Future of coal plants in doubt
Generators warn the demise of coal- fired plants will affect wholesale prices. Keith Orchison reports
IF Ross Garnaut has his way and coalfired power stations have to bear the full burden of the Australian emissions trading scheme, how many of the present fleet will still be in operation in five or 10 years? This is a question growing in importance for a number of stakeholders in the energy business, and not just the coalburning generators directly affected.
Central to the answer is the price of carbon emission that will emerge from the Rudd Government’s decisions on trading policy — which won’t necessarily be a rubber stamp on Garnaut’s recommendations. Climate Change Minister Penny Wong has made it clear the Government will not be bound by what Garnaut thinks it should do.
Current thinking in the industry and among the myriad analysts buzzing around the issue is that the Government will set up a regime that results in a carbon price of at least $ 20 per tonne — and the generators, through their lobby group, the National Generators Forum, say this will add $ 4 billion a year to their costs.
The real price of the trading scheme permits, however, will be set in the market and there is concern among generators and energy- intensive manufacturers that it may range well above $ 20. Manufacturers are especially vulnerable to competitors with production plants in countries without a carbon charge.
An example of the impact of permit prices is consultant modelling that shows a $ 30 charge would drive up wholesale prices in the national electricity market by more than 50 per cent, leading to a 25 per cent increase in customer bills. For energy- intensive manufacturers spending 25 to 35 per cent of their annual operating costs buying power this is a worrying prospect.
The generators want the Government to issue enough free permits to its members to enable them to embark on a phased shutdown of their higher- emitting plants and to replace them with new technology. Garnaut won’t have a bar of this.
In promoting this plan, the NGF points to the money generators have outlayed voluntarily since 2000 on reducing emissions. Forum chief executive John Boshier says this amounts to $ 2 billion and has resulted in emissions being cut by 4.4 million tonnes a year. The generators, he adds, have another $ 1.5 billion worth of outlays in train which will lead to abatement gains of another 1.7 million tonnes a year.
This expenditure has gone on greenhouse mitigation programs that generators agreed with the Howard Government — on commitments to low- emission technology projects also funded by Howard’s Low Emission Technology Development Fund, and on renewable energy projects responding to the initial Mandatory Renew Energy Target ( MRET) scheme.
In addition, says Boshier, generators have spent $ 108 million on research and development, mostly contributions to the cooperative research centres focussed on greenhouse abatement.
Their willingness to pursue these investment on a voluntary basis should now receive some recognition from the federal Government in framing emissions trading, he argues.
Part of the generators’ problem is the perception of Garnaut and other government advisers about what happened in the European Union when emissions trading was introduced earlier this decade. EU permits were ‘‘ grandfathered’’ — allocated for free — to generators to minimise very substantial wealth transfers from them to carbon traders. But this led to both so- called windfall profits in the generation industry and a sharp spike in customer prices, a doubly unpopular outcome with voters.
Australian generators claim our big difference is that coal- fired plants here provide 85 per cent of the market versus less than 30 per cent in the EU. Boshier also argues that European generators received nearly 90 per cent of their permits free. This has never been on the table in Australia, he says, and the proposal here is far more modest.
Failure to grandfather a portion of Australian permit for generators, he says, will drive some coal- fired plants out of the market prematurely, leading to spikes in wholesale prices, market volatility and prospects of unreliable supply.
The Government, he adds, is running the risk of ‘‘ catastrophic supply- side dislocation’’ in the electricity market if it allows itself to be persuaded against grandfathering by Garnaut. The implications of this happening, he says, will far outweigh problems created by allocating permits to incumbent generators.
The older the coal- fired power station and the higher its emissions intensity — the amount of CO it emits per megawatt hour of
2 electricity output — the more endangered it is by an emissions trading scheme.
Most exposed under a no- holds- barred regime are the brown coal plants in Victoria. They have an intensity rating of about 1300kg per MWh of electricity sent out — black coal burners in Queensland and New South Wales average 890 to 920kg/ MWh.
While the brown coal units are today frequently among the first dispatched in the eastern seaboard electricity market because of their low- cost fuel, under an emissions trading scheme they are expected to be driven backwards through the NEM dispatch pack of 30 power stations.
Among those most threatened is one of Australia’s oldest power complexes — Hazelwood, 150km from Melbourne and owned by British- based International Power. It supplies 12,000GWh a year of electricity, meeting 19 per cent of Victoria’s peak summer demand.
The eight 200MW turbines at Hazelwood were installed between 1964 and 1971 and the station was on the cusp of being shut down when the Kennett Government launched its privatisation program. Its buyers outlayed $ 2.35 billion and then spent another $ 400 million upgrading it and reducing its greenhouse gas emissions by some 8 per cent.
The complex was the centre of a strenuous environmental campaign earlier this decade when it applied for access to exploit a new coal field. Declaring it ‘‘ the dirtiest power station in the industrial world,’’ environmentalists sought to have it close next year when existing coal resources reach depletion. Instead, the Bracks Government approved the application, enabling the power plant to keep operating until 2027.
In explaining its decision, the Victorian Government said closure of Hazelwood would ‘‘ result in significant increases in power prices and a real risk of power shortages before a new generator is built.’’ It forecast a 40 per cent increase in wholesale prices and a 17 per cent rise in residential power bills.
The Government added that replacing Hazelwood with a gas- fired power station would increase the State’s gas consumption 40 per cent and might drive up gas prices, too.
As part of the deal, the Government has required Hazelwood to reduce its projected greenhouse emissions by 34 million tonnes over the rest of the development’s life.
International Power is now finalising plans to retrofit low- emission technology to one of its 200MW units at a cost of $ 370 million, to save 500,000 tonnes of carbon dioxide emissions annually from 2010.
Closing Hazelwood and replacing it with wind farms would require 2500 wind turbines — at an estimated capital cost of $ 6-$ 7 billion and, using the current MRET subsidy as a guide, would add $ 480 million a year to consumer electricity bills.