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Exposure drafts of the legislation to implement the Carbon Pollution Reduction Scheme

CHAIR —Welcome. Do you have an opening statement you wish to make?

Mr Trumble —Mr Cremin will provide an opening statement.

Mr Cremin —I have a brief opening statement that summarises our submission to the Senate committee. The Griffin Group has consistently supported the concept of introducing an Australian emissions trading scheme as part of an international effort to price the emissions of greenhouse gases from otherwise productive industry. We maintain that such a scheme should be broad based where practicable, offer a high level of certainty to investors and strike an appropriate balance between the benefit of Australia’s likely contribution to the global emissions reduction effort and potential disruption to Australia’s relatively emissions-intensive economy.

It should also recognise that, to maintain Australia’s reputation for investment certainty, investments made prior to any policy implementation in this area must be protected where it is constructive to do so. Griffin believes that the Electricity Sector Adjustment Scheme as currently conceived in the white paper and now the draft legislation does not adequately protect investments in the coal-fired electricity generation sector. This is especially evident in the Western Australian context. A sizeable capital investment will be required in the Australian electricity sector over the coming decades. The rationale for assistance to strongly affected industries is in the mitigation of regulatory risk attached to the attraction of this capital.

A way to mitigate the perception of regulatory risk is to compensate generators that suffer significant losses attributable to the CPRS policy. Generally, the Treasury modelling forecast for asset value losses, whether intentional or not, is conservative compared to other credible industry modelling. Understanding the potential losses that might be expected by rational investors only serves to undermine the credibility of the Electricity Sector Adjustment Scheme in mitigating the perception of regulatory risk. Additionally, the Western Australian market is different to the NEM. The overwhelming majority of energy is traded under bilateral contracts rather than through a spot market. A generation developer is required to underpin the financing of the asset with a long-term bilateral off-take contract typically in excess of 15 years.

The Electricity Sector Adjustment Scheme does not recognise this. It has assumed the same market conditions as exist in the NEM and has based its forecast of likely impacts on these assumptions. These forecasts bear little resemblance to the reality. Griffin’s Bluewaters unit 1 and unit 2 were financed on the back of several contracts with durations of 15 years or more. These contracts were struck at a time of greatly different policy positions than those in effect now. Griffin believes that the government must address the issues of how loss in asset value is construed in the WA electricity sector.

The WA electricity market is not interconnected to any other electricity system. It is characterised by a high reliance on gas relative to other Australian jurisdictions. Gas is sourced primarily from fields 1,600 kilometres away and connected to the south-west by a single pipeline. These fields are mostly controlled by international oil and gas majors with a predominant focus on the export LNG market. At issue is that the WA electricity market is already exposed to significant security of supply risk, evidenced just last year by the Varanus Island explosion in June and the North West Shelf joint venture supply interruption in January. Increasing the WA market’s reliance on gas to even greater levels would increase the risk of a catastrophic loss to the WA economy resulting from another major gas curtailment. Put simply, absent the non-gas baseload technologies, there will also be a position in the WA market for coal-fired generation. Recent announcements by the state-owned electricity generator Verve Energy suggest that they will invest tax dollars into further coal-fired generation in WA because current CPRS policy has caused financing new developments to dry up. State intervention as such is anathema to efficient electricity markets.

Griffin understands that one of the goals of the CPRS is to ultimately replace emission-intensive generation assets such as coal with low or zero emission technology, hence our investments in the renewable energy space in response to these price signals. However, the long lead times required to alter the fundamental make-up of an energy market, coupled with the WA market being an energy island with an inherently high reliance on gas, make the WA scenario a tricky policy issue. Developers of new generation assets must convince the same financiers, those that stand to lose significant amounts in recent investments, to again invest in generation assets in the WA market based on their perception of the risk of their investments not being similarly impaired by further economic reform or government intervention.

CHAIR —Thank you. Because Western Australia is not part of the NEM, the national energy market, and therefore your contracts are different, are you arguing that Western Australia is a special case?

