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ECONOMICS LEGISLATION COMMITTEE
06/08/2009
Renewable Energy (Electricity) Amendment Bill 2009

ACTING CHAIR —We welcome the Office of Climate Change back.

Senator BOSWELL —What effect will the RET and the CPRS have on retail electricity prices in each state and territory for each year from 2010 to 2020? I cannot find these numbers in the Treasury modelling report. There is a graph in a report done by NMA for Treasury in December last year but there are no numbers—just a graph. Can you advise us what the retail prices will increase by both in real terms and as a percentage?

Mr Comley —I will have to take it on notice. The numbers that I think have been published are that the expected change in retail prices in the first flexible price year of the scheme is around an 18 per cent increase in electricity prices.

Senator BOSWELL —I cannot find where the figures are. I have found a graph—and, if you are trying to get it off the graph, I have tried to do that, too, with a measuring stick and so forth—but can you give me the accurate figures.

Mr Comley —I said I will take on notice.

Senator BOSWELL —What form of assistance is available to small business in the Climate Change Action Fund? How much money has been allocated to ensure small trade-exposed businesses do not lose competitiveness while ever Australia’s major trading partners do not take on emission reduction targets?

Senator CAMERON —That was my question!

Senator BOSWELL —Well, great minds think alike!

Mr Comley —The Climate Change Action Fund, which is primarily targeted at firms not covered by the emissions-intensive trade-exposed sector, is $2.75 billion in total. Of that, there is a $750 million component which is for the coal sector adjustment scheme. I will just grab my copy of the white paper, which sets this out. The remaining funds are subdivided into a number of categories, a number of so-called streams, which vary in their application. The first stream is primarily related to information provision. The second stream is primarily related to providing assistance, including to small businesses, for energy efficiency upgrades that help them adjust to a low-carbon economy.

Chapter 18 of the white paper outlines the four streams of the Climate Change Action Fund, and for the benefit of the committee it is on page 18-11 of the white paper. At white paper stage the first stream had an allocation of $130 million over five years—and this was augmented in February by $300 million—for information, provision of a single access point, outreach through industry associations and community groups, advice on scheme operation and minimising impacts and assistance identifying energy efficiency improvements and enhancing energy audit and advisory services skills. The second stream, which at the point of the white paper was $1.37 billion over five years, is for small business capital allowance and community organisation capital allowance. That includes funding for schemes to adopt energy efficiency and activities from an eligible product list and competitive grants for low-emission technology processes. The third stream is a structural adjustment provision stream of $200 million. That is to assist workers, regions, and communities where a clear and sizable burden is identified as highly likely to occur. As I said, the fourth stream is the coal sector adjustment stream, which is broken down into two components: $500 million over five years for a coal sector transitional assistance fund, which is essentially money payments; and $250 million for grants associated with reducing the emissions from coal mines.

Senator BOSWELL —All right. We had this morning the Murray Goulburn Cooperative. They do not quite get to EITE industries but they are very trade exposed and export exposed and very high energy users. Would any of this money be allocated to them?

Mr Comley —The guidelines for the grant program have yet to be finalised and so I cannot definitively comment on whether a particular firm or industry would be allocated those funds. But certainly the intention of those streams is to allocate assistance to those that are not primarily emissions-intensive trade-exposed industries and are affected by the scheme because of energy use or other things. So it is precisely those sorts of activities that the Climate Change Action Fund was intended to address.

Senator BOSWELL —If the RET exemptions were to be decoupled from CPRS legislation then the activity definitions and all the technical details regarding the EITE activities would need to be put into either the RET legislation or into regulations. Have the EITE activity definitions been finalised so they can be put into the RET?

Mr Comley —Senator, I will answer the question whether the EITE definitions have been finalised because I think that is the matter of fact. The first point to make is that the EITE regulations obviously cannot formally be made until the CPRS is actually passed. So at the moment the government is—

Senator BOSWELL —You have said that the regulations cannot be finalised before the CPRS legislation is passed?

Mr Comley —The CPRS legislation provides the head of power that creates the regulations for the EITE industries and so the normal process would be that once the primary legislation is passed then you can make the regulations. The government is currently engaged in a process of releasing draft regulations which cannot formally be regulations until the legislation is passed. So I think that you are referring to the draft regulations and draft activity definitions that have been released.

Senator BOSWELL —So those draft regulations are actually regulations. They will be regulations?

Mr Comley —They are drafts which the government is seeking comments on, and people are giving feedback on the nature of those regulations. So it is a consultation process leading to the final regulations.

Senator BOSWELL —How are we going to vote on the RET bill when we do not know what the regulations are going to be or what the definitions are?

