Archive for March, 2011
Mud sticks, no matter how unfairly flung.
Ross Garnaut’s accusations against the electricity network businesses and the Australian Energy Regulator, accompanied by such headlines as “Power firms given free rein to gouge public” and “Bad regulation adds to power bills,” will create endless problems for both.
The large customers, of course, will be delighted. Garnaut, the Energy Users Association said immediately, was “spot on.”
Use by Garnaut of such emotive phrases as “gouging” and “gold-plating” will feed populist media criticism of the networks capital program, not least because the next tranche of price increases resulting from the current AER determinations is only months away.
Garnaut’s game, of course, is to set up a large distraction from the focus on the cost for consumers of the mooted carbon price. His thesis is that there needs to be an immediate review of networks regulation because the large price increases are making it harder to win acceptance for the small rises to be imposed by the carbon price.
The fact that, at core, the network expenditure is driven by need – to meet continuing demand growth, to cope with surging peak demand and to replace aged equipment – while the carbon price is a political option pushed by vote-grabbing rather than any prospect of an impact on global climate change without an international regime is to be brushed aside.
The real news from Garnaut’s eighth, and thankfully last, reprise of his review is his confirmation that average households will face an extra cost of $4 to $5 per week in their power bills from a carbon charge, that is $208 to $260 a year. Lost in the fog, of course, is that this is the initial impact – even the proposed trajectory for the Gillard/Brown tax will send the cost higher than this later in the decade and the real cost of meeting the 2020 abatement target will more or less double this impost.
For householders, it must also be pointed out, this cost is only the direct burden of the tax. Neither Federal Treasury nor anyone else has produced a comprehensible indication of what the flow-through effects in the terms of the cost of goods and services will be when the tax is in place.
That old Flinders Lane rag trade jibe of “Never mind the quality, feel the width” applies here – in spades.
Meanwhile, the networks and the AER have to live with Garnaut’s claim that “on the face of it, it looks like there might be a problem with the regulatory arrangements.”
The Energy Supply Association retorts that we have an independently-regulated system that challenges the network businesses and controls what they are allowed to do, but the mud has already stuck.
Garnaut’s chief weapon appears to be the claim that the regulator allows too much for the cost of capital, an issue that has been continuously on the boil through the recent round of network determinations.
However, even if the rate was slashed and a different approach to reliability and so forth resulted in a reduction of 20 per cent in distribution capex outlays for 2009-14, the expenditure would still be in excess of $25 billion and substantial charges would still be required.
This means, to quote Garnaut, that power bills will still go up regardless of the carbon price – and the point remains that the network expenditure is essential while the tax is optional and cannot be demonstrated either to have any material effect on the climate change issue or even, at the levels proposed, as likely to deliver the 2020 domestic abatement target.
It is worth drawing attention to the latest AER annual review and the four pillars it highlights for distribition system expenditure: rising demand driven by more new dwellings and greater use of energy-draining appliances, like air-conditioning, the need to replace infastructure dating from the 1950s to the 1970s, stricter government requirements for security, safety and reliability in networks and the borrowing costs of suppliers having risen in the wake of the global financial crisis.
Higher debt financing charges on their own have increased network revenue requirements by five to nine per cent.
The AER calculates that network revenues for the current determination period will be $55 billion, including $11 billion for transmission, and that they are, on average, 41 per cent higher than for the previous regulatory period.
The household share of this cost is about $15 billion over five years.
Nothing is going to change this outlook. The regulatory dice have been rolled. At issue now is what the approach will be for 2015-19, the next regulatory period. The outlook is for similar capex requirements.
Let’s suppose Garnaut’s argument could lead to a 10 per cent reduction in network charges. That would notionally represent a $1.5 billion benefit over five years on the present numbers – in reality more.
Meanwhile the Gillard/Brown carbon tax, taking Garnaut’s word, will add about $2.6 billion a year to aggregate householder costs – at a minimum.
And I repeat again – the network outlays/costs are essential or supply failures will ensure but the carbon tax is a political charge.
There are polls and there are polls. The one we had in New South Wales at the weekend was a real one. No need to guess about voter intentions here, as with Newspoll and other such, or to worry about margins for error in polling methodology – the voters spoke in overwhelming tones.
Now the standard ploy at the federal level is to pass off State election outcomes as not necessarily implying the same result nation-wide.
True, but there are two facts to be borne in mind here: first, NSW accounts for a third of the nation and, second, Julia Gillard chose to re-launch the carbon tax proposal, and to more-or-less admit that she had misled us at the last federal election, just as the local campaign got under way.
There is evidence from the hustings that unhappiness with current, and impending, power prices played some role in NSW voter reactions and no-one could seriously argue that the promise/threat of a carbon tax was not at least in voters’ minds.
NSW was where election victory got away from Tony Abbott last August.
A result at the next federal election reflecting the State poll even in a lesser key, along with a retention of gains elsewhere, will deliver him leadership of the country.
The internal recriminations the NSW ALP must now endure, with inevitable tremors reaching the national party conference, will not help Gillard one whit.
The federal opposition can be expected to focus a great deal of attention on the two “black coal States” – NSW and Queensland – in the months ahead, and the weekend polling news out of Brisbane was decidedly downbeat for the ALP, too.
