Big dollars ride on carbon decisions
THE political decisions made based around sustainable energy policy over the next six to 12 months will have a material impact on billions of dollars of new investment, and the value of numerous companies across Australia. The transition towards a carbon- constrained economy is likely to result in winners and losers, so the Government will need to take care on policy development to ensure the best emissions outcomes do not have large, unintended consequences.
The Garnaut Climate Change Review, reporting in September 2008, will recommend an approach to delivering an Australian emissions trading scheme ( ETS) for commencement in 2010. Garnaut is filling lecture halls across the country each time he gives an interim update, as companies increasingly recognise the potential opportunity or damage to their bottom line profitability. One of the more contentious design elements is whether some of the permits ( the right to emit a tonne of carbon dioxide or its equivalent in other greenhouse gases) will be free to affected companies or whether all of the permits will be auctioned.
The negative effect on the value of a coal power station, by requiring it to buy all permits at auction, could prevent currently anticipated reliability and/ or carbon mitigation focused investment. While it is generally accepted that power prices will rise as a result of the ETS, the potential for increased wholesale power price volatility, resulting from a less reliable power station asset base, and for reduced investment in mitigation have so far attracted little attention.
Renewable energy policy has been in place since 2000 at a federal level through the mandatory renewable energy target ( MRET) to deliver an additional 9500GWh of clean energy by 2010. State governments keen to provide further stimulus to the renewable energy industry have legislated additional targets within their individual states. In order to bring further certainty and growth to the industry, the commonwealth and states agreed in December 2007 to work towards bringing the existing MRET and the various state- based targets into a single national MRET scheme by early 2009 targeting delivery of 45,000GWh by 2020. It is unclear to what extent the current supply pipeline of renewable energy projects will increase as this may require a steeper trajectory towards the 2020 target than experienced under the existing scheme.
The MRET scheme itself is technology agnostic leading principally to the development of wind farms as the most economic form of renewable energy at present. The integration of more remotely located windfarms into the national transmission grid will become increasingly costly and so adversely affect the economics.
One potential route for funds received by government from the auctions of some of the permits under the ETS is towards supporting infrastructure costs for clean energy which could support realisation of the upgraded MRET.
It is expected that over time as the cap on emissions gets increasingly tighter under the ETS, sufficient support for renewable energy will be provided via higher electricity prices and the need for an MRET support mechanism will diminish.
When 2008 draws to a close, it is anticipated that increased certainty over sustainable energy policy will be given through detailed ETS design and draft legislation and the expanded MRET. This will enable businesses to make informed decisions which will guide Australia’s transition to a lower carbon economy.
Antony Cohen is a KPMG partner