Mr Comley —The issue of how much detail of regulation that is provided is not uncommon to a range of legislation and much regulation is provided after the legislation is actually put in place. What the government has released, in the white paper in particular, is a very detailed outline of the policy framework within which those regulations are being formed. In fact they are probably unusually detailed. To date there have been 18 draft activity definitions put out for—

Senator BOSWELL —How many more are there to come in? How many have not been finalised?

Mr Comley —That is not final yet, Senator, because there is still a question of establishing the eligibility of some industries.

Senator BOSWELL —How many industries have not established their eligibility and how many activities are there to come in?

Mr Comley —As a rough ballpark we would expect there to be in the order of 50 to 60 activity definitions within the EITE process. That could change in the light of—

Senator BOSWELL —How many have you got in?

Mr Comley —At the moment 18 activity definitions have been released for comment.

Senator BOSWELL —How are we expected to vote for a bill that has not been defined as yet?

Mr Comley —Without commenting on how people are expected to vote, what detail is currently provided is the full policy framework within those regulations that have been made—

Senator BOSWELL —But how do we know the cement industry, for example, is going to get X, Y or Z? How can we vote with any certainty if we know that X is going to send them broke, Y is going to—

Mr Comley —The level of detail provided at the moment is much larger than in any comparable process that I am aware of.

Senator BOSWELL —I cannot understand that because you have a number of industries out there that are depending on a definition of an EITE activity statement. If the definition has not been finalised, if they have not come to an agreement with that and if they have not got the agreements they want, they might go broke or they might not expand operations, I cannot see how you can vote for a bill when you still have—what did you say?—50 to come in.

Mr Comley —We think there will be a range of 50 to 60 in total. At the moment there has been 18 activity definitions released. There is an intent to release more activity definitions progressively.

Senator BOSWELL —But when is the bill coming up—next week or something?

Mr Comley —If I may finish, many pieces of legislation have regulations not passed in advance—

Senator BOSWELL —I understand that.

Mr Comley —and what effectively has happened is the policy framework is outlined in the white paper, the regulations give effect to those and people can certainly observe the way in which the activity definitions to date have implemented the policy that was outlined in white paper.

Senator BOSWELL —I understand regulations and I know that you have the right to disallow them, but that is a far different proposition that is being offered today where you have a group of companies that are going to be impacted very severely. Let’s take the obvious one which is the aluminium industry. They appeared before us today and gave evidence that if things stay as they are, they are going to up for $4 billion. As a group of people that represent people in Gladstone and so forth how can we vote for that when they do not know whether they are going to be up for $4 billion or whether the EITE activity statements are going to get them off the hook?

Mr Comley —In the case of aluminium my understanding—and I will have to check this—is that the draft activity definition for aluminium has been released. The aluminium industry in that instance is actually aware of the draft activity definition. The fact that they are doing those calculations, which I am not necessarily going to endorse, shows that they are actually taking all the detail that has been provided and doing an analysis through their business process because they feel they are in a position to do that. In the case of, certainly, most of the industries that we deal with there is not a great deal of uncertainty about the state of the policy framework. There are a lot of people who would like to change the policy framework and who have argued to change the policy framework but that actually reflects the level of detail that has been provided which they can use to analyse the impact of the scheme on them.

Senator BOSWELL —I find it very difficult to understand how you can vote for something or that you have to vote for something when you do not know what the effect will be on certain companies. Unless those activity statements—

Senator CAMERON —With Work Choices you had no compunction in there.

Senator BOSWELL —The unemployment rate went down with us and you must remember that. We offered more people a job with 20 per cent real increases in real wages. I have committed myself not to be diverted by you; I am going to ignore you.

Senator CAMERON —You have failed again!

Senator BOSWELL —Unless those activity statements are in and people know what they are going to get, I find it very difficult to see how we can support this. What is the policy position regarding decoupling?

Mr Comley —The position as represented in the bill before the House is that the assistance to emissions-intensive trade-exposed industries is contingent upon the passage of the CPRS bill in the context of the RET.

Senator BOSWELL —The government has not given you any indication they want that changed?

Mr Comley —As you know, it is not for me to talk about what the government may or may not have discussed on a particular issue with me.

Senator BOSWELL —I understand that.

ACTING CHAIR —This is a policy issue in fact.

Senator BOSWELL —Yesterday your colleague said that she did not know how many green jobs were created, no-one could find out and there was no way you could interpret those green jobs. That is basically what Meghan said, isn’t it?

