Archive for June, 2011

Carbon, cars and comparisons

The surreal nature of political spin and media reporting of the decarbonisation debate has been on view again in the past few days.

There have been 48 media reports on the “shot across the bows” complaints from GM-Holden about the federal government slashing $800 million from “green car” subsidies – and not a single one of them referred to the firm as a “big polluter,” the habitual appellation applied to industry in this debate.

Holden MD Mike Devereux, complaining that Australia is an expensive country in which to run an automotive manufacturing company, also warned that the proposed carbon price will substantially increase his cost of doing business at a time when other factors, like labour bills, are problems for a trade-exposed industry.

Encapsulated, the company message is “if you go on like this, we may find it harder to keep manufacturing here.”

Industry Minister Kim Carr, in America visiting Detroit, responded that the government is “strongly committed to an economically sustainable automotive industry” – not a word about “big polluters” from him either.

This two-faced approach to industry-related carbon policy issues would be laughable if it was not so serious.

A recent report from PricewaterhouseCoopers on the impact of a carbon price on the automotive manufacturing sector, which sells between $5 billion and $6 billion worth of cars a year and has a $2 billion annual export business, says that a charge between $20 and $30 per tonne will impose a burden of $56 million to $84 million a year on the industry without compensation and will add between $222 and $412 to the cost of a vehicle.

The local automotive industry operates in a highly competitive international market, says PwC, and “is likely to have little or no ability to pass on any additional costs.” Manufacturers are likely to increasingly source components from overseas to avoid incurring a carbon cost here.

All of which brings one back to that Productivity Commission report.

Michael Hitchens, CEO of the Australian Industry Greenhouse Network, has sent me a copy of a letter despatched to the Prime Minister last week. In it the Network emphasises that the Commission did not cover a large number of countries that are home for competitors for Australian firms like Holden.

The letter points out that the Commission, under its terms of reference, did not undertake a detailed assessment of impacts on competitiveness with rival nations and the report cannot be used to come up with a yardstick of what Australia should be doing – which is how Gillard, Swan and Combet have been attempting to use it.

This is how Swan greeted the Commission report on 12 June: a key message, he said, is that 1,000 carbon policies have been put in place around the world, “making it overwhelmingly clear that global action is taking place.”

To which the AIGN retorts, in its letter to Gillard, that the Commission has shown that these policies in the nine countries surveyed are cutting emissions by 210 million tonnes a year – roughly equivalent to the emissions from Australia’s electricity sector – at a total cost, measured by subsidy equivalent, of $18 billion annually.

Australia, Hitchens adds, is about average in this group on the amount of money it is spending on bad policies and Germany is way ahead of everyone on this score!

Swan lauded the rent-a-crowd green demos earlier in the month as showing that Australians “are eager to get on with the job of preparing for a clean-energy future.”

Which presumably is why he and the government abolished the $1.3 billion “green car innovation fund” to help pay for contributions to Queensland flood damage, an $800 million cut, the sore point that caused Holden to complain publicly about policymaking.

Here are some facts about this segment of the “big polluter” gang.

Vehicle manufacturers directly employ about 25,000 Australians, with the automotive sector overall providing more than 60,000 jobs.

There are more than 200 firms producing components for new vehicles and about 500 providing specialised tooling to vehicle and component producers.

The industry pays about $3.7 billion a year in remuneration, seven per cent of the total wages and salaries bill in manufacturing.

It is a major customer for related industries such as iron, steel, plastics, glass, electronics, paint, rubber and advanced textiles.

And it is just one of many industries now waiting to discover their fate as the Gillard government patches together a carbon price policy with its political survival depending on being able, first, to placate the Greens and the independents in Parliament and, second, on persuading voters that they have not been dudded.

The last ABS data had the number of Australian households at 8.5 million. I understand that the projection for 2012-13, when we are scheduled to go to the polls, is 9.2 million. How many of them will receive direct compensation for the impact of the carbon price on just their power bills?

How many will buy Swan’s latest sales pitch: “A carbon price will change relative prices, making goods and services that generate more pollution relatively more expensive and those that generate less pollution relatively cheaper. If people want to continue buying the more expensive goods and services, they will have the additional cash to do that. But if they switch to items made with lower carbon emissions at a cheaper price, they will be able to pocket some of the additional household savings. So if families can make a few changes, they will be able to pocket the extra tax cuts, family payments and pension increases and come out ahead.”

Whether it is Holden or households, the government has a tiger by the tail here.

There must be a ka-boom

One of the hallmarks of the modern media era is the lack of any sustained effort to analyse reports on key issues of debate, like carbon policy.

This is heightened by the inability of the political parties to deal with such reports apart from efforts to spin them to advantage in the first 24-48 hours.

Two cases in point are the Productivity Commission report for the federal government on carbon schemes and the still more recent report on carbon price impacts by Deloitte Access Economics for the Energy Users Association.

It says a lot about the standard of media coverage that Christopher Monckton’s “fascist” crack at Ross Garnaut has received 194 reports to date versus, so far as I can find, just a handful for the Deloitte study.

Joe Hockey’s stunt with a cardboard cut-out picture of Rudd on “Assassination Day” won 20 media reports!

Economist Geoff Carmody, writing in The Australian, has made a strong follow-up point about the Productivity Commission study: it was unable, thanks to the government’s carefully slanted terms of reference, to look at actions being taken by Australia’s trade competitors rather than the seven trading partners reviewed.

As he says: “If the average answer for our competitors is zero or not a lot, Australia is ahead of countries from which it has most to fear from carbon leakage.”

Carmody adds the important point that it is highly likely that the Treasury modelling on which the government is relying still assumes that trade competitors will take carbon action. That’s the assumption it made in looking at the impacts of the Rudd CPRS.

Go next to the Deloitte study – you can find it on the EUAA website.

The report starts by noting that electricity prices for both business and residential customers here have increased in real terms (ie inflation-adjusted) by 30 per cent in the past few years.

“While prices remain lower than the OECD average,” the consultants say, “for industrial users they are now higher than in some Asian economies like South Korea which are large importers of Australian thermal coal.”

The advantage for trade-exposed industries of competitively-priced energy is being eroded by these price increases.

Deloitte argue that a critical issue is that decarbonisation policies affecting electricity supply, including the renewable energy schemes, are occurring in the context of a higher power price environment.

“This place great importance on ensuring that policy responses are directed at least cost abatement options.”

The consultants add that, if policy is not directed at least-cost abatement and improving investor and consumer certainty about longer-term policy settings, “resultant price imposts have the potential to unnecessarily damage the economy.”

A reminder here that the Productivity Commission found that Australia at present has 230 carbon schemes – more than double the number in Britain, for example.

This is another issue that the media essentially has allowed to go through to the keeper.