Mr Cremin —Yes, essentially we are. Our argument is based on a few issues, the first being that modelling suggests that the asset impairment to coal generators that is meant to be treated under the electricity sector adjustment scheme is significantly more than the compensation or the transitionary assistance that is going to go back to those generators. That is broadly on a national basis. What we are saying here and bringing to light—and we have made mention of this over the ensuing months leading up to the green paper, white paper and now the draft legislation—is that WA is based on a very, very different market than the NEM. We are not based on a gross pool market with a spot price to which you can apply a dynamic model to predict future outcomes. We are based on a bilateral market where contracts were struck—in Griffin’s case several years ago—for very, very long terms, because that is how, essentially, you finance large assets in this market.

CHAIR —Can you explain how it could be remedied in the treatment of the Western Australian market?

Mr Cremin —It is difficult to remedy by minor adjustment as to how it is currently formulated. It is formulated based on the net, effectively. Unless WA is sectioned off and treated as a separate entity, which is not beyond the realms of possibility—there are only two markets affected here, the NEM and the WA market—then currently as it is construed it is not really going to have any effect on WA, or the correct effect on WA.

CHAIR —How much do you think you will be disadvantaged compared to other—

Mr Trumble —I know the figures. Of the $3.9 billion in industry-wide assistance being provided, some 90 per cent of that is going to a handful of generators on the east coast; $24 million of the $3.9 billion is being returned to Western Australia and then only to two state-owned generating plants at this point.

CHAIR —So your calculation is that Griffin Energy will receive no—

Mr Trumble —Zero.

Senator CAMERON —How much should Griffin Energy receive, how much support financially?

Mr Trumble —Our expectations are that over the life of our existing investments we are looking at a $100 million value loss.

Senator CAMERON —So you think government should make up that $100 million?

Mr Trumble —No. I think that of the $13 billion that has been taken from the coal-fired generation industry much more should be returned to the Western Australian industry.

Senator CAMERON —I am not clear.

Mr Trumble —The government is not making it up. $13 billion, in the modelling, is being taken out of the coal-fired generation industry. It is not government making up that money, it is $13 billion of which $3.9 billion is being returned to the industry. We are suggesting that amounts returned to the industry should be larger overall in a period of time, and in our case in Western Australia the particular nature of this market should be recognised and rewarded.

Senator CAMERON —The question I am asking is how much larger should the return from government to the industry be?

Mr Trumble —To the broad industry?

Senator CAMERON —Yes, of Western Australia.

Mr Trumble —We propose that the return in industry assistance to the broader industry should be approximately double the $3.9 billion and rather than being over five years it should be over at least a 10- to 15-year period.

Senator CAMERON —So this would mean a $3.9 billion reduction in support to households in the current equation. Is that correct?

Mr Trumble —At this point in time we are unsure of where the $13 billion is being distributed. We are told by government that all of it will be returned, but at this point in time legislation does not necessarily specifically identify where that return is.

Senator CAMERON —The point I make to you is that if you take $3.9 billion out of that pool and return it to the power industry then that is $3.9 billion that must be removed from financial support for families.

Mr Trumble —Or the emissions-intensive trade-exposed industry program or other parts of that program. It does not all come out of houses.

Mr Cremin —We are not suggesting that the Electricity Sector Adjustment Scheme only goes for five years, which causes some of the inherent problems within it because of the bias towards brown coal generation. What we are suggesting, as is consistent with other generators around the country, is that it should perhaps go for 10 or more years because these are very, very long-lived assets and their impairment happens at different times over the life of those assets. So it is not an additional $3.9 million over that initial five years of the Electricity Sector Adjustment Scheme. We are suggesting we effectively elongate that out.

Senator CAMERON —One way or another, it is $3.9 billion.

Mr Cremin —That is right.

Senator CAMERON —It has to be found. At the moment as the scheme is structured, that $3.9 billion would then have to be brought back from support to Australian families.

