trading carbon for disaster

http://www.businessspectator.com.au/bs.nsf/Article/Trading-carbon-for-disaster-pd20090807-UNS4L?OpenDocument&src=kgb


COMMENTARY

6:56 AM, 7 Aug 2009



Robert Gottliebsen
Trading carbon for disaster

RECENT GOTTLIEBSEN
Trading carbon for disaster Aug 7
Rufrano the Reasonable Aug 6
The carbon tax chorus Aug 6
If memory serves correct Aug 6
Finding a super balance Aug 5

TOP NEWS
RBA raises 2009 GDP forecast to 0.5%, signals higher rates if recovery continues 1:44 PM
Action against Packer, Murdoch stymied, says One.Tel liquidator 5:53 PM
China steel body woos small miners as ore talks stall, report 5:33 PM
Suncorp expects net profit to drop on volatile markets, insurance claims 4:16 PM
West Australian Newspapers says conditions stabilising as net profit falls 20% 4:18 PM

THE SPECTATORS
Gottliebsen, Bartholomeusz: KGB INTERROGATION: Andrew Penn
Dizzy from the dollar?
SCOREBOARD: The rates party is over
Bartholomeusz: The NBN number crunch
LUNCH DEALS: Goodman-o-war

It has no comparison in importance, but like the Washington Post writers on Watergate, every time I write on the Australian carbon crisis I feel this will be my last commentary on the subject. But every time I write, new information is put before me to encourage me to keep going.

Such is the power of Business Spectator that yesterday most of the players, excluding the Canberra public service, met with me (and Alan Kohler and Steve Bartholomeusz) under the 'Chatham House Rule'. What they told us had me reeling. Much of what I am about to write will be denied but have no doubt it is true. Having got through the GFC this is without doubt Australia’s biggest looming crisis and it will effect all citizens.

Effectively large segments of global energy capital will either black ban Australia or demand much higher returns with enormous consequences to this nation, including consequences for new renewable energy projects.

But we are getting ahead of ourselves. Let’s go step by step through what is about to happen to our nation because of an inexperienced government and an incompetent opposition.

-- In most parts of the world, apart from Australia, it is believed that the form of carbon trading scheme being proposed by Australia will not promote investment in lower carbon energy alternatives. We are about to prove the rest of the world right.

-- When a nation or a company is doing something stupid there will be a trigger that explodes the wrong strategy. In this case it is the Latrobe Valley brown coal power stations. These stations have huge debt repayments and emit a lot of carbon so the Canberra plan was that they should go broke and be bought at token prices. The plan was that the market would do its job and the power companies that own the stations and the banks that funded them will suffer well-deserved losses because they knew the risks they were taking when they made the investments and loans. If only it were so simple.

-- There are a number of large global players who invested in the Latrobe Valley, and they have not had big returns. The accepted practice in the US and Europe is that while there are no big profits for investors in legacy coal power stations there are no big losses. The power station owning groups need to have strong balance sheets to invest in renewable, gas and other low carbon power generating alternatives. Australia is thumbing its nose at the giants and global bankers and wants the world to follow us. We are about to learn what happens when you play that game and get it wrong.

-- The first step is that a number of the Latrobe Valley companies will halt long term maintenance. TRUenergy has already announced this, but at least one or two other Latrobe stations follow. The power stations say who in their right mind would spend cash when they have no idea whether the generators will be viable in the short and long term because the level of carbon charges and carbon policy is not known. Last summer every Latrobe Valley station went without a break down – the first time that has happened. This summer the odds are that they will break down. The companies are gradually abandoning long term contracts and going for the spot market which means that when there is a power station failure they will go into an Australian wide bidding process for power sending prices through the roof. However, there is a limited amount that can be sent to Victoria so Victorians will have the main burden of the price hikes and blackouts.

-- The banks will have the power to take control of at least one Latrobe Valley power station within six to nine months. They will be trying to extract as much money from the station as possible so will also cease long term maintenance and go for spot prices. If Australian and Victoria think the blackouts next summer are going to be bad wait for the following year when the full impact hits the nation.

-- Victorian Premier John Brumby’s staff know exactly what is going to happen to their state and realise that although this is a Canberra induced crisis they will cop the blame. Brumby’s people have gone to Canberra and been met with a wall of Godwin Greches. They might not fake emails, but they have no interest what so ever in the truth about what is going to happen. Fortunately there are some signs that not all the Canberra public servants are trained in the Godwin Grech mould and one or two are showing interest in discovering the facts.

So how do we get out of this? Step one is to vote down the crazy carbon trading legislation and forget the massive grants needed to offset the cost of carbon permits.

There will be no double dissolution because by the time one is due the disaster will be apparent. We have to devise a plan that phases out brown coal without sending the stations broke. We will need to foster low carbon gas-fired stations in the Latrobe Valley plus a lot more renewable projects. What we will need is a carbon-certain environment.

I don’t think the answer can be found in Canberra. If we go to China, the US, India or Europe we will find answers.