The future of energy generation and storage

[Value Collector]

so having my own business, some fixed costs as you can imagine , why can I not charge the local council for the service I could provide them should they want to ask for it?

Council hasn't demanded that you install certain infrastructure for them, and they aren't regulating your pricing.

But yes if you purpose built infrastructure for the council (or any customer), I would expect you would operate on a take of pay contract, this is common place across many industries.

One of the companies I invest in is building a gas pipeline and private power station for a mining company in the WA gold fields, and that project wouldn't be built if the mining company didn't sign a take or pay contract, the fact that in 2 years they might get some more efficient machines doesn't reduce our capital costs and the reality that we need to recoup that(plus a profit margin) over the life of the project, so there is still minimum charges we need to charge.

 

[Value Collector]

they were garanteed from memory a 8% return, could have been ok at the time but imagine now..rubbing hands

It changes depending on the rate of Bonds etc. basically it's a certain margin (3% or so) above other lower risk investments such as bonds depending on the asset.

 

[Smurf1976]

Comparing now with the old pre-"reform" days, there's a lot of costs in the industry which simply didn't exist at all in the past.

Wholesale market price risk. No such concept previously but now it's a very real thing and a "risk premium" tends to be attached to a market that can rise 35,000% and then crash 99% in less than a day.

Retail cost is another big one. Used to be very cheap to just send out the bills and take payment but now it's $ hundreds per year for each household. It's a cost comparable, in some cases larger, to that of the fuel going into power stations.

All those regulations and regulators don't come cheap either and nor do the assortment of non-engineering focused things they come up with. Ultimately that's how networks ended up costing a fortune.

Then there's the underlying motive of the industry and this is a very key point. Today we have numerous companies all with their own set of overheads and all seeking to make a profit.

Now go back 25 or more years and read the annual report of any of the fully integrated state electricity authorities. SECWA, ETSA, SECV, HEC and PAWA were all the same. In the report you'll find a description of what they were up to at all stages of the industry from generation to retailing but there's one theme that was incredibly consistent year after year and that was cost minimisation.

All of them could and did supply power, that was a given, so to the extent that there was something to be achieved it was to drive down costs. The SECV and HEC were the ones vying for top spot in that game, and in different ways both achieved it, whilst the others were also incredibly focused but had the natural disadvantages of higher cost available resources although their achievements were still impressive by any international mesure.

That competition was pretty intense at times since they all saw that broader economic development was an unstated part of their mandate. Driving down costs was the key to making that work so that's what they did.

That model gave Australia as a whole the third cheapest electricity in the OECD, beaten only by Canada and NZ with their large hydro resources. From an environmental perspective it's worth noting that we also had the most energy efficient fleet of fossil fuel power stations anywhere, Australia was No.1 in that regard.

I left Qld and NSW out of that list because they had a different model with generation being separate from the distribution and retail side. It worked just as well both physically and in achieving cost minimisation but turned out to be more prone to political interference in practice.

Not a lot more can be said really. No amount of economic theory will change the reality that from the perspective of consumers the present system is far less efficient (both economically and technically) than what it replaced.

 

[SirRumpole]

Thanks for that Smurf, as you say not much more that can be said. The politicians stuffed up, and now we are paying for it.

 

[Smurf1976]

Something I'll add is that the idea of linking the states to form a national (well, Qld, NSW, ACT, Vic, Tas, SA at least) grid was envisioned as being about cost reduction through the exploitation of the technical efficiency gain through that increasing of system scale.

It took politicians to see it as a means of creating what amounts to a casino.

 

[qldfrog]

Council hasn't demanded that you install certain infrastructure for them, and they aren't regulating your pricing.

I have not demanded to have that infrastructure installed and was happy/am happy not to have service connected ...This has a name extorsion.End result, my tenant (business) has closed...one more...
this is Qld: unemployment figure can only stay flat if the state government adds 30000 civil servants in a year to fill pre election targets....ah well more debt

 

[qldfrog]

lower risk investments such as bonds d"

lower? with a government guarantee??just a cash machine

 

[qldfrog]

lower? with a government guarantee??just a cash machine

Anyway if people are happy to pay $1000 a year to have the knowledge that there is a pipe of water along the road, what can I do, this country deserves its leaders.
More and more parasites, less and less productivity.

 

[Value Collector]

I have not demanded to have that infrastructure installed and was happy/am happy not to have service connected ...

Which service are you talking about?

 

[Value Collector]

lower? with a government guarantee??just a cash machine

Not sure what you are talking about? What government guarantee?

It's bank depositors and government bond holders that have a government guarantee.

 

[Smurf1976]

If there's something I haven't said much about it's my real reason for concern. It's somewhat more basic and less specific to the industry than you might be expecting.

