Department of State Development, $672,950,000

Administered Items for the Department of State Development, $10,448,000

Membership:

Mr Van Holst Pellekaan substituted for Mr Marshall.

Mr Griffiths substituted for Mr Duluk.

Mr Knoll substituted for Mr Williams.

Minister:

Hon. A. Koutsantonis, Treasurer, Minister for Finance, Minister for State Development, Minister for Mineral Resources and Energy.

Departmental Advisers:

Dr D. Russell, Chief Executive Officer, Department of State Development.

Mr P. Heithersay, Deputy Chief Executive, Department of State Development.

Mr R. Janssan, Executive Director, Strategy and Business Services, Department of State Development.

Mr V. Duffy, Executive Director, Resources and Energy, Department of State Development.

Dr T. Tyne, Executive Director, Mineral Resources, Department of State Development.

Mr B. Goldstein, Executive Director, Resources and Energy, Department of State Development.

Mr N. Panagopoulos, Director, Resource Royalties, Department of State Development.

The CHAIR: I declare the proposed payments open for examination and refer members to the portfolio statements in Budget Paper 4, Volume 3. There are no opening statements.

Mr VAN HOLST PELLEKAAN: I refer to Budget Paper 4, Agency Statements Volume 4, page 93. I will start with what I am sure will be a very predictable question but, nonetheless, a very important question. When I asked the minister in estimates exactly one year ago to the day what the government would be doing to make up for the fact that Alinta's electricity production would no longer be in the market, the minister responded by saying, 'I am quite confident that we will be fine. There is plenty of capacity in the system. There is plenty of safe interconnection.' Minister, what went wrong?

The Hon. A. KOUTSANTONIS: High gas prices. I think the unprecedented weather event that dramatically delayed the upgrade to the interconnector. I would have hoped that work would not have been disturbed. There was a confluence of events that conspired against us. There has been a lot of debate publicly about what occurred. I thought the most telling contribution was that of the new federal minister who said that you could not blame renewables for what occurred in South Australia, which I think has surprised many people in the state Liberal Party, but then he went on to defend privatisation, so there you go; you can have that.

The truth is that what occurred was that people who had purchased gas through long-term contracted arrangements were selling that gas on the spot market because the spot market was dramatically higher than the contracted rates, so they were making money in selling that gas and they were using alternative methods to generate electricity. The price setting in the market for that very small period was diesel and that was very, very expensive.

I think what you are finding is that the moratorium in Victoria, which is supported by both the Liberal and Labor parties, is having an impact. I think policies in New South Wales on not supporting the extraction of unconventional gas is having major impacts. Without trying to start conflict, I think the position of some members of this parliament about unconventional and conventional gas in the Otway Basin is causing there to be a very, very tight gas market. With the major gas companies trying to move as many gas trains as they can out through Gladstone, that means there is very little uncontracted gas in the market.

While the interconnector was down, we had a cold snap and the wind was not blowing, and we faced an unprecedented set of circumstances. Some people attempted to blame renewable energy for ideological reasons and others did so for financial reasons. The true culprit was a confluence of events. I suspect, had Alinta been in the market, we would not have seen that much of a difference.

Mr VAN HOLST PELLEKAAN: Thank you, minister. I think I would agree with much of what you said with regard to the week before last, when we had that perfect storm, but electricity prices in our state have been going up essentially since Alinta made their announcement two Junes ago that they were going to leave the market. We have had steadily rising electricity prices since then. That really had nothing to do with the wild weather or the very difficult circumstances that affected us for several days the week before last.

The Hon. A. KOUTSANTONIS: I do not want to enter into argy-bargy with you, but I do not accept that Alinta's closure is the major problem in South Australia. Losing competition is never good, especially when you have a monopoly market. Monopoly markets are very hard to break up. Through historical reasons which I do not want to go into because no-one in this room is guilty of imposing that on South Australians—there are others still the parliament who are—there are vertically integrated retailers who explore for gas, have gas, generate gas and have customers who are retailers, and they do very well at setting the price.

When you lose competition in the market, it is very hard for the government to respond. What we have been attempting to do is to bring as much cheap generation as we can into the market. We have been doing that successfully with solar and wind. The problem for solar and wind is that it is not dispatchable. You saw in the paper today a misunderstanding between me and the journalist who wrote the article. I was not saying that renewable energy is very expensive; I was saying that dispatchable renewable energy is expensive because technologies to store and dispatch it on a 24/7 basis have not been developed yet. That is why you need to have small demonstrators.

I could have quite easily used our procurement to buy very cheap wind and solar energy, but we want to incentivise storage. I think the member agrees with me that we should be trying to incentivise storage and dispatchable renewable energy. That is quite expensive at the moment. It is almost as expensive as gas fire or diesel fire generation on the current prices in the market. I think one problem is that there is no price signal in the national electricity market for open-cycle gas generation.

I think the commonwealth policy of a renewable energy target, which is bipartisan, is obtaining a perverse outcome from the national electricity market, which means we are getting more emissions. The Prime Minister signed an agreement in Paris on behalf of us all to reach a reduction in temperature of 2° by 2030. That means we have to completely decarbonise our electricity market. That is some of the advice I have received. We are going to need dramatic types of changes and the transitional fuel for that is going to be gas.

