Gillard and Abbott won't dethrone King Coal

With gas no longer a cheap option for Australia and the carbon price at risk of hitting the $15 floor or being non-existent, both Labor and the Coalition have some explaining to do about their promises to clean-up our power supply.

The Gillard Government and the Opposition’s plans to close Hazelwood or any other large brown coal power station will hit a great big road-block – liquefied natural gas or LNG.

By the end of next month the government intends to conclude negotiations on contracts to close 2000MW of coal-fired power generation on an agreed timetable. Unless the government is willing to pay a ridiculous price, they won’t get close to 2000MW. Also the opposition has a similar policy that would face an even steeper bill for the government budget.

The Coalition’s Climate Change spokesperson, Greg Hunt has told environmentalists the Opposition would aim to close Hazelwood and replace it with gas. I should note that the Opposition don’t say ‘close’ but rather “clean-up” Hazelwood, but any power engineer will tell you it is economically ludicrous to convert Hazelwood to gas. It would be far cheaper and easier to just build a new gas power station.

Around three years ago everyone thought the days were numbered for large brown coal generators like Hazelwood and Yallourn. These are decades-old power plants and some of the most emissions-intensive power plants in the developed world. The implementation of a carbon trading scheme was expected knock these plants off for good, to be replaced by new, highly-efficient combined-cycle gas power plants with a third of the carbon pollution.

But two key things have changed since then:

1)     The carbon price everyone now expects to prevail in Australia towards the end of the decade is likely to be stuck at the government-mandated floor of $15 per tonne of CO2 rather than $40. This will be too low to really hurt the competitiveness of brown coal generators.

2)     With several LNG plants now committed to construction in Gladstone, Australian east coast gas producers can transport their gas to Japan, Korea and China for premium prices. Australian east coast gas prices will have to rise considerably for producers to willingly sell into the domestic market, rather than to lucrative Asian markets.

I’ve prepared two charts below which help to illustrate just how marked a change these two developments have had to the competitiveness and expected longevity of brown coal generators. These were constructed using cost and emissions data prepared for the Australian Energy Market Operator (AEMO). 

This first chart illustrates how things looked around 2008 and 2009. It shows how Victorian brown coal generators’ operating costs (illustrated by blue section of bar) stack-up relative to other fossil-fuel generators they compete against in NSW and SA. The Victorian brown coal generators take the six top places in the generator dispatch order (the “merit-order”). But once you add a carbon price of $40 per tonne of CO2, the gas power stations Tallawarra and Pelican Point move from the middle of the pack to be up there with Loy Yang A as the lowest cost generators. Also, several NSW black coal generators become lower cost than Hazelwood and Yallourn. In 2008 and 2009, when it was expected the carbon price was likely to reach $40, there were good reasons to think that brown coal’s days were numbered. 

Power generators operating cost with and without $40/tonne carbon price based on current fuel prices

Sources for data: ACIL Tasman and Intelligent Energy Systems for AEMO

But this chart below illustrates a picture closer to what we now consider to be probable for 2020. It is based on the same data as the picture above, but the price of gas has ascended to $7 per gigajoule (GJ) because of linkages to the Asian LNG market. The carbon price is only $15 per tonne of CO2 in this case.

Under this scenario almost all the brown coal generators retain their priority position on the generator dispatch order, with just some minor reshuffling amongst the coal generators. The gas power stations represent no threat at all. If anything the rise in the price of gas will enable the coal generators to recover a large proportion of the lost profitability from the carbon price.

Power generators operating cost with and without $15/tonne carbon price with gas price of $7 per GJ

Sources for data: ACIL Tasman and Intelligent Energy Systems for AEMO

Small and old brown coal generators such as Playford and Energy Brix may be keen to negotiate a deal for payment to close. But the large brown coal generators, such as Hazelwood, will want to see billions of dollars on the table before they contemplate closure.

Also with such high gas prices and low carbon prices (or non-existent in the case of the Coalition), if these plants were closed, they will be replaced by generation from other, high-emitting coal generators. For example the large NSW black coal generators: Liddell, Bayswater and Eraring, all operate at utilisation levels well below Victorian generators. They have plenty of capacity to expand their generation if brown coal generators are closed. In addition there are development proposals for capacity expansions at a range of existing coal power plants.

Both Labor and the Coalition have some explaining to do about their rhetoric to clean-up our power supplies, now that gas will no longer be cheap.

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