Media Releases | 20th Feb, 2013

Massive windfalls to dirtiest power stations from carbon price compensation

Massive windfalls to dirtiest power stations from carbon price compensation

Wednesday, 20 February 2013

A new study released today shows that Victorian brown coal power stations will pocket billions of dollars in compensation payments while their businesses are relatively unaffected by the carbon price. The report has prompted calls for a review of the excessive compensation payments to Australia’s dirtiest power stations.

The report, ‘Transitional assistance or windfall profits?’, finds that in the first six months of the operation of the carbon price, generators have passed on over 100% of the carbon price to electricity retailers.  In addition, generators have received $1 billion in cash compensation payments from the Energy Security Fund and are scheduled to receive billions more over the next four years with the next payment due on 1 September. Unless these compensation payments are reviewed, the combination of full carbon price pass-through and compensation will deliver windfall profits for generators estimated at between $2.3 billion to $5.4 billion, depending on the future carbon price.

Environment Victoria Campaigns Director Mark Wakeham said today:

“The carbon price package is an important and necessary reform which is already reducing emissions from the electricity sector, but it is a terrible result for taxpayers and the environment if our dirtiest power stations like Hazelwood are becoming more profitable as a result of compensation payments.

“We now know brown coal generators are passing on the full carbon price and are therefore making massive windfall gains from the compensation payments. Given changed circumstances it is critical that the government reviews Energy Security Fund compensation payments before the next billion dollar handout.”

Report author Bruce Mountain of CME said:

“In the first six months since the introduction of the emission price, generators in Victoria seem to have been able to pass on all of the cost of the emission permits, through higher electricity prices in the spot market.

“Assuming the generators are able to pass on a similar proportion of the carbon price in future, the Victorian brown coal generators, which receive over 90% of Energy Security Fund payments, can expect to accrue additional operating profits somewhere in the range of $2.3bn to $5.4bn (Present Value) depending on emission prices in future.

“Professor Ross Garnaut and others warned against compensation payments for generators stating they were unnecessary. The level of pass-through that has been observed so far has been unexpectedly high, and seems to vindicate their concerns.”

Mr Wakeham concluded:

“Given this new evidence, it is critical the Gillard Government reviews the Energy Security Fund compensation to maintain the integrity of Australia’s carbon pricing package.

The Gillard Government never intended for the compensation payments to be used as windfall profits but that appears to be what’s happening. Taxpayers should not be funding polluting activities and making our dirtiest power stations more profitable.”

The report was commissioned by Environment Victoria and completed by energy analysts CME. It examines the first 6 months of operation of the carbon price and compensation payments to Victorian brown coal generators.  It is the first analysis based on market outcomes, as opposed to predictions and models.

For comment

Mark Wakeham, Campaigns Director, Environment Victoria    0439 700 501

Read the report here >