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

CHAIR —Good morning, Mr Catchpole and Mr Wain. Do you have an opening statement that you wish to make?

Mr Catchpole —Yes, please, for a couple of moments. I have a few opening remarks. Senators, thank you for the opportunity for Hydro Tasmania to present to your committee. Hydro Tasmania is the largest renewable energy generator in Australia and is internationally recognised for its expertise in renewable energy. We continue to make a major contribution to the production and growth of renewable energy and reduction of greenhouse gas emissions including through global wind energy developer Roaring 40s, which is a joint-venture company between Hydro Tasmania and China Light and Power. Hydro Tasmania also has a consulting business providing expertise internationally and a 51 per cent share in Momentum Energy, an accredited green power electricity retailer in Victoria.

A carbon price signal in the economy is important to Hydro Tasmania principally on two counts: firstly, to provide appropriate commercial returns to maintain and enhance our existing renewable energy base; and, secondly, to commercially deploy new renewable energy projects. Australia’s ageing hydro power assets have very long-term investment cycles. Around two-thirds of Hydro Tasmania’s production comes from assets past their midlife. That is an average age for our asset fleet of about 50 years. By far the vast majority of Australia’s renewable energy comes from existing hydro power resources. Consequently, the challenge of reducing emissions from the electricity sector will be exacerbated if Australia loses any existing renewable energy generation particularly if existing renewable plant is replaced by more emissions-intensive energy sources.

Varying rainfall year on year is the greatest operational risk for a hydro power business. The major concern as a result of climate change is the risk of reduced rainfall or an increased variability of inflows in the future. Market signals need to support the refurbishment, upgrade and enhancement of existing assets to ensure a continued contribution from Australia’s hydro power resources.

Hydro Tasmania can make an important contribution to Australia’s emission reduction goals and has a number of renewable projects waiting to be deployed. This project pipeline includes wind farms, mini hydro and system enhancement opportunities. Hydro Tasmania is also involved in proving and deploying new renewable energy solutions such as energy storage, system integration and diesel replacement solutions. The introduction of a carbon price through the CPRS, along with other complementary measures, will drive investment in and deployment of low- and zero-emission technologies and can ensure the maintenance and upgrade of existing resources.

Hydro Tasmania welcomes the release of the CPRS exposure draft legislation and broadly supports the design features and timing outlined in the white paper and exposure draft legislation. Delaying action will increase the costs of meeting future emissions reduction targets. In recognition of this, Hydro Tasmania supports a scheme design that ensures the full cost of carbon is reflected in all investment decisions as soon as practically possible, providing investment certainty and a long-term emissions reduction pathway for Australia.

The release of the CPRS draft legislation provides Australian industry with greater clarity over the workings of the scheme and reaffirms the government’s commitment to tackling climate change. In particular, Hydro Tasmania welcomes the confirmation that the CPRS will be designed to start on 1 July 2010, that the target will be for an emissions reduction of between five per cent and 15 per cent below 2000 levels by 2020, that the 2050 target is for a 60 per cent cut in emissions below 2000 levels and that liable entities carrying unit shortfalls will need to make good their shortfall. This will preserve the environmental integrity of the scheme.

Hydro Tasmania has not undertaken an extensive legal review in the time available. We are currently finalising our submission, due tomorrow, which highlights three areas where further clarification of the draft legislation may be required. Firstly, in relation to section 15, ‘National scheme gateway’, it would appear that under certain circumstances the scheme cap may be set outside the national target range. We are not sure what the implications of this might be and further guidance on this issue would be helpful. Secondly, in relation to section 130, ‘Unit shortfalls’, and section 133, ‘Penalty for unit shortfall’, the CPRS commentary document from the Department of Climate Change website is helpful to explain sections 130 to 133. Without this explanatory information, the interaction of the penalty, the make-good liability and borrowing would be unclear. Hydro Tasmania does not understand the legal status of the commentary document.

Finally, on recognition of additional voluntary action, leading businesses, including Hydro Tasmania, are undertaking voluntary action to reduce their carbon footprints. While the draft legislation allows future caps to be set with consideration to the level of voluntary action, the exposure draft does not allow immediate recognition of voluntary action under the CPRS. For an example of how this could be achieved, the purchase of additional renewable energy through green power could be converted into tons of CO2 equivalent avoided and CPRS permits retired accordingly. Thank you again for the opportunity to contribute to the inquiry. We understand the committee is working to a tight time frame. Therefore, if there are any issues that cannot be addressed today, Hydro Tasmania would be happy to work quickly to assist the committee in its ongoing inquiry.

