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Brown coal generators laugh all the way to the carbon bank

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A new analysis has concluded what most people had predicted and what the government was repeatedly advised – that the compensation package drawn up for brown coal generators to “protect them” from the impact of the carbon price was excessive and unnecessary.

The report, commissioned by Environment Victoria and prepared by energy consultants Carbon and Energy Markets, estimates that the brown coal generators will receive a windfall of between $2.3 and $5.4 billion. At the top end, the windfall is equivalent to the near entirety of the package.

It is yet another devastating blow to the Labor government, coming as it has so quickly after the true extent of the mining tax debacle was revealed, and the two issues have at least one common denominator  – the Minister for Resources and Energy, Martin Ferguson, who was central to both negotiations.

It highlights the extraordinary level of behind-the-scenes deal making and the public threats, and the capitulation of a Labor government desperate not to offend local and international utilities, who had virtually blackmailed the government with menaces that the lights would go out.

Of course, that bluff had already been called by Professor Ross Garnaut and, as the CME report suggests, even the Australian Energy Regulator disagreed with the need for compensation, and the Australian Energy Market Operator was equivocal at best.

But the influence of the Australian Energy Market Commission, pressure from state government and a conga-line of energy industry “old boys” saw to it that the compensation was delivered and the public purse was gouged – just as it has been by the extent of regulatory capture that has allowed network operators to spend billions more than needed at the expense of consumers.

CME principal Bruce Mountain said his analysis of price movements in the first six months of the carbon price shows the brown coal generators in Victoria, which stand to receive more than 90 per cent of the energy security fund payments, have been able to pass on all the costs of the emission permits through higher electricity prices in the spot market.

The biggest beneficiaries have been Hazelwood, which took $265 million, and Loy Yang A ($240 million), which was bought out by previous part-owner AGL Energy, just days before the compensation package was finalised. Mountain wonders, if asset impairment was such an issue for the brown coal generators and the AEMC, why AGL should have paid such a “handsome” price for the asset.

The generators have already received $1 billion in cash, and are due to receive a similar amount in free credits on September 1. If that were allowed to continue, their total profits could be in the range of $2.3 billion to $5.4 billion, depending on the course of the carbon price in the future.

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

Climate change minister Greg Combet this morning (on ABC Radio) defended the package, describing Mountain’s analysis as incomplete, and saying the compensation was the “result of years of work including very careful modelling, including private sector agencies that are expert in energy market modelling.”

One of those people who looked at the modelling was Garnaut (and the AER, it should be noted). Garnaut said that the market would be self-correcting. “I just don’t see the point of compensation,” he said when releasing the relevant chapter to his Garnaut Review in May, 2011.

Garnaut had argued against compensation in the original CPRS, but the Rudd government had offered $7.3 billion over 10 years. In the latest package, that sum was sliced and diced, to the point that while the brown coal generators had their hands out for more than $5 billion compensation to stay open, they also managed to convince the government to offer them special payments to close early and “get out of the way” of new, cleaner generation.

However, when it became clear just how much of a windfall they were sitting on, the generators decided they were making so much money they should stay in operation, and the government kept that $2 billion in its pocket. But it could have saved a lot more just by letting the natural course of the markets take effect – as Garnaut had suggested.

As it is, the impact of reduced demand, the effect of renewables on the wholesale price, and the combination of rooftop solar and energy efficiency measures has caused, instead, the mothballing of another 3,000MW of mostly black coal generators that did not get compensation.

On this, though, Australia risks running into the same situation that is occurring in Germany, where the oldest and dirtiest generation stays open, while more efficient and cleaner generation closes. In Germany, it has been the product of a low carbon price, courtesy of the mischievous, coal-dependent Poles, and the cost of imported gas, which is pricing itself out of the market. In Australia, however, these trends are entirely self inflicted.

Environment Victoria’s Mark Wakeham, who commissioned the report, wants the government to halt the compensation payments, noting that a mechanism to do so was actually included in the CPRS, in the case of windfall profits that had been widely expected.

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

The coal generators, however, are voracious. They, along with the black coal generators, and some network operators, have pushed vigorously for the scrapping or severe dilution of the RET, again on the premise that the lights will go out. The Climate Change Authority, a body of independent thought whose creation was recommended by Garnaut (and insisted on by the Greens), gave them short shrift, but the Labor government is yet to approve its recommendations, despite sitting on it for several months. The Abbott government-in-waiting, egged on by its conservative state colleagues who also oppose the RET, is likely to bow to their demands.