Mr Comley —That is not my recollection. What she said was a narrower observation: if you are looking to use a computable general equitable modelling tool to form a quantitative estimate of the amount of jobs created at below the state level then the current tools in Australia are not able to produce that modelling but that you can do so qualitative work on a partial basis.

Senator BOSWELL —You took it on yourself that you would take a question I asked about jobs on notice.

Mr Comley —We have provided a set of responses on notice.

Senator BOSWELL —I am sorry, I have not received those as yet. I will no doubt get them now. The green jobs are already out there. It seems that this CPRS policy is about to destroy some of the green jobs and that would include waste coalmine gas power generation. They have invested under the New South Wales scheme and made significant reductions in both destroying fugitive emissions and replacing traditional power generation. When this scheme comes in they will not get on the RET and they are going to be destroyed. I do not know how many jobs are there.

I believe Visy wrote to all members of parliament. They are concerned about their liabilities under the CPRS when collecting waste and recycling that waste into boxes and other materials. They are going to get severely penalised under the CPRS because of the electricity they are going to use to do that. They are saying that the $300 million recycling facility—and I do not know whether it is theirs or not—in New South Wales will not go ahead because of the costs imposed on the reprocessing of recyclable waste from CPRS. I take it that you know that the emissions associated with reprocessing organic recyclables are less than the methane emissions they would produce if they were dumped in landfill. Do you accept that?

Mr Comley —I am not sure I accept that. I would have to check. My understanding is that under the CPRS there is a strong incentive for recycling because of trying to avoid the methane emissions from landfill, because methane has quite a high global warming potential.

Senator BOSWELL —If I own a landfill dump and generate gas from the methane then I am entitled to renewable energy certificates. That is correct, isn’t it?

Mr Comley —That is correct.

Senator BOSWELL —But Visy would not get renewable energy certificates for recycling cardboard into boxes and cartons. They are disadvantaged.

Mr Comley —Disadvantaged compared to what? If they do not generate renewable energy then they are not eligible under the renewable energy target. The renewable energy target, as we discussed yesterday, is a scheme to promote renewable energy.

Senator BOSWELL —Can you give your opinion on the proposal to offset the CPRS liability for reprocessing with methane emissions saved from landfill?

Mr Comley —As to a matter of opinion on a change of policy, I will not venture there. But what the CPRS does is that wherever an emission enters the atmosphere in a covered sector—and all these emissions would be in a covered sector—there is a carbon price imposed and, because there is a common carbon price, that will drive people to choose the method of producing that, either from new products or recycling, that has the lowest carbon emissions into the atmosphere. So there is already incentive in the CPRS that picks up either emissions from landfill or—

Senator BOSWELL —Where is the incentive in the CPRS?

Mr Comley —The incentive—

ACTING CHAIR —Excuse me, Mr Comley, could you just hold on for a second. Senator Xenophon, are you back on the line?

Senator XENOPHON —Yes, I am.

ACTING CHAIR —Have you been online for a while?

Senator XENOPHON —I have been online for about 20 minutes. That is fine.

ACTING CHAIR —I did ask earlier but there was no answer. If you have questions we are quite happy for you to proceed to ask them.

Senator XENOPHON —Yes, if I could.

ACTING CHAIR —Senator Boswell is just finishing a question. I apologise if we have had you hanging out in the ether, unknown.

Senator XENOPHON —That is fine.

ACTING CHAIR —Please finish your answer, Mr Comley.

Senator BOSWELL —Let me just rephrase this. The RET is an additional free kick in terms of emission reductions and it is three times more costly. That is what the Treasury modelling says. If you want to reduce your emissions, it is three times more costly to do it by a renewable energy target than it is by the CPRS. Here is a group of people making a very significant contribution to reducing CO2 by recycling rather than putting it in landfill. They are paying the CPRS penalty because with the RET and so forth put on it there is probably a 40 per cent price increase on power, whereas the landfill alternatives are getting a renewable energy certificate, which is worth anywhere between 50 and 60 bucks. So there is a large distortion there. There is also a distortion in relation to removing coal gas, and those people have already got their plant and equipment out there doing the job and employing people. These are green jobs, and we are going to reduce those green jobs by penalising them. It just seems that some accommodation should be given to those people.

Mr Comley —On the last point, in the white paper the government made it clear that it would be negotiating transitional arrangements out of the GGAS scheme related in this area, and those discussions still continue. So there is consideration being given to transitional assistance for those that produce power in that way. It is worth remembering, though, from an environmental point of view that the CPRS has a strong incentive to destroy that methane. It is a question as to whether it either gets flared or turned into electricity generation, but the CPRS drives a strong incentive for that methane to be eliminated.