CHAIR —Thank you. You were saying that any delay will increase your costs. Are you talking about costs of investment? Are you talking about the ability to go forward with some of the renewable projects you outlined?

Mr Catchpole —I think it is a general view, as put forward by Garnaut and Stern, for example, that the costs to the economy of reducing emissions later would be higher. We have plans in three main areas. There is ongoing enhancement and refurbishment of existing plant to maintain and improve its contribution to the extent of renewable energy generation. We have also initiated a thing called the 1,000 gigawatt hours project, which is to identify and develop our capability to generate an additional 1,000 gigawatt hours of energy per annum from our existing electricity system through a range of system enhancements and small developments. As an example of the scale, the 20 most favourable prospects will produce around 440 gigawatt hours per annum, at a cost of approximately $200 million.

CHAIR —On those projects, you talk about enhancement—is that physical infrastructure, technological development or a combination of both?

Mr Catchpole —It is a combination of many things. The range includes the very prosaic cleaning of canals and water conveyancing infrastructure, which involves improving the flow of water through those conveyancing structures, through to upgrade of generating plant—fitting more efficient turbines and runners and mini hydro installations, for example, where there are environmental flows to add to the generation capability.

CHAIR —Do you have any estimate of the job creation involved in those projects?

Mr Catchpole —No, I am sorry; I do not. But it is something that we could perhaps come back to the committee with.

CHAIR —Thank you; that would be good.

Senator EGGLESTON —What are the main sources of renewable energy in Australia?

Mr Catchpole —At the moment the dominant generation is from hydropower.

Mr Wain —On that issue, hydropower represents the vast majority, probably well over 60, if not 70, per cent of Australia’s renewable energy at present. The second largest contributors would probably be biomass in certain regions of Queensland and Western Australia and wind generation, with a small contribution from solar photovoltaic systems.

Senator EGGLESTON —So you have this range of sources of renewable energy, but what capacity does renewable energy have to contribute to baseload power in Australia at this stage?

Mr Wain —Certainly the existing hydro resources, which are obviously predominantly in the Snowy Mountains and in Tasmania, have enormous capacity to support the development of other forms of renewable energy. Hydropower is a quick-start technology. It has been expressed, I think in Garnaut’s final report to the Commonwealth, that the hydropower resources of Australia can provide power when the wind drops off or when the sun is shining not so strongly. Certainly the other renewable technologies are not baseload in that respect, but the combination of hydro and other resources can provide a strong contribution to Australia’s electricity needs.

Senator EGGLESTON —But would you agree this is only in limited, well-defined geographical areas and not across the board?

Mr Wain —With regard to, for example, wind power, the whole South Coast of Australia and certainly all of Tasmania has world-renowned wind resources. They are certainly on a par with those of anywhere else in the world. Australia also has fantastic solar resources and is likely to have very good geothermal resources as well in many states.

Senator EGGLESTON —We do have, obviously, geothermal, and solar across this country in great abundance, but the technology to develop power from these sources is not very well developed yet—would you not agree?

Mr Catchpole —What we certainly have is a range of technologies at a range of maturities. Perhaps the committee would be interested in some information that we could provide that represents, I guess, a snapshot of the current stage of development and relative cost of implementation of this range of technologies. Mature technologies include hydropower and, very extensively, wind. Solar thermal, of course, is a much more readily commercialised technology, particularly in its distributed use—for example, for water heating—than solar photovoltaic. There are a number of distinctions even in those kinds of technologies. Biomass is certainly a commercial technology, particularly when used in co-generation applications, we understand. Perhaps the committee would benefit from some additional information. We would be happy to forward that on.

Senator EGGLESTON —We would indeed. There has been some criticism that the most deployable clean energy sources—wind and solar—really cannot, even in combination, deliver the amount of power needed for baseload. The government talks about using renewable energy as an alternative and has built that into this proposal, but in fact that is unlikely to be met for a very long time. What you agree with that?

Mr Catchpole —It is important in considering the CPRS to recognise that it is a technology-neutral policy measure. The technology that is most economically capable of assisting and meeting the target will be applied. It is not just renewables, even though that is the industry that we participate in. A very large part of the response will be from gas generation, with its much lower emissions profile than, say, incumbent coal generation.

Senator EGGLESTON —We do however have a mandatory renewable energy target, do we not?

Mr Catchpole —Yes, we do, and we have the proposed extension to that in the form of the renewable energy target.

Senator EGGLESTON —What is that target now?

Mr Catchpole —The current MRET is 9,500 gigawatt hours. The proposed extended target is 45,000 gigawatt hours which is intended to be 20 per cent renewable energy by 2020.