Perhaps, the most substantial federal impact relates to Port Macquarie, where the sitting independent, an acolyte of federal MP Rob Oakeshott, was thrown out in a 30 per cent swing to the Nationals, while the independent in the seat of Tamworth seems to have lost, too.
It only takes one of the trio of rural independents supporting Gillard to crack for the national scene to change and an early federal election to come in to focus.
As well, while the demolition of NSW Labor overshadows all else, the Greens will not walk away undamaged from this poll.
Surely, if all the hype about their ascendancy is real, this was their moment.
A collapsing Labor vote in a State without a great tradition of supporting the Liberals.
A radical approach to decarbonisation at a time when every pet shop galah is shrieking on the topic.
A refusal to consider nuclear power reinforced by pointing to the perceived dangers revealed by the Fukushima crisis amid media hysteria over the issue.
A reputation in the political commentariat for providing the spine on climate change issues in the undeclared federal coalition government of Labor, the Greens and the independents.
And what happened?
On initial results, the Greens obtained only about 10 per cent of the primary vote. They will not take Marrickville and they may not take Balmain, supposedly there for the asking this time round. Ten per cent is a very long way from 15 to 17 per cent that was being touted in some quarters.
Bob Brown looked to this election to strengthen his grip on Gillard and the NSW Greens have not delivered.
As for Barry O’Farrell, his is a very big win indeed, probably better in terms of completeness than either of Malcolm Fraser’s huge federal victories over the Whitlam-led ALP in the second half of the 1970s.
The Liberals and the Nationals can look forward to governing the second-most important jurisdiction in the country for at least eight years and possibly until 2023.
The size of the victory will give O’Farrell status at Council of Australian Government meetings and in one-on-one encounters with Julia Gillard that will be hard to downplay, not least by a Prime Minister clinging to office at the behest of a Green, Andrew Wilke and rural independents – two of whom have been sent the clearest of messages this weekend.
Federal Liberals will benefit, too, from having access to the analytical resources of NSW Treasury to counter the federal department, which is showing all the signs of having gone unchallenged for too long.
However, O’Farrell’s government has so much to do that its biggest dangers now are (1) paralysis by inquiry – with 40 reviews promised, this is a real issue; (2) over-expectation of what it can actually achieve in its first term; (3) incompetence on the part of MPs in ministerial office after an absence of 16 years and (4) the leadership losing control over a massive backbench.
The energy sector alone is fraught with difficulty for the Coalition.
O’Farrell does not have a huge amount of time to resolve an approach to generation issues before serious questions arise about security of supply.
He is committed to an inquiry in to the “gen-trader” process and another review of baseload needs.
When these are over, this year will be too and the time to build baseload will be still tighter while the performance pressures on ageing generation plant will be greater.
By mid-decade NSW could be one large plant breakdown away from supply strife, not a desirable position.
Labor has left the Coalition with a seriously out-of-kilter commercial situation for the generation businesses as a result of the “gen-trader” process, a position revealed to be the more perilous by publication in the past week of a letter from the Eraring Energy chairman to Eric Roozendaal in which the State Treasurer was told: “(We) will become a constrained organisation with no growth potential, with no capability to invest and,consequently, will gave difficulty retaining and recruiting quality staff. (We) will more than likely move from a dividend-generating organisation to (one) where there is a probability of regular losses and thus a requirement for (State) budget funding.”
The new government also has to make decisions about the future of the Cobbora coal mine, with implications for the availability and cost of fuel down the track.
It has to decide whether to go with coal or gas for the next big baseload construction tranche – and, if it opts for coal, only one of the government businesses can build the plant because no private investor could raise the funds in the decarbonisation environment.
The new government has committed itself to a major re-organisation of the networks sector, but this can have no effect on capital outlays, the real driver of higher end-user bills at this time. There will be no respite from customer price rises – the next instalment is due in July.
Both population growth and a burgeoning east coast wind farm sector will require substantial investment in augmenting transmission.
NSW will face some heavy lifting if the proposed $8.3 billion “NEMLink” – designed to decongest the east coast market and support large-scale remote renewable generation – is to be built by the end of the decade.
As it maintains ownership of the networks, the State government will also need to wrestle with a significant skills issue.
This is an area with ageing expertise as well as ageing assets and, like the water industry, networks are already constrained in competing with the mining and LNG booms for new talent.
This has implications later in the decade for the quality of system maintenance.
The Coalition has to make important decisions about ending retail price regulation and about whether to drive ahead with the roll-out of smart meters, followed by the introduction of time-of-use tariffs.
Failure to do so carries implications for curbing runaway peak demand that will flow in to large capital expenditure and then to the final bill.
The government, too, will be confronted by privatisation challenges – should it sell off generation to relieve taxpayers of big risks and can it afford to ignore up to $25 billion in revenue from selling networks and its share of about $5 billion from the sale of Snowy Hydro?
As well, the doubling of power prices by 2015, a growing likelihood, will leave NSW with a large “fuel poverty” issue that essentially requires State government intervention.
The gains to be made from re-organising the distribution businesses will be nowhere near adequate to fund the long-term welfare requirements now looming.
Good management in the energy area alone is a big ask for the new government, but it is only one of a dozen similar-sized problems.
