Grant King is the CEO of Origin Energy, the largest utility in the country, which is also a major shareholder in the $24 billion LNG project in Queensland.
King is influential in Coalition circles – to the point where some joke that he could be acting as a de-facto energy minister in an Abbott government – and his views carry great weight in the debate about energy policies in Australia.
In this interview with RenewEconomy, conducted on Thursday, King address a range of issues, from carbon pricing, the renewable energy target, the threat of solar PV and distributed generation, the future of centralised vs local grids, and the impact of gas.
It’s a long interview, but hopefully worth the effort to read. Our story on the interview can be found here.
Here are some highlights:
Renewable energy target: King says that the fall in wholesale prices caused by renewables is an “argument of convenience” because it was not the original intention of the scheme. He says RET target should be lifted and extended.
Subsidies: King says that wind energy and solar energy are both “free-riding” on the grid – wind through transmission and solar through subsidies borne by people with no solar and lower incomes.
Cost of PV: King says it has relied on falling cost of silicon, which may not be sustainable. He questions whether manufacturing is sustainable given the woes of Suntech, and if there is enough lithium to supply all the batteries required for distributed generation.
Centralised power vs distributed: Says centralised generation will continue to dominate because the numbers do not add up for distributed networks. However, he says network tariffs will need to change.
Gas reservation policy: Customers need to ask if there is any such thing as cheap gas. He says there isn’t, because without the export price incentive, CSG would not have been exploited to the point it has. He says the best way to cap prices is to increase supply.
Future fuel mix: Without a high carbon price – of between $40-$60 -there will be no change in the fuel mix and coal will remain the dominant energy source.
Here is an edited transcript of the interview:
The looming election and energy policies
RenewEconomy: I know corporates don’t like talking about politics, but it does seem to be that this industry has a lot riding on the outcome of this election, doesn’t it?
Grant King: I don’t think a lot rides on the outcome of the election, but there are some clear distinctions between the policy positions of the two parties, particularly around carbon.
RE: Well, I guess no investment decisions have been made by the industry until the result of this election has been resolved, and people can work out what policy is going to carry forward.
GK: So, the fact is for several years, probably three or four or five years we’ve had really a continually waxing and waning policy environment, so it’s easy to say that [the election is a week away and a lot turns around it, but that’s not in a sense the case. The reality is that there’s been a complete lack of bipartisanship and certainty about energy policy for – I don’t know – six years. Now, the point I keep making publically is that that’s okay for a while, but eventually the industry will need to invest more capital and when that time comes we’ll pay the price of that lack of certainty and lack of bipartisanship around some of these policy issues.
RE: Let’s go to the carbon price. What is your position on the carbon price? Are you in favour of having a carbon price or not?
GK: Well, the short answer to that question is yes. But that’s not the real question. The question is what level of carbon price.
GK: In my view our position has been the same, but it manifests in a different outcome and that is that, by whatever means we seek to introduce that price, it shouldn’t be disproportionately disadvantageous. Now, that plays out in two ways. One, people who have built assets in the prior ten, fifteen, twenty or thirty years shouldn’t be stranded as a result of that investment made in a world which didn’t value carbon. And two, Australia should not be disadvantaged relative to its peers in any economic sense by the means through which we introduce carbon price. Now, you’ll find that that principle was embodied in the design of the scheme in two respects. We had direct compensation for generators, but where one (sector) was proportionately disadvantaged, and we had assistance for export competing industries. So, at the core of all of these schemes has been a principle … but for which in relation to where the world has gone globally on carbon do not really reflect the relative disadvantage Australia now suffers. And the point there is that… pre Copehagen, when was Copenhagen?
GK: So, pre Copenhagen 2009, our view was that there was a sort of emerging global consensus that… Well, I’d say pre GFC in 2008, there appeared to be an emerging global consensus that somewhere around twenty dollars a tonne seemed about right. In my view it’s no surprise that the starting price (in Australia) was $23 or whatever it was because that was pretty consistent with that consensus. But the GFC started to really test that consensus and I think it was really in Copenhagen that the whole thing ran off the rails and I think since Copenhagen there hasn’t been a clear consensus about carbon price. The European price continues to sit where it is and in that regard athe price settings of Australia ultimately adopted have us at a significant relative disadvantage which in my view is a breach of one of the core principles that everybody articulated and was actually met in the design of the scheme we have.
