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Tasmania is currently facing one of the most significant energy security challenges in our history.
We have experienced similar challenges during previous periods of severe drought including back in 1968 and then more recently, under the previous Government, between 2006 and 2008.
On each previous occasion Tasmania has managed its way through the challenge and we will do so again.
The Tasmanian Government has a Plan in place to ensure we can continue to meet the energy requirements of Tasmania and we are getting on with the job of implementing that Plan.
Notwithstanding the fact that we have faced energy security challenges before, the precise circumstances that have led to the current situation are, in fact, unprecedented and it is worth briefly reflecting on them.
In Spring last year Tasmania experienced the lowest rainfall in over 100 years of recorded history. History proves that the Spring dry was worse than a one in 100 year event. The inflows to the Hydro Dams during Spring were also the lowest in Hydro’s records. In fact, the inflows were not just the lowest on record, they were less than half the previous record low in the last 30 years of Hydro records.
To put this in some perspective, if Hydro inflows during September to December last year had been equal to the previous 30 year low, water storages would be up to 8% higher than they are today.
This situation has been further exacerbated by continued below average inflows for January and February. While current forward forecasts are for a greater chance of above average rainfall for March through to May, we cannot rely on forecasts and that is why our Plan includes contingencies to manage continued dry conditions.
However, the current record dry period is only half of the story. At the same time we have also experienced the first ever substantive outage of the Basslink cable.
Basslink was commissioned under the former Government in 2006 and was intended to provide for energy security in times of low inflows and also to facilitate trade into the National Electricity Market allowing Hydro Tasmania to take advantage of peak prices interstate.
Up until the current outage the performance of the Basslink cable has been very reliable. In the decade since Basslink was commissioned, the previous maximum number of days Basslink has been out in a calendar year is just over 12 days in total. In fact over this period Basslink has operated with an average availability of approximately 96%. Basslink, up to the time of the current outage, had proven to be extremely reliable.
During the 2006 – 2008 dry, Basslink continued to be available although with a lower average import capability. In the 1968 dry there was of course no Basslink but equally it had not been factored in as a contingency leading into the event.
The present situation involving both the record dry and first substantive Basslink outage is therefore, quite literally, unprecedented.
Water Storage Context
It is important to briefly provide some broader context on water storage levels.
In the lead up to the carbon tax Hydro Tasmania commenced the process of building up water storages to maximise export capacity during the carbon tax period.
Up until the introduction of the carbon tax, Hydro Tasmania storages were set at a preferred minimum level of 30% by 1 July each year.
Following the introduction of the carbon tax, in September 2012, the preferred minimum level was lowered by 5% to 25%.
On 1 July in each subsequent year storages have been around 30%. On 1 July 2013 water storages were just under 33%. On 1 July 2014 they were just over 28% and on 1 July 2015 storage levels were just under 30%.
Hydro Tasmania’s inflows for the period of May through to August 2015 were above average. The inflow for August itself was below average but not by a significant amount.
The record dry commenced in September 2015 with below average inflows for that month and then intensified in October 2015 when Hydro Tasmania’s dams received just 7% of average inflows.
In response, from October 2015 Hydro Tasmania began to significantly increase its import of energy across Basslink in order to help manage the water storage levels. By late November Hydro Tasmania was importing up to 40% of Tasmania’s energy requirements across Basslink. They also reviewed plant utilisation to identify opportunities for deferring planned maintenance at its power stations.
In November, with the record dry continuing, Hydro Tasmania began the process of recommissioning the Combined Cycle Gas Turbine from dry lay up. This was well before the failure of the Basslink cable. It was returned to service on 20 January 2016 and continues to operate at or near maximum capacity.
Tamar Valley Power Station
Over recent weeks there has been a lot of commentary on the Tamar Valley Power Station and again I think it’s important to put some basic facts on the table.
The Tamar Valley Power Station is made up of 5 turbines which, at maximum capacity, can deliver up to 386 MW of energy. One of those turbines is the Combined Cycle Gas Turbine which has a maximum capacity of 208 MW. The balance is made up of 4 Open Cycle Gas Turbines.
The partly constructed Tamar Valley Power Station was purchased by the previous Government in 2008 through the retail energy business Aurora Energy. It cost the Tasmanian people more than $330m to acquire and bring into operation.
In March 2012 the Expert Panel released its report into the structure of the Tasmanian electricity industry. The Panel made a number of observations and recommendations in relation to the Tamar Valley Power Station.
The Panel confirmed that the Government at the time was advised that the total cost paid by the Government exceeded the value of the asset at the time of purchase by approximately $150m. It also confirmed that the power station had proven to be a financial burden to Aurora Energy because of its high cost of operation and associated debt.
The Expert Panel recommended the Tamar Valley Power Station, including the CCGT, be sold or transferred to Hydro Tasmania.
In May 2012 the former Government announced its response to the Expert Panel. While acknowledging the energy security value of the Tamar Valley Power Station, the former Government announced that it would be seeking an independent commercial analysis of the asset and investigate the potential sale of all five generators, including the Combined Cycle Gas Turbine, so long as it did not compromise energy security. It further committed to either transfer ownership of the Tamar Valley Power Station to Hydro Tasmania or to sell the power station, if the price was right, before June 2013.
