Issue 40, June 2008
A submission in May from the Clean Energy Council to a Senate committee reveals the scope of the sector's ambitions: once the MRET is built up from its 2008 target of 6,800 GWh to the Rudd Government's intended 45,000 GWh in 2020, the CEC wants the requirement retained at this level until 2035 and the penalty price (currently $40,000 per GWh) indexed to inflation.
This goal involves a huge return to the renewables industry. It is estimated that a 10 percent a year linear trajectory for MRET from 2010 to 2020 will deliver about $11 billion in cumulative premiums. In 2020, at a nominal $40,000 per GWh, MRET will fetch a premium of $1.8 billion. While the Rudd Government has talked about phasing out the target from 2020 because the emissions trading scheme will be fully operational then, the CEC is bidding for a further revenue flow from premiums of $27 billion in 2008 dollar values -- a figure that would be substantially higher if the penalty is indexed to inflation.
The Climate Change Department has told the Senate that it expects changes to the MRET legislation to be in place by mid-2009. Projects already accredited under State schemes will be eligible under the expanded national target, it says.
The carbon charge could have a "shock impact" on the economy and on consumers, Concannon pointed out, with substantial increases in wholesale power costs if trading led to the closure of most of the brown coal generation sector. A $30 a tonne carbon price, he said, could see 4,000 MW of generation closed within two years and as much as 6,100 MW within five years, representing power production of 143,000 GWh a year.
The government needed to ensure a smooth transition to the trading scheme, he urged. Generators needed incentives and allowance for the disproportionate impact of carbon prices on their industry.
International investors would be watching developments closely, Concannon added. "Replacing the displaced generation capacity would cost at least $12 billion."
Commercially viable "clean coal" technology was not available on the scale required before 2020, he said.
ACIL Tasman director Paul Hyslop told the CEDA forum that the gas industry would need to increase its supply to power generation from the current 140 petajoules a year to 500 PJ by 2020 to meet new demand as well as the requirements of gas turbines replacing the ousted brown coal plants.
Meeting in Canberra on 13 June, the MCE, chaired by federal minister Martin Ferguson, also agreed to defer work on a proposed mandatory national energy efficiency scheme pending the outcome of federal and CoAG climate change reviews.
The ministers confirmed that the Australian Energy Market Operator, which is to replace NEMMCo on 1 July next year and to cover power and gas markets, is to have a board that includes industry representatives -- the NEMMCo board is appointed by governments -- with governments retaining 60 percent of voting rights. The new board is expected to be in place in August.
As expected, the MCE gave the thumbs up to the roll-out of "smart meters" in the power market being undertaken by distribution network operators and went along with the concerns of a number of governments about the cost/benefits of the concept by agreeing that the process would start in Victoria and New South Wales rather than being countrywide. Under this arrangement, Victoria and NSW will install five million new meters by 2017 and deployment nationally will be reviewed again in 2012.
Energy ministers plan to meet again in Melbourne in July and in Adelaide in December. The July meeting will be used to discuss the Rudd Government's green paper on emissions trading (see Commentary below).
The issue, she argues, has led the world to a new frontier of economic reform. While nations must keep growing economically, they must also reduce their carbon intensity. Australia, she says, must undertake a "substantial task" to improve its carbon productivity, given projections that it will more than double national output to $2.5 trillion by 2050. Carbon productivity will need to improve far faster than in recent decades to meet emissions reduction targets.
Wong identifies four "imperatives" in improving carbon intensity: (1) Deploy existing low-carbon technologies. (2) Develop and scale-up technology that is near commercialisation, such as carbon capture and solar power. (3) Find big break-through technologies, such as zero-emissions electricity production. (4) Change the way industries and companies operate to shift the economy to a low carbon future.
NRG Energy, a former investor in power plants in Australia, is field-testing the concept in Louisiana where the algae are harvested daily for conversion to biofuels or animal feed supplements. It is claimed that two million tonnes of algae will capture one million tonnes of carbon dioxide -- and the big plus is that the process does not require retrofitting the power plant for sequestration.
