Power cuts, bigger bills on the way

Buy candles. Pray for more rain. And hope for good snow this winter, Paul Sheehan writes.

THE water shortage across eastern Australia is now so acute it has begun to affect power supplies, and the country is at risk of electricity shortages next year.
"I think we are in denial, and are going to have brownouts in NSW if we don't get snow this winter," a source within the electricity market told the Herald.
Coal and hydro power generation require very large amounts of water, and the Snowy scheme depends on it for 86 per cent of its generation capacity.
"Last year we had the lowest snowfall ever recorded. If this happens again we are in trouble," the source said. He declined to be named because electricity pricing and supply is a politically charged subject.
Prices are already tipped to double in South Australia.
The head of the CSIRO's Australian climate change science program, Paul Holper, said: "Lack of water could become a problem for power generation.
"You've got to find a supply of water to set aside for power generation, but there is already a shortage of water for agriculture. So this is going to become more of a problem."
The stock market has already sent an alarm signal. The price of electricity futures has almost doubled so far this year.
In January the price of a megawatt hour for delivery to NSW in 2008 was $38. This week the price rose to just over $72, a 90 per cent rise in less than five months. The electricity price in Queensland has more than doubled. The volume of trading in electricity futures has roughly quadrupled this year.
According to a market assessment from the Sydney Futures Exchange, it ranks as one of the biggest commodity price increases ever seen, and is not driven by market speculation but is caused by the convergence of several negative trends, dominated by the water shortage.
If this week's widespread rains continue, and the drought breaks, a power problem will be averted and the market will stabilise. But Australia is now an advanced economy at the mercy of the weather. Certainty over water supply has gone.
Power stations have a voracious appetite for water, and the shortage is affecting production in NSW, Victoria and Queensland, despite an abundance of coal and gas supplies.
"Australia has never factored in the cost of water, which is why it has some of the cheapest power in the world," the market expert told the Herald.
"Eventually, where there is not enough water for power in the Snowy, they will not be able meet their contractual obligations."

Snowy Hydro is the most vulnerable supplier because 86 per cent of its generating potential comes from hydro power. Water storage in the Snowy scheme system is at its lowest May level since the Snowy scheme was completed in 1974. The main water storage, Lake Eucumbene, is the lowest it has been since construction. Water levels are down to just 8 per cent of active capacity in the Snowy system.
Although Snowy Hydro is responsible for only about 7 per cent of NSW power generation, it is crucial for relieving demand upon the main power stations during periods of peak demand.
If the water supply is cut and hydro power halted, there will not be enough coal power to meet demand in peak periods.
"If the current drought conditions continue, it is likely that Eucumbene Lake levels will continue to drop, possibly to below original minimum operating levels," Snowy Hydro conceded in a statement eight days ago. "Water inflows during the past 12 months are significantly below the previous lowest ever
minimums since records were kept over the past 101 years. "Snowy Hydro believes that it can meet its water and electricity commitments this coming winter and into next summer."
This assurance extends only for the next eight months. Beyond that depends on rain and snowfall. Snowy Hydro will be cloud-seeding this winter to induce snow. It will also depend more on its two gas-fired plants in Victoria, but they only represent 14 per cent of Snowy's full capacity.
Market concerns and the soaring futures prices were buttressed this week by the release of a report commissioned by the Victorian Government that warns: "The strain on the [power] system as the population grows and more people install air-conditioners could result in brownouts or blackouts and system failures."
The report, which says that water shortages experienced by Snowy Hydro and coal-fired plants in Victoria's La Trobe Valley are likely to worsen, was prepared by the CSIRO together with the consultant Maunsell Australia and the law firm Phillips Fox. The CSIRO's Paul Holper was the principal author.
In Victoria three giant coal-fired power stations, Loy Yang A, Loy Yang B and Yallourn W, receive an annual water entitlement from the Government equal to 20 per cent of Melbourne's entire annual water use. But water shortages have forced them to buy water elsewhere to maintain capacity.
In Queensland, Rio Tinto said on Wednesday it was cutting 160 jobs at its Tarong coalmine because a water shortage was forcing Tarong Energy to slash power generation by 70 per cent.

South Australia's largest manufacturers called this week for an inquiry into electricity prices. They say an expected doubling in the rise in power costs over the next year would threaten their economic viability.
The surge in electricity futures prices places state regulators in a dilemma because they must balance the protection of consumers from excessive price rises and fluctuations with the realities of the market.
Coal is both abundant and the cheapest fuel, but investment in coal-powered production capacity has stopped because of uncertainty over future carbon taxes.
"When prices are high it is a signal that new electricity capacity is needed," the market expert told the Herald. "But who is going to invest over a 20-year horizon when the rules can change and do change? I think we are going to see another California here."
California experienced a series of blackouts during 2000 and 2001. The underlying cause was a failure to balance deregulation of power generation and regulation of household consumer prices. Two companies, Enron and Reliant Energy, manipulated the market, causing a rapid rise in prices, which led to blackouts.
A Federal Energy Regulatory Commission inquiry concluded: "Supply-demand imbalance, flawed market design and inconsistent rules made possible significant market manipulation."