Friday, July 29, 2011

Will Australia's carbon price stop new coal plants?

On Sunday evening, after reading the Dr Seuss classic “If I ran the zoo” to my three year old daughter, I sat on the couch, fortified myself with a strong drink, and began to read the Treasury modelling on the carbon price (I know, I know, it’s an exciting life).

After reading the projections for the likely impact of the carbon price between now and 2050, I began to wonder if Dr Seuss actually might work at Treasury. While there aren’t any ten-footed lions, Elephant-Cats or Tufted Mazurkas, there are certainly plenty of heroic assumptions, interspersed with ludicrous notions.

According to Treasury, Carbon Capture and Storage (CCS) will somehow become commercially viable around 2030, triggering a large-scale investment in coal with CCS and gas with CCS. It is a bit like predicting in 1990 how many betamax video machines will be sold in 2011 (except that betamax videos actually worked). They might as well have assumed that someone will invent a free energy machine. Seriously, it is becoming increasingly clear that even the coal industry have given up on CCS. The dream of ‘clean coal’ is slowly but surely collapsing under the weight of its own hubris as people actually start to think through what is required to make it work.

Treasury recognise that the long term direction for both coal and gas prices is up (notwithstanding an anticipated short term reduction in coal prices as supply catches up with demand) but they seem to have substantially under-estimated the costs of CCS and under-estimated the extent to which the cost of renewable energy is falling.

The modelling also assumes that no new conventional coal power station will be built in Australia, and it is clear that Julia Gillard and Martin Ferguson are planning on using this as an excuse to avoid their election promise to implement an emissions performance standard.

I asked the PM about this at a breakfast on Monday and pointed out to her that the Deloitte modelling of Electricity Generation Investment (commissioned by DRET) concluded that a carbon price of at least $70/tonne would be required to rule out new coal in WA, where three proposed new coal plants have environmental approvals. She said that she was more optimistic than me about the impact of a carbon price on directing the future of energy investment.

It is true that she is more optimistic than me about the impact of a $23 carbon price – much more. As far as I can tell, the only thing that is stopping three new coal power stations being built in WA is a strange combination of State Government policy incoherence and an increasingly convoluted commercial stoush between Lanco Infratech (the Indian buyer of Ric Stowe’s Griffin coal mine) and their customers over coal supply contracts. A low carbon price of only $23/tonne simply isn’t going to rule out coal in WA, even though their poor quality coal makes WA coal plants among the dirtiest in the country.

Similarly in Victoria, the proposed new HRL coal power station continues to stagger on – albeit without finance from the major Australian banks. The big question is whether or not Ferguson will give HRL $100Million of taxpayer money as promised (by the Howard Government). Mind you, it would be quite embarrassing to be publically subsidising a polluting coal plant immediately after the introduction of the carbon price package – so no doubt the Government will be looking closely at how they can get out of the contract. It shouldn’t be too hard given HRL’s record of missing deadlines.

As for the coalition, their climate and energy policy is a wretched pile of nonsense and despite claims of being interested in ‘direct action’ it is becoming abundantly clear that they are only really interested in ‘direct opposition’ to whatever the Government is saying. The only vaguely good thing that can be said about their approach is that it is so incoherent and destabilising that it is likely to undermine investor confidence in both coal and gas for some time to come, regardless of any actual regulation (This obviously isn’t a sensible policy approach but anything that delays fossil fuel investments is arguably a good thing as the price of renewables continues to fall). Abbot continues to play a high stakes game of wrecking the consensus for climate action for his own short-term political interests – without heed to the costs. It will no doubt define his legacy and it is difficult to imagine it being well regarded by those who follow.

Ruling out new coal power stations should fit perfectly with Abbot’s “Direct Action” approach, and it should fit perfectly with Gillards pre-election promise to “rule out new dirty coal power stations”. The fact that it seems so difficult for both of them seems more a reflection of the political/ideological aversion to putting the words ‘no’ and ‘coal’ together in the same sentence, rather than any rational policy objections.

We still need an emissions performance standard to rule out new polluting power stations.

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