In June 2013 the Tamar Valley Power Station was transferred to Hydro Tasmania together with its associated debt of $205m. In transferring the asset it was recognised that Hydro Tasmania had the potential to reduce the operating losses associated with the CCGT by electing to not operate the asset when it was not optimal to do so.
In June 2014 Hydro Tasmania commenced the process of putting the Combined Cycle Gas Turbine into dry layup. This was due to the ongoing running costs of the CCGT being well in excess of the expected and forecast NEM wholesale prices where continuing to operate the unit would have resulted in significant ongoing losses.
In January 2015, Hydro Tasmania wrote to the Tasmanian Government seeking permission to sell the Combined Cycle Gas Turbine but retain the other four Open Cycle Gas Turbines at the Tamar Valley Power Station.
In August 2015 the Government gave approval for Hydro Tasmania to seek expressions of interest for the sale of the CCGT but with strict conditions including written confirmation from Hydro Tasmania that energy security could be assured and that Hydro Tasmania review its prudent storage management guidelines and extreme credible event plans.
In November, Hydro Tasmania commenced the process of recommissioning the CCGT and it returned to operation on 20 January 2016.
As previously publically confirmed, the Government has withdrawn the approval given to Hydro Tasmania to seek expressions of interest for the sale of the CCGT. That sale is now completely off the table.
Energy Supply Plan
I would like to now turn to the Government’s response and the development of the Energy Supply Plan.
On learning of the Basslink outage, the Government’s response was immediate and proactive.
The extended outage was formally announced on 22 December 2015 and that same day the Government met with the Chairman and the CEO of Hydro Tasmania to discuss contingency plans in response to the outage.
On 14 January 2016, when Basslink announced an extension in the expected return to service of the cable from February to March, the Government, in partnership with Hydro, publically announced the first phase of the Energy Supply Plan would deliver more than 400 MW of additional energy capacity.
The Government has subsequently updated the Plan by announcing a firm commitment to bring up to 200MW of containerised diesel generation to Tasmania before the end of April. When fully implemented the total contingency generation will exceed the total import capability of Basslink.
The objective of the Plan is to ensure that Tasmania’s energy requirements can continue to be met even if the Basslink repair is significantly further delayed and we continue to experience dry conditions.
And the Government, together with our energy businesses, has continued the task of implementing the Plan.
The Government also announced the formation of an Energy Security sub committee of Cabinet to ensure whole of Government oversight of the energy security response.
The Energy Security Cabinet Sub-Committee has now met on ten occasions.
We have also put in place further arrangements to ensure the effective coordination across Government and across each of our energy businesses in the roll out of temporary generation.
Through Hydro Tasmania, we have continued discussions with each of the major energy users. A number of our major energy users have presented commercial proposals to Hydro Tasmania for load reduction to assist in managing the situation and several have now been agreed to.
Its important to note that in each instance the agreed load reductions have been voluntary and with no expected impact on permanent employees. While these arrangements have been voluntary it is appropriate to acknowledge the community leadership that has been shown in putting these reductions in place.
It is a great reminder that we can all play our part in responding to this situation. The Government continues to encourage the wider community to take their usual steps in acting responsibly to conserve energy. The Government has asked each of the energy businesses to assist their customers to identify opportunities to save energy should they choose to do so. The Government has also encouraged Government departments and businesses to play their part.
Notwithstanding this, the Energy Supply Plan’s objective is to bring on additional generation to meet demand, and therefore avoid the need for mandatory energy savings either for businesses or households.
The Energy Supply Plan has two phases:
I am pleased to provide the House with an update on Phase 1 of the Plan:
Hydro Tasmania has also agreed to commercial terms with a number of major industrials for voluntary load reductions. The total load reduction as of the 7March 2016 was equivalent to 115 MW (noting that it will peak at approximately 150 MW during the week of the Norske Skog paper machine shut down). We are advised that these reductions will not impact permanent jobs at these companies and will not jeopardise the long term variability of these businesses in Tasmania.
The cost of securing and installing 200 MW of temporary diesel generation will be significant. The site installation costs are approximately $20 million, equipment hire cost of approximately $24 million and the operational cost of operating the first 100 MW will be approximately $11 million per month. Actual costs will depend on how much of the diesel generation is operated, and for how long.
In addition, the Government is progressing with planning for Phase 2 of the Energy Supply Plan to deal with the event of an extended Basslink outage into next summer or beyond.
In progressing with Phase 2 a primary consideration is whether there may be cost efficiency in sourcing additional gas as an alternate power supply option to satisfy temporary generation requirements over the longer term.
The key steps involved in progressing Phase 2 of the Energy Supply Plan include:
Information in relation to Basslink’s return to service; actual winter/spring inflows; and actual TVPS contribution may relieve the need to replace the full 200MW of supplementary diesel units. If very dry, any dual fuelled units may be additional to capacity rather than replacing diesel capacity.
