The Carr government's "Energy Directions Green Paper", which closes for comment on Friday, raises serious energy policy issues. It forecasts a need for increased capacity in the next few years.
The Green Paper's objective is "to place NSW on the pathway to a new carbon-constrained future, while maintaining a prosperous economy and managing the impacts of climate change on the NSW community". The reality is that the government's radical environmentalism and ideological attachment to public ownership is creating a crisis.
The paper uses global warming and absurdly its local effects to justify a tax on electricity from fossil fuel in addition to that levied by the commonwealth's Mandatory Renewable Energy scheme. This will require 23 per cent of total supply to be high-cost energy. It leaves NSW uncompetitive.
In addition, the government's failure to privatise the power industry is eroding the state's prosperity levels. State ownership has meant a politically administered industry that has failed to match the labour productivity and plant availability of its privately owned Victorian counterpart.
The Green Paper argues in favour of private rather than public investment in new power stations. The government recognises that private sector investors will be wary of committing funds while there is a risk of competition from "non-commercial" government business investments. But it also says it will act "if it becomes clear that new generation plant will not be developed in time to meet NSW's potential supply needs". This illustrates both a willingness to override commercial considerations and a self-deception that the government has superior foresight to the private sector in determining optimal investment expenditure.
Obstacles and uncertainties that the government is putting in the way of new electricity generation developers make it inevitable that investors will require a risk premium before committing funds. This increases the state's electricity price and its prospect of shortages. That risk premium was increased as a result of the treatment of an investment by the US firm National Power stemming from a 1998 commitment involving two new power stations.
Soon after the deal was struck, the wholesale electricity price halved and remains 30 per cent below National Power's contract price. The first station, the Hunter Valley's Redbank 1, was built, but the government set up an inquiry into the second station. Various government-funded green groups chipped in with a chorus of opposition to the project. Citing greenhouse gas emissions, the government refused it development approval, thus avoiding an onerous contract for a project that in 2001 won the Institution of Engineers Award for Environmental Excellence. Last year National Power abandoned Redbank 2.
Playing the Green Card to energise radical environmentalists can rebound savagely on power system security. The NSW Green Paper is an acknowledgement that the government's energy policy will backfire on the timely market provision of low-cost new generation.
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