"It's hard not to get excited about algae's potential," says a spokesman for the US Department of Energy. "Its basic requirements are few: carbon dioxide, sun and water. Its potential oil yield per acre is unmatched by any other terrestrial feedstock."
Global wind capacity in 1990 was just 2,000 MW and it only passed the 60,000 MW mark in 2006. The past 18 months have seen a big surge in development, with global capacity passing the 100,000 MW mark in April. Growth is concentrated in five countries -- the US, China, Spain, Germany and India, which accounted for 78 percent of new installations in 2007.
The turbine manufacturing industry -- dominated by six companies, four of them in Europe -- is struggling to cope with the flood of orders. Germany-based Siemens is telling customers that orders placed now won't be delivered until 2012.
The situation is hardly likely to improve with the Chinese government announcing that it intends to boost its wind capacity from 5,600 MW today to 100,000 MW in 2010. Meanwhile more than 200,000 MW of wind farm development is under consideration in the US. Wind plant manufacturers also see Greece and South Korea as strong emerging markets.
The situation has led global leader Vestas of Denmark to announce that it will invest $US2.5 billion on new production lines.
India-based Suzlon Energy, the fourth-largest supplier, says it will spend $US1.5 billion on expanding manufacturing operations. It has also bought a German competitor for $US1.9 billion.
In the biggest deal of all, Spanish turbine manufacturer Gamesa, based in Bilboa, has signed a contract with Iberdrola Renovables to provide turbines, construction and services worth $US9.7 billion between 2010 and 2012, involving development of 4,500 MW of wind farms in Europe, Mexico and the US. Iberdrola Renovables, a subsidiary of Spain's largest utility, is the world's biggest wind generator with installed capacity of more than 7,800 MW.
Analysts in Australia are suggesting that the new MRET will require between 6,000 and 10,000 MW of wind capacity to be added between 2010 and 2020, but market commentators are already starting to query the available of turbines and the likelihood that wind farm capital costs, which have risen to about $3 million per megawatt in the past year, will increase substantially.
EnergyQuest says output in the March quarter was 106 million barrels -- compared with 112 million barrels in the first quarter of 2007.
LNG exports also fell slightly and domestic natural gas (ethane) output dropped by just over two percent.
On the other hand, adds EnergyQuest, coal seam gas production rose strongly in the quarter and is now contributing 23.8 percent of east coast gas consumption.
A number of factors suggest this outcome. One is the sudden weakening in business confidence in Australia. Another is the impact on the community and on the business sector of crude oil prices that are now the highest on record, with no real reason at present to believe they may start to fall back any time soon.
The "body language" of the Rudd Government seems to me also indicative of a stepping back from radical notions of global leadership on greenhouse gas abatement; the spin undoubtedly will continue, but the substance will be different.
In this regard, two recent speeches by ministers were interesting.
Note Climate Change Minister Penny Wong emphasizing "this government believes climate change is an economic issue." And promising that the government will make "responsible decisions" later this year, that the trading scheme will "address the competitive challenges facing emission-intensive, trade exposed-industries" and that it will "address the impact on strongly affected industries." The government, she says, knows it has to get the right balance.
Note, too, Resources and Energy Minister Martin Ferguson promising that the government is committed to reducing emissions "with the least economic cost" while maintaining the competitiveness of industry.
Then there is the change in the language of the government's front man on emissions trading, adviser Ross Garnaut. It was interesting to observe Garnaut earlier this month pushing the fact that, on presents indications, Australia will "probably" meet its emission commitments under the Kyoto protocol. "In this case," he went on, "it may be appropriate to have a fixed carbon price in 2010-12." A low fixed price would allow the institutions and systems for carbon trading to be tested while also reducing emissions. This approach, Garnaut added, has "come into focus" as a result of the exceptionally high fossil fuel prices.
