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LEGISLATIVE ASSEMBLY OF NEW SOUTH WALES PUBLIC ACCOUNTS COMMITTEE REPORT 6/55 – NOVEMBER 2012 THE ECONOMICS OF ENERGY GENERATION LEGISLATIVE ASSEMBLY PUBLIC ACCOUNTS COMMITTEE THE ECONOMICS OF ENERGY GENERATION REPORT 6/55 – NOVEMBER 2012 New South Wales Parliamentary Library cataloguing-in-publication data: New South Wales. Parliament. Legislative Assembly. Public Accounts Committee. Report on the economics of energy generation: “Electricity supply in NSW", "The national electricity market", "Electricity prices", "Energy security", "Carbon capture and storage", "Coal seam gas", "Renewable energy generation", "Alternative forms of energy generation" , "Demand management" / Legislative Assembly, Public Accounts Committee. [Sydney, N.S.W.] : the Committee, 2012. 252 p. ; 30 cm. (Report no. 6/55 Public Accounts Committee) “November 2012”. Chair: Jonathan O'Dea, MP. ISBN 9781921686580 1. Electric utilities—Rates—New South Wales. 2. Electric utilities—Economic aspects—New South Wales. 3. Gas industry—Economic aspects—New South Wales. 4. Coalbed methane—Economic aspects—New South Wales. 5. Carbon sequestration—Economic aspects—New South Wales. I. O'Dea, Jonathan. II. Title. III. Series: New South Wales. Parliament. Legislative Assembly. Public Accounts Committee. Report ; no. 6/55 333.79 (DDC22) The motto of the coat of arms for the state of New South Wales is “Orta recens quam pura nites”. It is written in Latin and means “newly risen, how brightly you shine”. ECONOMICS OF ENERGY GENERATION Contents Membership _____________________________________________________________ v Terms of Reference ________________________________________________________vi Chair’s Foreword _________________________________________________________ vii Executive Summary ________________________________________________________ ix List of Findings and Recommendations _______________________________________ xiii List of Abbreviations ______________________________________________________ xvi CHAPTER ONE – CONDUCT OF THE INQUIRY _______________________________1 CHAPTER TWO – ELECTRICITY SUPPLY IN NSW ____________________________ 6 HISTORY OF THE ELECTRICITY NETWORK IN NSW ______________________________ 6 GENERATION CAPACITY IN NSW ___________________________________________ 11 TRANSMISSION AND DISTRIBUTION _______________________________________ 21 DEMAND ____________________________________________________________ 23 CHAPTER THREE – THE NATIONAL ELECTRICITY MARKET ___________________ 29 STRUCTURE AND RULES OF THE NATIONAL ELECTRICITY MARKET ________________ 29 INTERCONNECTORS AND THE MOVEMENT OF ELECTRICITY BETWEEN STATES _______ 38 ADVANTAGES AND DISADVANTAGES OF THE NATIONAL ELECTRICITY MARKET _______ 41 CHAPTER FOUR – ELECTRICITY PRICES _________________________________ 45 WHOLESALE PRICES ___________________________________________________ 45 RETAIL PRICES ________________________________________________________51 COMPETITION IN THE RETAIL MARKET _____________________________________ 64 CHAPTER FIVE – ENERGY SECURITY ___________________________________ 69 ENERGY SECURITY IN THE NATIONAL ELECTRICITY MARKET ____________________ 70 FUEL PRICES _________________________________________________________ 76 THE ROLE OF GOVERNMENT _____________________________________________ 81 CITIZENS’ POLICY JURY VIEWS ___________________________________________ 84 CHAPTER SIX – CARBON CAPTURE AND STORAGE _________________________ 88 CHAPTER SEVEN – COAL SEAM GAS ____________________________________ 103 CHAPTER EIGHT – RENEWABLE ENERGY GENERATION _____________________ 111 HYDROELECTRICITY ___________________________________________________ 116 WIND ENERGY ________________________________________________________ 118 SOLAR ENERGY _______________________________________________________ 128 ENERGY STORAGE _____________________________________________________ 139 CHAPTER NINE – ALTERNATIVE FORMS OF ENERGY GENERATION_____________ 145 NUCLEAR ENERGY _____________________________________________________ 145 NOVEMBER 2012 i PUBLIC ACCOUNTS COMMITTEE CHAPTER TEN – DEMAND MANAGEMENT _______________________________ 164 DEMAND MANAGEMENT ________________________________________________ 164 DISTRIBUTED GENERATION _____________________________________________ 181 ENERGY EFFICIENCY ___________________________________________________ 185 APPENDIX ONE – NEWDEMOCRACY PROJECT ____________________________ 191 APPENDIX TWO – NEW ENGLAND CITIZENS’ POLICY JURY REPORT ____________ 197 APPENDIX THREE – SYDNEY CITIZENS POLICY JURY REPORT_________________ 207 APPENDIX FOUR – LIST OF SUBMISSIONS _______________________________ 216 APPENDIX FIVE – LIST OF WITNESSES __________________________________ 218 APPENDIX SIX – EXTRACTS FROM MINUTES _____________________________ 