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STANDING COMMITTEE ON ECONOMICS
24/03/2009
Exposure drafts of the legislation to implement the Carbon Pollution Reduction Scheme

CHAIR —Welcome. Mr Concannon, do you have an opening statement you wish to make?

Mr Concannon —I will ask Ms Savage to give that opening brief, if I may.

Ms Savage —We welcome the opportunity to appear before this committee this morning on the federal government’s proposed Carbon Pollution Reduction Scheme. The Energy Supply Association of Australia is the peak industry body for the electricity and downstream natural gas industries. We represent the chief executives of 45 electricity and gas businesses, including generation, which is all forms of generation—coal, gas and renewables—transmission, distribution and retail and gas networks and gas retail. Our businesses own and operate more than $120 billion worth of assets. We employ 49,000 people and contribute about $14½ billion directly to the nation’s gross domestic product.

The investment challenge for the energy sector over the next decade is significant, even in the absence of a Carbon Pollution Reduction Scheme and an expanded renewable energy target. Investor confidence in the energy supply sector is critical to ensure the continued secure, safe and reliable supply of competitively priced electricity and natural gas. In recognition of the threat that uncertain greenhouse policy can play with regard to energy sector investment, ESAA was the first industry association to proactively advocate for the introduction of an emissions trading scheme and outlined, in 2006, 11 critical design features to provide a least-cost market based solution.

Although the electricity sector represents about 35 per cent of Australia’s total emissions, ESAA members will actually account for about 50 per cent of liable entities under the proposed CPRS. With both a CPRS and an expanded renewable energy target, the investment challenge to the energy sector has increased threefold, with over $33 billion of generation investment required in addition to significant new investment in network assets. This investment is over and above the $50 billion which will need to be refinanced in the energy sector in the next five years alone. In addition, electricity contract markets have slowed beyond July 2010 because participants are still unsure about the costs of greenhouse gas emissions and the costs of their production going forward.

We see, as an association, that there are four critical issues that must be resolved with the CPRS to deliver the investor confidence that is required in the energy sector. The first of those issues is that the number of free permits issued to coal-fired generators needs to be increased significantly to avoid large-scale impairment of assets and a shock to the electricity sector, and to deliver investor confidence in a lower emission energy supply system going forward. We consider that a minimum term of 10 years is required for firm scheme caps, followed by a 10-year rolling gateway to ensure there is sufficient information for investors to commit to large capital-intensive assets and deliver that transition to a lower emission energy supply system. We also think there needs to be careful design of the permit auction arrangements to ensure that there is no increase in working capital requirements. We consider that retail price regulation must be removed so the full cost of emission abatement can be internalised in the electricity price for all energy users.

I just wanted to talk firstly about adequate structural adjustment assistance to coal-fired generators. Reducing Australia’s emissions by five per cent at 2020 is actually a 20 per cent reduction compared to business as usual. Achieving these reductions while also achieving a 20 per cent renewable energy target will require fundamental change to the entire energy supply system in what is, in infrastructure terms, a very short time frame.

Modelling for ESAA by ACIL Tasman suggests that around 15 per cent of east coast generating capacity, which is 6,700 megawatts, will have to close prior to its business as usual life. In addition, 15,000 megawatts of gas fired or renewable generation facilities will need to be constructed to replace those closed facilities. This amounts to about a third of Australia’s existing capacity. We welcome the government’s recognition that coal fired generators will be strongly affected by the advent of the CPRS.

However, the number of emission permits that are being offered with no charge, which is 130.7 million permits, is insufficient to avoid large-scale impairment of both equity and debt. It will frustrate the refinancing of existing assets and new debt, which is a material consideration, and will not facilitate a smooth transition to a lower emission energy supply system. Both the states and territories National Emissions Trading Taskforce and the former Prime Minister’s task group on emissions trading recognise the importance of having a gradual introduction to a charge on emissions for the industry, the recognition of asset value loss that occurs from a change in law or sovereign risk, the fact that there is no off-the-shelf technology currently available to capture greenhouse gases on a large scale and the need to provide investor confidence for ongoing investment for both existing infrastructure and new infrastructure. However, the current level of assistance is insufficient and the transition to the CPRS could have serious implications for the short-term viability of the electricity markets due to the financial distress of a significant number of generators. Insufficient assistance would also send a very poor signal to future investors about the government’s willingness to strand large-scale assets without adequate recognition.

