Blog | 19th Feb, 2013

Paying Australia’s dirtiest power stations to pollute

On the day the carbon price was implemented, we were excited. Finally, Australia was taking a historic step forward on climate change, and putting in place one of the most fundamental building blocks for action to cut emissions and create a safe climate future. To be honest, we’re still pretty excited, with emissions from the energy sector already down by 8.6 percent due to the carbon price and other factors. But there is one major flaw that the government must fix if the carbon price is going to get on with the job of cleaning up our energy supply.

There were always parts of the package that we didn’t support. In particular, we strongly opposed the $5.5 billion worth of compensation to Australia’s dirtiest coal-fired power stations like Hazelwood. We were fearful that it would dull the financial impact of the carbon price and keep big polluters operating and polluting for longer. But the government also committed to close up to 2000MW of our dirtiest power station, making for a more balanced package. If the worst of the worst power stations would close, we could live with the rest.
Unfortunately, this wasn’t to be the case. In fact, the excessive compensation offered to our dirtiest power stations increased their value by so much that the government claimed they could no longer afford to pay for them to close. As a result, they dumped the commitment to close 2000MW of coal power stations but the compensation remained.
Now that the carbon price has been in full swing for over six months, we can clearly the see the impact that it’s having, as well as the impact of the compensation package.
It’s been broadly noted that along with other factors, the policy is already having a positive impact on behaviour and investment decisions. This is great news, and further strengthens the arguments for why we should keep the carbon price.
But the impact of the compensation package hasn’t been as clear…until now. Environment Victoria commissioned energy consultants Carbon and Energy Markets to investigate the financial impact of the carbon price and the compensation package on Victoria’s brown coal fired power stations. And the news isn’t good.
Their analysis (based on actual carbon market and electricity market outcomes for the first six months of the carbon price) shows that Victoria’s brown coal generators have been passing on just over 100 per cent of the carbon price costs to their customers. The analysis also found that there is no reason why this surprisingly high pass-through rate would change in the future. This means that the Victorian brown coal fired power stations can expect to receive $2.3 billion to $5.4 billion (depending on the future price of carbon permits) in windfall profits in coming years as a result of the compensation package.
That’s right, the compensation is increasing the profit margins of the dirtiest power stations in the country – we’re paying them to pollute.
Another reason given for why compensation was important was to protect against asset value loss for power stations. However it doesn’t appear that generators have suffered any significant impact on asset value as yet, evident in the decision by AGL to acquire the remaining stake in Loy Yang A (one of our dirtiest power stations) at a remarkably high price two days before the carbon price commenced.
The compensation package is now standing in the way of the carbon price doing its job. We know how important the carbon price is, and we’ll be fighting hard for it to be retained no matter who wins the next federal election. But the compensation package is holding it back, and shouldn’t be allowed to continue.
When the government was designing the CPRS (their previous attempt to put a price on carbon), they recognised the threat of windfall profits to generators as a result of compensation. To counter this, they committed to a formal review of the compensation package should evidence of windfall profits emerge. While the CPRS was a different package, the principle still remains the same.
As a result of these new findings, we’re calling on the government to urgently review and scrap the compensation package in the lead up to the federal budget, and before the next scheduled payments of compensation of at least $1 billion in value on 1 September 2013.
It’s part of a major campaign we’re running over the coming months in the lead up to the federal budget. This compensation package tops the list of four major fossil fuel subsides that keep big polluters locked into polluting at the expense of taxpayers.
Both major parties continue to support over $10 billion worth of fossil fuel subsidies every year, and we simply can’t stop climate change if our governments keep funding it. As the International Energy Agency (IEA) recently claimed, fossil fuel subsidies are public enemy number one. The compensation to coal fired power stations tops the list. It can’t be allowed to continue.