RE: There is no global price, but China is introducing a carbon price now, California has got one which is about fourteen, fifteen dollars, so there do seem to be schemes popping up here and there. Do you think then there will be some sort of carbon price under Direct Action? Because you’re talking about different schemes, and I suspect you’re alluding to is the fact that even if there’s an emissions reduction fund, that does have e de facto carbon price.
GK: Well, there must be a carbon price in everything, by definition, and there’s a carbon price in the RET scheme. It just happens to be extraordinarily high. The RET scheme is a direct action scheme, right, but it has an implied carbon price in it and you can calculate it and in our view it’s forty to sixty dollars a tonne and the small scale scheme is a hundred and twenty dollars a tonne, depending on what you think is being displaced by the RET scheme. So, there is an express or implied carbon price in every intervention designed to change the way decisions are made in the market.
RE: So, would you support direct action as you understand it, because the Coalition is most likely to be governing from next week.
GK: People often ask what’s the difference between the government and the Coalition’s policies and or they ask do we prefer an ETS or direct action and that’s kind of sort of what you just asked, but that’s not the difference… that’s kind of the superficial level. The real difference between the parties is that, as I would understand it and I’ve made this comment many times and no one has challenged it, that the government’s policies are increasing the outsourcing the reduction to Europe and the Opposition’s policies have always said the reduction has to occur in Australia. And the interesting point is that that probably is completely counter to what those who feel strongly about the issues would think of each party’s they’ve adopted, because there is increasingly less likelihood that any real reductions will occur in Australia under the government’s current policies.
RE: Apart from having the RET scheme. Yes.
GK: Well, if we accept that there’s a degree of bipartisanship about the RET scheme, you’re asking me about the carbon scheme and that’s the fundamental difference between the positions of both parties; that in one all the reductions are to be sourced in Australia and in the other they’re increasingly being outsourced. And people have different views about that and it’s not my view… I’m happy to draw attention to the differences. It’s not my job to say which is better, but quite clearly some would say why are we paying a carbon price in Australia which ends up in European companies’ hands. If we go back in this debate over the years, it was almost an article of faith that the emissions reduction had to occur in Australia, you know. Now, under the government’s policies and presumably the Greens have supported them, they’re now happy for a substantial amount of that to come from overseas which I’d have to say is somewhat paradoxical.
Renewable energy target
RE: Let’s talk about the RET. Why is there such disagreement about the impact of the renewable energy target on consumers? You and Energy Australia and others are saying that the cost has not been properly calculated. Others say well it has been calculated and it isn’t as much as you say. But you all seem to agree that the impact of the RET by having more renewables in the market is a softening of wholesale prices. Isn’t that the key issue for the incumbent generators, that they suffer because of more renewables? Isn’t that the crux of the matter?
GK: So, the answer to that is no. We need to go back … when the RET scheme was initially implemented at the what eight per cent level initially, I think. The objective was to encourage the investment in new technologies and that was the primary reason for the scheme. It was to work hand in hand with a carbon price and the objective was such that as the carbon price rose the RET scheme would not cost any more. That was the cost of a REC certificate and go to zero because it would not cost more to implement renewable energy to the price of generation. And as a digression… You haven’t asked this question, but as a digression, I often see people report… you know, a report done by Bloomberg New Energy Finance, saying renewable energy was going to be competitive with fossil fuel. It’s amazing how these things then get picked up as authority sources, but if you’ve seen that report and look at it, it was premised on carbon being sixty dollars a tonne, so the statement is true if carbon is sixty dollars a tonne, but I don’t see that happening anywhere, anytime soon.
(Eds note: BNEF actually says it’s true without a carbon price. Here is their report).
Now, the reason that’s relevant to your question is that the objective of the RET scheme was that it didn’t cost any more because it worked hand in hand with a carbon price that lifted the cost of energy, black energy if you’d like to use that term, to the point where the REC (renewable energy certificate) fell to zero. Ok. Now, neither of those objectives are being met. There is no diversity and no pull through under the current scheme of any other form of technology that I can see other than wind and when it was pulling through solar, what did we do? We had to have two schemes. Heaven forbid. It wasn’t pulling through wind. So, it’s really become a wind subsidy. That’s all it is. The separate nature of the SRES scheme evidences that fact.
