CLIMATE SPECTATOR: Calling the coal generators' bluff

Climate Spectator

Back in May I wrote (Climate Spectator: Gillard and Abbott won't dethrone King Coal, May 22) that the government's contracts for closure process was going to fall significantly short of getting agreement on closure of 2000MW of coal generating capacity. Sure enough that's what has transpired as the government has found the price for closure too high.

The reason why is the owners of Hazelwood (International Power-GDF Suez) and Yallourn (TRUenergy) power stations could see the following events occurring that would ensure the power plants would continue to generate plenty of cash:

-- Their competitors' costs are expected to rise substantially due to gas and black coal fuel prices increasing. The price of gas on the east coast of Australia is widely expected to double due to the installation of liquefaction facilities that can export the gas to high paying Asian customers. And black coal prices (if the NSW government didn't subsidise them) could also rise substantially to reflect buoyant prices available for thermal coal in export markets.

-- The carbon price will be extremely low or possibly even non-existent. Back in 2008 when TruEnergy and International Power were crying blue murder about the introduction of a carbon price and trying to scare the wits out of people by claiming the lights would go out, the expectation was that the carbon price would start at $20 and then rise northward to about $40 by 2020. This would have squeezed their cash margins close to zero given past gas and black coal prices. But now the carbon price is expected to drop below $15 in 2015 and possibly stay there until 2020. What's more if Tony Abbott gets his way, the carbon price would be zero.

Consequently, for TRUenergy and International Power to sign-up to a contract to close they would need to see an offer with at least 10 numbers following a $ symbol.

For the public service and energy minister Martin Ferguson, contracts for closure was never about claiming an environmental trophy, it was about keeping the lights on. The owners of brown coal generators had been very successful in scaring many people within both the federal and Victorian government that unless they received extra money, the financial stress from the carbon price would make them prone to abruptly withdrawal supply.

So contracts for closure was dreamt-up, not as a way to accelerate the closure of Hazelwood or Yallourn (which is what the green movement wanted), but rather to get a firm agreement on an orderly withdrawal of capacity, with a timetable announced publicly well in advance. This would then encourage timely construction of new power capacity in anticipation of the gap in supply the closure would create.

From the government's perspective this meant it shouldn't need to outlay much money, after all the coal plants were going to close anyway due to the impact of the carbon price.

Also it was a good way of calling TruEnergy and International Power's bluff.

You can't claim that you need billions of dollars for it to be worth your while to close your power plant in an orderly fashion, while at the same time arguing that you'll be so badly financially damaged by the carbon price that you're prone to shut the thing at any moment.

In the end, the government would have realised that with electricity demand trailing-off over the last few years, there was no imminent threat that we'd be caught short of power plant capacity. And through the negotiations, both TRUenergy and International Power, in trying to justify billion dollar payouts, would have revealed financial data that showed their plants were unlikely to be abruptly closed.

The government has therefore wisely put its cheque book away safe in the knowledge that lights going out are just empty threats.

But one also has to ask is the government's "Clean Energy Future” an empty promise if some of the most emissions intensive power stations in the world can continue to viably operate out beyond 2020?

One also has to ask if Tony Abbott thinks, "this was always bad policy” to buy out coal-fired generators, then why did he take it as Coalition policy to the 2010 election? If Abbott can suddenly reject a policy he took to an election not all that long ago – why should we trust that he won't change his mind on the broader $10 billion Direct Action emission reduction fund? Especially when it's likely he'll be faced with a massive budget black hole after taking office?