Gas is a very good low carbon-emitting fossil fuel that we can use. Coal cannot be part of that solution. We need to change the rules to reflect the right price signals. One of the great moves of the last COAG meeting before the federal election was the unanimous support by COAG ministers to ask officers to go away and do some work on an energy intensity scheme for thermal generation. I think that work is being undertaken and I look forward to taking it up at the next COAG.

We need greater interconnection. I think we all know the reasons why the Olsen government abandoned the MOU between South Australia and New South Wales for greater interconnection: they wanted to maximise the sale price of a monopoly asset. They did not want anything to affect that sale price, and we all know that interconnection brings prices down. That is why you saw the ACCC speak out against privatisations in an unprecedented move yesterday in the Australian Financial Review. So, rule changes, wrong price signals in the market, gas prices, gas policies in other states, moratoriums, poor interconnection and past decisions and monopoly traders—it is a confluence of events that has led us to where we are today.

Mr VAN HOLST PELLEKAAN: Minister, sub-program 7.4 says:

Provide policy advice and coordination of energy market reforms, including national reforms, sustainability, energy efficiency and renewable energy policy.

What warnings did you receive about these things that you have just described? When did you first become aware, through the advice the taxpayers are paying for to give to you, about these problems?

The Hon. A. KOUTSANTONIS: I am now the longest serving member of the COAG Energy Council, so I am well aware, and we are also very lucky to be the lead legislators of the COAG Energy Council. Vince Duffy has been doing an excellent job of advising the government on the appropriate rule changes that we need. We are working on the energy intensity scheme. We have instituted rule changes in terms of bidding in good faith and late bid changes.

We are working with the commonwealth cooperatively. I have to say that the last four national resources ministers—Martin Ferguson, Gary Gray, Ian Macfarlane and Josh Frydenberg—have been exceptional energy ministers on a national level, and South Australia has an excellent working relationship with them. Indeed, I was pleased to catch up with Ian Macfarlane only a few weeks ago when he came to Adelaide to visit.

The advice we are getting is very consistent: the national electricity market is not fit for purpose. It does not suit the needs of the 21^st century decarbonising economy. The Prime Minister has, on our behalf, entered into international agreements that we support. We have renewable targets we have set in place (the commonwealth does) and we should be meeting them.

Mr VAN HOLST PELLEKAAN: Minister, of the 54 FTEs in that sub-program 7.4, how many of them are directly involved in providing advice on energy policy and market matters?

The Hon. A. KOUTSANTONIS: I am advised about 15.

Mr VAN HOLST PELLEKAAN: Two pages ahead, page 95, in the same book, given that 'provide policy advice and coordination of energy market reforms, including national reforms, sustainability, energy efficiency and renewable energy policy' was not a target for this agency in 2015-16, when did you realise it was necessary for this department to manage the transition of SA electricity to a low-carbon future?

The Hon. A. KOUTSANTONIS: I do not understand the question. What do you mean?

Mr VAN HOLST PELLEKAAN: That policy advice program was not a target in the 201-16 budget. It is a target now, so when did you become aware that this was an important body of work to concentrate on?

Mr KNOLL: Obviously just now.

The Hon. A. KOUTSANTONIS: That is very unkind. I expect much more. You should respect your elders. What we have done is we have actually articulated something we have been working on for quite some time. We have actually articulated something we have been working on for quite a long period of time.

Mr KNOLL: Have we?

The Hon. A. KOUTSANTONIS: Yes, but of course you have to remember there are very few levers that I have in this system other than rules. I do not own transmission, distribution, generation or retail. Alas, you and I could have been here 30 years ago talking about our energy mix and direct decisions that you and I could have made to effect that.

Right now, the only way I can break up a privatised monopoly is to bring in other forms of generation. Decarbonising is going to be a great way for us to help with that. We have been planning this for a long time. Just because we have outlined it in the target does not mean that this is the first time we have considered it. I think this government has a long and proud history of attempting to decarbonise our economy.

I am a personal believer that we need a price on carbon; I always have been. I think a price on carbon is the right policy mix. I think the private sector is factoring in a price on carbon, and I think they are well in advance of us, and I think the rest of the world is factoring in a price on carbon. It is just the uniqueness of Australian politics that does not allow us to have a mature debate about global warming.

Mr VAN HOLST PELLEKAAN: Given that you said you do not have your hands on the levers or that the levers are not available for you, is what you were saying—

The Hon. A. KOUTSANTONIS: No, they were sold.

Mr VAN HOLST PELLEKAAN: What do you spend the $28 million on? What do the 54 people do and the 15 who are specifically giving you advice in exactly this area but you have just said there is nothing you can do.

The Hon. A. KOUTSANTONIS: I think that ask is a little frightening, and I do not mean this as a personal insult in any way. Now is not the time to lose capability on national electricity and energy policy. Now is exactly the time to be more involved. We are at the end of a long and skinny transmission system. We are a land mass the size of Western Europe with 1.6 million people, and our electricity transmission lines run from the New South Wales and Victorian borders right through to our West Coast. We need to have expertise to manage rule changes, to talk about policies. We have submitted rule changes to try to make sure that we can look after energy security.

Obviously, we spend a lot of money on the REIS scheme, which is a large part of our budget, which I would have thought you would have been very supportive of, given some of the communities that you overlook. I think now is the time when we will be having more information and more expertise in this agency and the wrong time to be cutting back simply because our assets were privatised by the former Olsen government.