And secondly with the now bipartisan commitment to reduce the cost of carbon, so ironically some degree of bipartisanship is emerging and that is the carbon price should be much lower. The lower it gets, the more the RET scheme is costing. Now, the objective of the RET scheme was never to do anything to the wholesale cost of energy. It was never stated that an objective of the RET scheme was to cause excess investment and excess supply and lower the cost of energy. And you can see that evidence because the original twenty per cent or the original forty-one or forty-five kilowatt hours originally which was the original articulation of twenty per cent before the SRES and the RET schemes were split was effectively that amount effectively met the expected growth in demand for electricity and therefore would have no impact on the wholesale cost of electricity.
It has become an argument of convenience for the industry that as it’s turned out demand has fallen and because demand has fallen, supply exceeds demand and therefore wholesale prices are low. And where that argument fails in logic is that if the industry chooses to deal with that by withdrawing capacity, the wholesale cost of energy will return to where it would be in the long run which is the long run marginal cost and the RET scheme would be providing no benefit by forcing excess energy into the market.
RE: So, what do you think is a fair outcome then? Should it be diluted, or removed. Or isn’t part of the problem the fact that too much generation was built in the first place and it shouldn’t be a reason to lower the target on renewables just because we ended up having too much coal?
GK: Well, there’s a slight logical problem in your comment, Giles, and that was that coal was built before there was any RET scheme. It was built in response to the community’s desire to have a reliable supply of energy at the most competitive cost it could which… that was the objective of the NEM to make sure that there was a reliable and competitively priced supply of energy.
RE: But I think in retrospect now it’s clear that we built too much coal fired capacity and I think AGL was saying that there was probably nine gigawatts of excess capacity at the moment.
GK: Yeah. But that’s a comment relative to demand. And it’s a luxury the private sector has in any industry and that is to build excess capacity, in any deregulated market it faces the consequence of its own investment decisions whether you’re building offices in CBDs or power stations or coal mines, but what generally happens in industries is that through time that balance is restored. When that balance is restored this is notion that the RET scheme is somehow causing a lower wholesale cost of energy just disappears entirely. If Hazelwood, for example, was withdrawn entirely from the system which many would say that would be great from a carbon point of view, you would argue that supply and demand would be brought more back into balance and you would see no evidence that the RET scheme was having any beneficial, relative to any other outcome, impact on wholesale electricity prices
RE: Well, it would lower it from where it would otherwise be …
GK: That’s debatable because the NEM is very effective but more complex than most people understand and the two components of electricity price is the price of caps and the price of energy and at the end of the day the market will require those two prices together to provide an adequate return on investment. That’s why I go back to the objectives of the scheme … If the objective of a scheme was to reduce the wholesale cost of energy by causing excess capacity to be built, surely you’d just build the cheapest capacity, not the most expensive. It was never an objective of the RET scheme to cause excess capacity, never. And it can’t be stated that it’s a matter of public good that causing excess investment was an objective of the scheme.
RE: That’s interesting. Let’s move on then to solar and rooftop solar because a lot of people talk about this being one of the profound influences on electricity markets. I’m not just talking about here in Australia, but in Europe and in the United States. Even the head of the US public utilities commission said the other day that solar eventually changes everything. He was talking about distributed solar on rooftops. We don’t seem to hear that much of this talk in Australia. Do you accept that proposition that distributed solar and rooftop solar will have profound a change on the electricity market as we have known it?
GK: The answer to that is yes, in part, but when people use words like “profound change” and as “we know it” …
RE: I know, well it does affect the traditional business model, doesn’t it?
GK: Well, the world isn’t ending. Just make some observations about the PV supply chain, which is something we do know a fair bit about having spent hundreds of millions of dollars working in that sector. Firstly… the paradox of the PV supply chain is that the competitiveness of PV has been almost entirely driven by the fall in silicon price, right.
RE: Do you think so? Not by the reduction in manufacturing costs?
GK: No. If you go back… Have you plotted to cost the silicon over the last ten years?
RE: Well, it’s gone down a lot, yes.