At the same time State and Territory governments have organised an opportunity to scrutinise the Rudd Government's plans. The CoAG Ministerial Council on Energy, meeting in Canberra in mid-June, announced that it would sit again in July to consider the Federal Government's emissions trading green paper. Ministers agreed that the scheme "must be carefully designed to protect the security of energy supply," after receiving reports from the Energy Market Commission, the Australian Energy Regulator and NEMMCo all emphasizing this point.
Ministers agreed that the scheme's design will "need to ensure that the transition to a low-emissions energy mix achieves real abatement and maintains both investor confidence and energy security." They highlighted the importance of measures to "assist households to adjust to the impact of carbon prices" and to support research and development.
All of this may add up to a "get out of jail" card for Rudd and his cabinet as the full economic, community and political impact of a high price on carbon starts to be realised by Federal Cabinet confronted by opinion polls telling it that the long honeymoon with the electorate after the November victory is over.
There are more than a million jobs in the energy-intensive manufacturing sector and many hundreds of thousands more in businesses servicing the sector. The workers are all voters -- and the last election was decided, in effect, by what fewer than 20,000 voters did in marginal seats. Rudd and others in federal Labor won't need reminding about the fright the electorate gave a cocky Bob Hawke when he returned to the polls in 1984 after success in 1983 or of the large swing against the Howard Government in 1998 after its success in 1996.
Victorian Premier John Brumby will no doubt also be reminding his federal partners of his impending election and of the major impact of a hard-hitting emissions trading scheme on Victorian generators (see above) and of its costs on industries such as plastics and chemicals and automotive manufacture. The closure of even one large brown coal station -- Hazelwood is widely seen as being first "in the gun" under a large carbon charge -- would be an economic and political problem for Brumby, let alone a threat to all of them.
Part of Rudd's political dilemma is that, while he could lose the next election if his government makes a mess of emissions trading, he could go backwards in the Senate at the next poll if failure to meet the expectations of the environmental movement leads to a higher vote for the Greens.
It seems to follow that, if he is going to go soft on emissions trading, he will need to go hard on the Greens' darling, the renewable energy target. As reported above, the environmental movement and the renewable energy sector are looking for more than was promised at the last federal poll -- they want MRET extended well beyond 2020 and the subsidy bolstered by making it inflation-adjusted, something Howard resolutely refused to do.
Energy-intensive industry will complain very loudly when the time comes -- in the late 1990s it was in the forefront of the attack on the Howard Government's original MRET scheme. Its beef is that even the present scheme -- which is due to peak in 2010 at 9,500 GWh -- imposes a substantial cost on manufacturers. (The Howard scheme subsidy in 2010 is due to cost all consumers $380 million a year -- of which more than $125 million falls to the account of the major users.) The new MRET, without inflation adjusted subsidies, is calculated to cost consumers about $11 billion between 2010 and 2020 -- of which $3.6 billion falls on major users. Allow for inflation and manufacturers are looking at a cost of about $5 billion -- or four times what they currently face.
What the MRET won't do is put existing coal-fired generators out of business -- although it will steal the lunch of the gas industry, who have been hoping to capture the lion's share of new generation built in the next 10-15 years. Nor is it likely to lead to wholesale closure of energy-intensify manufacture through the next decade -- and Rudd & Co will be counting on it to be a vote-winner given the tele-visual value of every new wind farm.
The downside -- every political silver cloud has a dark lining -- is that massive deployment of wind farms, especially in Victoria, will inevitably meet a community backlash. The saga of the Bald Hills development -- the wind farm with the orange-bellied parrot problem -- illustrates the point. But the Rudd Government will console itself with the thought that every vote lost in the bush will be countered by several won in the big cities.
We have miles to go before all this is put to sleep (at least politically). Garnaut's interim report is due out next month and his final report in September. The Government's discussion paper on trading is due out next month and its present plans are to launch legislation to enable the emissions scheme in December (for implementation in 2010).
It is, of course, quite coincidental that the next big United Nations climate change conference will be held in Poland in the first two weeks of December.
Keith Orchison
13 June 2008
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