This mish-mash of schemes includes state policies on building standards for energy efficiency, solar rebates and feed-in schemes as well as federal subsidy programs.

As Deloitte say: “These policies have arisen with limited co-ordination across jurisdictions or across policies and with little consideration as to their cost in terms of the economy and electricity prices or of their environmental effectiveness.”

That old media headline stand-by “scandal” springs to mind here – but not for most actually engaged in the mainstream media, it seems. Or not in any co-ordinated way.

Deloitte also raise an interesting point about the RET, highlighting that it is legislated to last until 2030 – and that from 2019 onwards RECs rise to a tax-effective rate of $76 per megawatt hour rather than the projected $60 to 2018.

The consultants claim that the abatement cost of the RET in 2020 will be between $87 and $115 per tonne of carbon – compared with its estimate of $45 to $50 for the proposed carbon price.

And from 2020 this impacts by law on a fifth of the electricity we consume.

Deloitte modelling shows that the 2020 east coast market price for energy without a carbon price and with the RET will be $42.70 per MWh – while, under the goal to cut emissions to below 2000 levels by the end of a decade, the impact of a carbon tax (without recourse to emissions trading) plus the RET would more than double this cost. Their estimate is $94.20 per MWh.

This has to be considered, of course, in a market environment where, even with a new regulatory regime for networks, which might reduce wires charges growth but not in any sense eliminate it, 2020 power bills will be well north of double what they were in 2008.

This is the Gillard government’s compensation black hole: the short-term balm it says it will offer some households could not begin to salve the longer-term (ie 2020) hurt that will arise from both the direct impact of this situation (ie what we pay for electricity) and its indirect impact on the price of goods and services we buy plus jobs.

Deloitte condemn the RET because (1) it brings forward expensive off-the-shelf renewables, primarily wind generation, which are less likely to have a strongly declining price path over the longer term, and (2) it makes the structural transition to a lower carbon economy more challenging by locking in a higher cost base, resulting in substantial emissions cuts being more expensive in the future.

The consultants argue that, once an economy-wide carbon price is in place, supplementary policies across all jurisdictions should be withdrawn.

The political difficulty of this happening can’t be understated.

The RET alone is about as near to a bipartisan policy on decarbonisation at federal level as we have got.

The screaming we have seen from vested interests and environmentalists as governing politicians wake up to the problems of populist solar schemes and seek to wind them back will be as nothing compared with the reaction there will be to any attempt to shut down the RET.

Moreover, as part of its negotiating with the Greens and independents over the carbon price, the Gillard government is signalling that it is also open to introducing a mandatory energy efficiency measure designed, in effect, to force energy retailers to pursue cuts in consumption, especially peak demand.

Down this road lies “dynamic pricing” – high time of use charges aimed at forcing more power consumption in to off-peak periods. One could write a book about the difficulties, political and otherwise, of pursuing this policy.

For a start, it requires the national roll-out of “smart meters” – adding by itself something like $7 billion to network capital expenditures across the east coast. This is the capex that is currently being “gold-plated” by distributors, we are told, and must be cut back.

And, of course, in Victoria this weekend we are seeing reports that the follow-up study on burying power lines – flowing from the terrible Black Saturday fires – has estimated the cost at more than $20 billion.

Implementation would double this State’s power bills all by itself outside urban areas.

As those Looney Tunes Marvin the Martian T-shirts of my children’s youth two decades ago used to say “There must be a Ka-boom.”

Not being stupid, Julia Gillard, Wayne Swan and Greg Combet must know this – and one must therefore assume that their strategy is to shield the inevitable “ka-boom” from voters’ eyes until the next election.

Unlike the crashed-and-burned Keneally government, Gillard is not trapped in a fixed term. I suspect that she will be tempted to a 2012 election once she has the carbon price legislated, a generous May budget in hand and before the backlash gains new traction.

What price a double dissolution while she is at it?

Seeking security in Wonderland

In a media world dominated by the politically “sexy” nature of the carbon debate – along with the refugee issue and a handful of other big topics, including State of Origin football – it is hardly surprising that consideration of Australia’s national energy security is not considered particularly newsworthy.

Which is why a new Geoscience Australia report has got little coverage.

Released this week by federal Resources & Energy Minister Martin Ferguson, the report focuses on exploration for resources and is backed by a world-first project: an Australia-wide airborne geophysical survey.

No other continent has been mapped in such detail. As Ferguson says, the competitive edge work such as this gives Australia in attracting investment should not be under-estimated.

Among the outcomes of the survey is the discovery of a new basin in north Queensland with potential for petroleum, geothermal and other resources.

Australian Associated Press filed a report on this, but I can only find one newspaper story about it.

Ferguson points out that the survey is already paying off: the offshore petroleum industry has committed $600 million in exploration outlays for three years, with follow-up programs that could be worth another billion dollars.

Onshore exploration sparked by the survey is estimated to be worth $300 million.

The report entitled “Towards Future Energy Discovery” is on the Geoscience Australia website.

It should be read with Ferguson’s speech in Canberra on Monday to the Committee for the Economic Development of Australia – which is on his website.

Ferguson makes an interesting over-arching point in his talk: look at where we have come from economically to understand the importance of the resources sector today.

Just over 110 years ago,agriculture accounted for 22 per cent of our GDP while mining contributed nine per cent and manufacturing provided 10 per cent. Fifty-five per cent of the 1900 GDP came from the services sector.

Fast forward to 2010 and the services sector now contributes 76 per cent of a much larger GDP, with agriculture just four per cent, mining 10 per cent and manufacturing nine per cent.

(In parenthesis,I, at least, find it interesting to place electricity demand against these numbers: agriculture accounts for just 0.8 per cent of today’s consumption, manufacturing 9.1 per cent and mining 9.4 per cent with metals using 18.3 per cent and aluminium smelting 11 per cent. The power balance is made up of 27.7 per cent residential demand and a 22.8 per cent commercial requirement. Set these ratios against generated-based emissions, which were 203 million tonnes annually last year, and you can see quickly where the Gillard tax impact falls and why the per capita emissions spin does not make a lot of sense.

(It also, in passing, raises an interesting question about the impact on national emissions of the proposed mandatory energy efficiency program that is supposed to force retailers to drive down just household consumption.)

Ferguson makes an interesting point, too, about the impact of sustained growth in resources and energy activity on employment.

Apart from the direct effect, he says, opportunities are created in support services in everything from caterers to cleaners to construction workers as well, of course, as areas like accounting.

And almost all of us are shareholders in the resources and mining sectors through the superannuation funds – and through their investments in such areas as infrastructure development.

(So when you thwack the “big polluters,” guess who else feels some of the pain eventually?)

