At the end of the day, a very large, very profitable multinational utility which owns a very old, very dirty brown-coal-fired power station in Victoria is likely to walk away from this ''Clean Energy Future'' carbon tax package with hundreds of millions of taxpayer dollars.
They'll be paid cash to shut down. Employees won't see a cent. The company won't be required to reinvest the money in cleaner energy. Lenders will be repaid and the balance will go – whoosh! – overseas.
The multi-party climate change committee's carbon tax package includes provisions for contracts to pay for closure of up to 2000 megawatts of the country's dirtiest generation capacity, in the second half of this decade, after an expression-of-interest process starting this month.
The touted winner is foreign giant International Power-GDF Suez, owner of the controversial 1675-megawatt Hazelwood power station in the Latrobe Valley.
International Power, which combined with GDF Suez in February, has a market value of more than $86 billion. Last year, its Australian operations, including Hazelwood and the nearby 70 per cent-owned Loy Yang B (1026 megawatts), were its most profitable globally, making $676 million from sales of $1.89 billion, based on average foreign exchange rates. In the first half of this year it made another $266 million here, in earnings before interest, tax, depreciation and amortisation.
When a carbon price comes in, Hazelwood will struggle to compete. It will send power less often to the grid and it will make less revenue per unit of electricity generated. That's the point of bringing in a carbon price: internalising the cost of carbon pollution will tilt the electricity market away from dirtier generation. Left to themselves, the generators would have to clean up or go out of business.
The live question is whether Hazelwood and its brown-coal peers would be able to stay in business long enough to clean up by passing their increased costs on to electricity retailers and, ultimately, consumers. Climate change adviser Ross Garnaut said yes.
Industry and most analysts say no, although, last Friday, Ken Thompson, a top executive at Loy Yang A (2200 megawatts, the country's biggest brown coal-fired generator), told a Senate inquiry commercially sensitive modelling suggested generators could pass on two-thirds of the cost, resulting in a 30 per cent jump in wholesale electricity prices and a 10 per cent rise in retail prices.
Just to be sure they can cope, the coal-fired generators are being showered in transitional assistance, by way of free pollution permits. In 2009, it was the Electricity Sector Adjustment Scheme, providing permits worth $7.3 billion over 10 years under the Carbon Pollution Reduction Scheme. This time around it's just $5.6 billion over five years, more tightly focused on the brown-coal generators, but still generous – and there's an unspecified amount for closure contracts on top.
The Greens voted the old CPRS down because it ''locked in failure''. The ESAS was a big part of the problem. It not only gave too much assistance to generators, it required them to keep burning coal for a decade! Combine that with low targets, excessive industry compensation, high reliance on overseas permits and lack of complementary measures to promote renewables and … down it went.
The new carbon price package addresses many of the other problems but an ESAS is still there and it sticks in the craw.
''I don't justify it,'' Greens deputy leader Christine Milne says. ''I still think it's a very bad idea. Throughout the entire CEF [Clean Energy Future] negotiations, I argued in all meetings there was no need to be compensating coal-fired power stations and pointed out at every turn that these power stations have known for years a shift to reducing emissions was coming and they ought to have factored it into their costings.''
So why back it this time? Milne blames the ''extreme conservatism'' of the bodies that run the grid, the Australian Energy Market Commission and the Australian Energy Market Operator.
''We argued very strongly with them but they maintained their position that, to maintain energy security under carbon pricing, you needed to provide compensation by way of permits to coal-fired generators,'' she says. ''Then, the government made it clear that there is no way government can take a course of action which is opposed by independent operators of the energy market.''
After insisting the AEMC put its advice in writing, Milne folded. ''In my view, it is their view that has led to what is effectively a misallocation of public money,'' she says.
But absolutely nothing about the commission's advice was new or had changed since 2009, Climate Change Minister Greg Combet says: ''The advice to government on both occasions was that there was a risk to energy security that was appropriate to mitigate.''
A secret Morgan Stanley report in 2009 found certain debt-laden generators could suffer financial distress if a carbon price came in without transitional assistance. A government Investment Reference Group report earlier this year, backed by Deloitte, also painted a dire picture. Power-station asset values would fall – witness the prices paid in the NSW electricity privatisation, 30-40 per cent below book value. Generators were strapped as bank lenders, anticipating a carbon price, increased principal repayment requirements – ''in some cases via a mandatory sweep of all available cashflow except for a small management fee payable to equity''.
The AEMC's advice to the multi-party climate change committee stoked fears of insolvency and contagion although it stressed the concern was not about the financial position of the generators per se, ''but rather its impacts on the efficient functioning of the overall market and its consequences for energy security''.
Combet makes the same point, saying transitional assistance is not a handout and is not about offsetting asset devaluation or depreciation. ''It's about ensuring there is stability,'' he says.
Are energy security fears overblown, though? ACIL Tasman chief Paul Hyslop told The Australian Financial Review recently a carbon price could affect asset values, and the interests of debt and equity investors might clash, but it was unlikely supply would be affected. ''I don't think security of supply is a risk because, ultimately, the government, through the market operator, can step in and direct plant to run,'' he said.
When bully generators threaten the energy supply – by stalling maintenance or handing the keys back to the banks – it's called ''blackout-mail'', intimidation of politicians fearful of a public backlash if the lights go out. ''Complete garbage,'' Combet says.
Bluster? We'll know by the price the government agrees with International Power, if indeed Hazelwood is to close. The 2009 accounts of IP subsidiary Hazelwood Power Finance stated the value of assets potentially affected by a carbon price had risen to $2.053 billion at the end of 2009 but the most recent accounts sidestep a valuation. Colonial First State is believed to have written off its 8 per cent stake, so the uncertainty is acute.
A less likely alternative to pay to close the marginally cleaner Yallourn (1480 megawatts, valued at $1.7 billion at June 30, according to TRUenergy's parent, Hong Kong-listed China Light and Power). TRUenergy is hoping to float on the ASX next year and the book value of Yallourn is the biggest obstacle. The last thing Australian equity funds want to buy is a brown-coal power station.
The brown-coal generators get money either way, whether via transitional assistance or payments for closure. It's pay day for the greenhouse mafia.