Mr Trumble —No, that $3.9 billion does not have to come from Australian families. The coal industry on the east coast would have it, which is being protected against its fees and emissions. You have the energy-intensive trade-exposed industry program. There are any number of places that those dollars are going. You are suggesting that it is only going to those families. It is not.

Senator CAMERON —The coal industry in the eastern states is asking for exactly the same as you. They are asking for more protection and more government funds. They are not saying, ‘We want to give you more back.’ That is the issue the government has to face, surely. There is a limited amount of money and there is a limited capacity for that to be distributed across the economy. Do you accept that?

Mr Trumble —I would accept that. I just do not accept your point that it is coming from residences, all coming from residences. As you have just pointed out, there are any number of programs.

Senator CAMERON —Have you done an analysis on how you would like to see it distributed and where it should come from, or have you just come here and said, ‘We want more money’?

Mr Trumble —We have come here setting out the situation with regard to Western Australia.

Senator CAMERON —Are you giving a solution for it or are you just saying, ‘Give us more money’?

Mr Trumble —The solution, we believe, is to redistribute those funds more equitably into the market that has been assumed away by the Treasury.

Senator CAMERON —The question I am asking is, how do you do that? If you have done the analysis and if that is what you need, you have surely also done the analysis of where that money should come from.

Mr Trumble —As I have said to you, we do not know at this point in time exactly where the dollars are going under this draft legislation.

Senator CAMERON —Do you accept the proposition that if the government does not do anything on climate change that we could have an eight degree Celsius increase in temperatures, with particular effect in Western Australia?

Mr Trumble —We, in our opening statement, have said we are in support of a broadly based program. What we are suggesting, as we have pointed out here, is that in doing their modelling and in establishing the white paper and the draft legislation, for whatever reason, the treasury department has assumed away the particular specific nature of the Western Australian market.

Senator CAMERON —That is not the point I am asking. I am asking you about the science that is being brought to bear.

Mr Trumble —We are not in argument on the science. This is an economic matter at this point. It is a taxation matter at this point in time.

CHAIR —Senator Xenophon, do you have any questions?

Senator XENOPHON —The witness was saying that you are not part of the national electricity market and you are saying that the modelling has been fashioned as though you are. That is one of your key criticisms.

Mr Trumble —That is correct. If you look closely at chapter 13 of the white paper, there is a specific mention of an assumption made by the economists that developed the modelling in Treasury that assumes Western Australia is the same as the national electricity market.

Senator XENOPHON —Can I just move on and ask you about the issue of intensity schemes, such as output-based allocation, more generally. If permits were tied to output as well as an emissions intensity benchmark, would that make a difference in your attitude to this—getting the same result in terms of greenhouse targets but not having the same economic impact? Have you considered that?

Mr Cremin —I am not too familiar with the emissions intensity benchmarks. However, I would imagine that in a sector such as the electricity sector, where you effectively make commercial decisions on available plant and demand et cetera for that plant to meet, the application of intensity-based factors for specific plant may be curtailing your ability to go out and get the most appropriate plant for particular applications, which is why we are fairly comfortable with the market-based mechanisms of least cost reduction by whoever in the market is best able to reduce their emissions intensity at that point in time.

CHAIR —Senator Bushby.

Senator BUSHBY —Just a threshold question. Do you agree that you can support the need for action on climate change but disagree with the proposed solutions or parts of it?

Mr Trumble —Yes.

Senator BUSHBY —I think that is what you are saying today: you are supportive of the need for action but that you consider that the solutions that are imposed need to be appropriate ones and ones that work and do not impact unnecessarily on jobs and people.

Mr Trumble —That is correct.

Senator BUSHBY —Is Griffin Energy unique in WA in terms of the outline you gave of the way that the energy market works, bilateral contracts rather than spot market? Or are they characteristics that are in common with other energy outlets?

Mr Trumble —They are some characteristics of our market, not specifically our company.

Senator BUSHBY —So the Western Australian market as separate from the NEM?

Mr Trumble —That is correct.