Ferguson also said something that caught my eye about emissions abatement.

Last weekend he, the Prime Minister, the Queensland Premier and others were celebrating the first two “Solar Flagship” projects – which involve contributions of $965 million in taxpayers’ money (from State and federal governments) to achieve abatement equivalent to the emissions from 115,000 houses (a little more than double the residential sector in Darwin). This is over the 25-year life of the projects.

Ferguson mentioned in his CEDA talk that a federal investment of $52 million in the Collie south-west hub carbon capture and storage project in Western Australia will help leverage investment that will result in abatement equivalent to emissions from 178,000 households (almost four Darwins). This is annual abatement.

Think about that comparison when the solar spruikers are next rushing at you in the media (which is almost every day now) – and I hasten to add that I believe we should be helping to develop utility-scale solar power because of its long-term potential to meet some electricity demand.

It’s just that I also would rather like some actual understanding of the cost benefits of decarbonisation activity in the media and elsewhere.

Ferguson’s wind-up point to CEDA needs a great deal better understanding, too: energy security, he said, “is the end game for Australia as it is for other countries.” Continuing exploration is fundamental to maintaining energy security.

And for those who equate today’s search for energy security with more carbon emissions, it is interesting to note that the Geoscience Australia survey and report also focuses on geothermal resources. Its survey work is adding significantly to the data available to pursue “hot rock” prospects.

The agency points out that, if just one per cent of the thermal energy contained in the Australian earth’s crust at more than 150 degrees celsius above five kilometres could be harvested, we could get 26,000 times our total current energy supply – which means that we need access just 0000.4 per cent of the resource to meet all current demand.

Which yet again highlights the issue of where and why governments spend taxpayers’ dollars and why a long-term energy strategy is so important to address adequacy (the provision of sufficient energy to support economic and social activity), reliability (delivering energy with minimum disruptions) and affordability (supply at a price which does not impact adversely on the four pillars of the economy) as well as abatement.

And it highlights why more media focus on the “dull” stuff versus the “sexy” political shenanigans and shrill voices of sectoral interests would help Us Outdoors (and even those inside the Canberra Capital Hill precinct) to get a grip on what we should be doing.

(PS: The agency report has some interesting stuff to say about our uranium and thorium resources, too, including the fact that we have the world’s largest identified recoverable amounts of the latter – a possible alternative nuclear fuel for large-scale zero-emission electricity supply. Not that this would be of interest to the commentariat, the ALP, the Greens and probably half the Liberal Party.

(Why spend time on a huge potential for world-leading energy innovation like this when you can get 50 cheap headlines out of the demands of the Greens and their followers for a national solar rooftop program, which, if applied to every household in the country, has the capacity to deliver three Darwin-equivalents in annual abatement at a cost of $200 billion in capital outlays?)

Are you surprised that I feel we are collectively Alice loose in an energy Wonderland?

Regulation and reality

Read the media headlines and you must assume that the revolution has arrived – with the regulatory changes proposed electricity network costs must sink to levels that will not cause any more consumer and political pain.

One headline reads “Regulator demands halt to power spend.”

So what did Andrew Reeves, chairman of the Australian Energy Regulator, actually say in Melbourne on Monday?

“Fundamentally,” said Reeves, “there is a need to spend money on the networks to meet strong growth in demand, to provide services to new connections and to replace ageing equipment to maintain reliability.”

Those requirements have driven up capital outlays on networks on the east coast to about $9 billion a year today, double what they were in the middle of the past decade.

None of the demand drivers nominated by Reeves is about to change, especially not in New South Wales and Queensland, locale for more than half the consumption and (in NSW) a large part of the aged assets problem.

Assume if you like that a change in the regulatory approach results in a cut of a third in the capex outlays for 2014-19 – which is what is now in contention because the expenditure (and price rises) until 2013-14 are already in train.

This suggests that capex expenditure will average about $5-6 billion a year across the east coast in the five years from mid-2014.

And a bigger network system requires higher operating expenditures.

Factor in higher prices for materials and equipment and higher remuneration for workers in an environment where skilled staff are at a premium.

How does this deliver “a halt to the power spend”?

These quotes from Reeves have not been reported: “Network reliability is critical, so we need to be certain we make sufficient allowance for investment to meet demand and to replace equipment that has reached the end of its life.

“We need to be certain that firms have sufficient allowance to meet the cost to operate and maintain the network and to restore it quickly if blackouts occur.

“We need to provide a commercial return on efficient expenditure so that firms can fund the investment.”

How, for households, does it deliver an end to their “power pain” resulting from rising network charges plus higher wholesale energy prices (less coal, more gas) plus the increasing cost of the renewable energy target (as it is phased towards 40,000 GWh a year in 2020) and whatever burden is imposed by the solar schemes?

And, of course, if the Gillard government has its way, there will be a carbon charge – and we wait to discover what it will be in 2012 and then each year out to 2020 as it is escalated.

The given in this situation is that 2015 power bills will be about double what they were in 2008.

The “known unknown” is what they will be in 2020 – other than substantially higher still.

The politics of this situation is highlighted by an opinion poll undertaken for the Clean Energy Council: 66 per cent of those polled nominated the cost of living in their top three concerns versus 16 per cent who ticked “climate change.” Thirty-eight per cent nominated the cost of living first versus five per cent for “climate change.”

Reeves has identified the ongoing task the energy regulator faces: “We must be sure that we are only making customers pay the minimum necessary to meet the cost of an efficient service provider for the safe and reliable supply of energy. The challenge is to ensure that the rules allow the regulator to strike the balance.”

The regulatory problem areas he has highlighted have been in dispute between networks and watchdogs for nearly two decades.

The regulator wants much greater scope in assessing what is “efficient” capex and opex.

The cost of capital is a “forever” issue, not helped by disputes now over the impact of the global financial crisis.

The AER claims it is forced to use a methadology that does not reflect actual debt financing practices, a nod to one of the most vociferous arguments of the major users.

The principal AER charge is that the rules as they stand permit “a systemic bias towards inflated forecasts” for capex and opex by networks.

It asserts that the regime today gives networks incentives to submit revenue proposals that are “at the top, or beyond, what could be considered a range that reasonably reflects required expenditure.”

Lost to view in all this, and it is interesting that Reeves chose to make no mention of it in his speech to the Energy Users Association forum, is the fact, under these apparently flawed rules, the AER slashed several billion dollars from the initial capex bids of east coast networks for the 2009-14 determination period.

The largest east coast network business, Ausgrid (formerly Energy Australia), has seized on this point overnight in responding to the Reeves talk.

“The AER,” says chief executive George Maltabarow, “has not been bashful in substituting its own figures for capital and operating costs. It cut $460 million in capital funding from our original proposal and $170 million in operating costs in its final decision.

