Australia power industry fears "even worse" carbon

Reuters News
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Posted: Jun 16, 2011 4:43 AM
Australia power industry fears "even worse" carbon

By Mark Bendeich

SYDNEY (Reuters) - Australia's power industry has voiced fears the government could hatch a new carbon-reduction plan that is even worse for generators than its first proposal, which had sparked warnings of bankruptcies, shutdowns and electricity market chaos.

The Energy Supply Association of Australia, which represents coal-fired, gas and renewable energy suppliers, backs the concept of imposing a cost on carbon emissions but is lobbying Canberra hard for safeguards against sudden industry turmoil.

Association chief executive Brad Page said there was greater risk this time around of political miscalculation in finalizing the policy, saying clumsy design and implementation could cause a cascading series of asset write-downs and debt defaults.

"We think it has the potential to be worse," Page told Reuters in a phone interview on Wednesday, just a few weeks before the government is due to unveil its revised scheme.

"What we saw from our modeling (on the original plan) was that about 15 percent of the installed capacity of electricity on the east coast would close prematurely," he said, noting the additional potential for turmoil in traded electricity prices.

Page said the original plan would have led to around $10 billion in asset write-downs, delivering a shock to the industry that even renewable energy providers -- among the main beneficiaries of a carbon-reduction scheme -- would dread.

"I think the companies see that for the whole of the industry to make that transition, it needs a fair bit of care with all the elements of it," he said.

The government wants to cut national carbon emissions by at least 5 percent by 2020, from 2000 levels. The precise target might not be decided for a few years, but it plans to move ahead anyway and impose a tax on carbon emissions from 2012, followed within three to five years by the introduction of national trading of carbon pollution permits.

It is expected by the end of this month to announce the level of the tax, expected to be around A$20 ($21) per tonne of carbon emitted, as well as compensation for households and worst-affected industries, such as coal-fired power stations.

Coal accounts for 54 percent of Australia's energy production and electricity generation in turn makes up 37 percent of national emissions, helping to put Australians among the rich world's worst greenhouse-gas polluters per head.

Coal-fired power plants generate about 80 percent of Australia's electricity, with brown-coal plants the dirtiest, and the higher the pollution per unit of power, the higher the carbon cost. Uncertainty over future carbon costs, and therefore power prices, clouds investment plans.

BLACK BOX

The government's original plan, rejected by the previous parliament, was similar in its basic architecture to the current plan -- at least a 5 percent reduction target, and transitioning from an effective tax to a carbon market -- but the power lobby fears the devil could be in the detail of the revised version.

Page notes that since the original scheme's demise, the government has come to rely on Green lawmakers to ensure its legislation is passed, injecting a new element of uncertainty.

He noted that the government had given the Greens a strong role in formulating the new scheme by appointing them to a policy committee that would need to sign off on it.

"I regard that as a black box," Page said, referring to the Multi-Party Climate Change Committee (MPCCC), which is operating as a quasi sub-committee of cabinet.

"There is a big risk at that MPCCC stage that the right deal does not come out the other end."

Page was also critical of recommendations made by Canberra's official climate-change adviser, Ross Garnaut, who recently recommended the government offer guarantees on power-company debt rather than hand out compensation such as free permits.

Under the original plan, generators would have received free permits worth A$6 billion, covering 13 percent of the coal-fired sector's emissions over the first five years of the scheme and then 9 percent over the following five years.

But with Garnaut and the Greens opposed to that kind of compensation, the industry is again ratcheting up its warnings about the likely fallout for Australia's energy security.

COST OF UNCERTAINTY

The Greens accuse the electricity sector of special pleading, and Garnaut also suggests it is being overly alarmist, but the government's own energy regulator said in a report leaked on Thursday that Garnaut's assessment was flawed.

Bankers advising the industry are also concerned.

David Roseman, global head of infrastructure, utilities and renewables for Australian bank Macquarie Group, agrees that political uncertainty is a problem for the industry, especially for future investments.

"You are partly dependent on government decisions. You are dependent on carbon pricing and government regulations," Roseman told Reuters this week. "That's a very big cloud hanging over any investment decisions."

The electricity industry, including generation and transmission, will need up to A$82 billion in new investment by 2030, according to government estimates, though Garnaut argues that a carbon price will simply skew investment to low-carbon alternative energy sources such as gas and renewables.

Even after the government unveils its carbon tax, and overall compensation arrangements for industry and households, industry uncertainty could continue.

With investment horizons spanning 20 years or more, generators will need to hedge their exposure to major movements in electricity prices, but this may not be possible until the industry knows some crucial policy details which, according to the government, may not be forthcoming for some years.

Page said a trajectory for annual reduction targets would need to be decided before instruments such as futures contracts could be developed, as well as the amount of international carbon credits that could be brought into the country once the scheme moved from a tax to carbon trading.

Carbon trading firm COzero agrees with the power lobby, saying market and investment uncertainty are likely to remain in the electricity sector until such details are known.

"The market needs to know the supply and demand fundamentals and without a (specific) target there's really no way of setting a forward price," COzero chief executive Nicholas Armstrong said, referring to a forward carbon price.

"It makes our job very, very risky, and I would hate to be running a A$1 billion company that had to make 20-year investment decisions." ($1 = 0.946 Australian Dollars)

(Additional reporting by Narayanan Somasundaram; Editing by David Fogarty)