Senator BUSHBY —If the CPRS proceeds as proposed in the draft exposure, which, as I understand, is largely a reflection of the white paper, what impact will that have in Western Australia on the energy market in general, given what you have outlined?

Mr Cremin —Effectively, the way things were modelled in the NEM was based on the ability of different generation assets with different relative intensities being able to pass through the particular carbon cost on that asset through a real market, through a spot market. So that changes the bidding order, and affects the merit order and the dispatch order. Here in WA, as pointed out in our submission, around 95 per cent of electricity is traded bilaterally. We also have a capacity market as well, and 100 per cent of actual capacity is traded bilaterally. So what that means is that those contracts that are 10-plus, 15-plus years in duration have pretty much been set. Over the course of those 15 years, it would take some very, very significant changes in carbon prices in the market to actually change the dispatch order of the contractual arrangements here.

Senator BUSHBY —How would that play out if—

Mr Trumble —You would see a reduced investment in power generation in our state.

Senator BUSHBY —And what would the consequences be of that?

Mr Trumble —Let me back up. The inability to pass on the increased cost of carbon as a result of these long-term contracts will see existing investments in generation in this state lose money, lose value. The effect of losing value on those existing investments will be to curtail the willingness of investors to invest in future generation in our markets, in particular in black coal generation. Our point is that being an energy island not connected to the rest of the country in any form means that over the years we have had to be self-sufficient. We have become self-sufficient by having a mix of fuel types across our portfolio, as evidenced, as we pointed out, by losing 30 per cent of our gas supply in June but the lights did not go out in Western Australia. We kept everybody warm; we kept working. Our concern is that by disadvantaging the black coal industry and the market that we are contracted in here, we will see less of a willingness for the private sector to invest in the coal sector generation. We will become more dependent on gas, and with that will come the probability that we will see further interruptions in our supplies.

Mr Cremin —And we were also talking about our future clean coal developments as well. It is not just the fact that equity and debt providers will completely dry up. They are going to be more difficult to find, especially at this particular time when capital is scarce. They will also cost more. Debt providers will require an additional premium, and that is exactly what the Electricity Sector Adjustment Scheme was meant to try and mitigate, this regulatory risk perception. It is a very inefficient cost to actually overlay another debt cost, I suppose, on the wholesale price of electricity simply because investors perceive that they need to get a higher return because of risks in the market.

Senator BUSHBY —Has the Treasury modelling taken into account, to your knowledge, the unique circumstances in WA?

Mr Trumble —No, they have not.

CHAIR —Senator Eggleston.

Senator EGGLESTON —Senator Bushby has covered a lot of ground that I might have, but obviously Western Australia’s electricity supply is very dependent on gas and the North West Shelf. That is quite unique. However, in the eastern states there are also electricity suppliers who depend on gas. Is that not the case?

Mr Trumble —Yes, but from more diverse fields, a number of them. There is more diversity in the fields, and the fields are much closer than 1,600 kilometres away.

Senator EGGLESTON —That is true, but I was wondering whether or not in this modelling—we had the western electricity model and the national model, which has come through from Treasury—there should be some differentiation for gas versus coal. Could that be achieved, do you think? That would cover your circumstances to some degree.

Mr Trumble —I guess our position was that, rather than separating gas from coal, we should separate markets. Obviously the intent of the legislation is to move markets towards the lowest carbon intensity production possible, not necessarily pointing out which one of those fuel types should be favoured over the other.

Mr Cremin —I will just add to that. A good way of looking at this is to see that the white paper especially points out that the Electricity Sector Adjustment Scheme globally—that is, looking at the NEM—is primarily there to give some assistance to those most strongly affected generators. Now, in NEM, that is quite clearly brown coal. They have much, much higher relative intensities than anybody else. But there is no brown coal over here in WA. We are not connected to that market, so we are disassociated from it.