“It has the power to substitute and uses it. And its decisions have been upheld by the tribunal (hearing network appeals).”

Maltabarow is unamused at the thought that the regulator will employ more analysts to produce forecasts of costs for networks they don’t run.

“The AER is not accountable when a major substation fails,” he says, “and not accountable if workers are put at risk.”

This is a debate that it going to roll on. And there will be real changes because that is now a political necessity.

Whatever rule changes the AER wants will have to be approved by the Australian Energy Market Commission. The process of proposal and comment will be lengthy and loud. Plenty of scope for more tendentious media coverage.

However, there is a limited amount of time available to resolve all this.

The NSW networks – however many there are when the O’Farrell government has completed its “dice and slice” review of the organisations – will be the first cab off the rank in the regulatory determinations for post-2014 and will need to have their bids assembled by the end of 2012 at the latest.

Finally, while Reeves would have pleased the major energy users with most of his comments, his speech included a slap for recent attempts to compare local networks and the Australian ones with some overseas.

“While raw comparisons across networks can expose evidence of differences between (them), care must be taken to ensure that the data is a fair and reasonable comparison. It must take in to account differences in the regulatory environment, accounting treatment, asset classifications, network maturity, customer characteristics and geographical factors between regions.”

Letting in sunshine

It seems reasonable to suppose that the community of Moree in rural New South Wales will be chuffed to be the locale for a $923 million development of the largest solar photovoltaic power station in the world, but I wonder whether it will outweigh concerns about what is happening to their own electricity bills?

As a country community, they are faced with some of the highest householder charges in Australia from 1 July.

Rural and regional average household bills (customers using seven MWh) in NSW will be around $2,060 in 2011-12 versus about $1,800 for the metropolitan areas (where average consumption is 8MWh).

What this means is better appreciated when you note IPART reporting that electricity bills consume more than six per cent of disposable income in a quarter of households outside Greater Sydney – and more than four per cent of incomes in half of country homes.

It doesn’t stop there, either. Country municipalities, for one, have been quick to say that they will need to pass on their share of higher charges. They won’t be Robinson Crusoe in that respect.

A worry for the federal government is that media coverage of the power issue has managed to conflate big bill increases with imposed costs of solar and other renewable power.

It is certainly true that the daft federal and Keneally government rooftop solar schemes have helped drive the 2011-12 tariff rises in NSW, but for the Moree community and other country folk the actual dollar rise from all renewable costs (including the RET overall) will be about $70 versus some $186 for higher network charges.

About $1,100 of the final rural bill will be network-related in the new financial year versus about $750 for energy – the balance of around $200 will be for renewables costs and retail charges.

Shorn of all the hype, the two large-scale solar developments announced by the federal government and private investors this weekend are, in fact, a step in the right, long-term direction for Australian energy policy.

If CSIRO’s forecast that utility-scale solar will meet 30 per cent of national power supply at mid-century is to be borne out – and many of us reading this will never know – then these are the necessary baby steps.

These babies, of course, come with a hefty price tag.

The 250MW solar/gas hybrid power station at Chinchilla in Queensland will cost $1.2 billion (with the federal government contributing $464 million and the Queensland government $75 million) while the taxpayer is meeting $306 million of the Moree cost.

The Prime Minister pushed the point that these plants will provide enough electricity for 115,000 homes.

To the layman, it sounds very large.

It actually means supply of about 920 gigawatt hours a year – and just today’s national residential consumption is 60,000 GWh annually, of which 34,800 GWh is in NSW and Queensland.

Or to put it another way, we would need to fork out $130 billion (or three times the present value of all generation assets) to meet today’s national residential demand with solar power on this capex scale.

There is more to come from the federal government in the “solar flagship” program.

It has $1.5 billion earmarked in total for grants , aimed at kick-starting almost $5 billion worth of projects.

Scaled up to the size of, say, the American power sector, this would be about $20 billion in grants and more than $65 billion in total capex, a pretty respectable effort. Unfortunately, when international comparisons are made, it suits the greenies and others to do it on the bare numbers and call our efforts puny.

Of course, where the PM is, spin is close by.

“When we look at these clean energy projects using our abundant natural resources, our wonderful and bountiful sunshine,” she gushed in Brisbane on Saturday, “we can see our clean energy future.”

And this: “With this plant (Chinchilla), the solar future for Queensland is assured.”

Actually, Prime Minister, if we want to achieve the 70 per cent of our electricity supply in 2050 from non-emitting sources, in addition to CSIRO’s optimistic solar forecast, we will need large-scale recourse to nuclear energy, which your government will not countenance, and to fossil-fuelled plants using carbon capture and storage, a research area that has just suffered a $475 million knife attack in your latest budget.

And we will need a much higher carbon price than you wish to admit along with an enlarged RET to keep driving along utility-scale solar, wind power and other renewable energy.

But then can we really expect Julia Gillard to stand there and say: “This is a small and rather expensive step down a very long and exceptionally costly road which will see our power prices at treble what they are today by early in the next decade and rising rather more than that in the longer term – and, even then, we will be only a relatively small way towards meeting the carbon emissions budget we can allow ourselves to contribute to meeting our share of the UN’s mid-century global plan”?

Meanwhile, in a Business Spectator interview on Friday, we had ACIL Tasman CEO Paul Hyslop saying that a $25 or $30 carbon price will deliver “very little change in the current generation mix by 2020” and that it could take a carbon price of $70 or $80 a tonne to start driving NSW black coal generation out of the east coast market in favour of lower-emitting (but not non-emitting) gas.

Ditto Queensland, and the two States combined account for 60 per cent of power supply, with more than 80 per cent coming from burning black coal.

Nonetheless, the federal move to push large-scale solar generation is a worthwhile development in the decarbonisation effort and it is to be hoped that the rest of the announcements under the “solar flagship” program will not be delayed.

It goes against the grain to quote the mass-murderer Mao, but he was right to say “a journey of a thousand miles begins with a single step.”

Let’s just remember, shall we, that this is a journey of 10,000 miles (or more) and we could have a debate about just how many steps backwards, or round in circles, we have taken in the past 4-5 years.

I fear we are still more emulating the Grand Old Duke of York – he’s the one, you may recall, who marched his troops to the top of a hill and marched them back again.

California dreaming

If, like me, you are sick of the current claims and counter-claims regarding Australian carbon price policy, not to mention the political spinning and the “he said, then she said” media reporting, allow me to suggest a temporary antidote: settle down in your chair in front of the PC with a decent glass (or two) of red and read the newest international energy policy commentary available.

(In passing, I can offer a small personal indicator of the heightened community need to be informed, as opposed to hectored and lectured, about energy issues: this website’s “unique page views” reached 5,922 in May, up by more than 1,000 from April and now double what they were on average in 2010.)