Electricity generators will provide the government with over $55 billion worth of permit revenue in the first 10 years of this scheme. The proposed $3½ billion of assistance is insufficient and considerably lower than the consensus of modelling reports, which include two sets of government modelling reports, which suggest at least $10 billion of assistance is required in the first 10 years. It should also be noted that for many coal fired generators the loss in asset value extends well beyond the first 10 years of the scheme and these losses have been completely ignored by the government’s modelling. To ensure a smooth transition to a low-emission economy and to secure further investment in a low-emission energy supply sector, those generators that suffer significant value reductions as a result of the introduction of the CPRS should receive adequate transitional assistance.

The tenure of scheme caps and gateways is one that we think is an important issue and one that was picked up in both the state and territory process and the former Prime Minister’s process. Investor confidence in the energy sector is actually dependent on the ability to confidently determine a clear view of future greenhouse gas emission prices. To date this has not been possible, but the introduction of the CPRS is intended to rectify this. However, the CPRS proposal to only commit to five years of firm scheme caps is disappointing. Five years is an inadequate time frame for planning long-lived, capital-intensive investments. ESAA considers that at a minimum annual scheme caps should be set for a 10-year period; that is extended by one year each year followed by a 10-year rolling gateway, which would effectively give a 20-year view of carbon prices going forward. The government is the only entity that can commit Australia in international negotiations and it is the government that should bear the risk of future scheme caps or gateways being inappropriate. The industry should not be expected to bear this risk.

Permit auction design is an issue that we are working with the government on, and the government has indicated in its white paper that it is happy to work with the industry on. But electricity generators will be required to purchase and surrender around 200 million permits annually and the electricity generation sector could need to hold well in excess of $10 billion of permits at any one time. I am sure you can imagine that to hold $10 billion worth of permits and to have access to credit facilities to facilitate that is very difficult in the current environment and in the absence of a liquid secondary market. This is a significant increase in working capital requirements on generation businesses. The association welcomes the government’s commitment to work with industry on this, but we encourage the process to keep going.

Our final issue, which is a very significant issue, is retail price regulation. The regulation of retail electricity prices poses a significant threat to the efficient operation of the CPRS and the viability of retailers. For the scheme to operate efficiently and provide least-cost emission reductions, consumers must be exposed to the cost implications of greenhouse gas emissions. The government has acknowledged in its white paper that ideally there should be no regulatory impediments to the timely pass-through of reasonable costs to ensure the objectives of the CPRS are not undermined. However, the white paper concludes that the optimal approach to progressing cost pass-through is to support the work of the Ministerial Council on Energy, and the ESAA has very strong reservations about this approach. Thank you.

CHAIR —On retail regulation, how many states have any kind of cap on the retail price of electricity now?

Ms Savage —Every jurisdiction with the exception of Victoria.

CHAIR —Every one has a retail cap on the price?

Ms Savage —Yes.

CHAIR —Have you had any discussion with them about how they will respond?

Ms Savage —Yes, we have. My understanding is that Minister Ferguson, through the Ministerial Council on Energy, has been tasked with securing the agreement from the states and territories to provide cost pass-through. At this stage, the Ministerial Council on Energy has indicated that they will amend the Australian Energy Market Agreement to provide for cost pass-through. Our concern though is that the Australian Energy Market Commission, which is currently looking at how energy markets will respond to a CPRS, has found that the regulatory process is insufficiently flexible to accommodate that.

CHAIR —Can you go into that because in my home state of South Australia I thought—and I could well be wrong—there was not a cap but rather regulation of what increase would be allowed.

Ms Savage —But they set a maximum price that is allowed.

CHAIR —Year by year.

Ms Savage —No. I think in South Australia it is every three years.

CHAIR —I think they would view it as allowing an increase rather than setting a maximum.

Ms Savage —It is still setting a maximum price, and what that will require the regulator to do under a CPRS is accurately determine going forward what the impact on the electricity wholesale price is likely to be, which is going to be impacted by the volume and sale of permits and their price. It will also require a regulator to make an assessment of how much contracting will happen in the wholesale market—that is, what degree of risk the retailers are exposed to—and the volatility of the spot market. There are a number of factors that will need to be considered to actually determine what that maximum price should be. Our view is that the South Australian market is extremely competitive. The Australian Energy Market Commission has released a report saying that it is extremely competitive. They have also released a report saying retail price regulation should be removed and that there is no justification for continuing to regulate prices in South Australia.