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  • Beat Odermatt

    The massive payout and rewards payments to the dirtiest of the dirty ones is direct action sponsored by the Greens and Labor. Can you imagine how much good the Government could have done by spending this money on environmental improvements and renewable energy instead of making charity payments to people playing a game.

    • Giles Parkinson

      Not sure that the Greens agreed with the compo, but had to lump it as part of the multi party agreement.

      • Beat Odermatt

        The Greens are also responsible for rewarding polluters. The Greens had never good environmental policies. They used “Green” for politics and not politics for “Green”.

  • Sean

    surely if the govt. is running out of money the first thing it should do is ditch compo for brown coal?

  • Eric Hill

    Beats me why the generators get compensated. The coal compensation packages should be directly diversed into a straight out premium paid to renewable energy generators. Take from the rich and give to the industry that needs to be driven with firm government policy. There is so much potential for the renewable energy industry in Australia. The high capital start up costs for solar thermal could be funded by the present coal compensation payments.

    • Peter Bysouth

      There would not have been a need for compensation for the Brown Coal generators if the Govt and Greens had gone for a broad based start up carbon price of say $3-$5/tonne and progresively increased it over time as industry and the market/taxpayers progressively adapted.

      This is what China is doing in its trials. But no, the Govt/Greens coalition had to go for a near world leading targetted carbon price of $27/t; what glory, what grandstanding. They made another rod for the taxpayers back once again through bad policy. If you don’t believe me then note that the Govt has realised its own mistake by changing the reversion to a market price to be aligned to the European scheme that is still likely to be around $10/t in 2015.

      “Marn” Ferguson would appear to be the only Minister capable of looking after those in his own portfolio. That is a Minister’s job isn’t it?

  • Alan Baird

    Both major parties always, continuously, unremittingly assist (or want to) those miners/generators to selflessly insert their snouts in the trough for yet more largesse. Marn Ferson is again (yawn) prominently featured. What I’d really like to know is when the first hints of an Obeid connection to all this malarky occurs, will it be acknowledged?
    Don’t laugh!

  • http://thisnessofathat.blogspot.com.au/ Gillian

    $2.3 and $5.4 billion is a nice pot of money to kickstart solar thermal with storage. Good loans for the first 2-3 will see costs tumble for future builds.

    With solar thermal + storage in the system, the lights won’t go out when old coal is retired.

  • John P Morgan

    The Victorian electricity assets were transferred to private interests as recently as the 1990s. By then, it was abundently clear that some form of carbon pricing would be implemented in the short to medium term. It is reasonable to assume that investors prepared to spend billions on these resources would be including adequate risk management in their offers.
    Hence Professor Garnaut’s advice that there was no case for compensation – especially from taxpayers.
    Another government bungle!

    • Beat Odermatt

      I worked for an electricity generator for many years and we knew that in the near future some form of penalty for CO2 emission would be implemented. This knowledge kept the sale price of most generators well below the assets replacement cost. The buyers got a good deal when they bought the assets and now they are getting another present. What a dream for power companies. If Governments applies the same wisdom across the board, you would get a few hundred dollars whenever you break a road rule. It seems that the Greens and Labor having a policy of punishing the good and rewarding the bad.

  • Julien

    Next time I get a parking fine I’m going to appeal for compensation worth more than the penalty imposed by the fine. I love Australia’s economic model – do something bad, get a reward!

  • Simon

    This analysis has some major flaws in arriving at the conclusions it has made. To assume the carbon price is the only factor that has influenced pool price outcomes between H2 2011 and H2 2012 over-simplifies the factors impacting on the NEM.

    Price volatility and the increase in underlying prices as a result of significantly more baseload capacity across the NEM being off-line in the second half of 2012 has contributed to the price rise – in addition to the carbon price. Demand has continued to fall, but any price impact has been negated by the reduced available capacity and extreme weather events.

    With AEMO estimating that the carbon price uplift has contributed $21/MWh to H2 2012 pool price outcomes, this doesn’t come close to the $30-$40/MWh carbon cost of production range faced by Victorian brown coal generators.

    This is hardly a case of windfall carbon gains, and more a case of normal wholesale electricty market variations related to supply/demand.