The NSW coal subsidy scandal has reached its natural apotheosis. The hare-brained plan to build a massive new coal mine and ship the subsidised commodity to the state’s black coal generators so that they can deliver “cheap coal” has been abandoned, but at least one generator will be compensated by the government for having to pay something like the market price of coal. Only the taxpayer can feel aggrieved and out of pocket.
The NSW government’s coal scandal goes back to the previous Labor government and its bloody minded efforts to sell its generating assets. It proposed to build the Cobbora coal mine near Dubbo at a cost of $1.5 billion so it could deliver a subsidised price of coal at little more than $30/tonne, a fraction of the then export price. It did this because, without such a contract, it was told that the state’s generators were effectively worthless and a sale could not proceed.
Now, the new NSW government has decided to cut its losses and run away from Cobbora. The mine will not go ahead, but as part of a complicated transaction with Origin Energy, involving the purchase of the massive 2,880MW Eraring coal generator for a token price of $50 million (the trading rights to the output had already been sold), Origin will be paid $300 million by the NSW government (and taxpayers) as compensation for not getting the cheap coal.
As Deutsche Bank analysts wrote in a research note, the deal with Cobbora envisaged a “large proportion” of Eraring’s fuel requirements being supplied from the mine from 2015 as existing contracts rolled off.
But it says that Origin has already entered an eight-year, 24.5mt coal supply agreement with Centennial Coal, commencing in 2015. Deutsch Bank said this implies around 3.1 million tonnes of coal a year, or about two-thirds of its annual needs. ”
We understand the Eraring power station already sources the bulk of its coal from Centennial’s Newstan, Myuna and Mandalong mines. As a result, we view this agreement as a roll-over of existing contractual arrangements between the parties. We assume that the new eight-year agreement with Centennial Coal is at a higher price than envisaged within the Cobbora Coal Supply Agreement. However, based on our forecasts, the higher coal costs are broadly offset by the $300m termination payment.”
In other words, the coal cost for Origin out to 2023 is effectively subsidised by the NSW taxpayer, as it had been envisaged by the former Labor government under its half-baked scheme to sell the gentrader rights at any cost.
It really is quite staggering given the circumstances, but it continues the blundering by a succession of state governments while seeking to protect their existing fossil fuel assets. WA has just accepted what an idiotic decision it was to invest $260 million into a failed attempt to upgrade the ageing and dirty Muja power station, and the plan is now abandoned and the money lost. Successive Victorian governments entered into controversial deals to extend and protect the life of the ageing brown coal generators in the Latrobe Valley.
Consider, in contrast, the bungling attempts to get some large-scale solar plants developed. The REDP program and the Solar Flagships programs have still not produced anything. The original bidders both lost their grants. The difference is that it did not cost the taxpayer any money, apart from a lot of wasted time by a group of public servants.
The Cobbora scandal goes back to 2011 when the NSW government decided to develop the mine – a decision that alarmed Ross Garnaut at the time and led to predictions of a subsidy of more than $1 billion a year for the NSW black coal generators.
Garnaut said at the time that the move could undermine the impact of a carbon price, which was designed to force the black coal generators out of production, or at least inspire them to reduce emissions. “The implicit subsidy to coal-based generation within these arrangements could work against a carbon price, and be much larger than the highest carbon price that has been suggested in the Australian policy discussion,” he said.
The Tamberlin report released in 2011 revealed that the deal over Cobbora amounted to an effective subsidy of $4 billion to the gentraders that were sold by the government for just $1.5 billion, while the government would then commit to developing the Cobbora mine at a cost of ….. $1.5 billion. As the inquiry noted at the time, with a degree of understatement, it was not entirely clear that the cost of the subsidy exceeded the benefit.
The Tamberlin Inquiry’s independent advisor Donald Challen, a former Treasury secretary in Tasmania, concluded that the subsidy was of considerable benefit to the gentraders because it reduces the volume and pricing risk.
Challen noted at the time that the government still faced big risks with the Cobbora mine: these included its ability to actually get it up and running by 2015, when its first deliveries were due to start; that production will costs would rise; and that the mine, operating as a loss-making, state owned entity, would not be able to acquire the skills and expertise to efficiently operate at a large scale.
Challen’s assessment was damning: “The preliminary conclusion in considering the benefits and costs of the Cobbora development is therefore that a business case, had one existed, would have shown that the benefits of the development did not exceed the costs.” The only justification, he said, was that without a massive subsidy, the gentrader sales would not have been completed as “potential buyers for the rights might well have regarded the fuel supply and price risk too high.”
In short, the inquiry told us, the coal-fired power stations in NSW were unable to compete with other power sources unless their coal was supplied at around one quarter of the cost of export coal. The payout deal with Origin, skillfully obtained by its negotiators, ensure that these assets continue to be protected from market realities. It may turn out to be a net benefit, given the declining market price in thermal coal in the last 12 months.
A more recent review of the Cobbora deal by the former Treasury official Kerry Schott found that the cost of the mine of “at least” $1.4 billion would never be recovered by the sale of its coal because the contracted supply prices were “well below cost”. This prompted current Treasurer Mike Baird to describe the deal as a “shocker”. He said the mine would be sold so someone in the private sector could dig up the coal.
Now, what were they saying about renewable energy incentives?