CHAIR —So you are saying that the regulator would be unable under the CPRS to access all of those factors that you enunciated and factor them into the recommended price?

Ms Savage —Yes. Our view is that it would be very difficult for a regulator to set reasonable rates of return for retailers, to estimate all of the costs that go into the regulated retail price and to ensure enough flexibility so that retailers can change prices as they need to in response to what is happening in the wholesale market to ensure viability. But our first principle is that, even in the absence of the CPRS, in competitive markets there is no place for retail price regulation.

CHAIR —Regulators at the moment do quite complex assessments under the current national electricity market.

Ms Savage —They do an assessment at the moment, but there is actually a forward market for contracts which shows what they think the forward price of electricity will be. At the moment, those forward contracts are not fully factoring in the cost of carbon. So the complexity of those assessments and the degree of risk that will be introduced into the sector is something that we have never seen before.

Senator JOYCE —So in summary what you are saying, Ms Savage, is that there is a paradox at play here where the government is saying, ‘You cannot put up the price of power but we are going to put a cost on you for carbon. You were talking about 15 per cent of east coast facilities to close. I imagine that would also affect the employment structure that flows down from those facilities. Have you got any numbers of Australian working families that are involved with those facilities?

Ms Savage —We have not done any modelling on the employment impact because there are also new stations that will need to be opened. Tony might have something he would like to add to that.

Mr Concannon —If you look at a typical coal fired power station you get a range of employment. If we look at one, first of all, without a mine, your typical employment is going to be between 150 and 400 staff. That is what the order of magnitude would be. If you look at a mine as well you will see anywhere between 250 and 350 staff at that mine as well.

Senator JOYCE —Would you be able take on notice just exactly how many employees or working families would be attributed to that 15 per cent closure and get back to us on that?

Ms Savage —We could estimate that but we would also have to estimate how many jobs might be involved in the new stations that would open to replace them.

Senator JOYCE —That is fine. You were also talking about sequestration. We have already received evidence that sequestration will become commercially viable when permits go in excess of $100 a tonne. How will it affect the power market in Australia when permits are in excess of $100 a tonne?

Ms Savage —Is your question: how would the power market operate with permit prices over $100?

Senator JOYCE —Yes, that is correct.

Ms Savage —My understanding of the way in which the electricity market works at the moment is that with the introduction of a $100 permit price, which we would not expect to see for quite some time, you would have a different set of technologies operating than what you currently have today to deliver power to Australian consumers.

Senator JOYCE —Right. So we would need a different set of technologies. But they would not be coal fired, would they?

Ms Savage —Coal-fired power stations with a $100 cost of carbon would probably be uneconomic compared to things like wind or other technologies that are currently available.

Senator JOYCE —I am asking this question because this is the balance: carbon sequestration is what is being held out there, but that is not viable until you get in excess of $100 a tonne, and coal-fired power stations are not viable at $100 a tonne. So we are in a bit of a dilemma here, because that means our coal industry has just collapsed.

Ms Savage —I have seen a range of figures on what carbon price will be required for carbon capture and storage, and I think that is something that is still under development as the RD&D process continues. But there are a range of technologies that are viable at those kinds of power prices and are competitive. Wind is one; geothermal is potentially another one; carbon capture and storage may be viable at $100 a tonne. When the price is set in the market, the power system will respond to those prices. But, no, coal certainly would not be competitive at those kinds of prices.

Senator JOYCE —Question: how many coalmines does it take to run a wind-generated power plant? The answer is: none.

You are talking about more extensive exposure, free permits for the coal-generating section of the power industry. This is the message we are getting loud and clear. Everybody comes in and they all want the same thing: they like the ETS but they just want to be exempt from it. So the question I pose to everyone is this: to make the mechanism work properly, there has to be a pricing mechanism. If we exempt you, we have to increase the effect on somebody else. So who do we increase the effect on when we exempt the power industry?

Ms Savage —I think it is important to recognise that we are not actually asking to be exempted. What we are saying is that we want to transition from a higher-emission energy supply system to a lower-emission energy supply system. Through that process there is a transitional mechanism where you recognise the asset value destruction that is happening through that process, by the allocation of free permits. But we are not proposing to be exempted from the scheme. We recognise that these assets need to close in order to reduce Australia’s emissions and be replaced with new, lower-emission generation capacity. It is just a question of making sure you do not bankrupt generators on the way through.