Senator BOSWELL —Senator Xenophon, I know you have received the call but I have one more question. Would you allow me to ask that?

Senator XENOPHON —No problem.

Senator BOSWELL —Mr Comley, yesterday you said to me that the modelling done by government on the cost of RET included the cost of new transmission lines that would be needed to connect geothermal sites to the existing network. In the last round of estimates, back in May, I put a question on notice to your department, and just this week I received a response back from the Department of Resources, Energy and Tourism. I specifically asked for the total cost and also the unit cost of this additional infrastructure and was told in the response, not by you but by Resources, Energy and Tourism, that there are no estimates of this kind. If no estimates exist, as I have been told, how could the modelling include these costs?

Mr Comley —My understanding is the additional transmission cost to the line is included in the MMA modelling. I am surprised by that response, but I am happy to go and confer with my colleagues and see what was the basis on which they made that comment.

Senator BOSWELL —I would be grateful if you could do that and report back, because our report has to be in. Thank you.

ACTING CHAIR —Senator Xenophon, Senator Cameron has to go very shortly and he has one question. Do you mind deferring to him?

Senator XENOPHON —I do not mind.

Senator CAMERON —I will ask this question on notice. It will not take long. There has been lots of discussion about the Alvarez report from Spain in terms of the job destruction capacity of renewables. Could you have a look at the Alvarez report, provide some analysis of the Alvarez report from the department and also find for us the response from the Spanish government to that report.

Mr Comley —I will take that on notice.

Senator CAMERON —Thanks.

Senator XENOPHON —Mr Comley, yesterday we heard from the Gas Industry Alliance, in particular Mr Neilsen, who was quite critical about the way the RECs would operate for air source heat pump water heaters as distinct from the solar hot water heaters. One of his colleagues even went so far as to say that it was a rort. Could you comment in terms of some of the policy rationales. As I understand it, a solar hot water system accounts for 0.2 tonnes of CO2 while the electric air source heat pumps account for close to two tonnes of CO2 per year from residential use. Can you explain why—this appears to be an anomaly—the air source heat pumps get RECs under the system.

Mr Comley —I will make two comments. Firstly, as you are probably aware, the eligibility for heat pumps has been part of the system from the original MRET so that has been carried over in the expanded bill. Secondly, as part of the COAG agreement on 30 April, there was an agreement to set up a review that would report by the end of the year. One of the issues raised in that review was the treatment of heat pumps. That issue is currently going to be considered as part of that review process.

Senator XENOPHON —But we are dealing with the bill next week. I know you are not responsible for policy but, in terms of getting more bang for your buck in reducing greenhouse gases and in terms of the science, it seems to be anomalous, doesn’t it?

Mr Comley —My understanding is that heat pumps do lead to some displacement of other forms of energy and so there is an argument that they reduce emissions over all, but, because of some of the sensitivities that you have raised, that is why the COAG agreement included a review of these items. The feeling that motivated the process of going for review was that it was important to establish certainty for the broader architecture in the long-term framework. There were then a couple of other minor issues raised in the process, but COAG’s view was that it did not want to delay the overall process of providing certainty on the targets by going into those issues at this stage.

Senator XENOPHON —So you are saying that, as a result of the review initiated by COAG on April 30, there may be some further amendments to this legislation dependent on the outcome of that review?

Mr Comley —I think that is the intention of the review—that it would raise policy issues and it would see whether there was any requirement to modify the eligibility criteria for what can generate a REC.

Senator XENOPHON —I do not know if you can provide this to the committee but, in terms of the figures I have quoted to you, has any analysis been done by the department of the efficacy of giving a REC for an electric air source heat pump compared to a solar heat pump?

Mr Comley —I will ask Mr Raether to comment. We have looked at the issue and we are intending to feed that into the review process by the end of the year.

Senator XENOPHON —Presumably, you would have some information now in terms of the efficacy of both in the context of RECs.

Mr Raether —We are aware that there is a variety of studies comparing the effectiveness of heat pumps versus other solar hot water heaters. My understanding is that it does vary around the country. In some states they are fairly effective at reducing greenhouse gas emissions, in particular displacing fossil fuel energy, but that does vary across jurisdictions. As Mr Comley mentioned, that is one of the issues that will be brought up as part of the COAG review.

Senator XENOPHON —Insofar as you have any further information on that of a technical nature in terms of efficiencies of both in the context of this scheme, I would appreciate that.

Mr Comley —We will take that on notice.

