Issue 35  December  2007

Bali high? Nah

Fifteen years after a "climate change convention" was signed at an "Earth summit," 190 nations have spent a fortnight on Bali talking themselves in to exhaustion on what might form the basis for talks over the next two years on an agreement to cut greenhouse gas emissions by the middle of the century.

The Bali debate delivers a rocky path rather than a roadmap for progress towards a post-Kyoto pact at the next two summits: in Poznan, Poland, next year and Copenhagen in 2009. In that time the nations have to agree on (1) emissions targets for industrialised countries, (2) whether these should be binding, (3) a softer form of targets for large, developing countries -- China, India, Brazil and South Korea in particular,  and (4) mechanisms to fund adaptation projects -- sea walls, fresh water infrastructure, development of new crop varieties and other means of coping with changed rainfall patterns -- from carbon trading income. None was resolved at Bali.

Failure to achieve a viable agreement by 2009 will mean that insufficient time is left for the business community to adjust to targets before the present commitments by developed nations expire in 2012.

The call for global emissions to peak in the next 10-15 years has fallen by the drafting wayside, to the chagrin of environmental movement activists.

The fundamental message from the Bali meeting remains that there has been no progress in bridging the gap between the EU's demands for government-imposed caps on emissions and the view, led by the US, that favours market pressures (ie higher energy prices) and investment in technology. The European view does not include that continent's largest emitter, Russia. Nor have the large-emitting and industrialising nations such as China moved one step closer to accepting measures to force their reduction in the growth of emissions.

Overlooked in the media and activist anti-American rhetoric is the unwillingness of Japan to embrace a strong future emissions target, having adopted one at Kyoto that it knew it could not meet and now being embarrassingly far from doing so.

While much is being made of the US government's last-minute change of heart to endorse even the weak final text, complete failure of the Bali talks was only achieved by the European Union finally backing away from its demand for a commitment by all industrialised nations to cut emissions by 25 to 40 percent of 1990 levels by 2020 -- and the first government to resist this ambit claim was the new Rudd administration in Australia, immediately after embracing the symbolic Kyoto treaty. Apart from ratifying the treaty, Rudd, in fact, adopted almost exactly the position of the Howard government.

The commentators comfort themselves that, by agreeing (reluctantly) to the declaration, the US has accepted "that scientific evidence for global warming is unequivocal," but much good that will do on the floor of the Congress in Washington when, and if, a post-Kyoto treaty is presented for ratification and congressmen have to demand pain from their constituents.  That Al Gore of all people held out the hope of a "more progressive White House" in two years demonstrates his capacity for self-deception: the Senate saw him off 95-0 a decade ago when the Kyoto treaty he negotiated was adopted by the UN.

The "Bali Declaration" emanating from the conference purports to set out the priorities for negotiations to produce a new treaty by 2009, intended to take effect in 2012. It embraces feel-good statements on tackling deforestation -- by paying developing countries large sums to protect their rain forests -- and technology transfer between industrialised and developing nations, but offers no revolutionary breakthrough on the road to dealing with the perceived dangers of global warming.

A cold assessment of the Bali talks is that all concerned want to halve emissions by 2050 so long as they don't yet have to give up economic growth.

The conference metaphor was that the symbolic release of baby turtles on a Bali beach to mark its start was held up so long by the speeches of the participants that the little critters nearly died in their over-heated plastic bowls. How many actually survived once they were prodded in to the sea is anyone's guess.

On the positive side, the Bali conference's commitments on deforestation are the first genuine recognition by governments of one of the largest emission areas -- cutting down forests cuts carbon dioxide absorption by more than the emissions of all the global forms of transport -- and are led by oil-rich Norway's pledge to contribute $US2.8 billion over five years in payments to preserve forests. How, for example, giving money to the Indonesia government in Djakarta will result in ending of illegal logging, the main cause of the host nation's high emissions, was not apparently discussed.

The meeting was also notable for a warning from the International Trade Union Confederation, which claims to represent 170 million union members around the world, include Australia, that governments needed to manage policy to ensure jobs lost in large carbon-emitting industries are replaced elsewhere.

Attention now turns to the Honolulu meeting next month of large emitting countries, including the 16 major emitters (Australia among them) that George Bush has convened.

