Carbon subsidies: NSW’s great big coal subsidy scandal

The article below discusses the massive (but not entirely obvious) subsidies given to coal energy on the generation side. Giles Parkinson cites figures that show the level of support given to coal far exceeds the cost of the Mandatory Renewable Energy Target(later just Renewable Energy Target (RET)). We’ve kept a mirror copy below, but feel free to follow the link to read it as it originally appears.

From Climate Spectator

By Giles Parkinson

If there is a single mechanism that stands in the way of clean energy development across the globe it is fossil fuel subsidies, which amount to around half a trillion dollar worldwide, each year. That much has been recognised by the International Energy Agency and by the G20, who have promised to remove them. The IEA says that by doing that, more money can be freed up to invest in the technologies of the future. Given the course of the debate in the US and Australia, don’t expect that to happen any time soon. To understand why this is so, take a look at this exchange reported on Monday by Climate Progress. It noted that the five biggest oil companies in the world last week reported third quarter profits of $32 billion, taking total earnings for the year to date to a staggering $100 billion. Would that possibly be a signal that Big Oil no longer needs the massive subsidies that the US Congress is so keen to afford it? “Of course not,” shouted the Republicans. Florida Congressman Cliff Stearns is the chairman of a House sub-committee that has been investigating (and railing against) loan guarantees being offered to clean technologies.

Stearns has voted multiple times to extend oil company subsidies but says clean energy incentives pick “winners and losers”

(guess which Australian energy minister uses the same language in the same context – [GF hint – from NSW]). Stearns says it is much more fun just picking winners. “When somebody is successful, then you give them the subsidies and the tax credit,” he told Climate Progress, when asked if the oil companies should maintain their subsidies. That kind of logic is being repeated in Australia, where the Coalition and other established business figures have also been railing against clean energy incentives – it’s like putting money on the horses, said Opposition finance minister Andrew Robb last week – and all the while extending support and protection for the status quo.

The Tamberlin Inquiry into the NSW energy privatisation has revealed how far that thinking extended into the strategy behind the state’s half-baked, and half-completed electricity privatisation. In short, it found, the gentrader assets would not have attracted any buyers were it not for a massively subsidised and heavily discounted coal supply. It also found that NSW coal-fired power stations depend on those subsidies to maintain their place in the merit order of the National Electricity Market. We wrote about that subsidy when it first came to light late last year, when it was also lamented by the government’s then climate change advisor Ross Garnaut, who said it acted against the carbon price. And the Tamberlin report released on Monday reveals that it is even worse than we first thought, and amounts to an effective subsidy of $4 billion to the gentraders that were sold by the government for just $1.5 billion.

As the inquiry notes, with a degree of understatement, it’s not entirely clear that the cost of the subsidy exceeds the benefit. Of course, the NSW government doesn’t want you to know this and has taken great steps to black out the key numbers in the report. But the numbats in the Premier’s Department forgot that there’s not much point blacking them out in one section of the report, if you leave them in elsewhere, or if they are included in other reports. So we’ve put the figures together for you. One of the big issues around the gentrader sale was where they would source their future coal supplies. Contracts, mostly from Centennial Coal, were due to run out in coming years, and there was no way the would-be gentrader owners wanted to be exposed to buying coal at the current export price of thermal coal, which is around $100-$120/t. Or anywhere close to that. So the government set up a tender for the Cobbora coal mine, a massive resource that could produce up to 30 million tonnes a year and may well supply all of the state’s coal-fired power stations by 2020. Whitehaven Coal was the preferred tenderer, but even its offer of supplying coal at $55/t was deemed by Frontier Economics, an advisor to the NSW government, as “exorbitant”. Frontier said, at this price, there would be no interest from the private sector in the gentrader contracts. So the government decided to commit to spending $1.5 billion to develop the Cobbora mine itself (reversing a near 20 year-old policy), and supply coal to the generators at a vastly lower price. The Tamberlin inquiry blacks out the number, but includes a handy reference to the NSW auditor-general’s report which says it was just $31.16 a tonne. Even at the state’s estimated borrowing rate of 6 per cent (compared to the private sector’s 15 per cent), it is not even enough to cover the cost of production, meaning that the state has got Buckley’s chance of being able to sell it, despite Tamberlin’s recommendation that it attempts to do so.

