Contract for Closure negotiations cease.
“Not angry, just disappointed” seems to sum up the reaction to the untimely death of the Contracts for Closure process. Electricity market observers in the circles I move in weren’t that surprised to see the program cancelled, mostly due to forces beyond their control, but disappointed that it had to come to this
Contracts for Closure (CfC) sought to effectively purchase some of the dirtiest generating capacity in the NEM, and close it in an orderly fashion. Participation was determined entirely by the emissions intensity of the business (above about 1.3T/MWh from memory), which captured:
- Alinta Energy (Playford B in Port Augusta, South Australia);
- HRL (Energy Brix in Morwell, Victoria);
- Hazelwood Power Partnership (Morwell, Victoria) (91.8% owned by International Power GDF Suez Australia);
- RATCH-Australia (Collinsville, Queensland); and
- TRUenergy (Yallourn, Victoria).
Hazelwood is the big hitter in that group, at 1760MW, and regarded as probably the highest carbon intensity of any power-station in the world. Yallourn is just up the road from Hazelwood, and uses roughly the same sort of coal and slightly newer technology. It’s still not that great. Playford B and Collinsville are both small plants in the 200MW range, used principally during the summer/winter peaks. Peaking baseload if you like. HRL’s Energy Brix is right next door to Hazelwood, and uses Hazelwood coal to run a boiler, which dries and compresses Yallourn coal into briquettes. There is a heat recovery system installed in this boiler, which runs a small (~40MW) steam turbine, but my understanding is that this hasn’t provided electricity for some time. When it did though! Their emissions would have been amazing.
CfC was in a difficult policy position, but for a laudable goal. As I’ve mentioned previously, the carbon price is there to distort the trading market in favour of lower-emissions electricity. The factor that balances “cleaner generation” with “energy security” is the carbon price; politicians want to distort the market, but there is a risk that if they distort it too quickly generators can’t operate and we lose supply. Many would argue that $23 a tonne is much closer to the energy security end of this spectrum, but in the first couple of years that’s okay. CfC then was created to bridge the gap between the desire to drive change in the market and the desire to keep electricity coming out of the wall. Rather than waiting for the slow attrition of businesses failing, or even the spectacle of proper destruction, Government decided to take a couple of GW out of the market, and make sure that it was replaced. Sounds simple?
But the process has been very difficult from the start. No one knew how much money Government had for the job; no one could know, or their bargaining position would have been severely compromised. Then there’s the question of how much are these businesses worth? This too is a ridiculously complex question. Taking Hazelwood as an example; they have the world’s cheapest fuel source, right next door, and it will probably last for 300 years. The capital is already invested, so their costs are mining, maintenance and operation and now an additional carbon price. None of the other costs change, so how long until a carbon price renders the business unprofitable and they close? Then what profit would they have made in that period, and if someone paid that upfront would they close now? There are also questions of how to contract an orderly retreat from the market? Does the plant need to be operable but mothballed in case of emergency? If the plant caught on fire before the contract ran its course do they still qualify? All of this was known before they started and a bunch of smart people had some answers organised.
Then once the negotiations opened, matters turned out to be more complex than imagined. Electricity demand data was released that showed network demand had dropped for each of the last three years; this severely impacted Treasury forecasts of future profitability of these plants, but intuitively one expects this decreased the value of the plants. Less electricity to supply, same amount of generators. Concerns were raised about the flow on effects of closing Energy Brix; the briquettes are used throughout the La Trobe for starting coal-boilers, but also, they are used to drive thermal processes in large dairies throughout Victoria. Pasteurisation and dried milk products could mean that the Government was no longer going to close an electricity generator. Talk about perverse outcomes.
Here is Minister Ferguson’s official reasoning
“The Contract for Closure negotiations have taken place constructively and in good faith, but there remains a material gap between the level of compensation generators have sought and what the Government is prepared to pay,” Minister Ferguson said.
“Recently published forecasts for lower energy demand in Australia presented serious questions around the value for money evaluation of proposals. The recent announcement to link with the European emissions trading scheme and remove the price floor did not alter this outcome.
“I have said throughout this process that we had a set envelope of funding and were not willing to enter into contracts at any cost – this is about the responsible expenditure of public funds.”
So they didn’t have enough money? Among other things sure, but this points to what I consider a major problem with energy policy in Australia; that since Kevin Rudd changed the influence of the Department of Prime Minister and Cabinet, to essentially the political arm of the APS, unsubstantiated policy ideas have come thick and fast, with the Departments delivering them left to sort out the details. Maybe with a bit more work up front this wouldn’t happen? God forbid.
And so now all that is left to close the worst generators in the country is the carbon price and public opinion. I have wondered for a while if we’ll see more community direct action against these guys, and recent reports from Newcastle suggest this is already happening.