A high-level Government taskforce is investigating claims from the electricity generation sector that the CPRS will compound the impact of the financial crisis and problems in the regulation of the National Electricity Market.
In April, the Energy Supply Association of Australia released a report claiming the sector faced a $100b refinancing and investment bill and needed more free permits than currently provided under assistance arrangements in the Government’s ETS bill before Parliament.
The Secretary of the Departments of Prime Minister and Cabinet (Terry Moran), Climate Change (Martin Parkinson), Resources, Energy and Tourism (John Pierce) and a Treasury Deputy Secretary are now exploring the sector’s concerns with individual companies. ESAA is understood not to be involved in the discussions.
The Department of Climate Change has previously considered the impact of the CPRS on energy security issues and found there was no basis to some of the wilder claims from the sector that the CPRS would force the shutdown of power plants.
“We’re trying to tease out the impacts of three issues on the generation sector,” Parkinson told Crikey. “The generators have identified the confluence of the global financial crisis and its impacts on their cost of capital, some aspects of the operation of the National Electricity Market, and the CPRS, as potentially affecting them significantly. We’re working through those with the sector.”
The generation sector will receive nearly $4b over five years in assistance under the Electricity Sector Adjustment Scheme as part of the Government’s ETS. The biggest recipients will be the UK’s International Power, Hong Kong’s CLP Power International, Japan’s Tokyo Electric Power, the NSW and Queensland Governments, and AGL. However, the sector insisted in April that it needed more free carbon permits.
International Power has been particularly plaintive, demanding a trebling of the $1.1b assistance it will receive and writing to the Prime Minister in February warning that the CPRS offered “fundamental uncertainty” for the company. The company’s May interim management statement to investors, however, merely noted “we will continue to engage with government on scheme design and implementation.”
The inadequacy of assistance for electricity generators compared to the long-term support proposed in the US has also been singled out by the Coalition as one of its objections to the Government’s ETS. One conspiracy theory doing the rounds is that the Government will let itself be dragged by the Coalition to providing greater handouts to the sector as part of a deal to pass the bill.
Given Malcolm Turnbull’s parlous state, however, the Government is unlikely to be in any mood to give him a win on the issue most likely to split the Coalition down the middle.
It is also understood that the Secretaries’ taskforce is unlikely to recommend further CPRS-related assistance for generators. The sector’s fundamental problem is seen as stemming from the financial crisis and the higher cost, and lesser availability, of capital that the sector now faces – a problem a few extra free carbon permits is unlikely to remedy.
Nevertheless, the Government appears keen to ensure its CPRS cannot be blamed for the sector’s difficulties as it moves to refinance and undertake capital investment.
The power generation sector has a captive market in the population and industry of Australia.
Consumer demand for electricity is not very elastic, for it is a basic service and we will not willingly give up the running water, heat, light, and refrigeration that electricity provides us. For most consumers (the aluminium industry excepted, and it has its own subsidies) electricity is not a major expense.
Therefore the industry can and will raise its prices to meet any increased costs due to the CPRS. The whole point of the Scheme is to Reduce Carbon Pollution by jacking up the prices to consumers of such things as carbon-intensive electricity.
This will indeed reduce the most carbon-intensive power stations to unprofitability. The CPRS is a strong price signal telling those owners — with the “certainty” they demand, as soon as it is through Parliament — that they should disinvest in these assets and direct their capital elsewhere.
The generation industry already has a generous subsidy alleviating the initial impacts of the CPRS, generous R&D subsidies in the ‘clean coal’ and renewable energy sectors and — if the CPRS is passed — a separate mandate to invest heavily in new generation, at consumers’ expense, in the form of an increased MRET. I would not be surprised if the government did not also guarantee the debt of these companies to assure them of the necessary capital to invest in new generation.
Any owner which finds it impossible in these generous conditions to reliably deliver electricity to consumers deserves to fail in a financial sense. Any cry for increased subsidy is sheer rent-seeking.
All Australia’s high-emissions industries are doing is stalling any investment they might plan to make in clean technology until the CPRS or a similar instrument is law. Then, with their free permits locked in, they will be able to make a killing with very rapid investments in the most cost-effective process and equipment changes, benefiting from many years of development in other countries.
The Government must be prepared at once to dramatically decrease the emissions quota for subsequent years of the scheme, lest carbon permits become worthless and any but the largest and fastest businesses to convert lose money hand over fist as the financial instrument collapses.