Senator JOYCE —It looks like that is where we are off to. I want to go through your access to capital requirements. You talked about an increased access to capital of $10 billion, was it, for permits that would be held as current assets on your books?

Ms Savage —Essentially, electricity emissions are currently around 200 million tonnes a year. So, if you assume a permit price of about $20 a tonne, that means there are basically $4 billion worth of permits that the industry needs each and every year. As the permit price increases, that will go up, but obviously the number of permits will probably decrease as well. But then you also probably need to purchase that $4 billion worth of permits ahead for the next three to five years beyond the current year so you can support the forward market in electricity, because to sell an electricity contract you need to know what the price of carbon is. So you will want to hold a declining number of permits in the following year; it might be 80 per cent in the second year, 60 per cent in the year after that and 40 per cent in the year after that. When you add up that requirement, it is $10 billion for the electricity sector.

Senator JOYCE —Ten billion dollars on hand?

Ms Savage —Yes.

Senator JOYCE —How do you think you would go at the moment, getting your hands on $10 billion in the current market?

Ms Savage —I will let Mr Concannon answer that.

Mr Concannon —You have clearly only got to read the press. There is a lot of scarcity of capital, not only within Australia but on a global basis as well. We think it is unlikely that the electricity sector will be able to raise the necessary capital, as Ms Savage has just explained.

Senator JOYCE —Going to the next point, Mr Concannon, that is a pretty substantial investment that you have got as a non-current asset sitting on your books. The government has asked you to buy it. We have seen the collapse of the carbon market in Europe, so this is a tenuous asset and most accountants would be little bit concerned about what your exposure to it is. Has government given you any guarantees—for example, ‘If the thing falls over, don’t worry; we’ll fix you up for the money’?

Mr Concannon —I think there are actually two threads to that. I will answer the last one first, if I may, and that is: no, there is no guarantee; moreover, the industry would not expect any form of guarantee from a government regarding trading. I think that is the first point. The second point is that we think it is soluble. It is purely a working-capital requirement. For example, if the scheme is designed so that, as receipts are received from electricity sales, that is when the liability for paying permits for emissions is also due, then you can clearly use the proceeds from electricity sales to fund the auction permits. It can become very troublesome if there is a disconnect between those two and you find there is an enormous increase in your working capital requirements because the two mechanisms—electricity receipts and liability for emissions trading—are out of step with each other. As Clare mentioned before, they need to be in step with each other because the only way you will sell an electricity contract is if you can hedge your emissions liability at the same time.

Senator JOYCE —If we are walking forward with our capex requirements, now we have a requirement to hold up to $10 billion worth of static asset; it is just going to be sitting there. That is obviously going to affect other investments in other capital expenditure projects. It is oxymoronic that you will have money to invest in such things as carbon sequestration when your money is tied up in permits.

Mr Concannon —I think it is not sustainable. In other words, I do not believe the industry will be able to secure $10 billion. It circles back to the mechanism having to be properly designed such that it minimises the impact on existing working capital requirements, because the expectation is that there are very little additional credit lines available in the marketplace.

Senator JOYCE —The paradox I am getting to is that the government is trying to inspire you to be more carbon efficient by tying up the capital that you would have to invest to be carbon efficient. The money is not there to be carbon efficient. If they wanted to go about it in a different format they could say to you, for instance, ‘We will just give you an upfront tax deduction and then you will make your own arrangements.’ Therefore you have tied up no capital and it is completely up to you how you define your capex budget into the future. If you want a greater propensity of return to your shareholders, you can invest somewhere where there is a greater tax deductibility and therefore a greater return per share and it all makes sense.

Ms Savage —Can I clarify one point there. On the issue of working capital requirements, that is the one area where the government has actually recognised in the white paper that this is a significant issue for the industry. We are in discussions with them about a payment deferral facility, where the industry will actually be able to discharge its permit liability at the time it takes possession of those permits, which is when that liability will fall due. What is a more significant issue around tying up the capital of the industry is actually deteriorating the balance sheets of existing generators through inadequate assistance. That is where I think you will really see that the sector’s ability to reinvest in new, lower emission technologies will be seriously constrained.

Senator JOYCE —I want to go to two other issues. Your capex budgets in the power industry would be running, I imagine, at about a 25-year window. If you invest in a power plant you would be looking at about a 25-year window for it—or am I wrong there?

Mr Concannon —You would typically have asset plans going between 25 and 50 years.