Most importantly of all, perhaps, next year sees the US presidential election -- and potentially the emergence of a strong American view on protecting its industries against competition from countries not signed up to any Copenhagen treaty on targets. "Green protectionism" is the big sleeper issue for the next few years.

Coal rush

As governments and lobbyists gathered in Bali, it was reported that the China Electricity Council had revealed  the country added 90,000 megawatts of coal-fired plants, nearly three times Australia's coal-burning fleet, to its supply capacity in the period 2005 and 2006.

China also announced the commissioning of  its biggest coal generator, a 4,000 MW plant (more than five times the size of the Kogan Creek plant about to be commissioned in Queensland).

Garnaut guru

As the Rudd government made plain in Canberra and Bali during the climate change talkfest, its guiding light in deciding what to do to reduce greenhouse gas emissions will be Professor Ross Garnaut, former Hawke government adviser and former ambassador to China.

Garnaut's S.T.Lee Lecture on Asia and the Pacific at the Australian National University on 29 November, therefore, received rather more attention than most academic papers normally would. In it he said:

Garnaut argues that the key to a strategy is agreement on a "global emissions budget" -- representing the total volume of emissions that can be absorbed in to the atmosphere over a specified period without an unacceptably high risk of dangerous global warming.

It is not likely, he warns, that a sound agreement on emissions will emerge from  negotiations in a single, large, multilateral, inter-governmental meeting. The prospects are better from a "messier" process in which individual countries and groups of nations communicate in many forums. "It is impossible to avoid the imperative that effective action will be taken first by developed countries."  The principles adopted will need to be "simple, transparent and readily applicable."

Garnaut also argues that there are a number of trade upsides for Australia, including:

This is an argument for expanding coal mines, uranium mines and LNG developments, all anathema to the radical end of the environmental movement and some elements of the ALP. How far Rudd can drive such an agenda will be one of the touchstones of his government in the next 3-5 years. How far the Greens can exploit this to build their federal vote -- which stalled at around a million on 24 November -- and gain the balance of power in the Senate will also be an important issue. Could the Coalition be smart enough to combine with the ALP in the Senate to sweep over all objections in the national interest?

Garnaut dealt in his lecture with the risks to Australia's energy-intensive manufacturing sector -- which employs 1.1 million people -- by pointing to the need for a plan to impose the same emission restrictions sector-by-sector in all economies where they are sited.

Ominously for the renewable energy sector, currently waiting anxiously to see if the new government will deliver on its promised big increases in subsidies, Garnaut asserts that, if carbon is properly priced, "there is no need for other policy measures to tip the balance of investment decisions on supply and use of fossil fuels towards low-emissions technologies." 

However, he adds, so long as the emission trading price falls below this level, a transition case can be made for measures such as MRET.  For renewable energy firms needing 15 years of subsidies to make projects "bankable" this is not particularly re-assuring.

Garnaut also sends a warning to politicians: an emissions trading scheme has to be allowed to "do its job without political limits or adjustment."  He cites the gold market as illustrating how "a perfectly competitive, deep and mature market" for an exhaustible resource results in a forward price curve that provides fundamental stability, opportunities for hedging price risks and the means to adjust quickly to new information.

The bottom line for emissions trading, he says, is that it will only work in achieving abatement targets if the market accepts that the emissions "budget" and system structure will not be changed under political pressure.

Garnaut acknowledges that most of the early cost impact of the scheme will fall on households and urges government to pass back the revenue it accrues from permits to the community "in appropriate ways." 

Without adequate management of this issue, he warns, there will be political resistance to economically and environmentally efficient carbon prices. Inefficient distribution of revenue -- "an indiscriminate spraying of compensation towards interests that press strongly for it" -- will greatly increase emission mitigation costs.

Poor design and tardiness in implementation, he adds, could "increase costs immensely" and lead to "policy panic."

Sell, sell, sell

The New South Wales government has committed itself to selling its power retailers and semi-privatising its generation assets -- the largest power production ownership in Australia -- but whether it can overcome union opposition, despite large financial bribes to power workers, and resistance from its own MPs remains to be seen.

If it fails, the government now admits, the State's credit rating will be at risk.

