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Power games

WORD has it that some months ago, a high-powered team of executives from Western Power was invited to the WA Chamber of Commerce and Industry to explain their view of the world of energy.

But far from resolving the vast differences in the two organis-ations’ opinions about the reform of WA’s energy market, it is understood that meeting did not go well.

Amid growing concerns about how WA’s medium-term power needs will be met and a behind-the-scenes lobbying battle, these two key players remain at loggerheads.

That much is made patently clear by papers delivered at the recent Energy in WA 2001 Conference by Western Power managing director David Eiszele and CCI chief executive Lyndon Rowe.

If there was a simple explanation of their positions, then it would be this: CCI wants Western Power’s virtual mono-poly over generation and distri-bution broken up along with the introduction of full contestability at all levels as soon as possible, freeing the market to allow reform to take place.

CCI’s position on this is largely backed by the State Government, owner of Western Power, but the issue has been put in the hands of Electricity Reform Task Force which could take some time to provide its recommendations.

Against this, Western Power questions whether WA’s market is big enough to handle full competition. But, should reform take place, it argues that the market should be reformed before any of the players.

It particularly wants time to restructure a number of critical elements, such as fuel contracts, to create a better environment for competition to thrive.

Some with connections to Western Power believe dereg-ulation embarked upon too rapidly could see the State lose the most lucrative part of the market too cheaply while being left with the expensive rump.

But both sides of the argument agree that the development of a workable model is vital, otherwise WA could face some of the energy dramas witnessed in the devel-oped world in recent years.

Western Power estimates 200-250MW (present capacity is around 3150MW) of new capacity is needed by around 2005, (others suggest as much as 900MW could be needed by 2007) depending on a lot of factors, including the depth of the current global downturn.

With power stations taking as much as three years to build, that doesn’t leave much time for key decisions to be made.

Some of those horror stories from other markets include the shut down of power to Auckland, the supply crisis in California, brownouts on the east coast and the catastrophic explosion at Longford in Victoria.

All of these examples have highlighted flaws in the system of deregulation adopted by the areas concerned.

But they also highlight the pressing fact that few energy markets in the developed world remain in the hands of a Government-owned organisation such as Western Power.

“Western Power is a dinosaur,” comments one executive from the gas industry.

“It is a good example of a utility that is out of step with the rest of Australia.”

Western Power is the first to admit that reform is needed, though insiders believe the current level of deregulation, which opens 50 per cent of its market by value to competition within a year, is enough for WA to bear in the near term.

Mr Eiszele told the recent conference that Western Power “… acknowledge(s) the need for changes in the market” but that a vertically integrated model would be a safe, low cost and reliable option for the “short to medium term”.

But the government-owned corporation believes that someone has to steward the State through what will be a major process that will create pain in some sectors, possible acute pain if handled badly.

Western Power believes it is well placed to do this but needs time to shrug off some of the legacies of past Government decision-making which, in part at least, provide some fodder for those that wish to call it a dinosaur.

Two historical events have shaped the current Western Power more than anything.

One was the 20-year take or pay arrangements entered into by the State Government to underwrite the development of the North West Shelf and our southern coal fields.

WA’s energy utility, then SECWA, was contracted to take these fuels through to 2006 in some cases.

Secondly, the decision to split SECWA and privatise the smaller gas side of the business as AlintaGas was made in 1995.

AlintaGas was floated last year but Western Power insiders claim they were left with much of the baggage, particularly debt, which would not be worn by a public company. These insiders argue that such legacies leave Western Power ill-equipped to handle full competition when stand-alone generators simply want to cherry pick the best bits of the market.

They claim they are not concerned about the value of Western Power, they say, but rather the consequences of the rapid unravelling of cross-subsidies which see regional users, for example, pay a fraction of the real cost of energy.

“We have provided the foundation for other economic development to take place,” a senior Western Power source told Business News.

“We have been trying to make an orderly transition.”

“When deregulation comes we will need to be in a balanced situation, that point of balance is around the middle of this decade.”

It is understood Western Power is currently renegotiating several supply agreements.

It is also building a new gas-fired power plant at Kwinana in order to shift the power generation equation away from a 70 per cent reliance on coal.

This is a good place to try to explain the complexity of the electricity market.

Essentially there are three stages of electricity demand. The constant base load which currently represents about 1000MW in WA. It is needed day and night to run big industry and other constant power demands. On top of this demand is the electricity required to power daytime demand, such as offices and more 9-5 industry. It is about 70 per cent of baseload.

Finally, there is peak demand, which surges for a few hours in the day at the morning and the evening as the crossover between work and home takes places.

All up, this total demand is currently between 2250 MW and 2500MW.

The problem is, as a market, a State like WA must have capacity to meet peak demand, even though more than half of this capacity will only used for short bursts in the day.

There are a lot of other complicating factors but, essentially, the part of the market everyone wants is the baseload with some of the best retail contracts as cream on the cake.

Some inside Western Power believe the rapid deregulation will leave many users to fend for themselves without the cross-subsidies and forward planning which has been the hallmark of the current regualted system.

“CCI want more competition but what we want is lowest prices. We believe it is long-term sustainable lower prices which industry and customers want, not just a blip in the market for one year and then they get walloped later,” said another Western Power player.

But CCI believes the current pace of reform is failing to deliver outcomes.

“Currently, approximately four years after contestability was first introduced there are only eight customers, supplied through Western Power’s network, that have decided to switch to an alternative supplier,” Mr Rowe told the recent conference.

“The importance of competition in reducing energy prices cannot be overstated.”

“Competition ensures both that electricity and gas is supplied as efficiently as possible but also that the benefits of the efficiency gains are passed on to customers.”

The State Government has put this issue in the hands of a Electricity Reform Task Force.

But even there, market observers see concerns.

“That puts things a year behind,” one watcher said.

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