O’Farrell and his team should bask while they can in the sunshine of a massive victory because the clouds will roll in soon enough, more than a few of them electricity-fuelled.
The inability of the 24/7 news media to provide meaningful depth to reporting has been well on display with the coverage of BlueScope Steel Chairman Graham Kraehe’s talk to the National Press Club in Canberra.
Leave aside the fact that Kraehe’s trenchant comments got less media coverage than Bob Brown apologising to Julia Gillard for some silly git with a rude poster standing behind Tony Abbott when he spoke at an anti-carbon tax rally outside Parliament House. That’s par for the course with today’s mainstream media.
What’s more bothersome, at least to me, is that the hard details in Kraehe’s talk got barely any coverage – most of what appeared came down to Gillard and Greg Combet rejecting Kraehe’s complaint about the quality of consultation over the carbon tax, the tip of the iceberg.
Here are six points made by Kraehe, who is also a member of the Reserve Bank board and one of this country’s most senior business people, that are really important in the carbon debate:
First, there are “dangerous double standards” being applied. He illustrated this by pointing out that a big contribution Australia could make to cutting global carbon emissions would be to ban the export of coal, which, when burned overseas, adds 620 million tonnes a year of greenhouse gases, more than our domestic output of 547 Mt. Doing this, of course, he points out, would be economic and political suicide – so why is the government prepared to sacrifice Australian manufacturing in a move that will have little impact on global emissions?
Second, for Australian manufacturers focussed on the domestic market, the imported competition has become significantly cheaper due to the rise in our dollar values while exporters have a significant reduction in their global competitiveness. In the food manufacturing sector, he points out, exports have fallen to $24 billion last year compared with $34 billion a decade ago. Imports, meanwhile, have doubled. The basic economics, he adds, are also true for the aluminium and cement industries as well as tourism, education, agriculture and other trade-exposed businesses.
As he reminded the Press Club, manufacturing employs about a million Australians, or one in 10 of the workforce. (One of my hobby horses is that the media always use the pejorative “big polluters” in this debate and never “big employers.” Gillard, Wayne Swan and Combet do this continuously.)
Third, Kraehe points out that a decade ago China produced 125 Mt of steel per year and now its makes 690 Mt or 45 per cent of world output, using the same technology that BlueScope employs. China is now producing a billion tonnes a year (almost double Australia’s total annual emissions) of extra carbon dioxide emissions just from steelmaking. Kraehe says the Australian steel industry emits 17 Mt annually.
Fourth, contrary to the federal government’s propaganda, the European Union’s carbon program has not cut industrial emissions – it has just offshored them to China and other developing countries. Kraehe points out that, while carbon emissions in Europe from industry have fallen or been flat since 1990, emissions attributable to importing products in to the EU have risen 47 per cent.
Fifth, Garnaut has got his numbers wrong in his latest series of reports on the issue of a carbon price impact. He says the average carbon cost per tonne of steel would be “around $5,” but the first year burden, according to Kraehe, will be treble this for steelmaking. The cumulative cost of the policy for BlueScope, which employs 12,000 people in the Illawarra, would be $977 million over 10 years. Garnaut, says Kraehe cuttingly, is like the banker who sells you a home loan on the basis of the first year’s repayments and forgets to mention all the hidden fees and charges. (Kraehe is a former National Bank chairman.)
Sixth, in a blast directed at Gillard without naming her, Kraehe accuses the government of “some very selective spin” about China and its approach to decarbonisation. Yes, he says, China is closing old, inefficient coal-burning power stations, but it is planning to increase its coal-fired generation 60 per cent by 2020. And yes China is closing old iron and steel facilities, but over the past 10 years it has constructed the equivalent of 100 Port Kembla steelworks.
“It is patently false and misleading,” Kraehe says, “to use selective data to imply the Chinese are phasing out coal and we are not, implying that Australia must therefore act now.”
I cannot find a single media outlet that has highlighted what is surely an extra-ordinary rebuke for the Prime Minister from such a senior business person. Media members hate being accused of bias, but can you imagine the furore if someone of Kraehe’s standing had said this about claims by John Howard?
It also needs to be reported that Kraehe said he believed Australia and the world should cut carbon dioxide emissions, but that it shouldn’t tax locally-made goods and give importers a competitive advantage. “For BlueScope a tax on carbon produced in steelmaking is fine as long as the Chinese, Koreans, Japanese, Indians, Russians, Americans, Brazilians and others have a similar tax,” he said.
The BlueScope Steel view, as he told the Press Club, advocates a sector-by-sector approach to decarbonisation, combined with incentives for renewable energy, and starting with a carbon price on electricity generation, with compensation for low-income households and a rebate or exemption on the costs for trade-exposed businesses to mitigate the loss of competitiveness caused by higher power prices.
Under the present policy approach, he warns, “there will be no Australian steel industry in 20 years – and we will have sacrificed the industry and thousands of workers by offshoring our carbon dioxide generation and almost certainly increasing global emissions.”
Sifting real understanding from the tsunami of information and comment on energy issues overwhelming us at the moment is hard indeed.
The media’s need to feed a 24/7 news cycle means that most publicly-available information is at best rushed analysis and at worst just dross designed to fill a space and move on. Coverage of the Japanese crisis and the implications for nuclear development around the world are a case in point.