The decision comes 10 years after Premier Bob Carr and Treasurer Michael Egan caved in to union pressures and abandoned the first attempt at NSW power sector privatisation -- and three years since Carr issued an "energy green paper" that asserted "the government is committed to retaining the electricity assets it currently owns." Nonetheless the privatisation decision still applies to only half the industry -- there is no suggestion of privatising the network service providers, who make up half the power supply system.

Ironically, a large part of Premier Morris Iemma's spin on the privatisation plans focuses on promising residential customers they will be "protected from volatility in power prices" -- which will be interpreted, as was John Howard's 2004 election comments on interest rates, as promising no increases, an impossibility in a situation where the network sector alone will be seeking $10 billion in capital outlay approvals for 2009 to 2014 (double that capex for 2005-9) and wholesale generation costs may well continue to rise under the impact of water problems and demand pressures on relatively old generating assets.

Iemma has ditched the Owen Report recommendation to remove State price regulation for residential customers -- and the commitment his government made on this to CoAG earlier this year in a joint agreement to move to a more competitive national market.

In announcing the privatisation plan, Iemma finally has stated the government's view of demand growth: energy consumption in 2013-14 is expected to reach 91,000 GWh, he says, up from 62,000 GWh in 2002 and 69,000 GWh in 2006.  He also acknowledges that the government expects only 1,500 GWh of supply to come from new renewable resources in 2013, leaving the equivalent of production from a 1,000 MW power station to be found from fossil-fuelled generation.

(The government's consumption forecast indicates that 2014 demand will be more than double what it was in 1990 and more than 55 percent higher than it was in 2000 -- with 90 percent of it being supplied by burning coal.)

What Iemma naturally doesn't say is that this prediction makes a complete nonsense of the claims from Carr's administration only five years ago that the increase in demand could be constrained by energy efficiency measures to avoid building new baseload plant.

Iemma says, without privatisation, the government-owned generators would need to find up to $8 billion in the next 10 years for new plant and up to $4 billion to retrofit existing plant to cut carbon dioxide emissions.

He also sneaks in -- as a footnote to his media statement -- the admission that the private sector won't build the needed generation capacity unless it is allowed to own both production and retail assets in a "vertically-integrated" business.

If the State has to spend all the investment, and meet requirements for another $100 billion of infrastructure outlays for transport, education and health, he admits, the government's triple A credit rating will be at risk.

What about us?

Snowy Hydro, owned by the federal, NSW and Victorian governments, was quick out of the blocks after the Iemma announcement to say it has written to its shareholders -- and a number of MPs -- to complain about being left out of the sale, warning that its financial position could be weakened if it remains in the public sector. This, it says, could impact on its ability to properly maintain the iconic hydro-electric scheme.

A proposed $3 billion sale of Snowy Hydro collapsed earlier this year when then Prime Minister John Howard abandoned it in the fact of populist pressure.

NSW owns 58 percent of the Snowy scheme, Victoria 29 percent and the federal government 13 percent.  They receive about $140 million a year in dividends from its operations, which today are dominantly selling financial hedge products to electricity retailers.

Price hike

Fitch Ratings says  the average wholesale price for electricity in New South Wales doubled in 2007 -- reaching $66.37 per megawatt hour compared with $31.25 in 2006, largely as a result of the drought's impact on both coal-fired generation and hydro-electric supply.

Meanwhile, Steve Edwell, chairman of the Australian Energy Regulator, has told a meeting of the Ministerial Council on Energy in Perth that the impact of the drought on power supply has eased, but conditions remain tight.  Edwell says the situation will continue to put pressure on electricity prices, but is "unlikely to impact on reliability."

Ministers, meeting for the first time under the chairmanship of Martin Ferguson, also agreed to propose 1 July 2009 as the start-up date for the Australian Energy Market Operator for electricity and gas, replacing NEMMCo.

The MCE will next meet in Canberra in May.


Whatever else the resources and energy sector feels about the defeat of the Howard Government, it is very comfortable with the re-appearance of Martin Ferguson in the resources and energy portfolio -- he having held it for a time during Labor's period in opposition. Ferguson is seen by the industry as "sensible"  and well-briefed on the issues. What many question privately is how influential he will be with Rudd, particularly on climate change policy. The big unknown here is Senator Penny Wong, the not-Garrett climate change minister, although feedback from Bali is impressed with her presentation and negotiating skills under pressure.

