Bell Bay: another bungle

Bacchus H. Barren

ON Friday 18 August, Access Economics released a nationwide report card on state governance and financial reporting structures. Not surprisingly Tasmania ranked at the bottom of the heap with comments pointing to internal state secrecy and processes that are at least 20 years behind standard.

On the same day, the Examiner reported an apparently benign story (with the exception of the sacking of the workforce) about the closure of the Bell Bay thermal power station — to non-emergency operations. After years of refurbishment and gas conversion (at public cost) and in the light of the new world of the deregulated National Electricity grid (Basslink), what does the sudden closure of Bell Bay really mean?

And is the Government hiding something?
Bell Bay — a testament to bungled planning

The Bell Bay thermal power station was designed in the 1960s as an emergency state backup and was finally commissioned as an oil-fired 120MW power station in 1971. However as Tasmania has always operated in energy balance (indeed has often had a surplus of electricity), the need to fire-up Bell Bay has always been minimal. Since its construction, the station has only ever operated for about 10% of that time.

According to the Examiner article, the reason given for the closure on 18 August was that the operator, Alinta, could not come to an agreement with Hydro as to the future contract. Alinta was quoted as saying that there was never any intention that Bell Bay would be used to produce and sell electricity via Basslink. The minister was quoted as saying that the public had paid $81 million to convert the station to gas but this was a fantastic deal for taxpayers as the station owners (Hydro) have consequently saved $200 million in station operating costs. It may seem totally bizarre that a power station was converted to gas at a cost to taxpayers of $81 million and will now sit dormant whilst electricity is traded across Basslink! Whats going on here?

Smelling an oily rat?

The first sign of an odour in this story related to the fact that the numbers don’t add up. The article quoted the power stations capacity as a meagre 120MW, when in fact Bell Bay has two 120MW gas-fired generators and three 35MW portable gas-fired generators (a total installed capacity of 345MW — amongst the largest in the state). Does the government really not know the capacity of its own power utilities?. With electricity retailing to Tasmanian households at an average of 11 cents/kWh, this means that the retail value (revenue) of Bell Bay’s electricity is a cool $332 million per year (and a probable wholesale value of about $150 million per year). Why would the Government pull the plug on what appears to be a cash-cow?

The second nonsense figure quoted in the article relates to the alleged savings achieved by gas conversion ($200 million). One assumes that this is the price differential from running the station on cheaper gas instead of burning oil. In the same week that Bell-Bay was unplugged, two shipments of heavy fuel oil arrived in the Ports of Beirut and Tripoli (Lebanon) on the other side of the globe. These vessels were carrying 87,000 tons of heavy fuel oil between them, primarily to supply Lebanon’s electricity plants which had remained without shipments since the war with Israel commenced more than 40 days earlier.

Power stations do not consume run-of-the-mill household diesel. Most oil consumed by power stations is No.6 Heavy Fuel Oil which is considerably cheaper — although a small amount of lighter No.2 oil is used for boiler start-up and flame stabilisation. In the second quarter of 2006, the retail price of No.6 Heavy Fuel Oil was $US1.30 per gallon or $US7.33 per million British Thermal Unit equivalents. This equates to about $AUS 0.44 per litre. Hence the $200 million price tag provided by the Tasmanian Government as a cost-saving on Bell Bay gas conversion may have purchased about 454 million litres of heavy fuel oil or about 10.3 tanker-ship loads.

This same 454 million litres may have been sufficient to meet the entire electricity needs of Lebanon (population of about 4 million people) on a continuous basis for about 7 months. So why does the Tasmanian Government believe that one power station, operating on an emergency basis only, within a population base that is 12% of that of Lebanon, possibly need to consume such a huge amount of fuel oil? This argument is especially problematic given that the first phase of gas conversion at Bell Bay was only completed at the end of 2003-start of 2004 and the second phase was opened by Premier Lennon during the March 2006 election campaign. The simple answer is that the Government appears to have grossly overstated the cost-benefit of spending a huge amount of public money to convert Bell Bay to gas.

The Act of selling?

The final clanger in the argument around Bell Bay relates to the denial that gas conversion was a necessary component to enable continuous production and the sale of electricity on the national grid via Basslink. It has been widely known for years that the Government always intended to sell the Bell Bay power station as a utility servicing the national grid — indeed they rammed through the Bell Bay Power Station Act 2004 to enable the separation of the utility from the Hydro in preparation for sale post Basslink. As late at January 2006, Treasury documents were still describing the role of Bell Bay as contributing to the National Electricity Grid. So this denial seems to constitute both a sudden policy back-flip in the last few months and a load of old cobblers.

What energy policy?

So why has the Tasmanian Government seemingly a) grossly overstated the value of gas conversion for Bell-Bay, b) denied that Bell Bay was ever going to produce for the National Grid and c) canned the station almost entirely. There may be multiple reasons for this roller-coaster ride of decisions, but perhaps the common underlying theme is that Tasmania is now engulfed in an Energy Policy vacuum, crippled by political intervention and stymied by both a lack of talent and understanding of contemporary energy markets. This has resulted in a history of reactive decisions and policy back-flips culminating in a huge cost to the taxpayer — possibly within the hundreds of millions of dollars.

More damming still is that, after the taxpayer has forked out millions to convert Bell Bay to gas, the station will now largely remain as a dormant White Elephant — rather damning now that an open corridor to the National Grid now exists via Basslink. After all the hype about the value of Basslink, why has the Government now decided to lock-up 345MW of power generation? One possible answer to this conundrum is that the contract gas sale price negotiated on the gas pipeline is too high to enable economic power production from Bell Bay or that the market sale price for power obtained via Basslink is less than the cost of production. Possibly the answer is a combination of the two factors, however this may not bode well for the prospects of Basslink or the Tasmanian taxpayer.

Perhaps the government is pinning its hopes on the belief that each Tasmanian will be able to afford the power bill to run a Tellie for at least 2 hours per week to see the Tassie Hawks play at York Park.