so-called smart meters and then allows them to be used as designed to bring in time-of-use charges aimed at making a significant change in residential consumption patterns.

If this doesn't happen, the present trend of peak demand will continue unabated and the distribution businesses the government owns will be required to spend another billion dollars and more to augment the networks to deal with user needs for a few days a year.

The political problem with ToU tariffs is that they fall heavily on a substantial number of people who can't change their usage patterns. This raises more compensation issues for a state budget that is going to be seriously stretched to deliver on the Coalition's overall aims.

While consumers of all stripes are stroppy over price rises, they will go ballistic if there are issues with supply security mid-decade.

O'Farrell will have his hands full then trying to blame the problem – correctly – on past Labor governments four or five years after he shoved them from office. To him falls the job that the ALP has squibbed since 2007.

The problem falls into three parts.

There is a need to build at least 1,000 MW of new baseload capacity to cope with greater state demand and a lessening in interstate capacity as Victoria and Queensland supplies also tighten.

There is a big question mark over how the capacity will be fuelled.

And there is a danger that the existing coal-fired capacity, a large part of which will be old-aged technically speaking by mid-decade, will falter if required to deliver at a high rate to compensate for inadequate new supply.

If, like Labor in recent years, O'Farrell wants the new capacity built by the private sector, he must opt for gas as the fuel, with steps needed to bring on enough fuel and a question mark over its price.

If he goes for a coal-fired plant, which is the first choice put forward by Macquarie Generation and Delta Electricity, he will have to use a state-owned generation business to build it – no private investor is going to get finance support for it in the decarbonisation environment.

A complicating factor is whether, once the "gen-trader” judicial inquiry is completed later this year, the O'Farrell government actually wants to go on owning generation, given that the segments with output now sold to the private sector may have problems with their budgets.

Things are not helped by question marks over the new Cobbora coal mine, which Labor proposed be built and run by the three state-owned generators in a joint venture. It, too, will be under the judicial inquiry's scrutiny.

All of this supports the gag I use frequently in public speaking about the electricity industry: the big issues for power supply can be summed up in three four-letter words – time, risk and cost.

Labor has left them hanging over the new Coalition government in the power sector.