Senator EGGLESTON —There has been some criticism that the MRET program and the CPRS work at cross-purposes in that a well designed ETS should deliver the most economically efficient reductions in carbon emissions, whereas the MRET effectively forces dollars into technologies that are currently the most cost-effective but may not be the most efficient in the longer term or the most efficient at producing reductions in global emissions. Would you like to comment on that?

Mr Catchpole —Hydro Tasmania certainly supports the policy ambition for an emissions trading scheme, in the form of the proposed CPRS, to be the ultimate tool to deliver the least cost-abatement outcome. However, in order to achieve early action and bring on the development and commercialisation of a range of technologies, a strong renewable energy target is essential to meet the gap between the carbon price delivered through emissions trading and the price of these technologies as we deploy them in the early stages in Australia. What we would anticipate, and of course what we all hope for, is that MRET will do its job and roll off. That will happen as the carbon price meets the required level to enable commercial deployment of renewable technologies. At that point we will achieve the most efficient economic outcome.

Senator EGGLESTON —There is a concern in the gas industry that the combination of the MRETs and CPRS has the potential to undermine investment in gas production—gas production would be the substitute for coal-powered generation of electricity—and that a decrease in investment in the gas industry would result in an increase in emissions in the medium term. Would you like to comment on that criticism?

Mr Catchpole —The issue with a CPRS-only measure at this point, with no additional support for the renewable energy industry, is a case of putting all the eggs in one basket. We believe that there is a role for a range of complementary technologies in meeting Australia’s emissions abatement challenge and that, in fact, the broader the range of technologies and measures that can be brought to bear on the problem at this point will ultimately deliver the most efficient outcome.

Senator ABETZ —I welcome two Tasmanians. Why we are asking you a limited range of questions is that there are eight senators sitting around the table and we all want a bite of the cherry. It has been put to me that the regulations are going to play a very important role in this scheme. Does Hydro-Tasmania have any views on the benefit of industries such as your own being able to make a submission in relation to those proposed regulations?

Mr Catchpole —Absolutely, yes, is the answer there. If we look at the history of the development of legislation and the progress of various inquiries in this country, it has been extremely beneficial to have a very collaborative relationship between industry and policymakers to date. We would see that the maximum effectiveness of legislation and regulation could be achieved by continuing that relationship.

Senator ABETZ —Can you advise us as to whether, under the CPRS, one megawatt of hydropower will be regarded differently from one megawatt of coal power?

Mr Wain —Once the carbon price is taken into account, you should see a sort of levelling of the playing field, if you like, between different technologies. As it currently exists, the cost bases underpinning hydropower, gas and coal are very different. What the CPRS will do is take into account the environmental externality of the carbon emissions produced and, depending on that carbon price, you will see these different technologies switch between which is the most economic of the technologies. So, once a carbon price has been paid, there is no difference between one megawatt hour of hydropower and one megawatt hour of coal power, as far as the CPRS goes. There may be a difference to consumers but not as far as how the scheme will function.

Senator ABETZ —What carbon price is needed to make some of your projects in Tasmania and, indeed, potentially elsewhere in Australia viable?

Mr Catchpole —It is a very broad range of numbers for a range of different technologies and, indeed, projects within technologies. Perhaps some of the supplementary information we have already offered to provide will help illustrate that; but, if I could add a little colour, some of the more prosaic enhancements to our existing system come at a very small premium. Something in the order of $5 to $10 per megawatt hour will make some of those options commercial for us. If we look at—

Senator ABETZ —You talk about the price per megawatt hour. Are you able to translate that into dollars per tonne of CO2 emissions?

Mr Catchpole —I think we would all like to have an answer to the question: at what rate will the price of carbon flow through into the electricity market? It might be $5, it might be $7 or it might be $10 per tonne of CO2. The other extreme for us is the cost of a wind farm development. A wind farm development might have a total commercialisation cost of $105 per megawatt hour, of which perhaps $45 is met by the black energy price at the moment—the existing return on the energy sold—so there is a gap of $60 per megawatt hour. With the two pieces of legislation working together going forward, that gap will be met through a combination of the renewable energy target and the carbon price. The market is telling us at the moment that if that gap is $60 and the renewable energy certificate component is about $50 then about $10 per megawatt hour—or about $14 per tonne of CO2—will need to be met by the carbon price.

Senator ABETZ —If I read this correctly, the Musselroe Wind Farm would be reliant on the renewable energy target plus the CPRS.

Mr Catchpole —Yes, you have read it correctly. The Musselroe Wind Farm is an excellent choice to talk about from our point of view. The development of Musselroe, and I would think most wind farms remaining to be commercialised in Australia at the moment, is currently dependent on the renewable energy target and of course the CPRS.

