Article from today's Energy News Premium ... Total policy fail, but good for gas suppliers:
PREMIUM FEATURES:
Out of gas Thursday, 6 September 2012
ON THE face of it, it would appear it was pure economics that led the Gillard government to opt to withdraw from buying out the dirtiest power plants. However, the move suggests that not only is the carbon reduction plan in peril, there is serious gas supply concerns that prevent any substantial fuel-switching. By Gomati Jagadeesan With the government yanking the central plank of the carbon reduction scheme by pulling out of the contracts for closure program, two key elements of the government’s carbon pricing plan have unravelled.
Earlier this year it removed the floor price of $15 a tonne and decided to align prices closer to the European emissions trading regime.
Despite the stated “good faith” negotiations by all parties, ostensibly the deal was called off on valuation grounds. While the government had set aside $A2 billion for the buyout of the country’s five dirtiest brown coal-fired plants, there were valuation differences and owners of the assets were unwilling to accept “low ball” offers.
The government cited falling electricity demand as a reason for not agreeing on the price.
Federal Resources Minister Martin Fergusson said that given falling demand it did not make financial sense to buy out the asset shutdown.
“There was always a question of value for money; from the Australian government’s point of view we had an envelope beyond which I was not prepared to go,” he said.
However, the outcome is only partially valuations related.
What essentially happened after the government dropped the floor price, and allowed companies to buy low-priced European emissions certificates, is that it added billions to the book value of these low-cost power plants. As a result, even the suggested starting carbon price of $23 a tonne appears too low.
Then there is the bigger story. At a time when electricity demand is falling, what would replace these brown coal generators? Natural gas is seen as the transition fuel as the economy moves to greener power options, but there is not much gas-fired generation being built.
Again two factors seem to be at play. First there is uncertainty over the regulatory regime in the country, with Opposition Leader Tony Abbott vowing to repeal the emissions trading scheme should he come to power next year.
Perhaps the more pertinent question is one of gas supply. With most of the projects being developed for export purposes, there is serious concern over a shortage of gas for domestic use.
Already, existing onshore production in basins such as Cooper are in decline, though more unconventional gas discoveries may alter that in future. Even so, the gas will most likely be committed for export.
Also, most of the coal seam gas projects in Queensland and offshore gas in Western Australia are being developed as export projects.
In any case, these are very far away from load pockets in the eastern states and, with domestic gas prices only likely to netback with international LNG prices, gas generation will soon lose any advantage over coal.
All of this really means that the Gillard government’s carbon reduction plan of curbing 5% of carbon dioxide by 2020 is a tough goal to achieve.
The government’s clean energy program is unlikely to be aided by the almost $5.5 billion committed to subsidise brown coal power generators. Already the government has handed out $1 billion and with the deal to shut down power plants falling, it is up for giving out $4.5 billion worth of free carbon permits to generators until 2016-17.
With the renewable energy target also up for review, the transition to a low carbon economy is only going to get harder.
Soon will have to go long wood to get a hot shower! Can burn the mallee forests busy sequestering carbon.
BPT Price at posting:
$1.26 Sentiment: Buy Disclosure: Held
(20min delay)