Mr VAN HOLST PELLEKAAN: What advice did you receive about the potential to support, through whatever means are available to the government, keeping the Port Augusta power station open and operational?

The Hon. A. KOUTSANTONIS: What advice? The advice would be that the moment I pay a capacity charge to one generator, the obvious consequence of that would be paying a capacity charge to all generators, and then we are on a very slippery slide of having to pay everyone to provide electricity. I will give you a very common example: if we had paid Alinta the difference between their losses to make them profitable so that they could operate, what would stop AGL from saying to me, 'We are turning Torrens Island off unless you pay us,' or what would stop Origin from turning their generation off and saying, 'What will you pay us unless we operate?'

That is the consequence of privatising your electricity assets. The only measures you have left are that you can re-enter the market and build your own generator, and then what you are left with is the very real threat of other generators closing because they do not want to compete with the taxpayer because they cannot. Does that mean that you then nationalise all of them? If you nationalise all of them, what does that mean for sovereign risk and other investment and how will the market react to that?

We are now at the mercy of the free market and all we have is policy levers to pull on the National Electricity Market, and that is very limited, and these are the consequences. That is why Tom Playford decided that we should own our electricity assets, nationalised our electricity assets, formed ETSA, and ran an industrial base on the basis of cheap power. Again, with all due respect to the current members of the Liberal Party, his legacy was trashed in 1998 when the modern day Liberal Party decided to sell that legacy to the highest bidder.

Mr VAN HOLST PELLEKAAN: Minister, are you ruling out any capacity payments, and I am not recommending them, but I am trying to be very clear.

The Hon. A. KOUTSANTONIS: A state-based one? I think a state-based one would be unwise. I would like to see the work done by the COAG on a national basis. I think there needs to be some price signal in the market. How that is structured, I do not know. It would have to be a cooperative mechanism put in place by all the states. I am not ruling out a capacity charge on a national basis or some sort of energy intensity scheme to minimise carbon to try to get the right incentives to incentivise more gas into the system.

There was the GGAS scheme in New South Wales which worked exceptionally well, and there were other schemes which have incentivised gas generation. The problem is twofold: you need a national approach so that you are not picked off state by state because we do not have the interconnection into other jurisdictions to protect our consumers because of decisions made in the 1990s, and I am worried about the impacts, but done on a national basis and everyone is on a level playing field, so everyone is abiding by the same rules.

Mr VAN HOLST PELLEKAAN: Potentially, a national scheme that states would pay their share for, is that what you are saying?

The Hon. A. KOUTSANTONIS: It would have to be set out by the commonwealth. The commonwealth needs to lead here, and I think that is the thinking of the Prime Minister. I think that is why the Prime Minister has brought in minister Frydenberg and broken the tradition that it has always been separate.

Traditionally, you have always had the resources and energy separate from the environment. What he has done, and I think quite cleverly, is to move resources away and brought energy policy and climate policy together, because they are the two contradicting policy pieces we have. We have the National Electricity Market trying to do one thing, and then we have climate policy and environment policy attempting to do another, and the two commonwealth policies are at odds and getting perverse outcomes. What the Prime Minister is attempting to do, through his appointment and change in the auspices of the COAG council, is to rectify that, and I applaud him.

Mr VAN HOLST PELLEKAAN: Is that something that the South Australian state government is considering doing as well?

The Hon. A. KOUTSANTONIS: Only on a national basis with the commonwealth. This has to be a commonwealth response. This is a commonwealth problem.

Mr VAN HOLST PELLEKAAN: But with regard to allocation of portfolios and forming of portfolios, is that something the South Australian government is considering—

The Hon. A. KOUTSANTONIS: You would have to ask the Premier that.

Mr VAN HOLST PELLEKAAN: —mirroring?

The Hon. A. KOUTSANTONIS: I only decide how much money people get. I do not decide what portfolios they get.

Mr VAN HOLST PELLEKAAN: When was the government first contacted by Nyrstar, BHP, Arrium and Adelaide Brighton Cement regarding cost availability of base load power?

The Hon. A. KOUTSANTONIS: I am not going to enter those discussions other than to say that I did not have Arrium and Nyrstar bursting through my door on these issues. The people that I spoke to were industry groups on behalf of other people. I will not go into more detail than that, other than to say that the people I was speaking to were people who had not hedged their positions on the lower end market, or were exposed to the spot market (which I thought was a very courageous move by them). Ultimately, they gambled and lost.

It is fair to say that some of the larger energy users hedged through other forms of production, whether it is biomass or some other form of internal generation to try to offset high peaks, or they just turn off production, so they have the flexibility within their markets to do that, like Kimberly-Clark do in the South-East and BHP often do by moving scheduling and maintenance around.

I think the confluence of events, where diesel generators were setting the price in the South Australian market, meant that the question was: why have we not got all of our thermal generation in this state on that is available? Why is it not on? It is a very good question. Why was Pelican Point and ENGIE not responding to the price cycles in the market? You have prices going up, why were they not turning their generator on? Because they were probably making more money selling their gas on the spot market than they were by generating electricity. That is the failure in the market because there is not enough gas.