GK: Well, that’s $400 a kilogram to about $18 a kilogram. Silicon, particularly with the technology that’s most commonly used, you know, primarily in China for PV manufacture, is the major input cost. We were very close to this, the cost of silicon has been driven down by silicon manufacture out of China and I would probably suspect that is an energy intensive process, it’s largely based on brown coal fired power stations in western China. If you look at the supply chain, look at what’s happening to silicon and the first question is where’s silicon pricing going to go? Is it sustainable at that price? And maybe it is. But that’s been one of the key drivers. So, and I do find a certain irony in Australia. We’re subsidising the installation of, you know, PVs which are made probably from brown coal fired power stations in China. I just kind of puzzle over that.
RE: Well, I guess we import all sorts of stuff from China which is probably made by some form of coal fired generation, yeah.
GK: But we don’t subsidise it. So why are consumers in Australia subsiding, that is the question, right? The second observation is that… taking Suntech as a surrogate for the industry, so at the peak it was worth what? Five billion? And it’s now gone. People are in jail. I mean it’s a very sad story. How many companies have failed? No one is making any money. The PV supply chain is littered with failure.
RE: So, you’re suggesting then that the low PV price is not sustainable and therefore the prices will go back up …
GK: Well, I’m just making a series of observations, so when you look at the PV supply chain you might look at silicon. And then secondly look at participants in a supply chain who’s been profitable and from what I can see generally the companies that are making a bit of money and surviving are the installers and distributors, not the PV manufacturers. And there are really bell-weather stories like Suntech, and in the US there are a couple of big players that failed.
RE: Well, Solyndra and some others. But I guess the same could be said of the Internet in the 1990s. No one made much money, but we all ended up using the Internet.
GK: Well, the difference is that the people who make the boxes… you know, the Internet itself happens, the product that has got a zero marginal cost is information. People were making money. Microsoft made money. HP made money. People who make the boxes, you know, they’re making money. In the PV industry they’re not making money. So I’m just encouraging you to look at the supply chain.
RE: Yeah. I’ve had a look at the supply chain. I’m not too sure whether silicon is that a great a cost component. The Department of Energy SunShot initiative (which outlines the cost pathway), silicon is a part of it, but I think there are lots of other components which are coming down anyway.
GK: I’m just saying here some things to look at because you’ve asked the question. The third thing is that in Australia we have incredibly big subsidies, ridiculously big subsidies and for which now they are locked in and we are paying the price. And I feel particularly strongly about this issue in Australia and, QCA’s numbers – New South Wales have done the same analysis – but using the QCA numbers consumers in Queensland will pay I think for the next fifteen years something like #2.6 billion in cost subsidies for solar feed in tariffs and certainly on the QCA’s numbers something like eighteen per cent and growing of your average household electricity bill is those subsidies. It is particularly inequitable that people who rent and are generally lower income are subsidising people who have had the money to put these panels in. And I just think it’s outrageous that that’s not… people aren’t annoyed about that.
The case for distributed energy
RE: Those schemes have come to an end though, yet there still is a take up of solar and I guess this is the issue going forward – that people are still finding the economic incentive to put panels on their roof because it does reduce the amount that they need to draw from the grid and therefore provides an economic incentive for them. And that is pretty much without subsidies or with very little subsidy.
GK: So, the fourth point… look at silicon’s supply chain, look at whether anybody’s making money and whether that’s sustainable, look at the impact of massive levels of subsidies had here in Australia. And then fourthly, the fact is that the take up of solar will inevitably cause us to revisit how we price network services because effectively the renewable energy is free-riding on the existing investment … wind in respect of transmission and, you know, solar in respect of distributed. It’s not paying its way because people who are getting feed in tariffs still use network charges benefit from their excess, be it sort of any excess generation they make over and above their needs. Now, as you know, solar does not meet at an instant the energy requirements of a household. It’s just a balance across a day, a week, a month or a year. I love reading these articles but’s not my job to rebut them, but every time people say, you know, solar is fabulous, it’s reducing the a peak, I absolutely agree with that. The problem is we have a winter peak in Australia, even in Queensland.
RE: Well, we do now.
GK: And it’s still growing, right. So, the reality is that solar is free-riding, the network and inevitably network charges are going up because they’re energy based. That is, based on how much energy you use to the point where people who don’t hold solar are increasingly cost subsidising people who do and that’s independent of feed in tariffs. That’s irrespective of whether there were feed in tariffs or not. So, I think inevitably networks will in some way, shape or form have to migrate to being based on a capacity payment. What ought happen is that if people don’t want to pay their share of that network service which they consume, they should disconnect entirely from the grid.