Senator JOYCE —I imagine, in the time frame that they have put out, this would create an immense disturbance in your current sunk capital that is already invested in the market as well as any propensity to invest new capital into the market. How do you go when a government comes in and puts a regulation in place that completely disavows the principles that you put forward in previous assessments of capital expenditure?

Ms Savage —This is our issue in terms of wanting to make sure that asset value losses are actually recognised so that you do not actually strand those assets; you do recognise the fact that people invested in good faith and that going forward the industry has the confidence that, when the government makes significant policy change, the asset value losses will be recognised.

Mr Concannon —I think that is a very good point. What you are seeing with these very large, capital-intensive pieces of infrastructure is that they can tolerate a small degree of regulatory change but they cannot tolerate radical regulatory change. That is the first point.

The second point is some of our members, but clearly not all ESAA members—and remember again that those investors are both Australian and international—are concerned that, if the government has been prepared to radically change regulation in the form that is proposed at the moment in the white paper, this may happen again. It may happen with plants and equipment even though a 25- to 50-year design life is typical. Some of those assets are less than 10 years old. So if they have seen this radical change now, the concern is: what will happen in another 10, 15 or 20 years time? Will the ground rules change completely again within Australia?

Senator JOYCE —This is my final question and it goes back to my former days in banking. The people who issued you credit will be wanting to see you very soon, won’t they? They will be wanting to have a good hard talk to you about exactly what the terms were on which they gave you the money and what the terms are now. Your biggest risk has become one of government policy.

Mr Concannon —That is correct for some of our members.

Senator CAMERON —I might try and get this discussion into some context. How long has your association known that you could be faced with some type of scheme to regulate the emissions of carbon?

Ms Savage —We have known since the election of the Rudd government in November 2007.

Senator CAMERON —Wasn’t there a discussion paper issued by the Howard government over 10 years ago?

Ms Savage —There have been many discussion papers issued over the last 10 years, but we did not actually know anything until there was an election commitment and the government was elected in 2007.

Senator CAMERON —Wouldn’t the debate that has gone on for 10 years alert your members to the fact that you could be faced with a carbon pollution reduction scheme?

Ms Savage —I think it is important to recognise that, for every scheme that has ever been contemplated anywhere in the world, and for both the states’ and territories’ process and the Howard government’s process, none of those schemes has ever contemplated stranding electricity sector assets.

Senator CAMERON —Stranding electricity?

Ms Savage —All of them, including the Howard government’s proposal, have recognised that there should be compensation for disproportionate asset value loss.

Senator CAMERON —There is a significant amount of support for the industry through the scheme as announced. You are asking for more support. Where would that support come from?

Ms Savage —My understanding is that government has two sets of modelling results that suggest $10 billion of compensation is required in the first 10 years of the scheme, and they are offering $3½ billion. I do not think that is ‘significant level of support’ for the industry.

Senator CAMERON —But if the income is about $11 billion from the scheme, should the government take support from households and give it to the coal fired power industry?

Ms Savage —The income from the scheme is $11 billion in any one year, but over a 10-year period the electricity supply industry will provide the government with $55 billion worth of permit revenue. So to see an increase from $3½ billion to $10 billion is not unreasonable.

Senator CAMERON —I am asking: should we should take money from the household sector to support the coal fired power industry?

Ms Savage —It would be a decision of the government where they wish to get the money from. What we are interested in is ensuring that the assets are protected to make sure that you actually secure investor confidence going forward and you continue to have a viable electricity system.

Senator CAMERON —Some of your members have already started to diversify their power sources. Will they do better in a carbon constrained economy than those who do nothing?

Ms Savage —I will let Tony answer that question.

Mr Concannon —I think that is correct. We do have a number of different members. Some of them, frankly, have maybe one asset within the electricity market; some of them will have multiple assets across a number of states using a diverse range of fuels and technologies. I think that is true. However, although a number of the members—and I am conscious that today my representation is as Chairman of the ESAA—have diversity across a number of fuels and technologies, the magnitude of the potential losses due to the CPRS as it is designed currently would be so large that it would put into question further investment in Australia.

Senator CAMERON —Why should government compensate the industry further than 10 years out? Why wouldn’t you then operate in the marketplace without government assistance? Why is it a government proposition—

Mr Concannon —It circles back to the question raised by Senator Joyce earlier. These assets are typically over a 25-to-50 year design life, so you cannot chop and change every 10 years.

