WA’s emerging energy advantage

Problems with electricity supply and pricing on the eastern seaboard could provide an opportunity for WA.

Isolation from the nation’s major population centres has always meant Western Australia suffers from higher costs for basic services – though perhaps not for much longer, if events in the power market on the eastern seaboard are a guide.

Sharply rising prices for electricity and gas in South Australia, Victoria, NSW, Queensland and Tasmania are handing WA a business bonus, though not one that can be described as unexpected.

For the past decade, two popular but misguided government policies have been heavily promoted in the eastern states: heavy investment in renewable sources of electricity, especially wind and solar, coupled with an obstinate refusal to develop domestic gas supplies; and pressure to close coal and gas-fired power stations.

The result is the predictable crisis that has swamped the Tasmanian economy, is killing businesses in South Australia, and starting to threaten Sydney and Melbourne.

Tasmania is where this rolling train wreck started, when low rainfall forced the state’s all-important hydroelectricity system to cut production. This was followed by a break in the power line that connects the island to mainland Australia, with the upshot being something normally seen in third-world countries – the rushed installation of diesel-powered generation sets.

In an ideal world, Tasmania should have Australia’s lowest-cost electricity and be able to profit by selling power to other states. But what happened with the dam crisis was a reminder of why no-one should ever put all their eggs in one basket.

SA was the next crisis zone for renewable power, with government encouragement for wind and solar leading to the closure of coal and gas-fired power stations – and the inevitable crisis when the sun didn’t shine and the wind didn’t blow.

Two weeks ago in SA, which is already struggling to retain the remnants of its once-important manufacturing sector, wholesale electricity prices rocketed up through the $1,000 per megawatt hour at a time when neighbouring states were paying about $32/MWh – forcing the SA government to beg for the re-opening of a gas-fired power station.

Rain in Tasmania and sunny/windy days in SA will fix the power problems of those states, but a warning shot has been fired for business – renewable power might be politically correct but it’s not politically correct every day.

Gas is also becoming a problem for the eastern states, thanks to two events – the start of liquefied gas exports from Queensland to Asia, and the demonisation of coal-seam gas and deeper rock fracturing (fracking) for gas production.

Popular with voters, the problem with banning the development of a natural resource when it can be safely extracted is a predictable shortage and an equally predictable rise in price.

First shots in what could become a bruising war of words were fired last week when a cold snap, combined with a gas shortage, pushed the price of gas to $14.40/gigajoule, less than half the price being paid for Australian gas in Japan.

A blame game for the gas (and electricity) crisis is brewing in the east, with fingers being pointed at: pipeline companies for charging high gas haulage fees; gas liquefiers for buying gas that might otherwise have been available for the local market; and governments for placing too much faith in renewables, partly because of pressure from green lobby groups.

The truth is that everyone in the energy business has played a role in what is an energy-shortage event that should have never occurred in one of the world’s biggest energy exporting countries.

WA, which has its own energy issues, is isolated from what is incorrectly called the National Electricity Market and the problems developing in that market. And those problems are highly likely to get a lot worse, especially for big energy consumers that need reliable base-load power of the sort provided by traditional coal and gas power stations.

For the WA government, which is looking for a marketing edge, there appears to be an opening for a campaign promoting WA as ‘the energy state’, where power is abundant, reliable, and not part of a problem-prone interconnected grid.

Alumina pressure

ON a less optimistic note, there could be a problem brewing in WA’s biggest mineral processing industries – the conversion of bauxite into alumina by Alcoa of Australia and South32.

What’s happened is that Chinese importers of alumina have suddenly become exporters, thanks to a collapse in the domestic price of the aluminium-making material in that country.

In dollar terms, Australian alumina is reported to now be $US44 a tonne more expensive than discounted Chinese alumina; or as investment bank Credit Suisse described the situation, a ‘chasm’ has opened under the Australian price.

If, as seems likely, the discount flows into the Australian price, then WA’s alumina refineries will be under more pressure to cut processing and expand the embryonic business of exporting unprocessed bauxite, the ore of alumina.