June 10, 2013
Australia

High-powered row looms on horizon

By Brian Robins | Blue Mountains Gazette | June 11, 2013 | www.bluemountainsgazette.com.au

The parallel universe that is the electricity market has its own version of Blue Hills. Like the long-running radio drama, proponents of an upgrade to the connections between South Australia and the rest of the national electricity market have been pushing around various proposals for years.

One proposal to link directly to NSW was kiboshed after a legal challenge and now another proposal to upgrade the Heywood interconnector with Victoria is on the cards.

Rather than just another example of the argy-bargy that can envelop planned infrastructure upgrades, the latest push is the first under new rules aimed at preventing so-called ”gold plating” of the network.

Upgrades have been routine in the electricity industry. Decades of steady demand growth paved the way for an automatic presumption that capacity should regularly be increased to prepare for future demand growth.

The initial decline in demand in the later part of last decade was initially seen as an aberration. But when the super-strong dollar forced manufacturers to cut output, this kept pressure on demand, while in NSW the closure of the Kurri Kurri aluminium smelter lopped another 4 per cent or so off demand there.

The wobbles at Alcoa’s Point Henry smelter in Geelong have been covered for a year or two by cash from Canberra, anxious to shore up support in one of the most marginal seats in the country – Corangamite.

All power generators in the national electricity market – which does not include Western Australia or the Northern Territory – have been hit by falling demand, which has put a question mark over planned capital spending.

Against this backdrop, the push by South Australian transmission outfit ElectraNet – now controlled by China’s State Grid, with Hastings Asset Management and Malaysia’s YTL Power International also investors – to upgrade the Heywood interconnector linking Victoria and South Australia has developed into a symbolic fight.

At its simplest, the proposal will help supply wind power generated in South Australia to Victoria. Proponents of wind argue it is the cheapest source of energy, a similar claim to that made by proponents of nuclear energy. Along with its volatility – without wind, there is no power – the wind resource it taps blows mostly at night, which leads to ”negative” prices in the wholesale power market at a period of lowest demand and when supply is dominated by coal-fired power stations, which can be turned down, but not off. So, lifting the capacity to ”export” to Victoria is one way of getting ”unwanted” wind power to market. Some also argue power would flow the other way, from Victoria. Maybe, very occasionally, although the key here is to hem in the market power of AGL, which has a dominant position in SA.

Also, why SA households should have to pay for an upgrade that will be of little benefit to them, but mostly benefit wind power investors and Victorian consumers, is one aspect yet to be clarified. ElectraNet wants the upgrade. As a ”regulated” utility, virtually any upgrade to its network is good news for its shareholders, since they are guaranteed a return. But that investment adds to power bills and in the present climate is political anathema.

Critics say that under the present rules ElectraNet has been able to ”frame” the debate – choosing which ”independent expert” will evaluate the proposal. Unsurprisingly, the experts back its proposal for the high-cost option, which would cost as much as $100 million, even though cheaper options are available.

Now, the Australian Energy Regulator, an arm of the competition watchdog, the Australian Competition and Consumer Commission, is looking at the proposal, but already big generators such as GDF Suez, which operates the Hazelwood and Loy Yang B power stations in Victoria, and Macquarie Generation, which operates in NSW, are primed for a fight. For GDF Suez, there is a governance issue at stake.

”Allowing the [transmission network provider] to run a process where it has a commercial incentive to build more network suggests a conflict between rational investment and commercial reality,” it told the AER in a submission supporting a review of the upgrade.

Macquarie Generation commissioned Frontier Economics to review the original assessment. Rather than the claimed ”net benefit” of $284 million from the proposal, it reckons it would be $24 million, at best. In other words, it wouldn’t cover its costs.

South Australia already has close to 2000 megawatts of installed wind capacity, enough to cover the state’s demand under most circumstances, but this could rise to 3000 megawatts if new plans progress. Hence the push to make it easier to sell into Victoria. But with soft demand across the market, and serious doubts about the merits of the upgrade, the key elements are in place for a high-powered row.