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Time for a little more clarity on contract- for-closure agreement

We need to ensure we are getting value for money, writes Gujji Muthuswamy.

We need to ensure we are getting value for money, writes Gujji Muthuswamy.

THERE has been little public debate about the government's proposal to pay to close 2000 megawatts of heavy greenhouse gas (GHG)-emitting power stations under the "contract for closure" agreement.

Although the government claims it will only be a modest payment, speculation suggests it may cost taxpayers up to $3 billion. This public silence contrasts with the criticisms of "cash for clunkers", the government initiative proposing a $2000 incentive to owners of 15-year-old cars to send vehicles to the scrap yard, at a cost of $400 million. Is there any difference in the logic behind the two proposals?

Many of the candidates, like some Victorian brown coal stations, are already about 50 and might soon be closing anyway. What are the costs and benefits of the "contract for closure"? Is this a low-cost way of achieving GHG reduction? The government website mainly talks about the process, but not why the scheme is being undertaken. If it is serious about a least-cost approach to GHG mitigation, and has, say, $2 billion to $3 billion to play with, it should call for tenders not only from heavily emitting power stations, but all power stations and energy efficiency providers across the spectrum. It should ask them to submit proposals outlining, among other things:

(1) How much GHG they can reduce without necessarily shutting shop;

(2) Over what period;

(3) Expected capital and ongoing costs;

(4) How permanent the GHG savings would be;

(5) Impact on employment in Australia;

(6) Expected impact on risk to energy security.

If the evaluation of such a tender process finds the closure of brown coal stations to be a least-cost option, then good. If that were not the case, however, the money would be better spent on supply and demand side projects across diverse economic sectors that more effectively reduce GHG emissions and the portfolio risk of the program. The report Low Carbon Growth Project by ClimateWorks Australia has identified several projects that could deliver jobs and GHG reductions.

Regarding the closure contract, the key question is "how much is it worth?" The objectives of the two protagonists are different: the government wants to reduce GHG emissions at least cost, while station owners want to recover as much of the estimated lost value of their investments.

The government would hope to spend, say, no more than $23 to $30 per tonne of net GHG reduced to secure the closure of the brown coal stations. It may also expect a fillip to investment in low emissions technologies, but its valuation of the contract will mainly depend on its view of the forward price curve of carbon. Power station owners would estimate the compensation based on the loss of revenue in the remaining years of their ageing stations. They will estimate their lost revenue based on future electricity prices in the National Electricity Market (NEM), not just carbon prices. Other factors would also affect estimates.

The price of carbon in the carbon market and the price of electricity will be interlinked, as the carbon price will differentially affect the bid structures of different generators in the NEM. The 2000 MW of brown coal stations will probably be replaced by a mix of gas and renewable stations. Thus net reductions in GHG will be less than that obtained by closing brown coal stations.

The government's views on future carbon and electricity prices may not be the same as station owners. No one can be sure of the market price of carbon after July 2015, when the fixed price period ends. An estimate of low carbon prices in the 2015 to 2020 period would result in a low valuation of the closure contract by the government, and vice versa.

The government should tell the public why it thinks the "contract for closure" is the preferred means of reducing GHG emissions, and also the criteria on which the generator bids will be assessed. They must do this before they go too far down this route.


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