News | 17th May, 2011

GREEN DEALS: Buying out brown coal

Tuesday, 17 May 2011
Giles Parkinson, Climate Spectator

News this morning that a government-commissioned report by Deloittes has concluded that a $40 a tonne carbon price may now be needed to secure a transition to gas fired energy is likely to see the brown coal utilities intensify their push for a scheme that will pay for the closure of the utilities. The utilities argue that this is the only effective way of achieving emissions reduction, a position that has support from some environmental groups. However, unlike the Opposition policy which canvasses a similar proposal, this would work alongside a carbon price, but allow that carbon price to be lower than otherwise needed.

The SMH reported this morning that a Deloitte survey commissioned by Energy Minister Martin Ferguson had concluded that soaring gas prices – a legacy of the LNG export opportunities now being exploited on the east coast – will mean black coal generators would still provide the lowest cost generation even at $30 a tonne. Utilities have been warning of this for some months, and have been pushing the idea of a “contracts for closure” to the Greens, Independents and the government.

Ross Garnaut also canvassed the idea, but didn’t like it much. He said it was attractive to generators, and their owners and creditors, but not to consumes because it would lead to higher electricity prices, would preclude efficient restructuring, and the “challenge of designing and executiving such an auction cannot be underestimated. Rather than buying out capacity, Garnaut said a preferred approach would be to buy out production (megawatt hours) because it would allow an economically efficient adjustment. “The main benefit of the Auction for Closure approach is that it tells potential investors in low-emissions generation that future electricity prices will be higher,” Garnaut wrote. “It is not clear that this is necessary.”

Others such as Environment Victoria, which has been pushing the Victorian government to go ahead with such a scheme (it has now been abandoned), said the contracts for closure would guarantee reduced emissions in the early years of the scheme which, given the politics of the carbon price at the moment, could be important for the government. EV’s policy advocate Mark Wakeham said the rise in electricity prices meant that other black coal producers would make money, but it would also negate their need for compensation under a carbon price.

Either the contracts for closure, or the loan guarantees proposed by Garnaut, are emerging as a potential solution to the tricky matter of compensation to the electricity sector, which is the biggest source of friction between the government and the Greens. The utilities do not like the idea of loan guarantees, and it seems that the CPRS-style compensation has few friends, even within the industry. Hence the push for the contracts for closure. But the question remains: At what point does it stop? And then what happens?

Spring of discontent

Energy markets are often driven by the state of the weather – a run of abnormally cold or hot days and nights fuels more demand, and higher prices. But in Europe right now, the weather is playing havoc with the supply on energy rather than demand. A report prepared by Deutsche Bank analysts in Paris led by Mark Lewis says record high temperatures and low rainfall across Europe have cut reservoirs for hydro-electric plants across the continent, reduced water levels on rivers which is affecting fuel transportation, and may impact on the ability of nuclear plants to cool their reactors in the height of summer.

“While the situation is not yet as severe as that encountered in 2003, there are a number of reasons to monitor the situation for further deterioration due to the potential for far-reaching impacts on European energy markets,” the analysts said. Hydro-electric production from Norway was down 30 per cent in January, and fuel transport prices have more than trebled because declining river levels have reduced barge capacity to around 30 per cent of normal.

The report notes that low river levels alone can lead to difficulty in cooling nuclear power plants in France and Germany, but real problems arise if low river levels coincide with high temperatures, because of environmental restrictions over the release of excessively warm water. In extreme circumstances, this can lead to shutdowns, as happened in 2003. All of this is taking place amid concerns over generating capacity caused by the decision to close 6.2GW of older German nuclear capacity in March.

The report notes that the implications of dry weather across Europe will not only have an impact on the region’s coal, nuclear and emissions sectors, it could also impact on crop yields in Europe, which remains the world’s largest producer of wheat and second larger exporter. “In France, the country is experiencing the warmest and driest spring in decades,” the report said. Similar weather conditions are occurring in Germany and the UK, which threaten to depress crop yields as occurred in 2003, the last period of extreme heat to hit the continent. At that time, EU wheat production fell by just over 15 per cent.