The report I’m reading with some Tatachilla red from McLaren Vale is called “California’s Energy Future: the view to 2050,” published by the state’s Council on Science and Technology (similar to our ATSE). Putting the title in to Google Search will locate the paper.

Now I know some people twitch at the mention of energy and California in the same sentence.

Balmain basket-weaver territory writ large is how someone described the Golden State’s approach to me.

But, given what we are trying to do here in energy policy, there are a heap of interesting points raised by this study.

The report, in effect, says that, if you want to go down the path of deep greenhouse gas emission cuts by the middle of the century – surely the aspiration of our ALP/Greens federal “coalition” because what else could Gillard, Swan and Combet mean by their rhetoric on “clean energy” and their waving of maps about the impact of rising sea levels? — then you have to face up to two big things: aggressive efficiency measures for buildings, industry and transportation as well as aggressive decarbonisation of electricity supply while dealing with doubling demand.

The report is wholly focussed on technology options, so end-user costs and impacts on the economy don’t get a look-in, but one need not be too hung-up on this.

Its value lies in a fresh look at what can and can’t be done technically.

Affordability is another question – and, yes, for most of us here, probably the key issue when we have so much energy-intensive industry, not to mention unhappy householders.

(And, yes, California is a basket case, with a $US10 billion hole in its state budget, unemployment running at 12 per cent, substantial urban air pollution and crowded highways and aging rail lines, airports and and seaports that cause it to be ranked near bottom in the American infrastructure league table – plus its bleak real estate market is a big drag on economic recovery.

(All it really lacks at the moment are the highway posters that decorated Toronto in the 1990s when Ontario suffered under a government akin to the Australian Democrats: “So how do you like your socialism so far?” they asked under a picture of a beaming, and doomed, provincial premier.)

One of the key findings of the report, written by members of the Lawrence Berkeley National Laboratory, is that California’s existing transmission grid is “entirely unsustainable” in terms of balancing supply and demand to enable the integration of large-scale renewable energy resources.

That has a resonance with where we are supposedly headed here.

(I find it curious that the $8.3 billion “NEMlink” east coast proposal got a brief run in the media and has vanished without trace while we rabbit on about “pissant” solar rooftop schemes which are not remotely as important.)

Like Australia, California has ample renewable resources, but, says the report, “a high proportion of intermittent resources will result in significant emissions (exceeding the very ambitious 2050 target by themselves) if the power supply is firmed with natural gas – or greater risks of loss of reliability if it is not so supported.

Fossil fuels can be a transition path to the future, it says, providing there is large-scale development of underground carbon dioxide storage and an understanding that the technology is not going to deliver total sequestration.

Interestingly for us, it argues that natural gas with CCS is a better bet than coal because of the smaller emissions per unit of production. Much of the CCS technology is still in the demonstration phase, it reminds readers.

(Just a reminder,at this point, too, that the taxpayers of New South Wales and Queensland, the two largest power demand areas in Australia, own 20,000 megawatts of black coal plant.

(Replacing this with baseload gas or nuclear would be an interesting proposition, especially as it would require stranding the coal-burners at the taxpayers’ cost while the private sector would need encouragement to build alternative plant. What carbon price are we talking in this scenario? What retail price?)

California, however, if it wishes to rely more heavily on nuclear power,says the report, must face up to the prospect of building one new plant a year for three decades from 2020.

That’s 30 nuclear power stations in one state.

And this report was published after the Fukushima incident.

A re-invigorated nuclear industry, it asserts, could deliver energy at a price of about $US60-80 per megawatt hour.

However, this requires killing some local anti-nuclear laws and turning around local community sentiment.

The report also highlights a sleeper issue for boosters of huge development of solar and wind power: land use impacts.

Five per cent of the state’s land would be needed to provide all California’s electricity in 2050 from renewable resources.

The Grey Lady (aka the New York Times) has seized on this, pointing out editorially that to have just 8,500MW of solar capacity (that’s a little under Victoria’s current capacity) the Californians would need an area five times the size of Manhatten.

Wind energy, of course, requires more land than solar. The Times calculates that 8,500MW of wind farms would cover 70 Manhattens.

(Meanwhile, American environmentalists have moved to deter development of a proposed $US2 billion solar plant in California’s Mojave desert because of its impacts on the local tortoise.)

The bottom line in all this is that the study describes how California, without going in to end-user costs, could achieve about two-thirds of its 2050 goal with existing technology or stuff that is now in the demonstration phase – but the other third requires inventing new approaches or driving current ideas that are on the fringe of possibility to make them commercially viable.

This starts to put the knife to a lot of the current Australian rhetoric, skipping briskly, as it does, over the size of the challenge and prating about acting to “save the planet” this decade or the next. And read this in the context of our Department of Climate Change’s 2050 “emissions budget” numbers – see my earlier posts.

Most pointedly, there is nothing in current Australian policy that remotely approaches dealing with the Gillard/Swan/Combet nightmare scenarios of rising seas, which they are using to shoo us towards accepting their policies – although their true objective, as I keep on pointing out, is winning the election in 2012 or 2013.

The Californian study in part sums up its message like this: if the state electrifies as much as it can and make all energy end uses as efficient as it can, with an electricity portfolio that is roughly equal parts nuclear, natural gas with CCS and renewables, it will be three-quarters of the way to achieving the target that the politicians have set.

California, the study says, is capable of leading the world in energy innovation.

Well, actually, in some respects, so are we in Australia, but here’s the rub: is there anything you have seen to date that encourages you to think that (a) we are moving with sufficient speed and purpose to lead the world in innovation, (b) we have any policies in place or proposed by the government (or the official opposition) that will address the DCC “emissions budget” and (c) we have any idea at all, beyond Garnaut’s high-handed commentary, about how to meet our “climate change” objectives efficiently?

I can cope with an argument for a major effort to decarbonise – although I confess to being rather amused by this week’s views of scientists on whether or not the latest revelations about the Sun’s activities could see a new Little Ice Age (with its awesome issues for agriculture) – but I gag on the political unwillingness, greased by Garnaut, to confront the reality of what is being talked up by Gillard and Company.

“Holistic” is a word missing from the current political leadership’s lexicon.

I don’t put forward the Californian study (which I have most inadequately covered here) as offering anything more than some food for thought.

Imbibed along with red wine and a sharp cheese, it may do you some good.

An extra-ordinary challenge

The national electricity market is a misnomer; it’s not national because it doesn’t include Western Australia and the Northern Territory, but it is by far the most important factor in looking at Australia-wide electricity security and power-related carbon dioxide emissions.

Looking at the real national generation mix as opposed to the “national” market set-up skews the picture.

