10/03/2011 - 00:00

Tough choices lie ahead on energy

10/03/2011 - 00:00

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The state government is to be commended for preparing an energy strategy but the hard work lies ahead.

WHENEVER I ask business people what they are looking for from government, one of the most common answers is a long-term strategic plan that provides a degree of certainty and confidence about the future.

For that reason, the state government’s work on a 20-year strategic energy plan is spot on.

So far, the Barnett government has issued a discussion paper, which was followed this month by a directions paper.

Among all that, it flirted with the idea of re-merging retailer Synergy and generator Verve, and wisely decided that was a backward step.

The next constructive step will be making some decisions, and that’s where it gets hard.

The directions paper made this clear at the outset, when it said the state will have four strategic goals – secure, reliable, competitive and cleaner energy.

“There is an inevitable tension between these four goals,” it stated bluntly.

Focusing on competition may foster low-cost suppliers using proven carbon-intensive fuels, and is therefore not cleaner.

Conversely, focusing on cleaner energy may encourage use of new technologies that are not efficient.

Maximising reliability may require investment in back-up facilities or rarely used capacity that is very costly.

The directions paper includes key statistics and projections that provide a useful framework for discussion.

Energy consumption in Western Australia has doubled during the past 20 years and will continue to grow rapidly.

Modelling by the Australian Bureau of Agricultural and Resources Economics and Sciences indicates that primary energy demand in WA is forecast to rise by 2.2 per cent per year out to 2030, compared to 1.4 per cent for Australia.

Faster economic growth and increased mining activity are the drivers of this outcome.

To meet the extra demand out to 2020, the state will need to install 2,275 megawatts of generation capacity in the South West Interconnected System, lifting total capacity to 7,417 megawatts.

The directions paper makes it clear that higher costs are inevitable, as a result of increasing global demand for energy driving up the cost of liquid fuels. Measures to reduce carbon emissions will add to the cost pressures.

The paper acknowledges the high cost of energy supply disruptions but seeks to cap community expectations.

It notes that protection against rare but catastrophic disruption, such as large-scale gas or oil storage, LNG terminals or broad-scale underground placement of power lines, can be very expensive.

It suggests that customer-side protection of supply may need to become more common.

Chamber of Commerce and Industry WA chief executive James Pearson agreed that development of a long-term strategy was important, but was disappointed that the release of such an important document was nearly six months late.

He endorsed several recommendations, including the move to cost-reflective prices, the possible privatisation of state-owned energy utilities, the appointment of an independent umpire to set gas and electricity prices, and the roll-out of smart meter technology.

The challenge confronting the CCI is that its members are divided on some of the key issues.

APPEA, which represents gas producers such as Woodside and Santos, and the DomGas Alliance, which represents gas consumers such as Alcoa, Alinta Newmont and FMG, remain at odds on the key issue of a gas reservation policy.

APPEA said the directions paper indicated that the projected gas production capacity would be more than enough to meet growth in demand.

It noted that the Devil Creek gas project is being built, the Macedon and Gorgon projects are marketing their domestic gas now, and other projects such as Wheatstone are being proposed.

The DomGas Alliance, by contrast, maintains that WA faces a potential domestic gas shortfall over the next decade. Alliance chairman Tony Peterson said he supported the direction paper’s proposal to “tighten the state’s domestic gas reservation policy, while providing sufficient flexibility for LNG producers to meet domestic supply commitments through gas swaps”.

Isn’t that just typical – two lobby groups each claiming the report supports their competing goals?

The final word on this topic should go to Economic Regulation Authority chairman Lyndon Rowe, who a couple of years ago spelt out the challenge facing policy makers.

Speaking at an energy conference, he said: “The problem is that while everyone wants an energy policy, everyone has a different idea about what should be in it.”

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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