Opportunities to pause and reflect on the news and the consequences of major events are few, but one comes along in Australia on the last day of March in the shape of the Energy Alliance’s “Energy State of the Nation” forum in Sydney.
Energy Alliance executive director Robert Pritchard says one of the key issues to come out of Japan’s massive earthquake, inundation and then the nuclear power station crisis is the importance of effective, up-to-date technical regulation in the operation of the energy industry, not just in generation, but along the supply chain. He intends to toss this topic to the forum’s speaking panel.
The ESON forum will draw on presentations by the chief executives of the Energy Supply Association, the Clean Energy Council, the Energy Networks Association, the Australian Coal Association and the Queensland Resources Council, reviewing the state of play in domestic energy policymaking and developments. The chairman of the Australian Energy Market Commission, the chief executive of the CSIRO Energy Transformed Flagship and a senior manager from the Australian Petroleum Production & Exploration Association, which itself is holding its 51st conference in Perth a week later, will also be speakers.
Two keynote presenters will be Drew Clarke, Secretary of the Federal Department of Resources,Energy & Tourism, speaking at a time when pressure for the government to publish its long-delayed energy white paper is growing again, and Tim Stone, a partner in KPMG in Britain and an adviser to the British government.
As well, at a time when the the impact of uncertainty on energy investment in Australia is again in the headlines, the speaking panel will include Jeff Mitchell, managing director of corporate and institutional banking at Westpac Institutional Bank.
Domestically, the timing of ESON is useful because it comes at the renewed apogee of the national carbon pricing debate and just days after the New South Wales election, which even the incumbent ALP government is predicting in television advertising will result in a major swing to the Coalition!
How a new NSW government manages a raft of energy issues in the country’s biggest demand region has implications well beyond State borders in terms of policy development, regulation, interstate co-operation on electricity markets and politics.
Its approach to ownership of electricity supply assets will be closely watched over what is predicted, because of the size of the expected Keneally government rout, to be a reign of at least eight years.
Despite two decades of reform in east coast markets, State governments still own most of the generation capacity in the two largest demand regions (NSW and Queensland) as well as all the network businesses. The same applies in Tasmania.
In the Alliance’s latest newsletter, Pritchard makes an important point, as germane for a new NSW government as it is for the federal government: the most important priority for policymakers is to provide investors with “more conducive, durable policy settings with the aim of reducing the investment gap.”
As he says, in the aftermath of the global financial crisis and in an environment where attempts to deal with decarbonisation policy have stalled, not only here but around the world, the availability of investment capital is less assured.
There’s an example at hand at present in Australia: despite the introduction of an enlarged renewable energy target – or perhaps because it has been introduced in a thoroughly ham-fisted manner – wind farm development in Australia is now becalmed as renewable energy certificates slump well below the value needed to drive new developments.
The Australian Financial Review on 18 March, estimating that $4.4 billion worth of wind projects are now held up in this country, quotes Infigen Energy managing director Miles George as saying that wholesale electricity prices and the RECs need to have a combined value of $100 to $110 per megawatt hour “at a minimum” to drive investment. They stand at a combined value of $70 at present.
For this and a myriad of other reasons, an opportunity, such as provided by ESON, to pause and consider the energy scene is highly welcome.
Readers interested in the ESON forum can find details on the Energy Alliance website at www.energyalliance.com.au.
A big paradox in Australian electricity supply today is that both suppliers and household consumers are thinking “this can’t go on” – but they are thinking it for wholly different reasons.
For consumers, it is the escalating price of power – bills have risen sharply and are set to climb much further. Someone paying $1,270 last year can expect, on present indications, to be paying about $2,060 in 2015.
For suppliers, it is the manner in which runaway demand is driving up network costs – and in particular peak demand. In south-east Queensland, for example, $900 million (or 12.5 per cent of the network capital stock) is invested in meeting maximum demand for less than four days a year.
Caught in the middle, politicians, like Kristina Keneally and Barry O’Farrell in New South Wales, are trying to buy off consumer anger by offering handouts, but there is no chance that this will solve the underlying problem.
For politicians, the issue is that the solution suppliers are offering involves putting tariffs up and inevitably creating greater concern for pensioners and families on tight budgets.
The situation is exacerbated for politicians by the fact that they have already partly bought in to the solution, but obviously without thinking through the consequences and without having their heads around the current “bill shock” problem.
State governments, sitting with the federal government in the CoAG ministerial council on energy, put their hands up in the middle of the past decade for the roll-out of smart meters. Victoria, under Steve Bracks, eagerly volunteered to be the first to introduce the technology. By the time John Brumby was premier of Victoria, the State government was already having second thoughts in the face of rising consumer group concerns, and the Baillieu government is looking at imposing a moratorium on the process.
The Queensland government of Anna Bligh, which is supposed to be the next smart meter cab off the rank, is no doubt watching all this anxiously while O’Farrell will find that he has to start making decisions on the issue well before his first term in office is even half over.
The core of the problem is what suppliers prefer to call “dynamic pricing,” otherwise known as “time-of-use” pricing. If you use electricity at peak times, you pay a lot more for it, in essence.