RE: Well, I don’t really think that’s probably going to happen very soon.
GK: Correct. And then the logical point is right, so batteries is the thing that balances it out, but of course then the true cost of solar emerges, which is the cost of batteries. Ok. So, it just follows inevitably that solar is underpriced. It’s not paying its way because it’s free-riding the existing investment in distributions. And to the extent that it does become a larger and larger contributor, it will inevitably require the way those network services are provided to be repriced.
RE: I think even the solar industry accepts that those network charges need to priced, but a lot of people would argue that distributed generation with solar in combination with battery can actually reduce your network requirements and your network costs going, forward because it’s probably a more efficient way of providing for those services.
GK: Let’s go the other way. This is an entirely hypothetical point. It’s just a point to draw the argument out. If it was a requirement that when you installed solar, you disconnected from the grid and you could choose whether you put batteries in or you just sat in the dark at night. How many people would choose solar?
RE: Not very many, I don’t think.
RE: You’re saying that solar is underpriced, but other people would say that the value of solar and batteries could be recognised because of the value to the grid. Instead of building more poles and wires or having to replace those poles and wires, you have other forms of…
GK: That’s an entirely different question. That’s just an economic question around the effective cost of solar with batteries. See, the problem that people don’t kind of fully understand, Giles, and you’ve got an important role in helping people understand this, is the question of how it is generated and used and it’s stored to match that balance. And so, people love to say, ok we’ll give everybody who has a solar panel a battery. Now, no one asks well how many battery factories does that mean there are going to be in the world and what do we do with all the dead batteries and all of the products and chemicals and God knows what and is there enough lithium in the world to have that many batteries, right?
I’ve never seen anybody contemplate that question. But that’s not the point. The point is that at the end of the day the imbalance, that is the imbalance between when energy is generated and when it’s used, so let’s keep it really simple, night versus day, is met by using networks. Of course, for example, and I’ll give you a practical example, Origin operates a pump storage facility in the Shoalhaven, 200MW of hydroelectric pump storage, and when power is cheap, you know, in theory we could buy power from a wind farm that’s cheap overnight and we can pump water up and then use it to peak during the day; perfectly renewable, zero carbon. A far cheaper way to manage system imbalances and give everybody a battery.
So, networks play a critical role, and it’s just an economic question as to whether the world starts building squillions of batteries and digs up every ounce of lithium that the globe has got, and I’ve never seen anybody estimate how much lithium the globe’s got. All I know is that the Chinese seem to have cornered the supply for the world.
RE: Oh, I think there’s quite a bit in South America in big salt lakes.
GK: So, firstly I think you have an important role in having people think about some of these issues because there are just lots of simple sorts of things put out there, like solar is great because it’s reducing the summer peak. Well, absolutely true, but that’s not the point; we’ve got a winter peak.
Will solar change business models?
RE: It is said by the big utilities in the US and other independent analysts that the cost of solar will still come down, that its take-up is inevitable and it becomes what they describe as a no brainer for households because it does offer them an avenue to reduce their costs. They say this will have impact on the networks and on other generators, and those business models need to be recalibrated … …
GK: Sorry, Giles, but I’ve just given you some facts .. but that statement… it is possible that that statement may be right in Europe, but it doesn’t make it universally true. Let me firstly deal with Australia. So, another index you ought to go and get is the price of steaming coal into Newcastle. Steaming coal prices are falling and as a minor issue they’re falling because the US has got a huge amount of shale gas and it’s now displacing coal which is ending up in our markets. But at the price of steaming coal the price of electricity in Australia is going to be very low. The price in Europe which is full of nukes and imported LNG and gas from Russia is much, much higher. So, the difference between the cost of renewables and the cost of black energy is remarkably different in Europe and some comments may well be true there, but that does not make them universally true.
RE: But I guess the issue for the consumer is that the grid as a whole has not been very effective in actually delivering that low cost of electricity, because they are paying more than thirty cents a kilowatt hour. They are probably paying as much as some people pay for diesel generation, so that actually creates a more powerful incentive for other sources at the point of delivery to the household, and that’s where solar becomes an interesting alternative for consumers, doesn’t it?
