Energy, the news business risk

01 Aug 2008Archived News Energetics in the News

Published: WME magazine by Richard Collins - Energetics is quoted about costs for energy prices.


Emissions trading arrived in July with the twin bangs of the Garnaut Report and the green paper on the scheme design. But that’s only part of the picture when it comes to energy reform and pricing, reports Richard Collins.

Low-costs energy has long been a key contributor to Australia’s economic competitiveness, so it’s no surprise the concept of pricing in the environmental costs of energy has been controversial, to say the least. The newsprint and airtime devoted to the proposed emissions trading scheme during the past six weeks would take a small forest to offset.

In reality, however, energy prices have already made a step change.

“Without doubt, the market has dramatically changed in 2007 and ultimately all customers will be affected,” says a new report commissioned by the Energy Users Association of Australia (EUAA).

“Customers are advised to recognize that the forward market price and volatility has significantly changed and, consequently, previous purchasing methods are unlikely to be sufficient in the future.”

That case is made in two reports released in July, the EUAA report analyzing the causes of last year’s energy price spike and another projecting forward to life under an emissions trading scheme that suggests permit prices could quickly move to $55 a tonne of CO2e emitted.

First, the reflection. Energy prices last year soared well above their long-run average of $25-40/MWh, with companies caught renegotiating contracts at the time being quoted prices up to twice their existing rate. While prices have eased slightly, there is no prospect of a return to historic levels.

The findings are contained in the report by Creative Energy Solutions (CES), an independent analyst commissioned by the EUAA because, in the words of EUAA chief Roman Domanski, they were “not satisfied with the official explanation that ‘the drought’ was the cause of these problems and the response that government can’t do anything about this”.

CES found the drought was a major factor, with power stations unable to access cooling water – Queensland’s Tarong plant was forced to operate at 60 per cent capacity – and hydro stations revaluing their product due to record low dam levels. But it also found a raft of policy and energy market failures ratcheted up the stress, including a lack of rational water policy and planning, and opportunistic bidding by some generators not affected by drought and market power. Combined, they amplified the price pressure.

“The energy market in Australia has more risk as the market tightens and consequential impacts are greater.

Customers are encouraged to recognize that electricity is a commodity and ought to be treated as a business risk and not just a procurement activity,” says CES.

One trend reported by consultant Energetics is the uptake by end users of a total cost management approach to forward hedging to avoid sudden price changes. Many are also re-examining their energy, carbon and water efficiency opportunities in the short and long term, finding in the process the price volatility is helping justify new energy efficiency projects.

Prices spike, behaviour stagnates

The politics and positions of emissions trading are writ large in the public debate at the moment, but the real impacts cannot be determined until the government sets a 2020 emissions reduction target.

Treasury modeling due in October will also shed more light, but consultant ACIL Tasman has done its own modeling based on 10 per cent and 20 per cent cuts on 2000 emissions levels, backed up by the promised 20 per cent Mandatory Renewable Energy Target (MRET).

The modeling, which it undertook for the Energy Supply Association of Australia (ESAA), suggests carbon prices would need to start at $20/tonne of CO2e and increase rapidly to $45 and $55 under the respective targets. Electricity prices may rise 24-28 per cent in real terms, compared to business as usual.

Despite the price spike, some are concerned the carbon price signal will remain too weak to drive significant change in user behaviour outside the covered industries. Leading energy efficiency expert Professor Alan Pears is one such sceptic.

“Emissions trading is likely to have a relatively small impact on the level of emissions (both direct and indirect) from the non-ETS sectors, as the flow-on behaviour,” he wrote in his submission to the Garnaut review.

“Even in the ETS sectors, there are many uncertainties as to the extent of ETs impact on behaviour and decision-making. The ET signal will have to ‘compete’ with many other powerful market forces.”

New research into the property market provides an insight into the flow-on effect for sectors that are not covered in the trading scheme. International property consultancy Davis Langdon found a doubling of energy costs would only increase gross leasing costs by three per cent on average, hardly likely to drive upgrades to existing buildings.

Both Pears and Davis Langdon MD Mark Beattie have called for complementary measures to the trading regime, including investment in energy efficiency R&D and “green accelerated depreciation” for efficient plant.

Wind power ready to blow

While the energy user picture is murky, there’s little doubt about the impact on the generation mix. ACIL Tasman says the ETS will reduce volume and net revenue for incumbent fossil fuel generators by 40-95 per cent, with the bulk of coal-fired plants in Victoria and South Australia forced to close down.

“To replace stranded plant, satisfy the MRET and meet load growth, 15,000 and 17,600 megawatts (MW) of new capacity was required to achieve the 10 per cent and 20 per cent emission target cuts respectively,” said its report. “This equates to approximately one-third of Australia’s current generation capacity.”

It will require investment of $33-36 billion in new generation capacity over the next 12 years, well above the $13 billion projected under business as usual.

Interestingly, ACIL Tasman finds the MRET is essential to success as the ETS alone is not likely to cut deep enough into emissions. The 20 per cent renewables target alone will drive $23 billion of the projected spend.

Internal modeling recently released by AGL shows emissions trading by itself gives preference to gas, which is generally cheaper than wind and has less than half the emissions of most coal-fired generation. Add the MRET, though, and about half the new gas will switch to renewables, with wind first cab off the rank.

Jo Hume of CVC Sustainable Investments says wind power is regarded as a very low technology risk and projects are relatively easy to debt fund.

“The ‘peaky’ nature of wind generation can be very effectively balanced with peaking gas plants that can be ramped up and down very quickly,” she says.

Origin Energy’s Carl McCarnish said the ETS “presented very real economic opportunities for many businesses and for new Australian jobs”, and echoed the ESAA in calling for a “planned and nationally coordinated approach to investment in transmission networks in order to ensure an orderly transition to a lower-carbon energy system in Australia”.

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