The trouble is that household consumers don’t see using electricity as a privilege. As AGL Energy chief economist Paul Simshauser and pricing analyst David Downer put it in a new publication in the company’s very useful economic working paper series, “consumers view the deprivation of electricity, whether by economics or reliability, as a major violation of their rights and expect a level of protection regarding the level of service from extreme short-term price variability.”
The carrot, for governments as well as most consumers, Simshauser and Downer point out is that introducing dynamic pricing to flatten the load curve, on their modelling, could deliver a cut in overall power bills, of almost $1.7 billion a year in the four mainland States of the east coast market – while flattening the load curve by almost eight per cent.
The political stick is that this regime would add to the bill shock problems of perhaps one in eight of the households (my number) who, for various reasons, cannot adjust their electricity time of use to any great extent.
A commentary like this can’t do justice to the 21-page paper Simshauser and Downer have produced (and which can be found on the AGL Energy website), but it is required reading, I think, for all the stakeholders in electricity supply, politicians, producers, regulators and consumer groups.
The power system on the east coast and in the West in 2011 is no garden of Eden in terms of capital outlays, economic efficiency and affordable supply – and peak demand is a snake that will not be denied.
Changing metaphors, the pollies are trapped by the old boxing problem: in the ring you can run, but you can’t hide.
As Simshauser and Downer point out, power bills this decade are going to reach about 2.5 per cent of average household budgets, having been around 1.7 per cent for some time. Their solution for policymakers on the east coast is to remove retail price regulation, install smart meters and start implementing dynamic pricing to halt the primary cause of today’s difficulties (leaving aside the other knotty issue of carbon charges): the impact of network charges on power bills.
In another paper, Simshauser and his colleagues have canvassed the problem of fuel poverty in this environment in detail, so they don’t stand to be accused of heartlessness. What remains to be seen is whether policymakers have the heart to do what’s necessary and the smarts to make it acceptable to voters?
As a reader of an American media website has confessed, what most people know about nuclear power is defined by watching “The Simpsons” on television.
This is playing in to the hands of both media editors and strident elements of the environmental movement, engaged in the “meltdown mayhem” game this week for all they are worth.
These amateur dramatics should be read against the calm opinion offered by a real expert journalist, Marks Hibbs, now a senior associate for the nuclear policy program at the Carnegie Endowmen for World Peace in Berlin.
Boiled down, Hibbs says: (1) the problems at Fukushima are not caused by any lingering safety issues, (2) unlike Three Mile Island, the crisis has been initiated by events external to the power station, and (3) “this is not the same by any means as the accident at Chernobyl” – it is physically not possible to have a similar breach in containment of the reactor as occurred in Russia.
A senior commentator in “The Atlantic” magazine in the US makes the very good point that the monstrous earthquake and tsunami that followed it have stretched Japanese government and Tepco officials to breaking point and their communications are frequently failing to keep up with the 24/7 media demand for information.
This is fuelling the media’s indiscriminate use of “meltdown,” a seriously frightening term for most people, without understanding the context.
Critically, the Chernobyl plant lacked the major containment features used at Three Mile Island and in the Japanese plants.
Both work-a-day journalists and the public need to be reminded that, whether coal-fired or nuclear, power production in these big plants works on the same principle: create heat to turn water in to steam to drive turbines in a generator.
The big difference is what happens, apart from loss of supply and local injuries and loss of life, in a physical disaster such as the one that has engulfed Fukushima.
What should happen in this nuclear design is that, when the reactor shuts down, water is pumped through the core to keep it cool.
At Fukushima, the tsunami flooded the back-up diesel generators, preventing the cooling activity – hence the current crisis.
What the Tepco engineers are doing is to find other ways to cool the core and it is anything but easy in a disaster-ravaged environment.
Importantly, with respect to new nuclear programs being followed in the US, China, India and elsewhere, the need for pumps for emergency cooling has been obviated: the water is moved by gravity.
The explosions that have provided dramatic effect for television coverage this week have been in the plants’ secondary buildings in to which steam was being released – something ignited the hydrogen left behind after the steam condensed.
The walls, a metre to two metres thick, containing the reactor cores have not been breached.
Seven reactors at Fukushima have been affected by the earthquake.
Four reportedly still have access to power to run their water pumps and are in no danger.
Engineers have been able to provide a steady level of water for one of the remaining three but have had to turn to using seawater to stabilize the other two.
The battle is to keep the heat levels in these reactors dropping until the plant can be shut down.
While this is obviously going to take time at Fukushima, the prognosis on present indications is positive even if the “all clear” cannot be given for days.
The fact that the Japanese government has evacuated communities near the reactors and is handing out iodine pills, of course, fuels the media drama, but this is a sensible precaution that the Russians failed to take.
It does not, as much of the media coverage tends to imply, mean that a Chernobyl-style disaster is imminent.
Longer term, the backlash around the world to the use of new nuclear power – and the retention of existing plants, especially in Germany, where this is a major political issue right now – is inevitable.
The industry has a saying that a nuclear incident in one place is an incident everywhere – that every such event is grist to the mill of the global anti-nuclear fraternity – and Fukushima will reinforce this in spades, with some leading politicians in the US already calling for a moratorium on Obama’s ambitions to use the technology to help drive decarbonisation.