GK: So, again I’m sorry just to keep putting facts on the table, Giles. But if you look at various analyses that have been done on Australia’s network costs, they are higher than network costs in Europe and Japan, for example, so the delivered cost of energy appears in those countries to be more competitive. So, the difference between a delivered price of energy in Australia and some of those countries is less than the difference in our wholesale cost of energy. I.e. network costs are higher here, when you see it, but the reason it’s higher here is very simple. We have long distances and low populations. It is just a function of the way Australia is. The community does want reliability in its networks and it has to pay for that reliability. It’s a matter for governments and regulators to determine whether the regulatory process has produced good outcomes for consumers, but those outcomes should always be based on some sound technical understanding of appropriate reliability standards. And if we keep going back to that simple question that if you made it compulsory for people to put solar panels on their roof to disconnect from the grid, what would the take up rate be?
RE: Why would you make it compulsory to disconnect from the grid?
GK: Because they’re free-riding. They’re not contributing to the grid. So, I’m just putting that hypothetical point to draw attention to the issue that if it was compulsory to disconnect from the grid if you put a PV on your roof, how many people would take it up?
RE: Very few.
GK: And the answer is I don’t expect that to be the case, but the point I’m making is that simply says the grid provides value that will have to be paid. I think there is a real risk that as that becomes clearer and clearer people who spent money on PVs with, you know, payback periods will find that their costs are going to be higher than they thought because they will have to pay their share of network costs which they’re not currently paying.
RE: I guess though the argument about higher network costs, if because of the population and the distances and the geography, then maybe that provides a more powerful incentive for distributed energy, or microgrids …
GK: Just so I can keep you on the logic for this, Giles. Are you ready for this?
RE: Yes. Yes.
GK: So, the problem is no different if you talk about a household or what you might call a microgrid. So, let’s take a suburb. You know, I don’t know. Gordon, right, or Pymble or something and let’s say we’re going to have a little microgrid in Gordon and everybodyall the power in Gordon is going to come from a PV, you’re left with exactly the same question. Will Gordon separate itself from transmission? And the answer is no again because it wants to turn the lights on at night, right. So, you know, whether it’s a household or a micro microgrid or a mini microgrid or a bigger grid, the question of interconnectedness remains.
RE: I just wonder whether when you combine …
GK: And Australia has long distances, so in Australia networks come at a higher cost.
RE: It’ll be interesting to see whether storage gets down to the cost where marrying that with solar and other forms of distributed energy can actually beat the delivered cost of centralised generation with networks.
GK: And that’s the right question. At the end of the day it’s… there is not a single comment I’ve made about what’s good or bad or right or wrong. I’ve just said that when you think about those things we need to begin from some factual basis. I’ve not exercised a view about right, wrong, good or bad.
RE: Well ….
GK: But at the end of the day what happens in markets is that technologies get brought forward on a competitive basis and the day that, you know, PV and storage can compete with grids and people can be better off by disconnecting from the grid and avoiding those costs will for some be a good day and that’s… you know, if that happens, it will happen, but if it is going to happen, it will be a result of technology and innovation, you know, not locked in some subsidies which are not of themselves driving that technology and innovation.
RE: Can I glean from your comments then that you think that for the moment then that the old centralised model of generation with delivery networks will have primacy over distributed generation?
GK: So, in 1982 I was working in Canada in the energy industry and I read an article at the time about the fact that inevitably we would end up moving away from centralised grids to microgeneration and I should have kept the article because it was incredibly full of foresight and it will occur and the premise of that article was at that time around a couple of things; the emergence of distributor generation and the emergence of information technology, right. And the reason that centralised generation won for a period of time and there’s a whole series of thoughts here, but was that the issue that… There were actually two reasons. The reality is that power generation has been decarbonising at an incredible rate for a hundred and fifty years, right, but it’s always decarbonised simply because the most efficient way to deliver energy drove that decarbonisation, and the movement to more efficient centralised power plants has been a part of that process.
If you go back a hundred years, everybody had their little coal or coke oven, burnt timber. The carbon emissions at that time of decentralised generation was staggeringly high. Ok. So, we did have a decentralised energy world. We did have a microgenerated energy world as little as a hundred years ago, right, but it was incredibly carbon intensive. Ok. So, what technology did was decarbonise that process by centralising generation and putting interconnected networks in place and the inevitable consequence of that was more efficient generation, lower carbon emissions and lower costs to consumers and more reliability.. Now, as technology changes we probably will see more decentralised generation, but that that was 1982 which is forty years ago… and that day still hasn’t come yet. And then at the time the really exciting prospect out there was fuel cells, right, and if you again do a bit more research and you look at the history and promise of fuel cells and go and pull out some articles in 1980 and look at the revolution that fuel cells were going to bring to distributed generation and then say where is it today, the answer is it’s not there yet. And the point is not right or wrong, good or bad. The point is that these transformations take a long time.