While no national government can, or should, ignore WA and the NT, where the major action is, in terms of policy impacts, emissions, security of supply and the impact of prices, is east of the Nullabor.

It is also where federal government will be won or lost at the next election (maybe next year, maybe the first half of 2013).

The overwhelming importance of the east coast is illustrated by a report by Green Energy Markets for Environment Victoria, which is a lobby group not a government department, in the headlines at the moment for challenging a new coal-fired power station at Morwell in the State’s Civil & Administrative Tribunal.

If you look at the Australia-wide mix the report shows, you find that gas generation is rising quite fast and we now have 76 per cent coal power followed by 16 per cent gas output and seven per cent from renewables.

However, the picture for the NEM, which represents 88.7 per cent of customers and 91.4 per cent of annual consumption, is different: coal generation’s share is still 83 per cent versus eight per cent for gas and 8.5 per cent for renewables.

This situation is important because the east coast is where pledges from the current federal government (repeated ad nauseum by Gillard, Combet and Swan) about “clean energy” being delivered by a carbon price will be put to the acid test.

It is also where, in terms of voter impact, the burden of a carbon price (less the still-mysterious compensation) will be most marked, coming as it will, according to a new report by the National Energy Market Commission, on top of significant increases in power bills flowing from both network charges and other decarbonisation costs.

The AEMC report says that average annual bill impacts (represented by increases between 2008-10 and 2012-13) will be $413 in Queensland, $511 in New South Wales, $332 in Victoria, $327 in South Australia and $338 in Tasmania. And, even without a carbon price, they will be higher still in 2013-14 as the network charges flowing from regulatory-approved capital outlays continue to rise.

As Gillard and her team hardly need telling, the tough part about making policy decisions today for the long term is that they will be judged at the next election by those feeling today’s pain – and fearing what it will be tomorrow.

Overblown pledges about clean energy – see the national energy resource assessment generation mix numbers for 2030 for why they are spin – and rhetoric about how the impact of local decisions will benefit the attempts to hold down global temperatures (an argument now largely lost, I rather think, in terms of public perceptions) help not at all to deal with two government problems: how to avoid the voters’ axe at the forthcoming poll and how to put in place a meaningful long-term energy strategy.

If you want to stretch a metaphor – as a grandpa, I am used to using such devices to inform three small boys – imagine the problem as a kangaroo with power cost and supply security as the legs and decarbonisation strategy as the all-important tail. It doesn’t take a great deal to cause the poor beast to go round in circles.

The Environment Victoria numbers (the report is on its website) show that greenhouse gas emissions in the NEM rose by almost 14 million tonnes annually for coal generation between 2001 and 2008 (falling back a little in GFC-affected 2009) and by almost five million tonnes a year for gas-fired plant.

How does this drop between now and 2020?

Obviously, by closing down coal-fired generation – but where, when and to what extent?

If most of the eastern coal gencos stay in operation and gas generation rises to meet new demand, the level of emissions goes up, too, although reduced in extent by how much wind power is brought on this decade.

But what happens if, somewhere about the middle of the next decade, urban passenger vehicles are mostly electricity-fuelled?

Could this development be driven even faster by the fact that our capacity to provide liquid fuels from our own resources is dwindling and by the ever-present prospect of the impact of Middle East developments on global oil supply?

Which brings us back to the issue of what level of carbon price is needed to start driving down overall national emissions to the 2020 target, with NEM power plants doing a lot of the heavy lifting?

Even more importantly, in terms of decades-long strategy, what is needed to achieve just the 2030 generation mix, as forecast by the national energy resource assessment, let alone the much lower emissions output required to meet pledges about “clean energy”?

Australia has had two substantial stabs at formulating over-arching national energy policy in the past 25 years – under the Hawke government in 1986-88 and under Howard in 2004-06.

It is safe to say that neither administration faced anything like the challenge now confronting Gillard’s government.

In a highly contentious step in 1988, the Hawke government pulled the entire greenhouse gas chapter out of “Energy 2000,” as the white paper was titled, before publication because – I was told by officials and then-minister Peter Cook when I strongly criticised the decision publicly on behalf of the upstream petroleum industry – of not wishing to disadvantage our coal trade.

This was a significant error of judgement, I think, with consequences that have rolled down the years to today.

The Howard government’s key conclusion from its white paper (“Securing Australia’s energy future”) seems to me to be that we need to get serious about the use of nuclear power, a view that is no further forward 5-6 years later (at least politically) and may have regressed in public perceptions as the result of the Fukushima crisis.

Looking forward 20 years (to 2030), let alone 40 years (to 2050), requires a tremendous effort. Implementing what is perceived a still greater effort.

How to bring on nuclear energy, geothermal power and large-scale solar thermal power, as well as carbon capture and storage for fossil-fuelled plants, for example, to deliver much of the 2050 electricity supply is a set of issues that have to be adequately addressed now, not at some time in the future.

(En passant, there is absolutely no prospect of these generation developments being low-cost and their impact on our national trade competitiveness relies on what happens in developing nations, not in western Europe, North America or even Japan and South Korea.

(Contriving for short-term domestic political advantage that the new Productivity Commission report looked at decarbonisation activity in a few, mostly developed, nations rather than our trade competitors is just another example of much wit but little wisdom on the part of the government.)

The role of gas generation as the “bridge” for Australian power supply between now and mid-century is easy to envisage and not so easy to deliver, not least given the pushback today from both the farming community and environmentalists on the impacts of onshore gas exploration and development as well as the potential issue of domestic fuel prices reaching international parity because of the LNG trade.

Do we even begin to understand the potential contribution of shale gas?

How things can change over a half century is illustrated by the Environment Victoria report.

Between 1960 and 2009 national electricity generation output grew 10-fold.

Coal-based production grew 12-fold, renewable energy four-fold and gas generation rose from nothing to 42,000 gigawatt hours a year (in round terms equivalent to today’s consumption in Victoria).

The 1960s electricity strategy was simplicity itself: how best to burn coal at large supply points adjacent to the largest load centres to provide really cheap power and attract large-scale industrial development and its attendant jobs. No white paper was required – all mainland governments understood the point.

To a large extent that strategy worked over a long time – until now.

The current national energy resource assessment forecasts that growth in consumption between now and 2030 (using the Rudd CPRS as the policy basis for modelling) will be cut back by the equivalent of Victoria’s current demand.

This requires a perception of what will drive demand, and how high, and of how consumption will react to higher electricity prices as well as of the impact of mandatory policy, like the RET.

A considerable problem is that the perceived outcome is nowhere near the generation mix needed to meet even the current 2020 emissions target, let alone what it may be in 2030 – and still further removed from providing a platform under what may be a 2050 target.