Today nuclear energy meets 14 per cent of the world’s electricity supply, although the capacity is heavily concentrated in just six countries.
Both the renewables sector and the gas supply industry are already saying, just quietly at present, that substantial investments in nuclear can now be expected to be delayed this decade to their benefit.
However, there is little chance that China will deviate from its nuclear plan – it already has 10,800 MW of nuclear capacity and plans to add at least another 40,000 MW this decade. Already spokesmen there are reacting to Fukushima by saying that the lessons to be learned from Japan will be taken in to account, but China will not change its determination to build nuclear power.
India’s program to double its nuclear capacity over two decades, on the other hand, may be harder to pursue. Prime Minister Manmohan Singh has already ordered a safety review for the 20 existing reactors, two of which use the Fukushima design.
A think-tank in New Delhi probably spoke for a wider community than India in commenting this week that: “Democracies are reactive and an accident of this magnitude will raise concerns among the population about the safety of the technology.”
The fact that the Gillard government has failed to order Federal Treasury to re-do the modelling of the impact of a carbon price since it was assessed for Kevin Rudd in 2008 says a mouthful about policymaking process under this administration – and leaves the gate open to the rest of us to play with the maths.
For example, let us suppose that the Julia Gillard/Bob Brown tax turns out to be $26 per tonne, rising at a rate of five per cent a year, which is what was planned under Kevin Rudd and is being bandied about in the media at present.
Let us suppose that it is imposed only on emissions from electricity generation, which is what some close to the action in Canberra are suggesting could be the fall-back position as energy-intensive, trade-exposed companies keep up their criticism of the present approach.
And let us suppose that, based on the existing generation mix, power-based emissions rise from about 202 million tonnes a year now to about 230 Mt in 2020, allowing for a power station closure in Victoria, which is still a big “if.”
The inflated carbon price in this scenario is around $36.60 in 2020, which fits with the earlier Treasury modelling.
Imposing it on fossil-fuelled generation would deliver a starting aggregate impact of $5.25 billion in 2012-13, rising to just above $8 billion in 2019-20. The cumulative total would be more than $50 billion.
To which you can add another $5 billion for the impact of the GST.
The cost of just the carbon price for householders would be a cumulative $14 billion over eight financial years. The cumulative cost for the commercial sector would be about $12 billion and for manufacturing it would be more than $4 billion.
What portion of this are Gillard, Wayne Swan and Greg Combet proposing to return to consumers? How can they possibly commit a future government in five to eight years’ time?
Yes, all these numbers are pure speculation, but who’s fault is that?
The way to stop the speculation is to announce a decision on how much the carbon price will be and on which emitters it will fall – then turn the issue over to the Treasury for costing. Then announce who will get compensation – and who won’t. And to state what level of abatement the government expects will be achieved in 2020 by applying the measure.
The political reasons for Gillard & Co not being upfront like this are obvious, but ironically she is paying a rising price in the opinion polls anyway. The inevitable trouncing of Labor in New South Wales on 26 March will be closely analysed to see if fuel can be added to this fire.
Some commentators are now attacking critics of the government position on the basis that future costs of “inaction” will be so much greater.
They fall at the first hurdle because (a) at present voters and business are being asked (told) to buy a pig in a poke, (b) there are alternatives to a tax and “inaction” is a straw man, and (c) the future costs argument depends on events overseas that, in turn, depend on the faltering UN negotiating process and the Australian local political situation multiplied 20-30 times at least.
Most of all, these critics stumble over the fact that the real national issues are (a) actually reducing emissions (which a majority of voters obviously do want), not winning a political victory (which is what obsesses the commentariat) and (b) ensuring that investors are given sufficient security in Australia to enable them to build CCGT baseload plant because the need for more investment is the earlier imperative.
In case these folk haven’t noticed, the community requirements are (1) security of supply, (2) affordability of power bills and (3) sustainability, very much in that order.
It doesn’t seem to occur to those talking the Gillard government book that a “simple” – nothing’s actually simple in this game – set of alternative moves would be to (a) set an emissions intensity standard for new plants and existing ones that prevents the building of conventional coal generation this decade and dictates the closure of some current units or (b) set the standard for future plants and to buy out and close 5-6 existing coal-fired plants at a cost of perhaps $15-20 billion over 10 years.
Knowing when the coal plants will close is a crucial issue for banking new gas projects.
In addition, if needs must, the Queensland mandatory gas-use requirement could be extended nationally.
And the renewable energy target could be extended, too, because at least the cost of doing so is clear even if the end-user burden is higher than for gas.
Going down the latter path, of course, comes with an extra cost of about $8 billion for reinforcing and expanding the east coast transmission system (see the “NEMLink” proposal) and a need for more OCGT as back-up.
Tax or bust is not the only option.
The “efficiency” of the tax route is highly debatable, not a given.
Meanwhile, the government’s present position, to steal a phrase from a motor industry leader reacting to the situation, is in “a corner with nowhere to go” as the political backlash builds to the tax proposal (and its manner of re-introduction).
The real political problem for Julia Gillard and the ALP does not lie in whether or not Australia has a carbon price, but in who they compensate – and to what extent – for the impact of the charge.
