Treasurer Josh Frydenberg’s call for more investment can’t succeed while our second largest state (Victoria) is in a deep power crisis, with high energy prices and uncertain supply over the summer. NSW is not that much better.
This crisis is so deep that we cannot ignore it. Our centres of population, but particularly Victoria, have taken incredibly stupid energy decisions that contribute to institutions demanding companies return capital via dividends and buybacks so they can invest more overseas.
Today I will document those crazy gambles in Victoria but it’s also important to document the mistakes at the Commonwealth level too. Victoria’s energy lunacy contributed to BlueScope (formerly BHP Steel) siting its next major steel expansion in the US rather than Australia but so did the Coalition’s decision not to match the US in allowing better capital investment write-offs against profits — the so called “Calderon plan” — named after the CEO of Orica (R&D at heart of tax plan, May 26 2018).
Read more: Treasurer tells CEOs: get positive | Durie: Frydenberg needs to show leadership
I will return to tax systems later but I want to document Victoria’s gambles which equate to a commercial scandal that ranks with the banks and it needs to be understood by all Australians because the nation’s prosperity — not just Victoria’s — is endangered.
The saga started when the Victorian government set the state a renewable energy target. I can’t emphasis too strongly that the target and the desire for more no- carbon energy was not the problem. Victorians voted for the target and they assumed their elected representatives would know how to implement it without causing prices to skyrocket and heightening the danger of blackouts. With sensible decision making that aim could have been achieved.
Instead, mistakes and/or mischievous politically motivated decisions have caused the Australian Energy Market Operator to warn of looming blackouts. The only response the Victorian government can come up with is to blame the Commonwealth but on this occasion the danger (plus most of the price rises) was totally state-created. Here are the crucial decisions:
Gamble number one: Victoria has installed a vast network of solar and wind power generators that need backup for when the sun does not shine and the wind does not blow. Battery technology is improving but currently is too expensive but a relatively low cost partial backup was available in the Snowy. The Snowy Hydro currently comprises two basic generating systems: the northern generating system which supplies NSW and the southern generating system which supplies Victoria. They are only weakly connected by transmission lines. If they were connected properly and greater grid capacity installed so extra Snowy power could go to Victoria the northern systems could supply Victoria in a crisis, assuming NSW did not have a crisis at the same time. Accordingly, it lessened the chance of blackouts until the extra Snowy capacity is installed around 2026. NSW is undertaking its share of the task so it can tap the southern generating system, but Victoria has responded by saying “she’ll be right mate” and is not tapping the northern system. It takes one or two years to make the investment, but this first gamble is beyond comprehension.
Gamble number two: Paradoxically this gamble was started when the Coalition was in office. They banned gas development in the Latrobe Valley, Gippsland. It appears they succumbed to pressure from farmers who did not want gas development disrupting their farms. But the ALP extended and formalised the ban which will be reviewed next year. This gamble has already damaged the nation but there is more come. When the site of the Yallourn brown coal mines was being determined many decades ago the drilling encountered vast reserves of water that was deep underground and contained dissolved gas. It was ignored and later gas was found in Bass Strait. But as Bass Strait began to run down, Exxon returned to that original drilling plus later wells which showed that this water deep underground was of agricultural quality and would create a drought proof farmland. With the backing of BlueScope, Exxon planned to spend $400 million to develop the gas/water bonanza and offered farmers revenue from the gas and unlimited water. The government told Exxon to keep its money and believed drought was unlikely to occur in lush Gippsland. What followed was extensive building of windmills and solar stations without backup. There is a vast array of back-up strategies including pumped hydro schemes, batteries, interstate networking and load shedding. But one alternative would have been a gas-fired station. Like hydro when power runs short, gas-fired stations can be quickly turned on and, contrary to “the odds,” it did not rain in Gippsland and the farmers were hit with a devastating drought. The Exxon development would have turned Gippsland into a drought-proof food bowl where farmers received extra revenue via gas.
Gamble number three: Victoria believed only two of the back-up strategies were required — load shedding in peak demand times and access to diesels generators. The “she’ll be right mate” strategy relied on the good old coal to get the state through the tough times. But the coal stations are old and need strong reliable cash flow so that extra maintenance, including anticipatory maintenance is undertaken. If that’s done, they could last decades. The Victorian government not only closed the Hazelwood power station but turned a blind eye to the fact that market pricing of power meant that the coal fired stations were swinging from huge demand when the power price was high to negative demand when the price was a minus and the stations had to pay money to put their power in the grid. Naturally this caused chaos in the operation of the coal-fired stations. Just as everyone in the power business predicted, the coal stations have started to break down under the pressure and this will continue until the nonsense is stopped. Once again, the “she’ll be right mate” strategy has become high risk.
Gamble number four: Victoria generates vast amounts of renewable power that can’t get to market because the grid network is not designed for it. Victoria’s answer is to generate more wind and solar power. Again, it’s a nonsense. The network has to be redesigned. But here the “she’ll be right mate” strategy might actually work because of the development of the Faraday Grid technology. But we will have to wait for London and Tokyo who are going first.
Is there any answer? A few more mild summers will justify the “she’ll be right mate” strategy but in truth we probably need a hot summer and lots of blackouts to force the politicians to admit that these four big gambles were just too risky. It will take time, but the gas must be developed. The Snowy Hydro connections must be made and, in line with the industry funds strategy, long term energy contracts that lock in base demand for coal mandated so the generation can continue until better renewable technology is available. Meanwhile, Australian enterprises, small and large, that need power can either gamble like the Victorian government or install diesel backup.