(My recent post on the Department of Climate Change view of Australia’s “emissions budget” for the first half of this century explains why this is so.)

This is the large shadow over the hype and spin of today’s politics – which, let’s make clear, is coming from both sides of the mainstream political divide.

Resolving the issue – at least in terms of an energy roadmap – will require an extra-ordinary effort during an extra-ordinarily difficult time for making decisions. Sustaining the decision(s) will take some doing in a decade of political turmoil.

Swan’s lame duck spin

This is picking and choosing of the highest order!

This was the reaction of one of my friends, someone with a long experience of energy policymaking, on reading Treasurer Wayne Swan’s media statement about the Productivity Commission report on international carbon policies.

And, of course, it is.

It was always going to be.

Swan could be relied on to cherry pick from the careful, detailed commission findings to sell the Canberra Press Gallery his version of the message. After all, the government has had about a fortnight with the report in its hands to craft its media attack.

What’s perhaps surprising is how clumsily Swan has gone about his work.

The commission examined 1,000 policies in nine countries – and found we almost lead the pack for the number of policies already in place. The Americans (with 50 states and their federal government) have 307. With six states, two territories and the federal government, we have 237, more than double Britain’s programs (104) and nearly double Germany’s (131).

Modelling by the commission suggests that our abatement from existing policies for electricity “could have been achieved at a fraction of the cost.”

All policies, the PC points out, impose costs that someone must pay.

In Britain, for example, explicit carbon pricing appears to have been “a cost-effective way of achieving considerable abatement” – and to have had impacts on electricity prices of more than 10 per cent.

Swan’s take? “The commission identified over 1,000 policy measures to reduce pollution, showing yet again that the world is moving towards a cleaner future.”

And, of course, the government’s Big Lie always has to be included: a carbon price “will only apply to the biggest polluters in our economy, of which there are less than 1,000.”

What did the PC find about our emissions?

Metal products directly account for 30.65 million tonnes out of a manufacturing total of 66.6 million tonnes. The indirect manufacturing emissions from electricity use account for almost 63 million tonnes out of a power generation total of 196 millon tonnes.

For electricity production, that leaves 133 million tonnes of emissions not coming from “big polluters” – aka big employers.

(The Minerals Council says there are 950,000 people working in Australian mining and manufacturing.)

On my estimate, at a $26 per tonne carbon price, that leaves about $3.5 billion a year to be recovered from other than the “big polluters” before one takes in to account what manufacturers pass through to the community of their additional costs.

And $26 a tonne will not be anywhere near enough for Australia to “build a clean energy economy and protect our precious natural environment for future generations,” to quote Swan’s rousing media statement climax.

(Actually, after Gillard and Combet waved around those maps of alleged future inundated urban areas, I thought their latest sell was that we needed a carbon price to save our precious city real estate.)

The commission usefully includes a table of levelised electricity technology costs: combined-cycle gas turbines $97 per MWh, wind $150 to $214 and medium-sized solar PV systems $400 to $473.

And we already know what the government thinks abatement policies will deliver in 2020: 43 per cent from coal generation, 37 per cent from burning gas , 12 per cent from wind farms and eight per cent mostly from existing hydro-power.

As I have asked asked over and over: when will the government match its “clean energy” rhetoric to a carbon price needed to deliver what it claims to be pursuing?

Michael Hitchens, who is chief executive of the Australian Industry Greenhouse Network, an eclectic collection of associations and companies representing a large part of the energy consumption in this country (and, by way of disclosure, which I helped to found in the 1990s and chaired for a time), is one who finds the Treasurer’s latest spin all too much.

“Perhaps he has a different version of the report,” he says, “but nowhere can I find two results he claims are key.”

On the Swan hype about all that the world is doing, Hitchens points out that the PC, in effect, says the policies being pursued “are costing a lot and doing bugger all in terms of emissions reductions.”

He comes up with an interesting calculation, too: “In electricity, on the most optimistic terms, the commission shows that all these policies (internationally) are saving just 210 million tonnes of carbon dioxide for a total cost, as measured by subsidy equivalent, of more than $18 billion per year.”

Secondly, Swan somehow finds the report to be evidence that Australia is in danger of falling behind the rest of the world on abatement.

As Hitchens points out, the commission, in fact, warns over and over that nothing it says can be used to conclude that we are ahead, behind or average when it comes to measuring even current comparable efforts.

The question of future effort was outside its terms of reference.

Hitchens says there are different take-home messages from the report from those Swan wants us to receive.

One is that Australia is about average in terms of the amount of money being wasted on bad policies.

Economy-wide emissions pricing is likely to be a least-cost solution, but no-one has yet adopted it.

If we go down this route here, then a majority of the 237 local policies have to be dumped – not least because some of them will at best negate the carbon price. The Greens are already leaping up and down about this.

Nothing in the report, Hitchens asserts, points to Australia being a “laggard” in abatement compared with other countries, nor that the current pledge to achieve a 2020 target here should be increased.

So there you have it: on carbon policy, the Treasurer in spin mode is an ugly duckling after all.

More essential reading

What are you reading this week – at least with respect to energy supply?

Writings currently impacting on me include the following:

First, an excellent commentary by Ziggy Switkowski, Chancellor of RMIT University and new chairman of Suncorp, published by Business Spectator under the heading “Refuse the carbon tax’s junk mail,” in which he analyses the current global consumption of fossil fuels, notes that the world’s economy is predicted to grow at more than three per cent annually for years to come and observes that it seems emissions and warming will continue unabated “for this generation and perhaps the next.”

Switkowski adds: “Some might find (this) discouraging, but I believe that national strategies must be fact and data-based. Australia’s current approach to climate change is muddled and confused with economic reform. And we do not have a national energy policy.”

He says: “When citizens produce advertisements in favour of a carbon tax, they sound sincere in their belief that they are fighting for our environment. Yet I can think of no environmental parameter in Australia which will be improved by our initiative absent a concerted global effort targeted at reductions in absolute aggregate emissions.”

Second and very complementary to Switkowski’s thoughts, a speech to the Minerals Council of Australia last week by the new Secretary of the federal Department of Climate Change, Blair Comley, hardly noticed by the mainstream media but to be featured strongly in the June Coolibah newsletter going up on this website this week.

In it, Comley sets out the Australian emissions “budget” for first half of this century: 1,000 gigatonnes of carbon dioxide to contribute to a global effort with a 75 per cent chance of keeping the temperature rise within the “two degree guardrail” and 1,440 gigatonnes for a 50:50 chance.

He points out – the speech is on the DCC website – that we took up 305 gigatonnes of the 50-year “budget” between 2000 and 2008 and appear on track to be at around 700 gigatonnes by 2020.