GK: So, I think the transformation will occur, Giles. I’m incredibly optimistic that it should occur because there’s a competition around technology that drives down cost, increases innovation and provides solutions that are competitively priced and don’t require continued subsidy because it is not in the interests of the community to continue to subsidise these things if they can’t compete on their own right. In fact, destroys innovation because people rely on the subsidies rather than the innovation. And if you then go back to the RET scheme, the RET scheme is just subsidising it. There is no innovation happening in Australia in renewables. You tell me one idea that’s likely to qualify under the RET scheme that represents true innovation in Australia.
The future of the RET
RE: It’s probably all wind, but it’s a matter of whether the RET scheme was designed as you say for innovation or…
GK: Look at the speeches. It was designed to encourage a diversity of technology, you know, innovation and it is not doing that, so when you come back to what would we like, I would like the scheme to go back and deliver on its original objectives.
RE: But how do you do that then? Some people think solar PV will be competing in the RET in a few years…
GK: Because the RET scheme is designed to peak at 2020 and has a ten year tail only to 2030, there will be no economic benefit of doing anything other than building wind with no technology change. The scheme will not stimulate any of those choices. It will not help. This is one of the areas where, you know, our position continues to be misrepresented by those who are enjoying the benefits of the subsidies. You know, we invested for a long time in geothermal energy in the Cooper Basin, two hundred million dollars. It will not benefit under the RET scheme because the RET scheme’s economic benefit ends too soon.
RE: So, what do you argue then? That the RET scheme should be extended and the fixed target…
GK: I’d be very happy to have a higher RET target that extends out further, because that way you’ll get closer to the scheme achieving its original objectives. You know, it is not economically capable of achieving its objectives because it peaks in 2020 and ends in 2030.
RE: So, you have a higher target with a longer scheme. Do you then band the scheme to ensure that some of those technologies are encouraged to come forward?
GK: Well, let go back to a discussion that, I know has occurred, where you could have a series of targets around low emissions technology as well as zero emissions technology, you know, and the outcomes would be vastly different if, for example, people were encouraged to combine solar thermal with gas turbines, for example, you know, and you’d have much lower carbon emissions and you’d have all sorts of new ideas emerging, none of which will emerge under the current scheme. If I give you another example… If it is now good that under carbon we source most of our emissions reductions outside Australia which is the current scheme, why do we only allow the qualification of RET schemes in Australia under the RET scheme?
RE: Uh huh. This gets back to your PNG project.
GK: Or any other project.
RE: So, you would support banding then?
GK: It’s not my job to design the scheme. All I’m saying to you is that the scheme is doing so little of what it was intended to do for little public benefit. You know, I mean, for example, if it is now good to reduce carbon emissions in the way that we’re doing under the current scheme, why are we paying at a minimum forty to sixty dollars a tonne to reduce carbon emissions under the renewables scheme when we can buy it for five dollars in Europe? Why don’t we just increase the target and pay five bucks to the Europeans for the reduction?
RE: Because I think that there is an argument that the world is decarbonising and Australia should be decarbonising as well and this is part of that effort to do so.
GK: But is Australia is helping the world decarbonise by buying European credits.
RE: Yeah, but it probably needs to decarbonise its own industry though, doesn’t i
GK: Ok. So, why are we then saying it’s good under the current government scheme to allow more and more of that to occur overseas?
RE: Because there’s a balance between how much you do at home and what the cost is.
GK: So, what’s the right balance, Giles?
RE : Ha ha. I’m supposed to ask the questions.
Gas reservation policy:
RE: Let’s get on to gas. What will the impact of LNG exports be on gas prices, and should we have a gas reservation policy as they do in WA?
GK: The economic reality of this is that people value our gas overseas much more than we value it in Australia. And so they do for every other resource we have in this country. When the LNG industry comes on it values gas more highly for LNG tan it does for power generation. That’s because we have such a low carbon price, we will continue to use coal as our fuel. You keep asking us about our position, and our position is that people ought to make decisions based on facts. We’ve argued that if we want to decarbonise our generation, we need a $40-$60 a tonne carbon price.