Effectively, the class of generators that is much more emission intensive is black coal. However, the Electricity Sector Adjustment Scheme has not taken WA to be different from the NEM, and in the way it is made up it has an intensity cut-off factor that our reasonably efficient Bluewater unit just does not meet. In other words, we get zero out of that, even though here in WA we are much, much more emission intensive than the next best generator. Effectively, it is just the separation of those two markets and the fact that the NEM is so much bigger than the WA market that gets us into the position that we are in here.

Senator EGGLESTON —So we are left with the situation that the Western Australian market is unique. You make really quite a strong case for a different sort of method and scenario to be applied to the Western Australian market. I would have thought that was not impossible to do. Would you agree with that?

Mr Cremin —Totally agree. It is not impossible and we made the same cases over the months leading up to the green paper and the white paper being released. However, we were quite happy, for simplicity, for a single scheme to be applied to all of Australia. However, the way that single scheme has currently been defined in the white paper, it unfortunately precludes virtually any assistance from coming to WA.

Senator EGGLESTON —And it selectively disadvantages Western Australians.

Mr Cremin —That is right. In response to that we are basically saying it might be a wiser thing now to actually excise WA, not as a unique market—there are only two markets—just as a different one.

Senator EGGLESTON —As a different market. That should be possible, I would have thought, and I would have thought there is a very strong case for doing that so that there is a rational allowance for the fact that Western Australia’s electricity is largely based on gas, with different outcomes.

Mr Trumble —Gas and low-intensity coal.

Senator EGGLESTON —Indeed, yes.

Senator FURNER —I have a couple of questions. How old is your generation fleet, and how does it compare to emissions intensity with the other generators around the country?

Mr Trumble —Our black coal generation fleet is commissioning as we speak, so it is brand new. There are two units: one will be commissioned in March or April this year and one will be commissioned in November. They have yet to begin running commercially. They are the most efficient coal fired generators in the state, being the newest technology units to come on stream. Obviously, compared to the brown coal generators in Victoria and South Australia, they are substantially better from an intensity perspective and simply because of their age would be much better than older black coal plant on the east coast.

Senator FURNER —When did you make the final investment decisions based on your power stations currently under construction?

Mr Trumble —Five years ago.

Senator FURNER —[inaudible] how much longer you need [inaudible] also [inaudible] to set emissions trading schemes in place.

Mr Trumble —[inaudible] environment. As you would be aware, the EU had their system in place at that point in time, but the EU had protected against value loss of all of their generators. At that point in time, the strongest program put forward was the one developed by the States. That program also allowed for a protection of value loss in generators. That was the environment in which we were making that decision.

Mr Cremin —It is an important point, because the NETT scheme as well as the previous Howard government’s prime ministerial task group scheme had the concept very well established in the country at the time of a disproportionate loss in asset value. Those were the sorts of policy paradigms we were looking at when we had to negotiate those very long contracts to underpin the financing of these plants—plants that were very necessary to the system demand at the time.

Senator FURNER —What plans do you have to diversify into other areas of low emissions through gas or renewables in your industry?

Mr Trumble —We have an existing wind farm interest, 80 megawatts, north of Perth. It has been in operation since 2006. It is probably one of the 10 largest or at least half a dozen largest wind farms in the country. We continue to invest, both with the federal and state government and through the Collie coal futures group, in geosequestration. Studies have identified potential sites for the sequestration of carbon within a reasonable distance of our main coal-producing area in Collie. Finally, Bluewater was always designed to be up to four units. In the third and fourth units in our applications to the Environmental Protection Agency here in this state we have committed that those plants will be carbon capture ready as defined by the International Energy Agency.

Senator CAMERON —Mr Trumble, how much CO2, if we introduce it, will you put in your black coal plants?

Mr Trumble —At the moment, none.

Senator CAMERON —But how much will be?

Mr Trumble —Our intensity expectations, on a gross basis, are 0.920 tonnes per megawatt hour.

Senator CAMERON —That is less than the eastern states.

Mr Trumble —Much less than the brown coal plants in the eastern states, yes.

CHAIR —There being no further questions, thank you, Griffin Energy, for coming this morning.

[9.25 am]