Brown to green - at what cost?

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This was published 13 years ago

Brown to green - at what cost?

By Paddy Manning

In terms of emissions per unit of energy produced, it's the most polluting power station in the country, pumping out 3 per cent of Australia's greenhouse gas all by itself.

Everybody wants the brown coal-fired Hazelwood power station shut now - the questions are how soon, how much will it cost and what precedent will it set.

Hazelwood, which supplies a quarter of Victoria's electricity, was one of the oldest, dirtiest coal-fired power stations in the OECD in 2005 - and an embarrassment.

Built between 1959 and 1971, the plant is also making its owners, the British-listed utility International Power (92 per cent) and the Commonwealth Bank (8 per cent), an embarrassing amount of money.

Australia was the most profitable of IP's geographies last year, delivering 27 per cent profit growth without counting the boost from our strong currency.

One manifestation of global warming here is demand for more airconditioning, a virtuous circle if you're a coal-fired power generator. IP's chief executive, Philip Cox, told investors in March that periods of "exceptionally high temperature" in Victoria and South Australia helped boost power prices last year. Hazelwood got special mention, delivering "substantially improved availability compared to 2008". Its load factor - basically, how much time it spent working - jumped from 75 to 85 per cent and electricity prices rose from $43 to $45 per megawatt hour.

In Britain, IP's shares have climbed steadily since the financial crisis. Its credit rating is stable. Its annual meeting in London this week went smoothly. In Australia, Hazelwood's bankers refinanced $742 million in loans in January (but it was a short-term reprieve, until June 2012, and at an interest rate 1 per cent higher, which IP attributed to uncertainty about emissions trading).

Accounts for IP (Australia) filed at the end of April show the directors believed, given all the uncertainty, it was impractical to determine any financial impact of proposed climate policy on its Australian assets. (IP's Australian directors must be getting edgy about climate risk, though; the company gave them extra indemnification this year.)

The IP subsidiary Hazelwood Power Finance Pty Ltd reported the carrying amount of assets whose value could be affected by the abandoned carbon pollution reduction scheme was $2.053 billion at December 31 - up $26 million on a year ago - but an IP spokesman said this could not be taken as a direct valuation of Hazelwood, owned in partnership with other IP subsidiaries.

During the CPRS negotiations, IP (Australia) offered early retirement of Hazelwood and its 70 per cent-owned stablemate, Loy Yang B, if an amount was paid to keep equity and debt investors "commercially whole to a pre-CPRS valuation". Which means, buy us out at book value - certainly not market value: who would buy Hazelwood in 2010? Blurring the figures, IP said the enterprise value of the two stations was more than $4 billion combined.

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Under the Electricity Sector Adjustment Scheme negotiated with the then opposition leader Malcolm Turnbull, the government buckled to threats from coal-fired power generators to run down maintenance of the electricity supply or even ''hand back the keys'' to their plant. Hazelwood alone stood to receive permits worth almost $1 billion, the analyst group Innovest calculated - and this was before the amount of compensation in the scheme doubled, jumping by $4 billion to $7.3 billion.

ESAS flouted the principles in the Garnaut climate change review, which rejected "inadequate" arguments for compensation based on the loss of value of emissions-intensive assets, unanticipated regulatory change or sovereign risk.

The review agreed the Latrobe Valley was a special case, but said public financial assistance should be directed, first, to fund low-emissions coal technologies (matched by industry) and second, to the workers and communities affected by a transition away from brown coal. The government's ESAS, in contrast, was a straight allocation to electricity generators, conditional only on their agreement to maintain a reliable supply of coal-fired power for another decade at least.

Even the sceptical Opposition Leader, Tony Abbott, can do better than that, with his proposed emissions reduction fund, rising from $300 million to $1.2 billion a year by 2020, to buy abatement projects volunteered by business. There is a wide expectation the fund would start spending in the Latrobe Valley, where the Australia Institute estimates retiring brown coal-fired power stations could create deep and early emissions cuts for as little as $6 per tonne. IP itself estimated the cost would be $20 to $30 a tonne - still relatively cheap for the volume of abatement on offer. IP's original offer remains on the table but a spokesman said no negotiations were under way.

Amid the demonstrations, as Hazelwood becomes a green cause celebre, everyone wants to throw money at IP. This month, Environment Victoria stepped up its campaign to close the plant by 2012 (a tight deadline but the director, Mark Wakeham, says ''if the state government was to propose that Hazelwood shut in 2013, we wouldn't be quibbling'').

A report by Green Energy Markets, headed by the former Business Council for Sustainable Energy chief, Ric Brazzale, said Hazelwood could be shut down and replaced with a combination of gas, renewables and improved energy efficiency for about $320 million a year - a figure reached by multiplying the plant's emissions (16.2 million tonnes a year) by a presumed carbon price of $20 a tonne. If Victorian households were to foot the bill, that would add $36 a year to their electricity bills.

''No-brainer'' was a common observation in the letters pages of The Age - including letters from the Latrobe Valley.

But does IP deserve the money? It was pushing its barrow again this week, as the website CE Daily revealed when it publicised a confidential IP submission which found its way onto the Department of Climate Change website. The submission attacked a crazy idea from the PM's Energy Efficiency Taskforce, to try to reform the National Electricity Market so it promotes, rather than impedes, energy efficiency. "[IP] rejects any proposal to introduce climate change policy, under the guise of energy efficiency measures, which has the potential to destroy the value of existing investments in the generator sector."

IP says the quote was taken out of context and the company supports both energy efficiency and action on climate change. They didn't say: as long as it costs us nothing (they so can't afford it).

Paddy.manning@fairfaxmedia.com.au

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