This becomes more important when the message hits home for consumers that it will take a $50 per tonne carbon charge to deliver the key element of carbon policy: pushing coal-fired power stations out of the market.
The issue is highlighted in the latest Essential Media polling.
Go beyond the headline outcome that 48 per cent of those polled oppose the introduction of a carbon price scheme – versus 35 per cent who support it and 18 per cent who can’t make up their minds – while 59 per cent believe the Prime Minister has broken an election promise and should take the issue to an election.
Look beyond the response to whether the government should “take action on climate change as soon as possible” – which is supported by 47 per cent of respondents, with 24 per cent saying we can wait a few years before taking action and 19 per cent rejecting the need for action. Energy Minister Martin Ferguson has neatly summed up this “government needs to act” attitude by observing: “Everyone wants us to resolve the price on carbon but, when they start thinking about how that might increase the cost of electricity, they don’t want to know about it.”
The real devilry lies in the response of those polled to the question of who should be compensated for the impact of the carbon charge on electricity prices?
Seventy per cent say all households. Seventy per cent say small business owners. Seventy-four per cent support compensation for farmers and 84 per cent want help for low-income households.
This already raises knotty issues for Gillard and her ministers, who, for example, to date have not proposed one dollar of compo for small businesses, but the attitude of those polled to compensation for industry exacerbates the problem.
Sixty-eight per cent of respondents are opposed to compensation for power companies – versus only 15 per cent in favour and 17 per cent undecided. Fifty-one per cent oppose compensation for manufacturing industries versus 26 per cent in favour and 23 per cent undecided. Forty-four per cent oppose compensation for trade-exposed industries versus 28 per cent in favour and 29 per cent undecided.
Peter Lewis, director of Essential Media Communications, says: “If the carbon price debate becomes a contest for compensation between households and industry, with the Coalition arguing for a larger share of the pie for big business, then the government will have an opportunity to recast the debate not as ‘should we pay’ but who should pay?”
Leaving aside Lewis’s loaded assumption that the Coalition will side with “big business” – which includes trade-exposed, energy-intensive companies directly employing a million Australians – against householders, one wonders why he sees the “who pays” question as a plus for Gillard & Co?
Meanwhile the business lobby has moved to throw a further spanner in the works: if you want a carbon price, the Australian Industry Greenhouse Network is telling the Prime Minister, you have to ensure that State and Territory governments phase out their existing decarbonisation programs and don’t introduce any more.
AIGN claims the federal renewable energy target alone will add $1.2 billion to consumers’ bills this year, but its main point in this context is that the RET is an example of the “constant direct and indirect intereference by federal and State governments in a new emissions pricing mechanism” that must be avoided with a carbon price measure.
The hard part for Gillard is the call for removal of State measures like the solar feed-in tariff in exchange for a national carbon price. Down that road lies nothing but political trouble.
In addition, AIGN wants to ensure that the carbon price measure is least-cost and therefore comprehensive in its coverage of gases and sectors. Which is another way of saying include agriculture and petrol.
AIGN also seems to set out to wedge Gillard on another of her flights of rhetoric, reminding her that she called for Australia to be “manufacturing more and exporting more and regaining competitive advantage” while her predecessor’s scheme, which doesn’t seem light years away from what is on offer now, would have imposed a cost disadvantage on exporters of $20 billion by 2020.
The AIGN speaks up for power generation compensation, too. “It is important that the (carbon price) design fully restores confidence in investing in electricity supply. If some investors incur large losses, they will not be investing in new capacity and new investors will be looking for higher risk-weighted returns.” The end result, it points out, will be still higher electricity prices.
What all this drives home is that compensation is where the rubber of Gillard’s carbon car really hits the road and it is very difficult to see how she can steer it between all the potholes, some of which more resemble craters
Opinion polling carried out by the research firm Colmar Brunton for an air-conditioning company shows that 50 per cent of the 2,500 people interviewed “felt stressed” when they open their power bills.
“Worry over how power bills will hit the back pocket is a significant issue in Australia, particularly in NSW and Victoria, where stress levels are the highest,” says the report.
This information is useful background to the outcomes of the latest Newspoll, which shows Labor crashing in support to its lowest levels nationally in 20 years in the wake of the Gillard/Brown carbon price announcement.
In its desperation to get back on its feet, especially as New South Wales heads to the polls on 26 March, an election increasingly likely to inflict an historic towelling for the Keneally government, the federal government is throwing out information without thinking through its meaning.
Thus Climate Change Minister Greg Combet is now saying that he will negotiate with energy sector companies with a view to producing “a different kind of emissions trading scheme for electricity.”
What that means is anyone’s guess and it obviously opens the door to a range of carbon prices on different sectors of the economy.
Combet is also telling the media that “less than 1,000 of the largest carbon emitters are likely to incur a liability from a carbon price.” It is not, he insists, “a tax on households or on people or on consumers – it’s on the large polluters in our economy.”
They, of course, include all the coal-fired and gas-fired power stations, which emit 200 million tonnes a year of carbon dioxide. At $26 per tonne, this represents a $5.2 billion annual liability that then gets fed through to all end-users.
Trying to fend off the voter backlash, Combet is also telling media “there will be fair compensation for low-income households and pensioners.”