221 ii REPORT 6/55 ECONOMICS OF ENERGY GENERATION Figures Figure 1: Electricity supply __________________________________________________ 7 Figure 2: NSW generation capacity by fuel _____________________________________ 11 Figure 3: Electricity generation in NSW from all sources 2010-11 ___________________ 12 Figure 4: Installed capacity by fuel type (as at June 2010) _________________________ 14 Figure 5: Retail market shares of small customers in NSW (as at 30 June 2011) ________ 23 Figure 6: Annual growth in Australia's energy consumption _______________________ 24 Figure 7: Maximum demand in NSW, summer and winter ________________________ 26 Figure 8: The National Electricity Network ____________________________________ 31 Figure 9: History of Australian electricity market reform __________________________ 37 Figure 10: Interconnectors in the NEM _______________________________________ 39 Figure 11: Market design and price setting in the NEM ___________________________ 46 Figure 12: Average annual electricity prices in the NEM (per financial year) ___________ 48 Figure 13: Hedge contracts in the NEM _______________________________________ 50 Figure 14: Residential electricity price in NEM states (1955-2013) __________________ 52 Figure 15: Composition of an indicative annual bill for customers in all NSW supply areas, 2012-13 ________________________________________________________________ 53 Figure 16: Drivers of increase in average regulated retail electricity prices in NSW on 1 July 2012 (nominal %) ________________________________________________________ 54 Figure 17: Total network charges, real 2008/09 – 2012/13 ________________________ 55 Figure 18: Capex Allowance Determinations ___________________________________ 56 Figure 19: NSW summer supply-demand outlook _______________________________ 72 Figure 20: Retirement of baseload power stations in NSW ________________________ 73 Figure 21: How CCS works _________________________________________________ 89 Figure 22: Current and proposed CCS projects in Australia ________________________ 92 Figure 23: Coal seam gas and its extraction ___________________________________ 104 Figure 24: Levelised Cost of Energy 2012 _____________________________________ 115 Figure 25: Levelised Cost of Energy 2030 _____________________________________ 116 Figure 26:Global cumulative installed wind capacity 1996-2010. __________________ 120 NOVEMBER 2012 iii PUBLIC ACCOUNTS COMMITTEE Tables Table 1: Major existing power stations in NSW _________________________________ 13 Table 2: Projects with development approval in NSW ____________________________ 17 Table 3: Interconnectors in the NEM _________________________________________ 38 Table 4: Summary of recently completed CCS storage cost studies _________________ 96 Table 5: Australian conventional and coal seam gas resources and reserve estimates as at 31 December 2010 (PJ) __________________________________________________ 105 Table 6: Existing wind generation in NSW at 31 July 2012 _______________________ 118 Table 7: NSW wind projects under development at 31 July 2012 _________________ 121 Table 8: Connection and application data as reported by network distribution businesses at 27 July 2012 _________________________________________________________ 128 iv REPORT 6/55 ECONOMICS OF ENERGY GENERATION Membership CHAIR Mr Jonathan O'Dea MP, Member for Davidson DEPUTY CHAIR Dr Geoff Lee MP, Member for Parramatta MEMBERS Mr Bart Bassett MP, Member for Londonderry Mr Michael Daley MP, Member for Maroubra Mr Richard Torbay MP, Member for Northern Tablelands Mr John Williams MP, Member for Murray-Darling CONTACT DETAILS Public Accounts Committee Parliament of New South Wales Macquarie Street Sydney NSW 2000 TELEPHONE (02) 9230 2031 FACSIMILE (02) 9230 3309 E-MAIL [email protected] URL www.parliament.nsw.gov.au/publicaccounts NOVEMBER 2012 v PUBLIC ACCOUNTS COMMITTEE Terms of Reference That the Committee inquire into and report on the comparable economics of energy generation in New South Wales. In particular, the Committee will consider: i) the mix of energy sources used in New South Wales; ii) a comparison of NSW's energy mix with other jurisdictions both in Australia and overseas; iii) issues relating to long term energy security in New South Wales; iv) the potential for NSW sourcing energy interstate; v) the potential for, and barriers to, development of alternative forms of energy generation (e.g. tidal, geothermal) in New South Wales; and vi) best practice in alternative energy generation in other jurisdictions. vi REPORT 6/55 ECONOMICS OF ENERGY GENERATION Chair’s Foreword Energy economics has become increasingly relevant to people over recent years as they have opened envelopes and emails to discover continually rising electricity bills.