Date created: 12/4/07
Last modified:12/4/07
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John Quiggin

Another grandiose flop

Australian Financial Review

9 June 2005

American philosopher George Santayana once observed that those who do not learn from history are condemned to repeat it. I imagine he had a historical span of decades or centuries in mind, but it appears NT Opposition leader Denis Burke’s historical memory does not even go back six months.

In January this year, Colin Barnett looked set to become the next Premier of Western Australia. Despite a reasonable performance in its first term, the Gallop government was lagging in the polls and looked doomed to defeat.

Then Barnett came up with the idea of a 3700km canal to bring water from the Kimberleys to Perth. Running on the slogan ‘decisions not delays’, Barnett disdained such bureaucratic red tape as benefit-cost analysis or environmental impact studies, promising to implement the project regardless.

Working on the limited public information available, I estimated that water from the project could cost as much as $10/kilolitre, a price at which it would be cost-effective to tow icebergs from the Antarctic, Mirages don't win polls 10/2/05. Any credibility Barnett had left after this proposal was shredded when it was found he’d left a $200 million hole in his costings. Labor was re-elected and Barnett is now an ex-opposition leader.

Amazingly, Northern Territory Country-Liberal Party Leader Denis Burke is following in Barnett’s footsteps. He’s proposed a 3000km transmission line to connect the Northern Territory to the national electricity grid, via Queensland, at a cost of $1.3 billion. Burke suggests that the proposal could reduce NT electricity costs by 30 per cent.

Although there’s much that is murky about this proposal, it’s perfectly clear how this number was obtained. As Burke’s statement observes, the cost of power in the Territory is 14 cents/Kwh, compared to a national average of 10c/Kwh. If Territorians could get their power at the national average price they’d save 30 per cent.

Of course, this could only happen if the transmission line, including both capital and operating costs came free of charge, that is, if it were paid for by somebody else. Getting someone else to pay has been the traditional CLP approach to infrastructure finance, a point emphasised in Burke’s statement, which notes that the line will be ‘the one of the biggest Territory building projects since the CLP built the Alice Springs-Darwin rail link.’

In the present case, the assumption is apparently that the costs of the NT link can be borne by the existing users of the grid. Unfortunately for Burke, the National Electricity Market doesn’t work like that, so the only plausible source of financing is a direct handout from the Commonwealth. As Colin Barnett could tell him, this is unlikely to be forthcoming.

Let’s assume then that the cost of the transmission line is passed on to consumers. At a conservative average cost of capital of 9 per cent, the capital charge for a $1.3 billion dollar line would be about $120 million per year. With depreciation and operating expenditure of $40 million total cost would be $160 million per year.

The Territory’s total consumption at present is about 1600 Gigawatt hours per year. Assuming, very optimistically, that 50 per cent of this demand was switched to interstate suppliers, the transmission charge alone would be 20c per Kwh. Against this, buyers would save the 4c a Kwh difference between the NT and grid prices, implying that the total charge would be about 30c/Kwh. At this price, Burke’s other idea of relying on solar photovoltaics looks considerably more sensible.

Why are the economics of this proposal so awful? First, although long-distance transmission using high-voltage direct current (HDVC) is feasible, this project is unprecendented in its scale. According to the ABB Group, leaders in this field, the world’s longest transmission line is a 1700 km line transmitting power from the Inga falls in the Congo river to the copper mining district of Katanga in the Democratic Republic of Congo (DRC).

Second, the market is tiny. Darwin’s peak electricity demand is around 200 MW, and most of this will continue to be met by existing generators. The Inga-Shaba line has a power rating of 560 MW and the optimal scale for this transmission technology is even larger.

In a generally unedifying campaign, we can hope for one positive outcome. If the CLP is defeated, as seems likely, the idea of presenting uneconomic white elephants as election fodder will seem a little less attractive next time around.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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