Senator XENOPHON —I move now to comments made by Susan Jeanes yesterday on behalf of the Australian Geothermal Energy Association. Mr Comley, you may have seen her comments reported in today’s Australian Financial Review that geothermal power has a potential to provide base electricity as distinct from wind power, which is intermittent in its nature. Her assertion is that, by taking the short-term low cost approach, Australia will be incurring a long-term high-cost penalty. Does the scheme make allowance for the fact that geothermal is a baseload energy source—one that could directly replace coal if it were up and running?

Mr Comley —No. The way the legislation is set up is that, effectively, a megawatt hour of renewable energy source is counted to create a REC and it does not differentiate between whether that is, for example, a wind turbine that operates at some part of the day and a geothermal that operates at other parts of the day. However, the nature of the electricity market will make that distinction in terms of the incentives to set up either type of power, because the fact that you can have a baseload allows you to run at peak pricing periods because you can run it the whole time. So, for example, if you look at wind power, my understanding is that the wind often does not blow at times of peak pricing and because of the variation in electricity prices it is very profitable—

Senator XENOPHON —Are you saying that wind does not actually blow at times of peak pricing?

Mr Comley —It is a curious fact that if you looked at the revenue yield of a wind turbine versus if the wind blew consistently, you would get a lower revenue yield per megawatt hour because in practice the wind does not blow when there is peak electricity demand. For example, on very hot days, it just happens that it typically does not blow as much. So, over time, it means that the revenue yield of wind is lower than you might otherwise expect, whereas a technology such as geothermal that has the capacity to operate at those peak pricing points becomes relatively more attractive. So there is not an incentive built into the RET because that looks a megawatt hour as a megawatt hour, but the commercial reality of the market does give you a benefit if you have the capacity to deliver on a consistent basis at peak prices.

Senator XENOPHON —As I understand the criticism from the Geothermal Energy Association, there are not the pricing mechanisms to allow merging technologies to get up and running and what will occur is that they will be left behind. We will end up having more and more wind power without the emerging technologies such as geothermal and wave energy, which have the potential to provide that baseload power.

Mr Comley —As I explained yesterday, that is why the RET, which does target the lowest cost form of renewables, is complemented by a range of grants programs, in particular the $465 million fund that is grant assistance for more innovative technologies and the Solar Flagships program of $1.5 billion. They are directly targeted at assisting higher cost technologies that are earlier in their development phase but doing it in a more direct way than by using the RET, which is just for the lowest cost technology that is currently available. Because the RET exists out to 2030 and the carbon price is rising, geothermal producers still have an incentive, because the fact is that they are able to provide baseload capacity over the life of their investment, and there is still the REC potentially available and also the higher carbon price into the future.

Senator XENOPHON —But you can understand why they are quite nervous or pessimistic that they might be locked out of achieving their full potential.

Mr Comley —I certainly understand that. I do not want to put words into the mouth of that particular witnesses, but from many of the discussions that I have had if the MMA modelling came to pass and around a quarter of the target was met by geothermal, that would not worry them; it seems a reasonable share. They are actually concerned about building even more wind than is forecast in the MMA modelling. Part of this is that different people are forming estimates of the likely build—and this is not just in the RETs base—but they are making fairly pessimistic assumptions or very risk averse assumptions about what may happen and being concerned about the scenario of where there is a very rapid build-up of wind and a very rapid establishment of that as large market share. I understand that.

Senator XENOPHON —I will leave that line of questioning then. My final line of questioning is in relation to the submissions we heard yesterday from the Australian Industry Greenhouse Network. My understanding of their evidence is that they are concerned that there will be incentives for renewables. I think it is a good thing that, under the proposed CPRS, there will be compensation for coal, but a perverse outcome will be that gas, which is much cleaner than coal, admittedly, albeit not a renewable, will be crowded out of the new structure. Can you comment on that? There is a concern that gas, which some would say has a very important role, especially for that transition from a high-carbon to a low-carbon economy, will be left out in the cold.

Mr Comley —I understand. Some people have been concerned. They often describe it as: ‘You’ll skip gas; you’ll go from coal and straight through to renewables.’ Two factors are probably relevant here. The first is that gas has a lot lower intensity energy source than certainly brown coal but even lower than black coal, and so there is still going to be an incentive to use gas. The second thing related to that is the wind power issue. Because wind is intermittent, then, almost in a portfolio of power supplies, there is an incentive to have wind generation complemented by gas power stations that can move into peak load and offset when the wind is not blowing. That is another factor where gas is quite useful, because typically a gas-fired power station can be started up much more quickly than a baseload coal power station.

ACTING CHAIR —We have to conclude the hearings at this point. I thank the witnesses for appearing. I thank the staff and also Hansard.

Committee adjourned at 4.47 pm