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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 Warren, do you have an opening statement?

Mr Warren —Sure. The Clean Energy Council has now consolidated its role as the peak body for the energy efficiency sectors in Australia. The council represents nearly 400 companies developing and deploying clean energy and energy efficiency technologies in Australia. Its membership ranges from the smaller technology specific companies—deploying and developing technologies as to solar PV and ocean energy—through to the major retailers and most of the major generators managing their carbon risk by diversifying their businesses.

We consider the energy transformation that Australia and the world have embarked upon to be a marathon, not a sprint. Given the nature of a marathon, we need to run as fast as we can for a considerably long time. It is a process of radical and induced change that will last a generation. Therefore this process needs to be robust enough to continue irrespective of the political tide running at any given time. Public opinion and the public’s levels of concern over the threat of dangerous climate change is going to wax and wane.

This brings us to the government’s Carbon Pollution Reduction Scheme. The Clean Energy Council has identified a small number of concerns about its design features and has engaged with the government and the Department of Climate Change to see how they can be remedied. In this respect we seem to be a relatively minor player compared with other industries. One important issue is the treatment of voluntary actions. Since January we have been arguing for the need for reform of the treatment of voluntary actions under the CPRS design. There are some key behaviours by businesses and households that are strongly motivated by the ambition to reduce greenhouse gases. Some of these, like installing rooftop solar PV panels, rely on a substantial financial commitment by households and are encouraged by government policy. It is therefore inconsistent for the government to encourage this type of action on the one hand only for the individual in question to discover their efforts have no impact on the overall emissions profile. It is not possible or feasible for all voluntary actions to be rewarded or recognised in this way, but we suggest there are key discrete actions that require consideration.

The last point I would make is that we liken the implementation of the CPRS to buying a computer. Whenever you go to buy one there is always a rational incentive to wait for a couple of years because there is always a faster, better and cheaper model coming. But if you adopt this thinking then you will never buy a computer. By buying one now, you will discover the design features that are really important and those that do not make so much difference, so that when you upgrade, in two or three years time, you will be better informed—just as we would be better informed consumers of new policy. We should accept the harsh reality of climate policy sooner rather than later. We are evolving novel policy and are destined to make mistakes, perhaps many times over. The design of the trading scheme, if that ends up being the final policy tool, will evolve many times over the next decade and the international dynamic of this policy will add further uncertainty.

The white paper delivered in December should not be seen as the end of the policy process but as the start. The approach that the Europeans have taken is innately risk averse. They got criticised for being too generous at the start of the scheme and grandfathering permits to major emitters and trade exposed industries. But now the debate in Europe is on how to improve their scheme design rather than on when or whether to start it. So the political and technical uncertainty over deployment of the CPRS makes the deployment of complementary measures even more important. The aggressive development of clean generation technologies and energy efficiency measures should have pre-empted any trading scheme. This was the rationale behind the deployment of the MRET in 2000 and the recommendation of the Parer review in 2003.

CHAIR —Thank you, Mr Warren. You were talking about the possibility of some voluntary actions being incorporated in the CPRS. How do you see the mechanism for that happening?

Mr Warren —In the discussions we have had with the department, the concern that they have, which we are sympathetic to, is about creation. I should go back a step. When it comes to individuals doing various actions, there are a range of motivations for those actions and they vary as to deciding to ride a bike or walk to work, rather than driving, or catching public transport. They go through to purchases of white and brown goods, and what sort of car you drive. It does open a Pandora’s box if you try to account for every one of these voluntary actions. We figure that at the very least where there is discrete government policy in place, one that directly stimulates and motivates individuals to take steps to reduce their greenhouse profile, that needs to have the integrity of that action preserved. The classic case, we think, is the deployment of solar PV panels. It is a reasonably expensive exercise for a household to invest in that technology. There are a few other reasons why they would do that other than reducing their greenhouse profile. We are concerned that if a perception evolves in the marketplace that putting PV on the group does not actually make any difference—it just reduces the cost of carbon permits for major emitters in the economy—that will undermine the enthusiasm and incentive for those households and small businesses to deploy the technology. That will in turn undermine a developing market. So we are currently in discussions with the government and the department to try and resolve that.

CHAIR —So how do you see this fitting in to the permit trading system? There are a series of federal and state government subsidies for installing solar PV panels.

Mr Warren —We do not think it is very difficult. The easiest way is this. The proposed multiplier under the renewable energy target will provide an exact known amount of deemed energy that is being saved. It is banded to different regions. So that gives you a fairly clear metric by which to account for the amount of greenhouse gases that has been avoided through the deployment of those technologies, which can then be retired in, say, 2015 or at some point in the future. It is a relatively simple one-off exercise. At the same time it creates a clear link between an individual’s action, in this case, and the reduction of the Australian greenhouse emissions profile by the amount of greenhouse gases that they have avoided through the deployment of that technology. That is enough, just so people know that they are making a difference, so that their significant efforts are fully acknowledged and recognised in the marketplace.

CHAIR —So you do not think that the subsidies that exist now do make enough difference?