Firstly, electricity and/or gas is an input to the overwhelming majority of all economic activity. With very few exceptions, just about every business uses electricity and/or gas in some way.

So in moving from among the cheapest energy in the world to being among the most expensive we have in one fell swoop increased the costs and reduced competitiveness of practically every business in the country. From a political perspective I'll add that the extent of this impost far exceeds that of the much talked about carbon tax and also exceeds anything most unions have been party to in recent times.

Then there's the human side to it all. It's inevitable that, a few weeks from now, we'll be hearing plenty of stories about people receiving massive electricity or gas bills. Winter is the season of highest total consumption in many areas and with the recent price jumps it's going to have a pretty big impact on many.

The only way such stories won't be in the news is if the media chooses to not run them but there's going to be a lot of pain arriving pretty soon as the bills turn up.

Overall it just saddens me that heating a house, having a hot shower without using an egg timer and cooking dinner is fast becoming a symbol of wealth rather than the taken for granted entitlement it was not too long ago. This just shouldn't be a problem in a country with such an abundance of resources.

It would be bad enough if the situation had arisen due to unavoidable factors. That it happened for no reason other than the blind pursuit of ideology is just ridiculous.

 

[sptrawler]

If there's something I haven't said much about it's my real reason for concern. It's somewhat more basic and less specific to the industry than you might be expecting.

Firstly, electricity and/or gas is an input to the overwhelming majority of all economic activity. With very few exceptions, just about every business uses electricity and/or gas in some way.

So in moving from among the cheapest energy in the world to being among the most expensive we have in one fell swoop increased the costs and reduced competitiveness of practically every business in the country. From a political perspective I'll add that the extent of this impost far exceeds that of the much talked about carbon tax and also exceeds anything most unions have been party to in recent times.

Then there's the human side to it all. It's inevitable that, a few weeks from now, we'll be hearing plenty of stories about people receiving massive electricity or gas bills. Winter is the season of highest total consumption in many areas and with the recent price jumps it's going to have a pretty big impact on many.

The only way such stories won't be in the news is if the media chooses to not run them but there's going to be a lot of pain arriving pretty soon as the bills turn up.

Overall it just saddens me that heating a house, having a hot shower without using an egg timer and cooking dinner is fast becoming a symbol of wealth rather than the taken for granted entitlement it was not too long ago. This just shouldn't be a problem in a country with such an abundance of resources.

It would be bad enough if the situation had arisen due to unavoidable factors. That it happened for no reason other than the blind pursuit of ideology is just ridiculous.

It's not easy being green, I guess those feeling the pinch, will have to get a warm feeling from their sacrifice for the greater good.
IMO it isn't ridiculous, it's sad, but being pursued at a ridiculous pace.

 

[SirRumpole]

It's not easy being green, I guess those feeling the pinch, will have to get a warm feeling from their sacrifice for the greater good.

I think you have the wrong ideology there. You say "green" ideology is the problem, but it's actually privatisation policy that is the problem, and the splitting off of the various parts of the energy supply spectrum into their components all with their inbuilt costs and profit margins thus eliminating the benefits of cross subsidising the various elements of generation, distribution and retailing.

The cost of green power has been steadily reducing, rooftop PV has been reducing some of the demand, but since Hazlewood was taken out of the picture by a foreign private company thanks to Kennet selling it off there is a generation shortfall because politicians thought that privatisation solved the problems for them and they dropped the ball on maintaining and replacing the old coal stations in an orderly process.

 

[sptrawler]

I think you have the wrong ideology there. You say "green" ideology is the problem, but it's actually privatisation policy that is the problem, and the splitting off of the various parts of the energy supply spectrum into their components all with their inbuilt costs and profit margins thus eliminating the benefits of cross subsidising the various elements of generation, distribution and retailing.
.

Yes, I think I said that a while back.
When I discussed the desegregation of Western Power in Western Australia.

 

[sptrawler]

The cost of green power has been steadily reducing, rooftop PV has been reducing some of the demand, but since Hazlewood was taken out of the picture by a foreign private company thanks to Kennet selling it off there is a generation shortfall because politicians thought that privatisation solved the problems for them and they dropped the ball on maintaining and replacing the old coal stations in an orderly process.

If that was the only problem, companies would be putting in new coal fired power stations, as coal is still a cheap fuel.
They aren't, because of the blind "green" push, which will manifest itself in a drop in living standards.IMO

 

[Value Collector]

I think you have the wrong ideology there. You say "green" ideology is the problem, but it's actually privatisation policy that is the problem, and the splitting off of the various parts of the energy supply spectrum into their components all with their inbuilt costs and profit margins thus eliminating the benefits of cross subsidising the various elements of generation, distribution and retailing.

