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Energy reform off the rails?

Following last week’s unprecedented energy crisis, Mark Beyer and Noel Dyson look at what went wrong and what can be done to fix the problems.

 

FOUR weeks ago, Western Power proudly announced that its generators had coped with record electricity demand.

The government utility said power demand hit a new all-time record of 2,756 megawatts, almost 1.5 per cent higher than the previous record

And early last week the utility announced that its generators had coped with yet another record.

Power demand peaked at 2,846MW shortly before 5pm last Monday.

Just 24 hours later, Western Power was starting to implode.

Power demand reached a new record last Tuesday, peaking at about 3,000MW, and the State-owned utility wasn’t coping.

Its fateful decision to impose power restrictions last Wednesday will be long remembered as bungling and inept.

The immediate impact was fairly clear – community anger, business losses, a damaged government, and the forced resignation of chairman Malcolm Macpherson and managing director Stephen van der Mye.

But the energy crisis, if anything, has muddied the debate about what really needs to change in Western Australia’s energy industry.

Every group with a stake in the energy industry has claimed the events support their point of view.

A few key facts might help to clarify the position.

Western Power’s total generating capacity in the South West interconnected system (SWIS) is 3,175MW.

Yet last week, generating capacity was down to about 2,800MW, partly because of units at Muja and Kwinana being out of action but mainly because Western Power could not get all of the gas it wanted.

Western Power was scheduled to take 131TJ of gas per day from Epic Energy’s Dampier to Bunbury pipeline, a fairly common mid-summer level.

Under an agreed peaking allowance, it was able to take a further 20 per cent for short periods.

In practice, it took delivery of 167TJ of gas on Monday and 148TJ on Tuesday, well above the agreed level.

At the peak on Monday it was taking gas at the rate of 260TJ a day, double the scheduled volume.

This was clearly unsustainable, despite the best efforts of Epic.

The restrictions on Wednesday held electricity demand to a manageable 2,350MW, allowing the system to recover.

A scary aspect of the energy crisis is that, despite all of the huffing and puffing from the Government, the same problem could arise again.

Last year, energy demand peaked in the month of March, so potentially we could have another peak next month.

While there has been little constructive action, there has been plenty of blame thrown around.

Opposition leader Colin Barnett thinks the core problem is the Government’s focus on breaking up Western Power, and specifically last year’s appointment of Dr van der Mye.

“The subsequent mismanagement of Western Power and the focus on breaking up the utility has resulted in an unprecedented and unnecessary power crisis,” Mr Barnett said

The coal companies, Griffin Energy and Wesfarmers’ Premier Coal, believe the crisis has exposed the State’s reliance on gas.

The Government has blamed Mr Barnett, who privatised the Dampier to Bunbury natural gas pipeline, and the pipeline’s current owner Epic Energy.

“The State is hostage to a privately-owned gas pipeline that needs to expand,” said Premier Geoff Gallop said. “The failure of the previous government to legally bind Epic Energy to expand the pipeline means we have to wait for a commercial solution to the problem.”

Epic has been calling for a commercial solution ever since the State Government’s Gas Access Regulator ruled that gas tariffs had to be kept below Epic’s preferred level.

With higher tariffs, Epic would be able to service its debt, courtesy of the unexpectedly high price it paid for the pipeline in 1998, and afford the estimated $300 million it would cost to expand capacity.

However, Epic accepts that is not going to happen and has put the pipeline up for sale.

“The Government’s desire is for a new, financially robust owner to emerge from the sale process and get on with the expansion,” Dr Gallop said.

It is understood three consortia have lodged bids for the pipeline.

The prospect of a successful sale have been helped by the three major ‘shippers’ – Western Power, Alinta and Alcoa – agreeing to negotiate new tariffs outside the regulated structure for gas supplies from 2005 onwards.

“We are in an advanced state of negotiations with Epic,” newly installed Western Power chairman Neil Hamilton said last week.

“It’s in the interests of everyone to have long-term contracts.”

Mr Hamilton said the sale process would also include bidders having direct discussions with the three major shippers.

In the meantime, the Government and Western Power are working on a number of emergency measures.

These include spending $7 million so the Kwinana power station can run on distillate and upgrading the Muja coal fired power station.

These measures are expected to deliver an additional 200MW of capacity next summer, though at a substantial financial cost given the high price of distillate compared to gas.

The Government is also pushing Western Power to introduce ‘demand management strategies’ with its major consumers, so it can cut energy use at peak times.

“That’s an area that Western Power hasn’t put a lot of effort into,” a spokesman for Energy Minister Eric Ripper said. “They need to do more on that front.”

The Kemerton Silica smelter is one customer with an ‘interruptible’ power supply, yet it kept running last week with its supply of 40MW.

Mr Barnett believes the focus should be on renegotiating gas transportation and supply contracts.

He also believes Western Power should be given greater financial capacity to proceed with maintenance and infrastructure upgrades.

Looking ahead, there is the critical question of expanding generating capacity.

The Government has already contracted Transfield to build, own and operate a 260MW peak-load power station at Kemerton, due to open in late 2005. In addition, Alinta and Alcoa have commenced work on a 140MW co-generation plant at Alcoa’s Pinjarra alumina refinery.

Epic has previously suggested Transfield and Alinta could run into supply problems unless $15 million was spent ‘debottlenecking’ the gas pipeline at Kwinana.

When asked about this, an Epic spokesman washed his hands of the issue.

“We don’t know where else the gas would be sourced from, but that’s up to Alinta and Transfield,” he said.

The next step in the power procurement process is a 300MW base-load power station, due to come on line in 2008. Western Power delayed this project because the prospect of market deregulation meant it was wary of locking-in a traditional 25-year power purchase contract.

The Government responded late last year by appointing its own working party to take over the power procurement process.

Overlaying the current crisis is the future of energy reform.

Energy Minister Eric Ripper might have to climb down from his reform wagon and accept Mr Barnett’s compromise proposal of a three-way split, with retail and generation staying together.

If not, the long-running energy reform process may come to nought.

 

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