Blog | 9th Oct, 2011

Getting closure on dirty power

Last Friday the federal government called for expressions of interest to retire up to 2000MW of coal generation by 2020. The call comes as part of the government’s “Contract for Closure” program, negotiated as part of the carbon pricing package.

To be eligible, power stations must have emissions in excess of 1.2 tonnes CO2e/MWh, which effectively means that only the four most polluting power stations can bid for closure; two large power stations – Hazelwood (1600MW) and Yallourn (1480MW); and two small power stations – Energy Brix in Morwell (170MW) and Playford (240MW) near Port Augusta. Operators of these power stations now have until October 21 to submit their expression of interest, and then the serious work will begin, with the federal government moving in to the negotiation phase.

With the carbon pricing legislation inching slowly through the Parliament, it’s a welcome development that the federal government is moving quickly on the process for the contracts for closure scheme. Power station retirements have the potential to deliver significant emissions reductions in addition to those anticipated by the carbon price and modelled in the reports prepared for Treasury. By delivering these emissions cuts, contracts for closure will also drag down the carbon price when Australia moves to a full emissions trading scheme.

There are other positive benefits of contracts for closure. Securing closure dates will provide certainty to those considering new investments in clean energy projects, so they can plan to fill the generation gap when old assets are retired. And regions like the Latrobe Valley will get adequate warning of power station closures, and so can develop a timetable and plan to attract new jobs and industries.

Environment Victoria has actively campaigned for the replacement of Hazelwood power station via a contract for closure arrangement, and welcomes the progress of the process. However there remains much work to be done to ensure maximum public benefit from this program – after all, power station retirements will be secured with taxpayers’ money. This will be particularly important given the sort of inflated numbers some of the generators are ascribing to their asset value.

So in assessing whether the contract for closure program delivers a good climate policy and public interest outcome we will be applying five key tests:

1) Does it begin the process of generator closures early or does it leave all the hard work till the end of the decade?

The federal government’s preferred timeline is for closures to commence in 2016 which leaves a short window to achieve the 2000 MW closure. Australian climate policy history is littered with examples of programs that started slowly and aimed to ramp up to extremely ambitious targets in the final years (Renewable Energy Target anyone?) A linear trajectory for the contract for closure program will guarantee early emissions reductions and maximise emissions reductions over the next decade. There is no reason why we can’t begin closing turbines at Hazelwood, for example, well before 2016 and still maintain energy security, particularly given that Hazelwood has been operating far below full capacity for the past 12 months.

2) Does it only pay generators for actual reduction of capacity rather than purported capacity?

The contract for closure scheme currently proposes to pay for closure on nameplate capacity. That means that a power stations like Hazelwood could receive payment for up to 1675 MW despite the fact that it has not provided that much output for years due to auxiliary power use, transmission losses and declining efficiency. To maximise bang for buck (and ensure that the program achieves maximum possible emissions reductions), generators should only be paid for retirement of their peak contribution to the NEM, not notional nameplate capacity.

3) Does it encourage least emissions replacement of capacity?

Contract for closure expressions of interest that present a supply-side solution should receive favourable treatment, particularly where there is a proposal to replace capacity with renewable energy in the same region. For example there is growing interest in replacing Playford with solar thermal capacity. Such a proposal would deliver new jobs and investment in the affected region and therefore should receive higher levels of support than a proposal which just retires plant.

4) Is it Abbott-proof?

The Coalition is in wrecking mode on climate policy and therefore a key test of the contract for closure program will be the extent to which closure schedules are locked in by the June 30 2012 deadline. So far the Gillard government is passing this test with encouraging progress in rolling out the program design. If contracts are signed and generators are given a clear schedule to provide replacement capacity it should prove difficult to roll-back the program, though the program needs to be designed with a robust Abbott-proof fence.

5) Is it delivered in conjunction with structural adjustment programs and the development of new jobs and industry?

The price on carbon package commits $200 million over 7 years for structural adjustment programs and investment in affected regions. While there are concerns that this amount falls short of what’s required, it will be important that this spending commences early to bring on-line new jobs and industries prior to and during early turbine closures. The federal government should be holding business roundtables in the Latrobe Valley now to understand what assistance industry would need to locate new investment and projects in the Latrobe Valley.

The contracts for closure program presents a great opportunity to begin replacing some of our most polluting power stations and do it in a way that protects communities and workers. It’s not an easy task, but we need to deliver a good public interest outcome that inspires future decision-makers globally. After all, these power station closures need to be the first of many in coming decades.

This piece appeared in the Climate Spectator on Monday, 10 October 2011.

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