Paper given at Climate Action Hobart forum, “Tasmania’s Energy Future” [Peter Boyer | 30 March 2011]
Half a century ago, a seminar about Tasmania’s energy future would have been a pretty predictable affair. Eric Reece [Premier through the 1960s], Alan Knight [long-serving head of Tasmania’s Hydro-Electric Commission] or one of any number of white-shirted functionaries, most of them engineering graduates, would have been telling us how the all-embracing Hydro-Electric Commission would give us energy security into eternity, from Tarraleah’s penstocks all the way to our hot cup of tea. Those were the days!
But nostalgia is no help in understanding today’s energy scene. The Hydro-Electric Commission became a corporation before being split into three separate entities, Hydro (generating), Transend (transmitting) and Aurora (retailing). That was to prepare us for entry into the National Electricity Market (or NEM) and completion of the Bass Strait cable, Basslink, which is where we find ourselves today.
All of which has left us in an ocean of imponderables that it’s fair to say Reece and Knight never contemplated.
In considering today’s complex energy scene, it’s necessary to put aside any preconceptions we might have about what’s “good” or “right” and what isn’t. There have been strong feelings abroad in the community, for instance, about public utility ownership, and nuclear power, and clean-green renewables. My own views about these sorts of things have at different times in the past been pretty well set in concrete. How do I feel about them today? Let’s just say the concrete has become a bit like Chernobyl’s — a bit flaky.
Victims of the modern energy market
So what’s happening? I don’t need to tell you about the steep rise in electricity costs — the news is everywhere, which suggests that proposing a price on carbon is a pretty good mechanism for getting people to sit up and take notice, if nothing else. (That said, the impact on household budgets of a carbon levy at, say, $25 per carbon tonne would be miniscule compared to the recent electricity rises, or the extra cost of petrol during the 2008 oil price spike.)
So the hip pocket is an early victim.
So too is “certainty”, if such a thing ever existed. What I mean is, our energy future seems less assured now than it did twenty years ago. But that may be simply a reflection of how much we’ve learned since then.
Our infrastructure is a victim, neglected over too many years after losing its well-staffed, heavily-subsidised, state-run maintenance system. Energy retailers all over Australia, including Tasmania, are facing replacement costs for poles and wires that in many cases are decades past their use-by date. The task is on a scale similar to the National Broadband Network, which is why they’re now piggy-backing off each other.
Another victim is the monopoly energy market. When Premier Bacon assured us in the dying years of last century that he’d never sell off our beloved Hydro, just slice it into three state-owned enterprises, he didn’t know the half of it. The National Electricity Market experience is that monopoly energy markets are dead and gone. Organisations like Aurora and Hydro need to understand that and behave accordingly, or they’ll suffer on the bottom line.
The analogue world that was old electricity is also no more. Computers are running the show at every level, from bulk sales and transmission down to household “smart metering”. When consumers finally grasp how they can benefit from computer power to monitor their own usage, they might actually start to see their bills falling, or at least stabilising. But in the meantime, smart metering and billing will cost us all, because these are costs that Aurora simply can’t absorb.
Interstate competition for Aurora
Then there’s Aurora itself. It’s having to deal with a legacy of residential service obligations, along with a small Tasmanian customer base compared to that of bigger NEM competitors. It’s also having to buy power in a national market where long term prices are heading in only one direction: up.
Now, it’s having to compete with other retailers — not at the household level (Aurora will have that Tasmanian market to itself for a while yet) but certainly in the business and government sector. Late last year the government awarded contracts to a Brisbane-based private company, ERM Power, to supply electricity to every government department except Treasury and Infrastructure, Energy and Resources. This is the National Electricity Market at work.
Let’s be clear about what this means for Tasmanian electricity: most if not all of the power supplied by ERM will come from Hydro Tasmania. NEM gives energy companies access to generation and transmission capability across all Australia except Western Australia and the Northern Territory. Because it can source electricity anywhere, ERM will tend toward the local option, which has a price advantage in that electricity is lost in transmission and the greater the distance the bigger the loss.
It’s worth knowing a bit about ERM, if only as an example of this new age of electricity marketing. Australia’s largest privately-owned power company, it started expanding aggressively in the 1990s. With interests in coal-seam or natural gas power stations in Queensland, New South Wales and Western Australia, it entered the retail market in 2007. In Tasmania, it is one of five retailers serving corporate and small business consumers.
Future electricity: a whole new experience
The National Electricity Market, covering all eastern States and Tasmania, is fully contestable right down to domestic supply — except in Tasmania. The state government is now facing the challenge of when and how to introduce full, top-to-bottom retail competition. The small size of the Tasmanian market will probably leave Aurora as the sole domestic supplier for some time yet.
Jim Bacon’s structural disaggregation (separating Hydro into generating, transmitting and retailing entities) may turn out to be yet another victim of the times. There are big financial risks involved in this sort of arrangement. Generators and retailers operating independently, like Hydro Tasmania and Aurora Energy, are much less attractive to investors than a company like ERM, which has a finger in many pies including power station design and operation as well as retailing. In the United Kingdom, as an example, there have been moves to re-integrate such entities, allowing generation and retail to offset each other’s risks, while distribution and transmission are operated as asset-managing monopolies (back to the future!).