The obvious question is what compensation the government plans to offer the other seven million or so residential account holders?
Householders collectively will be exposed to about $1.4 billion a year in extra power costs with a $26/tonne carbon price.
How many of them will be able to access what levels of compensation – and for how long?
As well, no-one seems so far to have modelled the impact of a carbon price on small business people, many of whom work from home, and are not intended it would seem to receive any compensation.
Opposition Leader Tony Abbott, riding the scare mare for all he’s worth, with Labor providing him with a rails run, argues that the $26/tonne level of carbon impost will add 25 per cent to end-user electricity costs and flow, via transport and power costs, to a rise in grocery prices of five per cent.
None of the politicians has yet addressed the longer-term issue of what carbon price will be needed to deliver the current national target of 160 million tonnes of abatement a year in 2020, although Greens leader Bob Brown told a reporter earlier this month that he knew businesses were factoring in $40 per tonne in their forward planning.
Speaking at the energy forum held by the Committee for the Economic Development of Australia in Sydney on 7 March, Richard McIndoe, managing director of TRUenergy, answering a question, made the point that it is impossible to make a call on the long-term carbon price because the volume of abatement in the target is moving.
It will take a $50/tonne charge, he said, to start closing down Australia’s coal-fired power stations and replacing them with gas plants.
(At $50, the carbon charge impact on electricity alone starts to exceed $10 billion a year.)
As Newspoll demonstrates, the Gillard government has succeeded in trapping itself between the rock of a voter backlash against carbon policy adding to power bills and the hard place that business stakeholders in the economy, not least investors in energy, need clarity and a long-term glide-path for carbon pricing in order to outlay large sums on new projects.
McIndoe told reporters interviewing him after the CEDA forum that he believed investors stood to spend $31 billion on new power generation this decade. TRUenergy itself, he said, had gas-fired and renewable projects costing about $10 billion under consideration.
Investment, he said, required “right” government policies that would incentivise development, not just a carbon price.
Wayne Swan, standing in as Prime Minister for Julia Gillard while she is visiting America, has claimed on television this weekend that a carbon charge “will not act like a traditional tax, is not deducted from your pay packet, it comes from the big polluters.”
He’s correct that the carbon price will not be deducted by employers from remuneration and paid to the Taxation Office, but this in no way amounts to a non-deduction from household budgets.
Residential electricity users in Australia, in round terms, are responsible for about 60 million tonnes a year of carbon dioxide emissions through their consumption of electricity fuelled by coal and natural gas.
Assuming an introductory carbon price of $20 per tonne, rising through the decade to $35 per tonne, and it cannot be less than this range to have any meaningful impact on emissions, the aggregate impost on householders will be about $1.2 billion per year initially to about $2.3 billion a year by 2020, allowing for a rise in consumer demand, driven in part by a bigger population.
This assumes that the carbon price does not have to be much higher to drive abatement towards even its present goal. Manifestly members of the Gillard government do not fully appreciate what levels will be required – as witness Climate Change Minister Greg Combet talking over the weekend about the measure enabling technological change in coal-burning generation.
He needs telling that it will take a carbon price well over $50 to make carbon capture and storage technology commercially viable – at which point it may be seen off by the combined thrust of wind, solar and geothermal power as well as nuclear energy. And it would take still more to enable retro-fitting existing coal plants.
Back to Swan: is he now pledging that every dollar of any carbon cost will be rebated to householders, regardless of their wealth, through the government’s compensation scheme?
Will the government’s policy also encompass petrol prices – where the carbon charge will translate, given average passenger vehicle fuel efficiency and travel patterns, to about an extra $200 or so a year in its initial phases?
If so, for the average household, this will result in federal government carbon give-aways of some $500 a year at the start. In aggregate, something like $4 billion annually in hand-outs, rising beyond $5 billion as the net has to be stretched to accommodate population growth.
Or are the rumours in Canberra true that the end-product of the present arm-wrestling with the Greens and the independents will see a carbon price imposed just on electricity generation, making the yearly householder “gift” only about $2.5 billion initially?
Of course, in the present environment, following the polling reaction to Swan and Gillard breaking their now notorious pre-2010 election promise that “there will be no carbon tax” under a government they lead, who among voters will believe Swan’s latest claim or believe that his successors in office in five or 10 years’ time will sustain the compensation he seems to be promising?
Who will believe that this approach can help deliver the government’s existing promise to cut emissions by 160 million tonnes a year by 2020? Let alone, the higher abatement targets being pushed by the Greens, who seem to have Gillard in thrall?
Why does Swan himself believe that what he is offering will lessen the heat of voter unhappiness created by the inexorable shift in their power bills towards double what they were in 2008, driven by higher network charges, the cost of the renewable energy target and such other imposts as support for rooftop solar feed-in tariff schemes?
And this is before foreshadowed higher prices for coal and gas push up the wholesale price of electricity, a 45 per cent segment of the end-user bill. And before, “smart meters” enable distribution network service providers to win agreement to introduce “time-of-use” tariff regimes?
Lost to view in all this, by the way, is the fact that there must be a million small businessfolk working from home who are going to have to wear the carbon charge and power price rise burdens, too. No compensation for them is on offer.
What a tangled web this is becoming.