Policies of reservation and policies of moratoriums are driving this country to the point where we are one of the most blessed countries in the world for gas availability and energy, and we are locking it up in the ground. Those policies have to stop. Again, with respect, I say that the Lock the Gate movement, and those movements about preserving farmland, are not movements of the left. They are movements of the right. I think the Liberal Party is going to have a very tough job dealing with that over the next 10 to 15 years, and I do not know how you are going to deal with it but we need to because energy security is essential for a manufacturing state like ours.

Mr VAN HOLST PELLEKAAN: For the record, the state Liberal Party has made it very clear that we do not support moratoriums on gas production.

The Hon. A. KOUTSANTONIS: I know that you do not, but I was very concerned about comments made by the Leader of the Opposition in the lead-up to the election. That was not you—you were not the resources spokesperson at the time.

Mr VAN HOLST PELLEKAAN: That is our team position.

The Hon. A. KOUTSANTONIS: I know that you understand the issues about resources, but I think when the Liberal Party are voting with the Greens to establish inquiries in the upper house into unconventional gas, they are very dangerous precedents set by your leader, and I think all of you were very worried about that. I know privately, from what Santos and other companies have told me—

Mr VAN HOLST PELLEKAAN: Rubbish.

The Hon. A. KOUTSANTONIS: —there was a lot of concern, federally, within the Liberal Party about the direction that Mr Marshall was taking, the swing to the left where Mr Marshall was taking the Liberal Party. A lot of concern about his—

Mr VAN HOLST PELLEKAAN: Chair, can you bring him back on track, please?

The CHAIR: Back to another question, perhaps.

The Hon. A. KOUTSANTONIS: You voted with the Greens.

Mr Knoll: You cannot have it both ways.

The CHAIR: Order!

Mr VAN HOLST PELLEKAAN: Thank you. Apart from asking ENGIE to fire up Pelican Point again, is there anything else that the government has done to support those large consumers who came seeking help two weeks ago?

The Hon. A. KOUTSANTONIS: Obviously, we have been working with them for a long period of time, since we held a round table in December. At that round table in December we articulated a lot of issues about what we thought needed to be done. We explained what we were doing, and there was general consensus from that group that we were on the right path, with real changes to the National Electricity Market and greater interconnection.

We are all finding that greater interconnection is probably going to give us the ability to actually unlock and unleash the potential of our own renewable assets into the eastern seaboard, get that investment, get those jobs here in South Australia, and get that wind and solar pumping out into the eastern seaboard, and, at times when we cannot take the benefit of it, having good, free and fair trading of electrons across borders and pour those electrons back across when we need them, otherwise the Prime Minister will not meet his targets.

Mr VAN HOLST PELLEKAAN: Not that I am recommending this, but is the government or you as the relevant minister considering any form of nuclear energy, including, potentially, small modular reactors?

The Hon. A. KOUTSANTONIS: That is currently not lawful in Australia.

Mr VAN HOLST PELLEKAAN: But are you considering it? Are you receiving any advice on it? Have you sought advice on it?

The Hon. A. KOUTSANTONIS: I think I answered this earlier—that if I attempted to build a generator of any form, whether it is nuclear or otherwise (which we are not), the market would react. You would either have to build a generator that was large enough to take all the load for the state because—

Mr VAN HOLST PELLEKAAN: No, small modular, I said.

The Hon. A. KOUTSANTONIS: The state is not thinking about entering the electricity generation business again because, the way the market was privatised, there would be no advantage to the taxpayer; in fact, there would be dramatic penalties.

Mr VAN HOLST PELLEKAAN: And you are not thinking about giving the permission to any private entity to operate that?

The Hon. A. KOUTSANTONIS: No-one from the private sector has come to me, that I am aware of (but I will check), wanting to build a nuclear reactor. There is the nuclear royal commission that is contemplating a whole series of assessments about whether we should enter the fuel cycle.

Mr VAN HOLST PELLEKAAN: I understand; you have ruled that out.

The Hon. A. KOUTSANTONIS: The government is not thinking of that.

Mr VAN HOLST PELLEKAAN: So you have not sought any advice on small modular reactors?

The Hon. A. KOUTSANTONIS: Not that I am aware of. I will check. We do not have a second nuclear program, do we, somewhere?

Mr DUFFY: Not in my division.

Mr VAN HOLST PELLEKAAN: Minister, when do you expect the upgrade of the Heywood interconnector to be completed?

The Hon. A. KOUTSANTONIS: It is complete.

Mr VAN HOLST PELLEKAAN: It is completed now?

The Hon. A. KOUTSANTONIS: I am advised it is completed, but there is some work being done. I am advised that the physical upgrade works are completed. Now there is commissioning work that needs to be done, and it will be taking until the end of the year to get it up to full capacity. It is running at 570 megawatts an hour.

Mr VAN HOLST PELLEKAAN: So, 570 and up to 650 by the end of the year?

The Hon. A. KOUTSANTONIS: Yes.

Mr VAN HOLST PELLEKAAN: What will be the final cost of that upgrade, and who pays for that?

The Hon. A. KOUTSANTONIS: The RIT-T process that does the assessment about our interconnection that needs to be built takes into account a whole series of considerations. You make applications under the act. People are allowed to object. Of course, the way the rules are structured, monopoly generators are allowed to object and offer other alternatives to increase interconnection, which means more competition, which could worsen their financial position. These costs are spread across consumers. There is a formula in place that is spread between Victorian and South Australian consumers. I do not have the breakdown here, but I can get that for you.

