Gridlock?

The Queensland Government has foreshadowed major changes in its electricity businesses.  Its two retail distributors, Energex and Ergon, though active as retailers in the southern states, face little home state competition.

The Government is now committed to opening the retail market fully to interstate firms.  It has, however, stated a determination not to sell the lines businesses, a resolve strengthened by the blackouts stemming from inadequate investment.

In leaving unsaid its intentions regarding the retail operations, the Government has created an expectation for possible sale.  One issue, whether or not retailing is to be sold, is whether consumers should have a single retailer or the choice of Ergon and Energex.

Dwarfing these issues is the matter of generation.

In the 10 years from 1990, the state built only one major power station and its precarious balance of supply and demand was immediately revealed once the electricity market went live during 1998.

Shortages that had been hidden were immediately reflected in wholesale prices that were double those of the southern states.

Remedying this was essential.  And, since Queensland, along with parts of NSW, probably has the lowest cost abundant quantities of coal in the world -- remedying this was straightforward.

Over the five years to the end of 2005, Queensland increased its electricity generating capacity by a quarter, adding 2100 mW.  In that period, Queensland accounted for two thirds of the new capacity within the Australian National Electricity Market.

Having already overhauled Victoria as a producer the state is now fast catching up with NSW.  New projects include Babcock and Brown's 450 mW Braemar peaking plant and CS Energy's 750 mW Kogan Creek.  These two plants comprise most of the National Electricity Market's expected new capacity.

There are, however, some dark clouds surrounding the apparently comfortable picture of generation.

As part of its initial catch-up in capacity, the Government encouraged private investment to enter the market.  A Shell-dominated consortium built the 850 mW Millmerran power station in 2002.  That consortium also took a half share with the Government's CS Energy in the 920 mW Callide C station, which was completed a year earlier.  The 450 mW Tarong North, started in 2000 and completed in 2003, also had a mixture of Government and private funding.

Soon after entering the market, Shell clearly felt its investment had turned sour and steadily sold down its interest.

The final one quarter share went for $US226 million in December 2003 to China Huaneng Group.  Perhaps the Chinese bought well, but the transaction valued investments that had cost some $2.2 billion at only $1.2 billion.

It was an unexpected continued building of capacity that led to this devaluation of worth.  There is much to be said in favour of new infrastructure investment.

However, investments undertaken on non-commercial terms using government funds will undermine all investments.

The latest of these investments was the decision (announced in May 2004) to build Kogan Creek.

Queensland's electricity growth is rapid and will be spurred on further by the Aldoga aluminium smelter, which will start operations in late 2006.

Even so, the production growth is outstripping demand.

The private sector businesses argue that the Queensland Government, having enticed investment into baseload power, has then accepted non-commercial rates of return from the power stations it owns.

Energy Minister John Mickel has declared that he sleeps easier if he has 25 per cent surplus generation capacity.  Well and good.  But a corollary of such a supply margin is a collapse in prices and in the value of assets.

This financial year spot prices in Queensland have been 30 per cent below those of NSW.  And prices in NSW were themselves considerably reduced by the export of surplus power from Queensland.

Even so, the more attractive prices across the Tweed have encouraged the Queensland Government to seek more robust transmission capacity to take advantage of NSW prices.  But state-owned NSW generators see their market as being infected by surplus Queensland capacity and low prices from oversupply.

The irony is that in establishing a more robust link with NSW, the original rationale for new investment -- a 25 per cent surplus -- is lost.  The stronger the link, the less Queensland can rely on its own capacity to be dedicated to its market.

More importantly, the loss of profits by private sector investors has left them shy about the future, especially to baseload power.  This risks the creation of a vicious circle under which all future investments will be state funded.

The Government will then be trapped into management of an industry that, unlike distribution, does not have monopoly characteristics as justification for public ownership.

Electricity is one of the last industry sector playgrounds for politicians.  But their posturing and overriding of market forces brings risks of instability.  Politicians must exit the power industry and do so quickly or see a renewal of the waste and inefficiencies that the national market was established to combat.

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