In one weird press conference, Clive Palmer and Al Gore have determined the course of clean energy policy in Australia for the next few years. Comprehending these changes requires an understanding of the emissions problem we are trying to fix, and the tools available to do this.
Australia has some of the highest per-capita CO2 emissions in the world, driven primarily by the appalling emissions of our electricity sector. Generation emissions account for over a third of our total emissions and are the largest single contributor. Agriculture, forestry and fisheries together are close to 20%, then mining, manufacturing, construction and transport, and residential tail off from 12% to less than 10%.
Our electricity sector emissions are very high in world standards, the highest by some measures. Much of this can be attributed to our brown-coal burners, particularly Hazelwood and Yallourn in the La Trobe Valley and, to a lesser extent, Loy Yang, Playford and Colinsville. The coal they burn is soft and moist, up to 60% water in some cases and is therefore hopelessly inefficient to burn through a coal boiler. As a result, Hazelwood, almost the highest emitting powerstation in the world, emits about 1.4 tonnes of CO2 for every mega-watt hour of electricity produced, where one of the new black-coal burning, supercritical plants in Queensland achieve closer to .8 tonnes per MWh.
For Australia to make a lasting impression on our emissions we need to reform our electricity sector. We also need to limit and lower our total emissions, but we will struggle to do that without lasting changes to our generation mix.
The carbon price was designed to work on this problem and losing it is a disaster. The carbon price added a production cost to higher emitting electricity and so changed the order that plants are dispatched into the market. This is a complicated transaction which I have described elsewhere, and plenty of indicators suggest that it was working as planned.
Figure 1 From Pitt and Sherry's CEDEX report
Since there is no international competition in the electricity sector, the impact of the carbon price does very little to our international competitiveness as long as electricity users are compensated the amount collected by the tax, which is pretty much what was happening. Now that the carbon price will be removed we have the absurd situation of the price impost being removed while the compensation remains. Repeat after me: the age of entitlement is over.
Replacing the carbon price with an internationally traded ETS is not as useful. The international price on permits is too low to drive change in Australian generators and so doesn’t work on the root problem. My preference is for a carbon price on the generators and an ETS for the rest of the economy.
The carbon price prioritises lower carbon generators. This is a stop-gap measure only though, as the long-run goal is an electricity sector powered entirely by renewables. This is what the Renewable Energy Target is working towards and absolutely must continue doing. Renewable electricity generators need long-term certainty and a robust RET provides that. The incumbent generators have benefited from state-ownership and extended lifetimes, which distort the market so much that it is impossible for renewables to compete on price.
Hazelwood was supposed to close in the 1990s but its contract was extended so the state government could sell it. 15 years later it is still running, burning the cheapest coal deposit in the world. The RET provides a mechanism to side-step this sort of meddling and the benefits of incumbency to provide certainty that we are progressing to a 100% renewable energy grid. The RET must stay and be increased beyond 2020. 50% by 2030 seems achievable to me, and modelling released as part of the RET review suggests this is economically desirable.
Keeping the Clean Energy Finance Corporation is also a win, and should be easily defensible given that it makes the government money. The CEFC provides loans to clean technology projects, half of which must be renewables. This is addressing two related problems; that the traditional finance sector doesn’t want to invest in renewables because they don’t understand them and there is little regulatory certainty in their use, and to help first-of-type projects demonstrate their worth and create some ‘market pull’. By providing finance, rather than grants, they motivate the applicants to ensure their projects succeed by finding a sound financial return, rather than a development path based on continued government assistance.
The future of ARENA is uncertain at this stage, and I am not fussed either way. ARENA provides grants for renewable energy projects, typically demonstrating or exploring some technical aspect which needs work, like hybrid powerplant integration (like a wind and diesel system) or energy management. I am not fussed because government has a terrible record of implementing projects with direct grants, it creates the wrong impression of the sector as one requiring constant handouts and also fuels the lie that we need to invent new technologies to combat climate change.
ARENA would not be necessary if we had regulatory certainty in renewables. If we knew that clean energy would continue to be recognised in 10 years there would be no need for grants. ARENA is a negotiated compromise between certainty and government wanting to sit on the fence and does very little to address the root problems with clean technology.
I also loathe handouts for renewables, which is an unpopular view among my contemporaries. It creates the impression that this is some cottage industry, surviving only on the benevolence of government, when the truth is that there are many cost-effective project opportunities around Australia where renewables can provide cheaper electricity than what we have now. There are places in Western Australia where providing electricity costs over $1/kWh, compared to the recent solar auction in the ACT where project proponents accepted 17c/kWh for twenty years. Coupled with a big battery that electricity could be supplied for half what it currently costs, without inventing anything new or demonstrating new technology. The barrier is not a little bit of money from government.
The Climate Change Authority also survived Clive’s little brain fart, but to what benefit is hard to gauge. The CCA provides advice on Australia’s targets, costs and trajectories, but it is not binding. They have been suggesting sensible targets since their inception which have been roundly ignored. I suppose it offers some credibility as a state-sanctioned voice for the rational, but I haven’t seen much impact from their efforts. That said though, they released an excellent paper this week on vehicle fuel efficiency standards which has already had an impact on the debate. Perhaps a continued focus on this sort of techno-economic analysis of efficiency performance could make a valuable contribution.
Lastly, and fantastically, Direct Action is dead. I never believed that the Liberals wanted to implement this policy and for once we can agree on an outcome. It was very badly designed and essentially amounted to government handouts for things big emitters should have been doing already. There were no emissions targets, no solid framework for decision making and little consideration of the root problem being addressed. The arguement that something is better than nothing really doesn’t stand up in this case. A billion dollars a year would have gone to high emitters for projects that were probably cost effective already. It would not have reformed our electricity sector, nor provided certainty for renewables. All it provided was a figleaf of action and a bucket of cash to dole out to their favourites. It was a stupid policy conceived by someone who should have known better. That it ever made the light of day spoke very strongly to the Coalition’s commitment to action on climate change: it was a problem they never believed in and had absolutely no interest in attempting what is required. I hope it stays dead now.
Killing Direct Action, keeping the RET, CEFC and CCA can all be counted as wins. The RET review has now largely been neutered meaning the RET should survive until the next election. Losing the carbon price is a disaster and sets back progress in that sector by as much as a decade. Getting a price on carbon that reflects the urgency of the situation in our generating sector should be the focus of our policy efforts until the next election, and might be the sort of thing about which it is worth writing to our local members.