The $24/$25 carbon price is not causing anything to happen, it’s not causing anything to change. If the community wants our carbon emissions to change dramatically, you need $40-$60 a tonne. Origin’s not arguing that’s what we should be charging, just that’s the facts. If that was the case you would see gas used increasingly in generation, but it’s not because both sides of politics are lowering the carbon price to the point where coal will remain the dominant fuel for generation for a long, long time to come. As gas gets drawn away for higher value use, which is interests of Australian community because the more gas is worth the more royalties and tax the government gets, the price of electricity won’t go up for that reason, because it is coal that determines the price of electricity in Australia. And there is no upward pressure on the steaming price of coal.
RE: So that will further price gas out of the market then?
GK. Correct, so there is no need for gas to go into generation. There is no index for brown coal, because it is only used for power generation in Victoria. The only issue is the cost to dig it up, and the answer is two fifths of not much at all.
RE: What about the idea for the gas reservation policy.
GK: APEA published a paper on this, which most in the industry know to be true. When you look around the word the great irony is that the governments that seek to control the domestic gas price – it is not a reservation policy, it is a price policy – the argument is that some cheap gas for Australian industry. That has two parts to the questions. Is there any such thing as cheap gas, because it has to be produced. Prior to CSG emerging, east Australia was running out of gas. You may recall, depending on when, the gas was going to come from the north west shelf, as far back as Rex Connor it was going to come from Timor, and then it was going to come from PNG.
I can tell you that in the absence of CSG, gas prices in east Australia would be what they are going to be, because the gas would be pulled from pipelines from areas that have alternatives to export LNG. So one of the premises that is flawed is that there was going to be cheap gas. What’s made the CSG industry viable is the LNG industry, because customers of the LNG industry is willing to pay a price to massively expand the resource base, and help grow the industry in Australia. Reservation policies are price policies, not physical policies. You have to ask if there is any such thing as cheap gas going forward.
To the extent that people want to argue that the good thing about the renewable scheme is that it is keeping down the cost of energy, what are they doing, they are boosting supply. It is always a supply side argument ultimately, and the only sensible thing is to do those things that improve all access to resources and boost supply.
Future fuel mix
RE: How do you see the fuel mix in 2030 and 2040 in Australia between coal, gas and renewables. I guess it depends so much on policy and technology costs.
GK: Look at the IEA’s supply and demand forecasts. They will tell you that the world will continue to use fossil fuels in large quantities. They have a high carbon case, and a 450 case, but unless the world shows resolve to price carbon, then the world will continue to use fossil fuels for our energy. We believe we should be tackling climate change, and putting in the policies that do that, but we don’t believe we should be putting ourselves at a relative disadvantage, and until the world moves on this issue, the relative disadvantage is greater than what people thought is was 3, 4, or 5 years ago. That’s why both sides of politics are reducing the carbon price>
RE: So the only way to change the fuel mix is to have a high carbon price, but we can’t afford to do it because no one else is doing it?
GK: That seems to be where it’s at.
RE: That’s very frustrating, isn’t it.
GK: I share you’re frustration. It’s a complex issue but that is where it is at. In the absence of a global movement, all we do is to de-industrialise Australia without changing the world’s carbon. The difference between the party’s policies about whether the reductions happen overseas or in Australia is an important point.
If we are happy to have it happen overseas, then we are contributing. If we don’t like it happening overseas because we don’t think that the credits are real, and some have that view, then we are disadvantaging Australia. There is a lot to be thought through. We still don’t have a policy environment that is cohesive, bipartisan and enduring, because if you look at how carbon pricing has evolved in this country it has gone from nothing, to a fair bit, to not much.
The RET is not achieving any of its objectives. We’ve seen interventions, from the old RET, to the SRET, to increased targets, and all these sorts of things, so to your core question, all of those policies which go to supply of energy in the community, there is still substantial uncertainty about key elements of that policy mix and how we achieve our environmental objectives as well as our economic objectives in this country. Origin’s role in that we really ought to try and sought this out, but we really ought to try and use facts as a basis for doing it.
RE: There seems to be more than one fact.
GK: The cliché is that you entitled to your own opinions, but not your own facts.