Mr VAN HOLST PELLEKAAN: Given that you said on 2 November, in relation to the major blackout, which cut power to more than 100,000 homes, and I quote:

This outage [last night] wasn't caused because there was too much wind or not enough wind—it was a once-in-a-thousand year event.

Do you still believe that is the case?

The Hon. A. KOUTSANTONIS: That is the advice I had at the time. Do you have anything to say that that was wrong?

Mr VAN HOLST PELLEKAAN: Do you still believe that is the case?

The Hon. A. KOUTSANTONIS: I have not seen anything that says that was different, but if you have got something I would like you to provide it to me.

Mr VAN HOLST PELLEKAAN: No, I am asking you, minister. So that is still your opinion?

The CHAIR: He said that is the advice he had at the time.

Mr VAN HOLST PELLEKAAN: At the time, but my question was: does he still believe it is accurate?

The CHAIR: And he said that.

The Hon. A. KOUTSANTONIS: I have to say that I have been trying to answer these questions—

The CHAIR: I know you are.

The Hon. A. KOUTSANTONIS: —as openly as possible.

The CHAIR: Next question.

The Hon. A. KOUTSANTONIS: I think what the member for Stuart is clumsily attempting to do is to set a trap of some sort. I think this committee is better than that.

Mr VAN HOLST PELLEKAAN: No, it is not. I just want to know—

The CHAIR: No, just a question.

Mr VAN HOLST PELLEKAAN: I just wanted to know whether anything has changed or not; that is all.

The CHAIR: Just a question.

Mr VAN HOLST PELLEKAAN: Given that the AEMO report entitled 'Update to renewable energy integration in South Australia', which was published in February this year, specifies that ElectraNet was undertaking a high-level assessment of the potential technical and economic benefits of a new high-capacity interconnector between SA and the Eastern States to determine whether a more detailed investigation into the feasibility of such a project is warranted, have you seen the results of that, and are the results of that study what made you decide to spend half a million dollars on the feasibility study that has been announced in this budget?

The Hon. A. KOUTSANTONIS: They have not published the findings, I am advised, of that initial feasibility, but there was some discussion with the government and industry, especially industries that are attempting to begin new projects over the next four to five years and which are seeking certainty of power reliability and price.

Given the confidence that ElectraNet had in the early feasibilities, the government made a decision in the budget process to assist them with their final feasibility. It is the RIT-T test. Unfortunately for us, the RIT-T test offers many participants in the NEM opportunities to offer alternatives to interconnection, which is, from my perspective, a lot of vested interest, an attempt to try to stop greater interconnection. I am very keen to see greater interconnection.

In my discussions with the late Matt Zema, who was a great loss to South Australia and a great loss to this industry because he knew it better than anyone, he had some very good ideas about how this interconnection would work and what its impacts would be. On top of losing a good friend and a confidant on this issue, we have lost an advocate. That is going to be a very big hole for this nation to fill, especially this state, because I do not think there is anyone who understands the operation of interconnection and NEM better than he did. It could not have happened at a worse time. Obviously, the personal issues are much more important than the public policy ones, but it just shows you how fragile life is.

Mr VAN HOLST PELLEKAAN: Will this feasibility study incorporate assessments of impacts on the volumes that would be exported and imported between South Australia and the Eastern States?

The Hon. A. KOUTSANTONIS: The modelling will model, I understand, 20 years of market operation with and without further interconnection, and it will model a whole series of scenarios within those models about what may or may not occur over the next 20 years. They will all be made public and we can make a decision about whether greater interconnection or storage or more generation or any other issues that could come up would be found from that feasibility study.

Mr VAN HOLST PELLEKAAN: That is good, thanks. I have one last question on gas that I meant to ask you when you were answering before. You were talking about market impacts and that gas is one of the biggest, if not the biggest, negative impactor upon our electricity market. You said there is a whole range of things that happen at the moment that should be stopped. Does that include exports, or is there any view from you or the government about a reservation policy or anything like that? Clearly, accessing the export market, which is terrific for gas producers, is one of the things that has a very negative impact upon our electricity pricing. Is that something you are considering?

The Hon. A. KOUTSANTONIS: No. You have to be very careful. I am not suggesting that you support one policy or another. You have to be very careful with these levers. The reason there are export markets being built is because there were investments made in the ground to get the gas out of the ground to meet those targets, which meant dollars and boots on the ground here in South Australia, drilling holes to find that gas, building pipelines, creating infrastructure to meet those targets.

If business invests on the basis that they can drill holes and export and provide to the domestic market, and you change the rules halfway through on them about what they can and cannot do with those forward contracts, I think you will see over the next 20 years a dramatic decrease in investment in energy exploration in Australia, especially South Australia, and you would actually be doing more harm than good.

You might get some short-term benefit for some contracted gas that is already drilled and ready to go to be able to divert it to the domestic market, but in the long term you would be wrecking a wonderful industry that employs thousands of Australians and provides energy security to our nation and our trading partners.

So, no, I do not support my entering the market and reserving South Australian gas for South Australians. What I do want to see, though, is more exploration. I want to see more holes drilled. I want to see land access issues dealt with. I want to see resources exploited and I want to see jobs created.

Mr VAN HOLST PELLEKAAN: And I am not recommending it either.

