Brown coal generators laugh all the way to the carbon bank

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.