Given the commitment to strong economic and population growth, how does Australia meet either “budget” by 2050 without a national strategy on energy supply and use that looks way beyond 2020 or even 2030?

Third, on New York’s Columbia University Earth Institute website, a new paper by James Hansen and associates which suggests that global warming is already headed to the “two degree guardrail” and is being kept from it at present by industrial emissions of sulphur dioxide.

My attention was drawn to it by a commentary by Andrew Glikson of the Australian National University in Crikey.

Glikson asserts that, barring an indefinite and undesirable continuation of sulphur aerosol emissions, deep carbon cuts need to be accompanied by use of fast-track tree planting, application of biochar methods and chemical carbon dioxide sequestration.

Fourth, a critique on the website Online Opinion of Ross Garnaut’s latest report from the Energy Supply Association in which the point is driven home that investment of the order of $220 billion in the electricity supply chain between now and 2030, as recently envisioned by federal Energy Minister Martin Ferguson, requires the energy industry to have confidence to commit to these very large sums on the basis that they generate returns over their lifetime of several decades.

Fifth, the mounting collection of commentary on Germany’s decision to abandon its nuclear power fleet over the next 12 years and the significant cost and strategic issues this raises, including a greater reliance on gas from Russia and a flow-on impact to the whole western Europe power system, not least when exceptionally hot northern summers affect French electricity output.

Google Search will deliver a wealth of material on this topic.

The German move will see an increase in greenhouse gas emissions equal to the current output of Slovakia, it is asserted, and add a cumulative 370 to 400 million tonnes over the decade. That’s more than double the abatement achieved here over a decade by closing down Hazelwood power station.

In a sentence, it appears that Angela Merkel’s government has moved against nuclear for base reasons, choosing a near-term politically attractive approach that is economically unfeasible and strategically unwise, all cloaked in rhetoric about pursuing greater use of renewable power. Sound familiar?

Sixth, coverage in European media of the potential impact of this year’s forecast very hot summer on Nicolas Sarkozy’s chances of re-election if the ensuing drought causes 24 of France’s nuclear reactors (out of 58) to shut because they are dependent on the flow of river water for cooling.

Extreme summer weather in 2003 saw this happen and a claimed 15,000 people die from heat-related problems. It was followed as well by the political demise of Sarkozy’s predecessor, Jaques Chirac.

This really brings home the importance of energy security and makes one wonder what the French have been doing for the past eight years?

And last, the latest Essential Report opinion poll, just published, which throws up the fascinating information that, asked for the three most important issues which will decide how they vote at the next federal election, respondents placed addressing climate change eighth (with 15 per cent) behind management of the economy (61), ensuring quality in the health system (49), jobs maintenance and protection of local industries (32), a quality education system (26), a fair tax system (17), political leadership (17) and housing affordability (16).

What’s more the overall perception on climate change in the poll was skewed by Greens respondents awarding it 45 per cent of their votes versus 23 per cent for Labor and six per cent for Coalition voters.

Greens polled also gave sustaining jobs and protection of local industries 12 per cent support.

Their party will have the balance of power in the Senate in less than a month’s time and the Gillard government’s current carbon posture is largely attributable to Greens’ pressure aided and abetted by Messrs Oakeshott and Windsor.

Garnaut and generation

Prime Minister Julia Gillard and Climate Change Minister Greg Combet now face a stark choice when it comes to the impact of their proposed carbon price on electricity supply: either Ross Garnaut is a guru on whom they can rely or key suppliers are about to be put in jeopardy if they accept his advice.

The electricity industry is sure where it stands.

The Energy Supply Association, representing 40 businesses with investment plans worth $49 billion over the first half of this decade, has come out swinging this week.

Emphasizing that it supports an emissions trading scheme, the association assails Garnaut for recommending in his “final” report that generators be refused compensation under a carbon price regime.

It dismisses his suggestion that the government offer loan guarantees for suppliers with distressed assets in the wake of the carbon decision.

“This,” it says, “does not assure energy security because companies in (such a) situation will have no ability to trade their way out of financial disaster.”

It reminds the government that it has only recently received advice from the investment reference group it established that it needs to treat existing generation “with care.”

Garnaut’s prescription, it argues, will provide no help to an industry required to fundamentally alter its emissions profile.

What he proposes, it says, will “dramatically increase” the risk of stranding billions of dollars of assets” and will “threaten the reliable supply of electricity.”

International Power, owner of the Hazelwood power station in Victoria’s Latrobe Valley, has told journalists that Garnaut lacks “commercial reality” in putting forward his recommendations. He is wrong to “glibly suggest” that a $26 per tonne tax on generators can be simply passed through to consumers.

His approach, it adds, is “naïve” and “blinkered.”

TRUenergy managing director Richard McIndoe, whose Yallourn power station in the Latrobe Valley is also on the front line for receiving the impact of Garnaut’s proposals, has warned the government it cannot afford to pursue a “hit and hope” approach.

Garnaut, he has told journalists, is “foolish” to think that his approach holds “negligible risk” for power supply.

A number of project-financed power stations will have a “significant impairment write-down of their equity” as a result of a carbon tax imposed as Garnaut recommends.

Yallourn and Hazelwood supply about half of Victoria’s electricity.

McIndoe is warning that closing the two plants without adequate replacement capacity in Victoria will leave the State relying for substantial baseload energy on black coal generation in New South Wales and vulnerable to problems with inter-connection.

However, NSW itself needs new baseload capacity to be built by mid-decade and consultants advising on proposed developments at Bayswater and Mount Piper have warned that part of the supply issue for the State is that it cannot rely on the net 5,000 gigawatt hours a year of imported electricity that it consumes at present because of over-the-border demand growth.

McIndoe has added that TRUenergy will be “happy” to discuss a closure program for Yallourn with the federal government, but only on the basis of direct compensation until the plant shuts down. Transitional assistance, he says, is needed both to provide incentives for replacement generation and to reduce the ultimate buy-out cost.

International Power is already on record as being willing to discuss a closure agreement for Hazelwood.

Under Kevin Rudd, the federal government ignored Garnaut’s views and proposed some $3.3 billion compensation for generators, a level the industry labeled as “inadequate.”

Where the Gillard cabinet, in thrall to the Greens and the independents for its hold on office, will land is anyone’s guess.

Federal Resources & Energy Minister Martin Ferguson sought to apply some perspective on the day Garnaut handed down his latest advice by telling journalists: “(Garnaut) does not represent the views of the government. (His report) is a contribution to the debate. It is the responsibility of the government not only to sift through his views but (those of) everyone else seeking to contribute to this process and to get the balance right.”

Nonetheless, generators – seeing on television a beaming Julia Gillard receiving the report from Garnaut – will continue to be highly anxious until C-day some time in the next 4-5 weeks.