The Hon. A. KOUTSANTONIS: I did not say you were.

Mr VAN HOLST PELLEKAAN: I wanted to know the government's position. Minister, referring to page 93, so we are still on the same topic, please advise what recommendations have been progressed relating to electricity supply for the development of mining in South Australia's Regional Mining and Infrastructure Plan? Which mines that are currently operating do you think need the most help and are at the greatest risk, and what new areas could benefit if something like that was successfully undertaken?

The Hon. A. KOUTSANTONIS: I think all mines need power. We do not want them burning diesel to generate their needs, we want them on the grid. I would like to see Carrapateena proceed, I would like to see Iron Road's proposal proceed, I would like to see the Braemar province work proceed, I would like to see the Gawler Craton exploited to its full potential, and it is all going to require power and it is all going to require investment.

A lot of that investment will be paid for by the proponents, and what we need is for commodity prices to return to trend or even above trend if possible. We are seeing that a bit now with gold and silver; gold and silver are doing quite well. We need magnetite, copper, uranium and iron ore all to increase in price and, when those prices increase, you will see the investment flow, the capital unlocked and they will make investments that they need to make their operations feasible.

Mr VAN HOLST PELLEKAAN: But has anything actually been done to progress recommendations with regard to electricity supply?

The Hon. A. KOUTSANTONIS: We are working cooperatively with them. We are not going to build them generators. If they want extra generation, they will build it themselves. If they want extra connection, they will negotiate with the private operators. What we do is we let the market know about what is coming and what we can do to assist, but it will not be taxpayers' money used to build infrastructure for the private sector like that unless we make a decision to apply a community service obligation to this operation because we think there is a broader benefit somewhere else.

Mr VAN HOLST PELLEKAAN: In regard to the Copper Strategy, half a million dollars towards the state's Copper Strategy, with the overarching intent of tripling the state's copper production over 20 years, and also tripling employment in copper over 20 years, why do you think that tripling production will lead to a tripling in employment? Why do you think that in 20 years from now, if this strategy is successful, it will still take just as many people to produce one tonne of copper in 20 years as it does today?

The Hon. A. KOUTSANTONIS: First and foremost, to find it, you have to dig it out of the ground—that creates jobs. You have to process it and you have to support those people digging it out of the ground. There are a lot of industries around mining that grow, so to meet those targets you dramatically need to have more numbers of mines and more mines discovered, and that means more exploration, more holes drilled, more mine engineers. It does increase employment. Mining is a great way to increase employment. It is a great industry that does amazing things for our country and we should be very supportive of it.

Mr VAN HOLST PELLEKAAN: Given that we have seen enormous labour efficiency and mining over the last 20 years, why do you think that there will be none in the next 20 years if this strategy is successful? Why do you think it will take the same number of people to produce a tonne of copper in 20 years as it does now when it certainly did not 20 years ago?

The Hon. A. KOUTSANTONIS: As Mr Russell says, a confident expanding industry that is growing is always going to employ more people and there are always going to be new mines. To give you an example, OZ Minerals will not survive on Prominent Hill alone; they need to go out and find new deposits; they need to develop Carrapateena. Once they start developing Carrapateena, there will be people within OZ Minerals looking for the next deposit and the next commodity and that generates more activity, more wealth and more jobs.

Setting a target of tripling copper production will mean that you need a lot more mines and a lot more people working in those mines. I do not think it is right to say that you can have the same level of production for the same level of employment now. I do not think that is how it will occur. We have seen over the last 50 years through boom and bust how industries scale up and, when the drop comes, they forget all the lessons that they learned from the lost drop and they cut back again, then they scale up again. I am very, very confident that this state will take its rightful place amongst mining giants across the country because we have the resources to back it up.

Mr VAN HOLST PELLEKAAN: Minister, I would certainly hope that there will be a significant increase in production, but I cannot accept that labour productivity will not increase.

The Hon. A. KOUTSANTONIS: I hope it does, too.

Mr VAN HOLST PELLEKAAN: We want as many jobs for this state as possible, but I cannot accept that efficiency of tonnes per person won't change, if the industry is successful in tripling its copper production.

The Hon. A. KOUTSANTONIS: You are assuming the same grade ongoing; I am assuming diminishing grades.

Mr VAN HOLST PELLEKAAN: I am assuming significant technological advances.

The Hon. A. KOUTSANTONIS: Like what?

Mr VAN HOLST PELLEKAAN: Like we have seen in the last 20 years but increasing. If I could lay them all out now I would not be in this job, would I?

The Hon. A. KOUTSANTONIS: Give us two.

Mr VAN HOLST PELLEKAAN: I refer to page 86 and the government's Building a Stronger South Australia Future Fund. The documents say that contributions will be made when the budget is in an operating surplus position. This will occur from 2015-16 and it is proposed that payments into the fund would be based on 7 per cent of total royalty revenues per annum. Will the government be putting 7 per cent of total royalty revenues into the future fund starting now, given that the budget just finished with a surplus?

The Hon. A. KOUTSANTONIS: Thank you for acknowledging it is in surplus; you are the first Liberal to do so; the rest have been arguing that it is not. I am pleased; you are a bigger man than most in many ways. There was a report by the Royal Commission into the Nuclear Fuel Cycle that suggested a sovereign wealth fund and my view as Treasurer is that we should await the final outcome of the royal commission report. What is the use of establishing one wealth fund simply to have another?