In focusing on how our “clean, green” hydro power contrasts with dirty brown coal across Bass Strait, we’ve tended to overlook some energy cost benefits accruing from strong competition among Victoria’s privately-owned generators. Like Victoria, Tasmania needs to look at how its generating sector, and its Bass Strait power link, might be better structured to serve Tasmanians and our interstate markets in a post-carbon world where hydro power will carry market weight. That will mean many of us abandoning some cherished positions on state-run monopolies. If we assume anything about future Tasmanian energy infrastructure any distance into the future, it’s that it won’t look anything like it does now, or like it did. It’ll be something else altogether.
The rebound effect: implications for energy efficiency
A couple of other general energy issues, not specific to Tasmania, deserve our attention.
The first is to do with the economics of energy. William Stanley Jevons, a 19th century English economist, said in 1865: “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.” His idea, now known as the “Jevons Paradox”, or in its modern form the “rebound effect”, is that when people or corporations get the benefit of improved energy efficiency, the likeliest outcome overall is that more energy will be consumed.
How could this be? Why wouldn’t a more economical family car or power station automatically result in lower fuel consumption? Jevons argued that if less coal were used in a steel-making blast-furnace for the same yield, the price of pig-iron would fall but demand for it would increase. Greater profits and new capital would bring greater production, making up for reduced consumption by each unit and resulting in greater coal consumption overall. Which is exactly what happened.
The implications of Jevons’s idea are starting to resonate once more around economic circles. US-based economist Harry Saunders has applied it to the modern global economy and found some worrying implications for energy policy everywhere. While “direct rebound”, such as when people respond to having more energy-efficient cars or homes by raising their level of activity, has been written off by most economists as too small an issue to be more than a peripheral problem, Saunders points out that two-thirds of all energy is consumed indirectly to produce goods and services.
Making a car or a washing machine or a hybrid motor car, a photo-voltaic solar panel or a wind turbine or pretty well anything else involves a lot of “embedded energy” in mining, smelting and fashioning metals, making other components, assembling the parts, and transporting the finished item to where it will be used. Money saved by a household on efficient appliances tends to be re-spent on other things whose production involves energy, while, as Saunders puts it, “more productive use of our money spurs a more robust economy, demanding even more energy”. And so the cycle repeats itself, endlessly.
Analysts like Steve Sorrell of the University of Sussex argue that economists have badly underestimated the indirect role of energy in the economy. Observing that the falling energy intensity of industrial economies has failed to stop both energy consumption and carbon emissions from rising over the last century, Sorrell points to “the long-term effect on global energy consumption from the adoption of new technologies”, including such things as hybrid cars, wind turbines and photo-voltaic solar panels — “clean, green” icons that cannot economically be deployed without cheap fossil-fuelled power to manufacture and transport them.
We’re coming up against some brick walls here. Today’s debt-based economies depend heavily on both growth (needed to pay interest on debt) and a huge consumption of fossil fuel. The economy as we know it could never survive the sudden, arbitrary removal of one or both of these buttresses. Which only adds to the difficulty of decoupling energy consumption from economic growth, as Ross Garnaut and others have advocated.
Ultimately, technology can’t give us answers. Only we can.
An issue connected to the rebound effect is the way mindsets affect our perceptions, and it brings us back to what I was saying earlier about “good” and “right” things to do. All forms of energy, whether it’s nuclear or renewable or fossil fuel, have been burdened with ideological baggage. It’s hard to break free of that burden, but if we’re to make genuine reforms in the direction of low-impact energy I think it’s important to try.
The nuclear issue is a case in point. With anti-nuclear activist Dr Helen Caldicott in one corner and nuclear advocate Professor Barry Brook in another, it’s hard to find clear air in this important debate. Just so that you know, I don’t think nuclear power is a viable option for Australia, nor, probably, for any country that doesn’t presently have it, because of cost (both capital and operational) and complexity, leading to concerns about the ability of states in less stable times to ensure its safety. That’s my firm belief. But equally I think the issue of carbon build-up in the atmosphere is so important that new-generation nuclear energy should not be ruled out for all situations everywhere.
A growing energy crisis over the next couple of decades will force us to keep options open as long as possible. Every energy source in the mix has problems: environmental damage, waste, water used, big land footprint, remoteness, or high capital cost, to name a few.
We’re having this discussion because no-one seems to want to curb their energy use. We talk of demand as if it’s set in concrete, but it’s an economic forcing that we have the ability to modify, if we choose. And choose we must. The lowering of demand is by far the most cost-effective way to meet our future energy challenge.
The funny thing is, it’s also by far the most sensible thing to do in light of the relentless rise in our power bills, brought about mainly by the cost pressures noted above. The future won’t bring any relief to this process. It makes very good practical and financial sense to find every means possible to reduce our energy demands.
The biggest demand on energy is for space heating and cooling. If we want to use less electricity in our homes and workplaces, we need to ensure that they’re well-insulated against outside cold and heat. Tasmanian buildings — even some new ones — are notoriously poorly insulated. What we need is a nationally-funded insulation scheme, like getting batts into ceilings. Great idea, don’t you think?
Humans have shown over and over again a great capacity for technological innovation. Good ideas such as using marine algae to make biofuels and sequester carbon will continue to crop up. We must earnestly hope that the best of them will get enough support to reach the market. But technology offers no silver bullets. In an increasingly uncertain world, energy conservation has to be the main game.