Gas records

Analyst EnergyQuest says East Coast gas production reached record levels in the September quarter, with production from Bass Strait via Longford up 18.6 percent on the 2006 third quarter and coal seam methane supply in Queensland breaking the 100 PJ barrier for the 12 months (to 30 September) for the first time. By contract, oil production plummeted 18.1 percent in the September quarter over the same period in 2006.


What constitutes deception  in modern politics?

Is it making a promise to the electorate that you don't intend to keep -- as in Paul Keating's L-A-W tax cuts in the early 1990s which he abandoned on being re-elected.

Or is it carefully not telling the electorate the facts on an important issue prior to an election -- as it is now clear the Iemma government has done with respect to the NSW power industry.

Iemma and his team are, in fact, guilty twice over. They kept information from the community before the March 24 State election this year and did it all over again to avoid controversy during the 24 November federal election.

John Howard and his now-rejected federal government have been pilloried by their opponents and most of the media for a 2004 election "lie" on interest rates.

In  fact, what Howard claimed at the time was not that rates would not rise, but that they would "always" be lower under his hand than under Labor.  The promise was handled so clumsily between 2004 and 2007 --  and exploited so well by his opponents and critics -- when the Reserve Bank kept pushing up rates that it became conventional community wisdom Howard had lied.

How far that contributed to his personal and party downfall on 24 November can only be a matter for speculation -- it suits the new Rudd government and media commentators far more to argue that the main reasons for his loss were public perceptions of leadership and antipathy to WorkChoices and global warming policy.

In the case of the Iemma Government, however, the case is more clear cut.

The State community voted on 24 March believing the ALP would not privatise its NSW power assets.  The Iemma government then set up the Owen Inquiry to provide cover for what it had intended to do all along: sell the power sector. It carefully held off any public comment about the subsequent Owen Report proposals for privatisation until the federal election on 24 November was out of the way -- and the union movement aided and abetted this by not voicing its trenchant opposition to the recommendations in return for its power industry members being offered a very generous bribe at taxpayers' expense.

The State community also voted on 24 March  without the knowledge, which the Iemma government obviously held, that the next decade's infrastructure needs in NSW could not be met without putting the administration's triple A rating at risk unless it sold off as much power infrastructure and assets as it could. While the Owen Report "outed" the issue before 24 November, Iemma government silence and Coalition failure to focus on it ensured the point  passed by voters in the federal election.

At present Iemma is resolutely avoiding any suggestion that the networks his government owns could also be put up for sale.  But, given that the infrastructure capex requirement over the next 10 years for transport, health, education and so forth is now conceded by the government to be $100 million (leaving aside power generation needs), it also seems to follow that the next step by Iemma, providing his present privatisation attempt is not derailed, will be to sell (or lease) the network service providers to ensure that the credit rating is sustained via another injection of funds down the track.

Presumably, he and his government hope to keep this from an extra-ordinarily gullible public (and media) until the March 2011 election is out of the way.

Keith Orchison

16 December 2007

That this level of growth will offer massive opportunities for manufacturers of turbines, gearboxes, bearings and other renewable energy equipment is obvious.  That most of this investment will take place in China, India, the United States and parts of the European Union is also obvious. Manufacturing for renewables investment in these countries, says Ernst & Young, can be expected to be  concentrated in the US, the EU, China, India, South Korea and possibly Japan, countries  where governments are placing equal emphasis on supporting the equipment  supply chain and electricity producers  -- and the large players can be expected to be very active in pursuing mergers and acquisitions to build critical mass.

Ernest & Young also  point to the problems being encountered by solar companies competing with the semi-conductor industry for raw materials and by wind turbine manufacturers with the many users of steel, aluminium and other metals as examples of tight supply issues for renewable energy developers.

Both manufacturer pursuit of profitability in a sellers' market and pinch points in essential supplies are going to see the construction costs soar for the renewable sector as they doing in the petroleum and conventional power industries. This, in turn, will require larger subsidies to keep some of  these forms of electricity viable in competitive power markets against natural gas and existing coal-fuelled generators even when emissions trading is taken in to account.

On the other hand,  emissions trading plus higher renewables subsidies may very well facilitate development of geothermal power in Australia and comprehensively eat the lunch of other green power developers between now and 2030.

Keith Orchison

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