Once the royal commission has finished its work about this sovereign wealth fund and once the consultation with the community is over we will absolutely honour all our commitments for a future sovereign wealth fund, depending on the outcome of the royal commission. If the public, the opposition or whoever it is says, 'This is not what we want,' we will proceed with a future fund. If the path then is a sovereign wealth fund, rather than duplicating it and moving everything over, we will do that.

I also point out that we are spending almost the entire surplus in terms of value on STEM schools across South Australia—194 primary and secondary schools. I know the opposition youth spokesperson has said that that is a waste of money, but we disagree. We think it is an excellent allocation of resources and that is probably our best investment in the future, but we are still committed absolutely to the future fund.

Mr VAN HOLST PELLEKAAN: Minister, did you know that the royal commission was going to be established when you made this commitment a year ago?

The Hon. A. KOUTSANTONIS: I did not know what the findings were going to be though.

Mr VAN HOLST PELLEKAAN: You still do not. So you made the commitment a year ago—

The Hon. A. KOUTSANTONIS: I know what the findings are. They have made their findings and now we are consulting on those findings.

Mr VAN HOLST PELLEKAAN: Okay, but you do not know. You are using it as a reason, for the moment at least, to not fulfil the commitment that you made a year ago.

The Hon. A. KOUTSANTONIS: No, we are committed to the commitment. What I am saying to you is that the royal commission conducted its job, it has finished, and it has reported. In that report, it recommends a sovereign wealth fund. My view is that the sovereign wealth fund is probably superior to a future fund, but let's wait for the outcome of the finalised consultations.

Mr VAN HOLST PELLEKAAN: I refer to Budget Paper 3, Budget Statement, page 54. Commentary in last year's budget states:

Royalty revenue is expected to grow moderately over the forward estimates largely reflecting the resumption of full production at Olympic Dam and changes in commodity prices.

Given that commentary, is your advice that Olympic Dam did resume full production?

The Hon. A. KOUTSANTONIS: What budget paper?

The CHAIR: Budget Paper 4, Volume 4, page 54?

Mr VAN HOLST PELLEKAAN: Budget Paper 3, Budget Statement, page 53.

The CHAIR: Royalties are mentioned on this page as well; that is a coincidence, isn't it?

Mr VAN HOLST PELLEKAAN: There is mention of royalties all through the mining pages. Do you want me to repeat the question?

The Hon. A. KOUTSANTONIS: Sorry, yes.

Mr VAN HOLST PELLEKAAN: Basically, the question is that last year's budget said that:

Royalty revenue was expected to grow…over the forward estimates largely reflecting the resumption of full production at Olympic Dam—

after the difficulties that they had over the previous couple of years—

and changes in commodity prices.

Is your advice that they resumed full production? The reason I am asking is that royalties clearly went down $68 million. What happened? What was the reason that they were forecast to grow moderately but they dropped by $68 million? The only proviso that you put on it a year ago was OD.

The Hon. A. KOUTSANTONIS: The advice I have is that we met most of our targets on volume but the biggest drop in commodity prices was in January 2016, I am advised, in copper. So, despite the dramatic drop in commodity prices, BHP and other mines still met their volume targets but they were just getting less for their products. These things are out of our control. Had the price remained where it was, we would have met our targets, if not exceeded them. The problem we had was a dramatic fall in commodity prices.

Mr VAN HOLST PELLEKAAN: Given that commodity prices have been falling for nearly three years, are you forecasting lower prices for next year into your royalty revenue forecasts? What I am saying is that it was not a surprise that they fell.

The Hon. A. KOUTSANTONIS: Sorry to delay you. I am not trying to stall. The advice I have is that it was a dramatic fall compared to what you are talking about, and it was not expected. We are talking about prices from nearly $6,500 a tonne dropping down to $4,000 something a tonne—dramatic drops within a period of months, and no-one was forecasting those types of drops.

Then, of course, the oil price dropped. We were looking at barrels of oil at $27, so there were some dramatic falls that people were not predicting. That was after a barrel of oil dropped $109 down to the mid to high $60s down to $27. These were dramatic falls. So, we got it right on volume, we got it wrong on price, but so did the rest of the world. If you did not, you are in the wrong business.

Mr VAN HOLST PELLEKAAN: So what are you forecasting? Continued falls for the current financial year?

The Hon. A. KOUTSANTONIS: The forecasts for movements were similar to those identified in 2015-16, namely, lower sales and production than previously forecasted, limited growth and renewed discoveries, and an overall lower crude brent oil price. Forecasts in the oil price are expected to be slower than previously envisaged, and they are saying that the volatility in the business environment has contributed to endeavours to lower costs and mitigate risks, so there are operational and structural reviews all across South Australia in most mining operations, oil and gas.

You are seeing merges between Beach Energy and Drillsearch. You are seeing restructures and changes of personnel at Santos: a new chief executive and a new CFO, new board members, the chairman resigned (I forget when he resigned, but the old chairman has been put back in place) and reducing capital expenses—there is a lot of turnover and change occurring in this industry.

Mr VAN HOLST PELLEKAAN: None of that affects commodity prices.

The Hon. A. KOUTSANTONIS: We have moderate forecasts across 2016-17. I am comfortable with them and I think they will be fine.