Senator ABETZ —So it is the two in combination. I understand that you are involved in my colleague Senator Xenophon’s state of South Australia, but are you looking at any other projects around Australia?

Mr Catchpole —The two that we have currently built are the various stages of Woolnorth in Tasmania and Cathedral Rocks near Port Lincoln in South Australia. In addition our next leading projects are Musselroe in Tasmania and Waterloo in South Australia. After that there are a range of prospects at various stages of development where we have certainly established the rights for development but perhaps have not been through the full environmental approvals process in the way that we have with Musselroe Bay and Waterloo to date.

Senator ABETZ —So in general terms the commentary you have provided in relation to the viability of Musselroe Bay applies to the other prospective projects that you have on the drawing board?

Mr Catchpole —In general terms, it is the same position.

Senator FURNER —In relation to your projects—I am particularly focusing on your joint ventures with wind power company Roaring 40s—can you tell the committee of your experience in global carbon markets?

Mr Catchpole —Certainly. The Roaring 40s partnership was formed after our initial development in Tasmania and South Australia to preserve the project development capability until the time when we would again be able to build wind farms in Australia. The best places for us to do that ended up being China and, more recently, India. In China we have currently built seven wind farms. We have several more under construction as a partnership. The way that works is that, under the Chinese legislation, the proponent—in this case, Roaring 40s—must have a local joint venture partner in the form of one of the local energy companies. These are generally provincial energy companies. We have those in a number of provinces. The developer, Roaring 40s, then owns half of the ultimate project. The mechanism by which that comes about is that the Chinese have a system of tariffs to support the development of a range of technologies, including renewable energy, and those tariffs are in addition to the base energy price. Further, the project is underpinned by the ability under the clean development mechanism of the Kyoto protocol to generate CERs, which have a value in the European market in meeting companies’ obligations under that scheme. It is the combination of those value sources, both locally from within China and also through the clean development mechanism, that underpins the viability of those wind farm developments.

Senator FURNER —Focusing on wind power, I understand there may be some impediments in securing supplies from major manufacturers and rolling out more wind power as a result of that.

Mr Catchpole —There are a number of project challenges facing any developer in Australia at the moment, whether it be of wind power or other technologies. One of those that have improved of late is the exchange rate. In procuring technology, particularly that which is manufactured in Europe, recent trends in the exchange rate have lowered that hurdle. Certainly anybody who is looking at a major investment in Australia at the moment faces the common problem of the impact of the financial crisis and the global economic downturn on the availability of capital. In the very short term, all developers will face that challenge. We hope that it is only in the short term, but the future is unknown in that regard. They would be the significant additional challenges.

There was a period of time over the last couple of years where demand for wind turbine generators was quite high relative to global supply. This certainly led to some significant lead times in project construction due to the need to acquire the production capability of a supplier. I think the general global economic downturn will also soften that position. That is also being addressed by the arrival over time of new suppliers in the market, particularly in India and China, where increasingly their domestic requirements are being met by local manufacturers.

Senator FURNER —What is the current wait time for wind turbines?

Mr Catchpole —I do not know that off the top of my head. We will find out for you and get back to you on that one.

Senator FURNER —Thank you.

Senator PRATT —I am interested to know how the economic downturn might have affected any particular developments that you are looking at pursuing. You have said quite clearly that the industry would like to see the CPRS in place. Some are arguing that the CPRS might be an additional burden, but clearly you are arguing that the CPRS provides a framework for investment certainty. I would like your comment on those issues from your company’s point of view.

Mr Catchpole —I preface my remarks with the fact that I am not an economist and I am speaking for one company. I will confine my remarks to our actual experience. Our actual experience to date is that we have not had any particular impact from the global economic downturn on our business apart perhaps from the movement in the Australian dollar against other currencies that I have already spoken about. We are all, I suppose, anticipating particular consequences such as the availability of capital as the projects go forward. We have not directly experienced those conditions as yet, and certainly with the financing models that are applied to project developments, again, we are anticipating that for projects built under a project financing model the banks would be more conservative in the debt equity ratios that they apply to deals. So we may see some higher equity requirements from project developers. I would be guessing if I said what those would be other than that we have had some indication that we are on the path, for example, where a debt equity ratio of 70 per cent has been fairly standard for project finance of a wind farm, perhaps 60 per cent would be more the number going forward.

CHAIR —Thank you, Mr Catchpole and Mr Wain, for making time available for us this morning to answer questions. It is much appreciated.

Mr Catchpole —Thank you.

Proceedings suspended from 10.42 am to 11.03 am