Importantly, as we have consistently said, our Energy Supply Plan is designed to be responsive to changing circumstances. It needs to be, as we are dealing with a very fluid situation. If the current dry conditions continue we will utilise more of the temporary generation. If the rains start to return we will utilise less.
We can’t control the rain and we can’t control the repair to Basslink but we can control the contingencies necessary to ensure energy security in Tasmania and that is what the Government is doing.
As we have set out in our Energy Supply Plan update, the costs associated with the additional contingencies will be significant but it is necessary and prudent that we put them in place.
Importantly, because of the Government’s sound Budget management, we are able to afford the Energy Supply Plan without impacting on essential services. And we have taken the pressure off Hydro at this difficult time by writing down its expected returns to Government.
The Government is getting on with the job of securing the State’s energy supply, and Tasmanians can be assured of the continuation of energy security despite the challenges faced by dry conditions and an extended Basslink outage.
Our focus on mitigating the risks to Tasmania’s energy needs are being met, and the priority to manage the situation until water storages return to lower risk levels is a sound one.
Future energy security
I would like now to turn to the future.
The issue of Tasmania’s future energy security, into the long-term, is inextricably linked to an assessment of Tasmania’s renewable energy potential in the context of Australia’s rapidly changing energy landscape.
The national energy market is undergoing a transition to lower carbon forms of generation and there are rapid technological changes that are occurring in battery storage, grid design and electric vehicles.
The decision to build Basslink and join the National Electricity Market was based, in part, on Tasmania’s capacity to export our renewable energy and thereby contribute to Australia’s transition to cleaner generation. It was also designed to afford Tasmania with additional energy security in times of lower rainfall.
Despite our current temporary energy issues there is no doubting Tasmania’s long term capacity to contribute further to Australia’s clean energy transition. Our natural renewable energy resources are genuinely world class and there continues to be a strong case for our Hydro assets to be seen as a strategic asset for Australia as much as they are for Tasmania.
What our present predicament has yet again illustrated, is Tasmania’s vulnerability as an island State. If we are to maximise the role we can play and take full advantage of our natural advantages then a secure and reliable interconnection remains a vital ingredient. The facilitation of substantial further renewable development will depend on it.
Similarly, if Australia is to successfully encourage greater renewable penetration and if the National Electricity Market is to truly meet its original intent then strong interconnection between the regions of that market is also essential.
That is why strong interconnection should not be seen as just a Tasmanian objective, it should be recognised as a national objective.
In designing Basslink, it was wrong for Tasmanians to be left to meet the costs in its entirety.
The Tasmanian Government remains committed to pursuing the case for a second Bass Strait interconnector but it must be recognised as national infrastructure and Tasmania must not be left to foot the bill.
Making the case for a second interconnector will be hard and it must be recognised as a longer term project. But if Tasmania is to maximize its renewable energy contribution then a second interconnector should be built and we will continue to advance the case to make it happen.
In addressing Tasmania’s future energy security there are other factors that must also be considered. Changing rainfall patterns and its impact on inflows, load risks and opportunities and their impact on our anticipated energy supply and demand balance as well as medium to long term gas price risk are all relevant to the assessment.
In assessing actions required to mitigate our future energy security risks we must act carefully and prudently and based on sound expert advice. We must not engage in knee jerk reactions. What we can all agree on is that the status quo is not an option. We must act to ensure that the present energy security issues never happen again.
Today I can announce the establishment of the Tasmanian Energy Security Taskforce. The Taskforce will have 3 members with extensive experience in the energy sector including renewable energy development and financing, national electricity market regulation, business management and governance. The Taskforce will be chaired by Mr Geoff Willis, the current Chairman of Aurora Energy. Mr Willis has extensive experience in the energy sector having previously been CEO of Hydro Tasmania as well as a Member of the AEMC Reliability Panel.
The Tasmanian Energy Security Taskforce will be charged with undertaking a future energy security risk assessment for Tasmania having regard to:
The Taskforce will report back to the Government with recommended actions to help future proof Tasmania from energy security risks.
An interim report will be delivered within 6 months and a final report within 12 months. The Taskforce will engage with relevant stakeholders and the broader community in developing its recommendations.
In addition, the Taskforce will undertake an independent evaluation of key decision making relevant to the present energy security situation and report back to Government with recommendations in response.
It is important that there is a careful assessment of key decisions but it should be undertaken at a time that does not distract from the focus of meeting Tasmania’s immediate energy needs.
The current efforts being made by our energy businesses in responding to this situation are intense and they must not be distracted from that effort. Accordingly the Taskforce will make an independent judgment on the appropriate timing of this aspect of its function.
There are of course many people working very hard to help us manage this situation. We have over one hundred people across Government and the energy businesses working on our response to this situation.
I want to take the opportunity once again to publicly thank all of the hard work people are putting in to help ensure we get through this.
I firmly believe that one of the great qualities of Tasmania is a strong resilience in meeting challenging circumstances. I have no doubt we will get through this and when we do it will be seen as yet another demonstration of that enduring strength.