Membership:

Ms Chapman substituted for Mr Knoll.

Mr VAN HOLST PELLEKAAN: Minister, can you give me some advice, please, on the release to market new mineral exploration licences through a merit-based exploration release area process? You had that in the budget that you have a new merit-based system for handing out exploration licences, which of course makes me wonder what it was based on before.

The Hon. A. KOUTSANTONIS: Can I introduce Dr Ted Tyne and bring him to the chair. He will give you a detailed analysis of the merit-based—

Mr VAN HOLST PELLEKAAN: Or take it on notice, because I know that the deputy leader wants to ask some other questions on other DSD issues, with all respect to Dr Tyne, given we only have five minutes left.

The Hon. A. KOUTSANTONIS: I will take it on notice.

Mr VAN HOLST PELLEKAAN: Thanks.

The CHAIR: Through the Chair, of course, did you wish to ask some questions, deputy leader? We have not yet given over control of the room. The deputy leader has a question.

Ms CHAPMAN: As the shadow minister for state development, I would like to address a question to the Minister for State Development. I appreciate that many of the areas of responsibility under this new super department have—and I hate to say junior ministers—other ministers below the minister in this role, one of whom of course is to deal with mining and energy, which currently is under consideration. I ask the Minister for State Development: how does the state advance in its development by the sale of the Lands Titles Office?

The CHAIR: Can I just ask you which page and line you are referring to as we move into this question?

Ms CHAPMAN: We can start with—

The CHAIR: Well it is the normal practice. I am just asking because it is not—

Ms CHAPMAN: Page 53, the whole agency, Budget Paper 4, Agency Statement 4, State Development. It starts on page 49, and covers all of the portfolios under State Development and identifies here—

The Hon. A. KOUTSANTONIS: Madam Chair, I had the Valuer-General and the Lands Titles Office here for examination to answer these questions in the previous committee hearings.

Ms CHAPMAN: I am not asking about the detail. Madam Chair, I seek your ruling.

The CHAIR: Yes, I am listening.

Ms CHAPMAN: I would seek your ruling. My question is to the Minister for State Development—

The Hon. A. KOUTSANTONIS: I hope I can answer it—

The CHAIR: Hang on: I cannot hear her question first. We need to listen—noise on my right.

Ms CHAPMAN: Whilst the minister is also the Treasurer, and doubtless has received some questions about the machinery operations of the prospective sale of part of the Land Services Division—

The CHAIR: I do not recall any, as it turns out, but nevertheless—

Ms CHAPMAN: Well, that is even better.

The CHAIR: It depends because we do not know what page you are on and we don't know what you're talking about. So, go on.

Ms CHAPMAN: I thought the minister just said that he had been the subject of questioning on this, but in any event maybe perhaps everyone else was not listening. My question is to the Minister for State Development, as to how his proposal in the budget speech, which has been referred to in Budget Paper 3, the sale of aspects of the Land Services Division, is going to advance the state of South Australia as state development minister.

The Hon. A. KOUTSANTONIS: I am happy to.

Ms CHAPMAN: Thank you.

The Hon. A. KOUTSANTONIS: In my discussions with other treasurers, the person for whom I have a great deal of admiration is Ms Gladys Berejiklian, the New South Wales Treasurer—you might know her—a very exceptional woman I think she has transformed the finances of the New South Wales government and is doing a great job of transforming the New South Wales economy. The New South Wales government is undertaking a similar exercise to us, and my view is that, by incentivising the private sector and helping the private sector grow in this state, you create more private investment opportunities.

One of the bugbears I have always had in this state as Treasurer, as a member of parliament and even as a citizen, is that the largest employer in the state is the government. I have always wanted to see a time and a day when the largest employer in the state is not the South Australian government, that it is the private sector, so whether it is the Motor Accident Commission privatisation or whether it is the Lands Titles Office, if we can do things more efficiently through the private sector, incentivise new investment in South Australia, we will allow the private sector to grow and flourish.

I might also add that, when you privatise these assets, these functions, these roles—and I am not talking about the Torrens title system (that will remain publicly owned and so will the insurance programs that protect security of title), which remain in government hands—and make these policy moves, as they have in New South Wales, you are lifting the horizons of the entire state, because what occurs then is that these multinational investors who look at South Australia, because of these opportunities, see, first, a forward-thinking government that is confident about its future, that is happy to engage with the private sector and that creates a regulatory framework around that which incentivises more direct foreign or private investment in South Australia.

I do not think there is anyone in South Australia who would not think that the most important thing we should do as a state is incentivise and encourage more foreign direct and private investment in South Australia. I, for one, am a champion within the government, I humbly submit, for greater private investment in South Australia. I have cut taxes, with the support of my cabinet colleagues. We have job incentives in place, we have cut red tape, we have reformed WorkCover, we are doing the structural reform that is needed to try to put this state on a better footing.

I am looking at my clock, and I know that the shadow minister would like to read the omnibus questions into the record, or I can keep on talking and they will not be done, because the Deputy Leader came in and asked a late question, but I am not that mean.

The CHAIR: There being no further time for questions of the minister, I declare the examination of the proposed payments completed. I thank the Treasurer and his advisers for their assistance with the committee today and thank members for their assistance also.

At 17:37 the committee adjourned to Friday 29 July 2016 at 09:00.