The cost of green power has been steadily reducing, rooftop PV has been reducing some of the demand, but since Hazlewood was taken out of the picture by a foreign private company thanks to Kennet selling it off there is a generation shortfall because politicians thought that privatisation solved the problems for them and they dropped the ball on maintaining and replacing the old coal stations in an orderly process.

I don't agree, there is a lot more to it.

I mean some of the cheapest suppliers around the world are privately owned systems, and some of the "cheap" government ones are cheap because the are subsidised by tax payers.

Offcourse there is expensive private too, and some genuinely cheap state owned, but it's not as simple as saying private = expensive, state owned =cheap.

 

[sptrawler]

I don't agree, there is a lot more to it.

I mean some of the cheapest suppliers around the world are privately owned systems, and some of the "cheap" government ones are cheap because the are subsidised by tax payers.

Offcourse there is expensive private too, and some genuinely cheap state owned, but it's not as simple as saying private = expensive, state owned =cheap.

I agree with that, but to raise money from distribution, when you don't own the product is a difficult proposition.
Therefore to cover your costs, you can only charge the user, you have no control over the product.
This would be fine if it was a static model, but it isn't, the network degrades loads increase which require the installation of upgrades coverage increases etc.
When the Governments owned the "whole" system, a small increase in costs, could be spread over the generation, distribution and administration.
Now that isn't possible, so a slight reduction in fuel costs, isn't transferred to a slight increase in distribution costs.
The slight decrease in fuel cost, is not passed on and the slight increase in distribution cost is.

 

[SirRumpole]

If that was the only problem, companies would be putting in new coal fired power stations, as coal is still a cheap fuel.
They aren't, because of the blind "green" push, which will manifest itself in a drop in living standards.IMO

Well, SA has admitted it made a mistake and is building gas turbine stations as well as battery supplies so maybe there will be some sense coming back into government decisions where they can achieve a reliable and cost effective mix of technologies.

 

[Value Collector]

I agree with that, but to raise money from distribution, when you don't own the product is a difficult proposition.
Therefore to cover your costs, you can only charge the user, you have no control over the product.
This would be fine if it was a static model, but it isn't, the network degrades loads increase which require the installation of upgrades coverage increases etc.
When the Governments owned the "whole" system, a small increase in costs, could be spread over the generation, distribution and administration.
Now that isn't possible, so a slight reduction in fuel costs, isn't transferred to a slight increase in distribution costs.
The slight decrease in fuel cost, is not passed on and the slight increase in distribution cost is.

I am not entirely sure of your point.

But the cost of fuel is a relatively small part of the cost base, a 10% reduction in the price of fuel would never flow to a 10% reduction in the price of electricity.

It's exactly the same in the petrol supply chain, a 50% reduction in the price of oil will never mean a 50% reduction in the price of unleaded fuel, it would probably only relate to a 15% - 20% reduction in the price of unleaded, due to the large amount of fixed costs.

e.g, Oil might drop 50%, But because the price of oil is only a portion of the price you pay per litre of fuel, the total price you pay won't drop.

Service station rent + other site costs, Government fuel tax, refining costs, trucking costs, Insurance, staff wages, the list is huge, none of these costs drop just because the price of fuel went down.

when you pay $1.5 for a litre of unleaded, as little as 40cents of that relates to the price of a barrel of oil, so if oil drops 50% you can expect fuel to drop 20cents.

 

[sptrawler]

I am not entirely sure of your point.

But the cost of fuel is a relatively small part of the cost base, a 10% reduction in the price of fuel would never flow to a 10% reduction in the price of electricity.

It's exactly the same in the petrol supply chain, a 50% reduction in the price of oil will never mean a 50% reduction in the price of unleaded fuel, it would probably only relate to a 15% - 20% reduction in the price of unleaded, due to the large amount of fixed costs.

e.g, Oil might drop 50%, But because the price of oil is only a portion of the price you pay per litre of fuel, the total price you pay won't drop.

Service station rent + other site costs, Government fuel tax, refining costs, trucking costs, Insurance, staff wages, the list is huge, none of these costs drop just because the price of fuel went down.

when you pay $1.5 for a litre of unleaded, as little as 40cents of that relates to the price of a barrel of oil, so if oil drops 50% you can expect fuel to drop 20cents.

I was talking about the ability to cross subsidies, when the whole supply chain was a Government body.
Also Government = cheap and Private = dear, is usually the case. This is due to any profit, being returned to consolidated revenue, where as with private the profit is returned to shareholders.
The other issue of course is, the Government is providing a service, the private sector is driven by a desire to increase profit.
There isn't anything wrong with that, but is does leave the public, having to pay more for the same service.