07 Dec 2012

"The Economics of Energy Generation" and the future energy mix for NSW

by Graham Taylor, Graeme Dennis, Joel Von Thien, Samy Mansour

November saw not only the release of the Federal Government's Energy White Paper but also that of the Report by the NSW Parliament's Public Accounts Committee on "The Economics of Energy Generation" which provides an interesting insight into the potential future energy mix for NSW.

The Report contains a total of 24 recommendations including:

  • accelerating the sale of the State-owned electricity generators (which are the subject of current negotiations between the State and industry participants) and avoiding further State investment in electricity generation;
  • the removal of price regulation when competition is found to be effective in NSW; 
  • the sale or lease of the Cobbora coal mine, the legislative mandate for which has been passed; and
  • the creation of an expert panel to explore strategies to maintain affordable supplies of gas in NSW.

Of particular interest are the following two recommendations which may have significant implications for the future mix of baseload electricity generation in NSW: 

  • the NSW Government conducting a public education campaign regarding coal seam gas production in NSW; and
  • a review of the Australian Radiation and Nuclear Safety Agency Act 1998.

Developing NSW's coal seam gas reserves

The Report recognises that, while gas-fired electricity generation is expected to increase due to relatively low carbon emissions, NSW does not have significant reserves of conventional gas and is reliant on supplies from other States.

NSW does, however, have significant coal seam gas reserves which, if extracted, have the potential to improve the State's energy security. In fact, submissions made on behalf of the Department of Trade and Investment indicate that potential reserves of CSG in NSW are sufficient to not only supply the domestic market but demand for liquefied natural gas exports as well.

While there are many opportunities that will come from developing the CSG industry in NSW, there are challenges affecting the CSG industry, some of which are discussed in the Report, including:

  • the development of infrastructure necessary to support CSG development in an appropriate and timely fashion; 
  • the imposition of onerous planning restrictions; and
  • public concerns regarding the impact of CSG development, particularly on regional areas.

The Report recommends that: 

  • CSG should be considered as part of the State's overall energy mix;
  • the NSW Government allow the gas market to operate freely. The Report is not in favour of the introduction of a domestic gas reservation policy and suggests that, if incentives are required to encourage CSG supply to the domestic market, a reduction in royalties be considered; and 
  • the Government conduct a public education campaign providing up-to-date and accurate information about the economic and environmental risks, relevant government regulations and benefits of CSG production in NSW.

Uranium – part of the NSW energy mix?

While the Report highlights a number of advantages of nuclear power, it also recognises a number of barriers to nuclear power becoming a viable source of electricity for NSW. These include:

  • legal prohibitions regarding the construction of nuclear power facilities and uranium mining in NSW;
  • high capital costs; and
  • the public's concerns with respect to the safety of nuclear power generation.

Consistent with the view that no potential source of power should be arbitrarily ruled out, the Report urges:

  • the NSW Government to initiate public discussion about nuclear power generation as an option for the State; and 
  • the Minister for Energy and Resources to raise the issue of nuclear power generation at both Commonwealth and State level, including a review of the Australian Radiation and Nuclear Safety Agency Act 1998 which, amongst other things, prohibits the construction of nuclear power plants in Australia.

Where to from here?

It will be interesting to see which recommendations the Government will adopt in the new year and what changes, if any, it will make to the initiatives implemented in 2012 in light of the Report.

While the State's largest CSG project supplies around 6% of the State's gas market, CSG has the potential to generate a significant amount of the State's base load power in the future and the flourishing CSG industry in Queensland indicates that CSG projects in Australia can be successful. The Government's policies with respect to the construction of infrastructure relating to, and the regulation of, CSG will significantly impact whether or not CSG will play a larger role in NSW's energy mix in the future.

While nuclear power generation is a long term proposition for NSW (for example, submissions suggested that a nuclear power facility would take at least 10 years to build), the NSW Government has left the door open for this to occur. The State has recently removed the ban on the exploration for nuclear deposits (which attracted 39 expressions of interest) and intends to grant exploration licences by mid-2013. The Minister for Energy and Resources has said that it will be at least 2015 before the Government moves to lift the ban on mining uranium and, if the recommendations from the Report are adopted, the removal of Federal prohibitions may also be on the table.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.