Ms Savage —But even if you did just take a 10-year time horizon, as the government has proposed in the white paper, the number you would be looking at is not $3½ billion but $10 billion.

Senator CAMERON —How many new coal-fired power stations have been built in the last 15 years?

Ms Savage —I would have to take that question on notice, but you would be talking about only a handful.

Mr Concannon —I have one other supplementary point. Some of our members actually procured coal-fired power plants in the mid-1990s, and some of those members have gone, on a number of occasions, to public inquiries—which have representation both at a state level and a federal level—where again they have made it clear what the expectation is in terms of design life. As far as I am aware, at no time, either at a federal level or a state level, has there been any red flag waved such as ‘Look, you should really tread with caution, because an emissions trading scheme could be coming in fairly dramatically in Australia.’

Senator CAMERON —Didn’t some companies in the 1990s pay well over the odds for that investment and they are paying a price for that?

Mr Concannon —It is true that a number of entities did get their forecasts wrong in the mid-1990s, particularly in Victoria. I think that is acknowledged. But after 13 or 14 years, a lot of that has already shaken through. Indeed, you did not hear a peep from business at the time when a lot of those companies wrote off all their equity and some of them, as well, a portion of their debt, in order to get the books and assets back into balance. But what you are seeing here is not market forces at work. What you are seeing here is potential new regulation at work, causing that potential write-off in the future.

Senator CAMERON —Some other criticism we have heard of the government’s scheme is that it does not go far enough, that it does not penalise the big polluters effectively, that there should be no money going to the massive polluters such as the coal-fired power industry. How does the government balance that argument against your argument, and how can you describe the government’s scheme as ‘radical’ when you have known for a decade that you may be faced with a carbon pollution reduction scheme?

Ms Savage —I think it is important to recognise that we have not known for a decade that we might face a carbon pollution reduction scheme. The industry has contemplated the prospects of an emissions trading scheme, which is very different to what the CPRS is, as designed. They have made investments on the basis of the investment climate that existed at that time. In the absence of investment in coal-fired generation Australian energy consumers would have been paying a lot more for their energy for a lot longer. Your household assistance package is designed to assist households so that they do not face the full cost of their energy consumption. We support assisting low-income households, but you do not need to bankrupt generators to achieve environmental integrity in an emissions trading scheme. You can have an emissions trading scheme with a firm cap that has environmental integrity, and you can recognise asset value losses. What you have chosen to do with permit revenue are your own policy choices around equity.

Senator CAMERON —No-one has come here and said that they are going to be bankrupt. We have had generators come to us and actually say, ‘We don’t like the scheme.’ ‘We think you should help us more.’ ‘We think it’s unfair.’ But we have never heard an argument that we are going to bankrupt anyone.

Ms Savage —I would have to take issue with that, Senator, because as a representative of those businesses I have said it to the government on a number of occasions.

Senator JOYCE —I do not think they are able to go out and say something as explicit as that. They might have a little problem with the stock exchange.

Senator XENOPHON —This follows on from Senator Joyce’s questions about the modelling effects on employment. I think you said that you had not done any modelling of that. Has the ESAA or its members modelled the effects on prices and on consumers of different scheme designs?

Ms Savage —The ESAA has not modelled the impacts of different scheme designs on employment or on prices, but I am aware of other studies and, since you asked me this question in the last Senate hearings, I have looked into it. There are other schemes out there that could have lower impact on electricity prices, but you need to recognise that it is a muting of a price signal when you use those other schemes—a baseline and credit scheme or an output based intensity scheme. The way they operate is to effectively suppress the price signal by subsidising some forms of generation and, by doing that, just suppress the price effect for households and for energy-intensive users. With the Carbon Pollution Reduction Scheme, an emissions trading scheme, a well-designed scheme can achieve the same thing but through allowing the price to actually reflect the cost of carbon, and that is an important part of making sure that people use energy more efficiently and appropriately. Households and large energy users need to actually see the full cost of their electricity to ensure that they consume at the level that is appropriate.

Senator XENOPHON —But if you mute the price effects you could go for a deeper cut in the targets, couldn’t you?

Ms Savage —The impact on our sector is the same under either scheme. So you still strand electricity assets.

Senator XENOPHON —Okay. I will leave it there.

CHAIR —There being no further questions, I thank the ESAA for coming in this afternoon.

Ms Savage —Thanks for your time.

Proceedings suspended from 12.21 pm to 1.32 pm