The state’s advisors, including Arne Dimpfel from Credit Suisse, argued before Tamberlin that because both assets (the coal mine and the gentraders) were owned by the government, it was not in fact a subsidy. Better not try to run that argument past the IEA or the G20, who say government subsidies such as this are the most egregious; or, for that matter, the Tamberlin Inquiry’s independent advisor Donald Challen, a former Treasury secretary in Tasmania and now chair of the transmission group, Transend. Challen concluded that the subsidy was of considerable benefit to the gentraders because it reduces the volume and pricing risk. He noted that Ernst & Young had concluded that the mine’s “unavoidable costs of meeting each coal supply agreement exceeded the revenues.” He also noted that any owner, government or private, should receive a return on capital commensurate with the risks inherent in the investment. And this one clearly does not. The magnitude of the shortfall of acceptable returns were also blacked out. But the revenue shortfall was not. Given that the contract is $24/t less than Whitehaven’s offer, at around 10 million tonnes a year, and over 17 years, that’s around $4 billion over the life of these contracts. This number is supported by Treasury calculations revealed elsewhere in the document.

Challen noted that the government still faces big risks with the Cobbora mine: these include its ability to get it up and running by 2015, when its first deliveries are due to start; that production will costs will rise; and that the mine, operating as a loss-making, state owned entity, will not be able to acquire the skills and expertise to efficiently operate at a large scale. And it may also be found that future coal prices will rise to such an extent that an even greater benefit is conferred on the gentraders. Challen’s assessment is damning: “The preliminary conclusion in considering the benefits and costs of the Cobbora development is therefore that a business case, had one existed, would have shown that the benefits of the development did not exceed the costs.” The only justification, he said, was that without a massive subsidy, the gentrader sales would not have been completed as “potential buyers for the rights might well have regarded the fuel supply and price risk too high.”

In short, this inquiry tells us, the coal-fired power stations in NSW are unable to compete with other power sources unless their coal is supplied at around one quarter of the cost of export coal. Given that Cobbora has the potential to supply 30 million tonnes of coal to the state’s coal fired power plants by 2020, as noted by the Australian Energy Market Operator, the lost export revenue potential from the mine could amount to some $2.7 billion a year, at current prices.

The similarities between Australia (the world’s largest coal exporter) and the Gulf oil states (the world’s largest crude exporters), are uncanny. Neither can afford to consume their own fossil fuels at export prices [GF note: because our prices are held artificially low on the energy retail market]. As we noted last week, the Gulf States are now looking to invest massively solar so they can reduce their domestic oil consumption and recoup the billion of dollars in lost revenue.

So here’s a crazy idea. Maybe the NSW government should take the same approach, and invest heavily in solar, freeing up coal for export and having an established and ultimately lower cost solar industry to fall back on when the world finally gets really serious about cutting greenhouse emissions. Imagine if NSW tries to sell the remaining coal-generation assets, as Tamberlin recommends. As the Australian Energy Market Operator states in its report, Cobbora will likely be supplying all of the state’s coal-fired power plants by the end of the decade. We know from this report that the plants can’t be sold at all without the subsidised cost of coal. But at its capacity of 30 million tonnes, at the current export price of $100-$120 a tonne, the state could generate $3-$3.6 billion a year in export revenue, compared to the $900 million it will receive from the state-owned coal generators at the current price. That should be enough to build a few solar power stations, but we’d better make sure the NSW government understands that this is an idea from the Saudis, Kuwaitis, Omanis and the Emirates, and not some sort of subversive green plot.

But you may want to ask them this: will the government’s criteria on solar incentives, that it not cost a single dollar to either consumers or the government, now be applied to coal-fired generators?

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