Mr Warren —It is not that. They are important as market development mechanisms. PV is a unique case. Think about the market where people are buying, say, hybrid cars. There is a range of decisions and motivations as to the car you might choose. But when you are spending between $6,000 and $15,000 of your own money to put a PV system on your roof, your only motivation is environmental and greenhouse driven, given the estimate as to the purchase. It is just to make sure that those actions are fully recognised by assuring those households that the amount of greenhouse gases that they are saving through that investment is actually coming off the top of Australia’s emissions profile and not just being absorbed and making the cost of the scheme slightly cheaper for the rest of the economy.

CHAIR —Thank you. We will go to Senator Eggleston.

Senator EGGLESTON —What is the total energy from electricity production from installed capacity in Australia?

Mr Warren —Do you mean the total grid?

Senator EGGLESTON —Yes.

Mr Warren —I do not have that information in front of me, Senator, I am afraid. I can get back to you with the answer on that. I would guess, just working backwards off the top of my head, we are talking about a 20 per cent energy target by 2020, which is 45,000 gigawatt hours. So you could multiply that by five to give you the size of the electricity energy market in Australia.

Senator EGGLESTON —Okay. Right now what percentage of the total power generation do you think your members contribute to that total energy supply in Australia?

Mr Warren —It is about eight per cent.

Senator EGGLESTON —Where is that coming from? Is it from hydro—

Mr Warren —It is from hydro, wind. South Australia has 75 per cent or thereabouts of wind energy deployed in Australia. So it is hydro, wind and some solar PV. They are the main players. There is also some avoided energy through solar hot water deployment as well.

Senator EGGLESTON —That is a long way short of the 20 per cent clean energy target that you are advocating, isn’t it?

Mr Warren —I would not argue it is a long way short. The clean energy target is certainly achievable. There is not much of a view within the industry that that is something we cannot deliver. The interesting thing will be to see how that is filled. I think the nature of that target is appropriate for Australia. We are probably one of only two countries in the world that I can think of that have genuine first-best or A list natural clean energy resources. We have the roaring forties wind along the south coast, we have the most abundant sunshine on earth, we have excellent hot fractured rocks and conventional geothermal assets and we have good access to bioenergy. The nature of the RET is that it is an effective policy because it does not pick a winner from any of those technologies and it creates an open market in which they can compete and deploy at the lowest possible cost.

Senator EGGLESTON —What renewables are ready to go now that will make up the required baseline and deliver a carbon emission reduction?

Mr Warren —Wind and solar PV are certainly ready to go right now. Indeed, there is a queue of wind projects that are on the drawing board waiting for the RET legislation to be finalised. The trajectory to meet the target will be met mainly by wind and some solar PVs in the first year. We did not expect to see a growing diversification potentially in the ensuing years, subject to how other technologies develop and deploy. We think solar thermal technology is reasonably close. Geothermal energy suppliers indicate that they should be ready to market by 2015 or thereabouts.

The nature of this policy and this process is that it is innovative—and innovation, by its nature, is surprising. When the MRET was first introduced in 2000 we were surprised by the way it ended up deploying, and I think we can expect to be surprised again. But part of that is getting the economy fit enough to run the marathon that we are facing over the next generation.

Senator EGGLESTON —With a 20 per cent target, I think you are fairly optimistic to think that things like solar are going to make that up. It seems to me that it is going to be very difficult to reach.

Mr Warren —Sorry, we do not agree at all. Solar will play a role. The challenge for solar will be evolving effective policy that brings the costs down and also realises the value of the deployed generation, so there are savings from avoided transmission and infrastructure costs by being able to deploy generation and at the point of consumption. That applies to microwind and microhydro as well as solar. That will certainly play a role. Wind is clearly quite capable of filling a large part of that process right now.

Senator EGGLESTON —But only in limited areas, surely. It is a very uncertain source of supply.

Mr Warren —No. Australia has outstanding wind assets all along the south coast and parts of New South Wales. It is a very big country. Our wind assets are probably three times more efficient than many in Europe. We expect that there will be no problems in deploying to meet that target if that is what is required.

Senator EGGLESTON —Sadly the wind does not blow every day. There is a Parliamentary Library brief which says:

There is substance to the claims that an expanded MRET will see the relative decline in the use of gas for power generation in Australia but only if the emissions permit price is low enough. Unfortunately, permit prices in the initial years of the scheme may be too low to give sufficient incentive for the deployment of large-scale gas fired power generation in Australia. In these circumstances, the continued high use of coal to generate electricity may well also increase greenhouse gas emissions, not reduce them.

Would you like to comment on that?

Mr Warren —Sure. There is no indication that we will see any likelihood of an increase in emissions from coal-fired generation, because we do not see any plans or proposals or the likelihood of the construction of new coal-fired generation for the next decade. It is generally accepted in the market that you are unlikely to see a new generation from coal unless it is fitted with carbon capture and storage and able to be deployed. On the other hand, there is already a large investment in gas as well as potential for base load generation capacity. So gas is growing at a substantial pace into big growth energy generation technology right now in the grid and we expect that to continue.

The second point is that the gas industry cannot lose in a sense, because the opening up of LNG facilities in Gladstone will create great export opportunities. All the gas that is able to be generated will either be consumed here or be able to be sold through those terminals. That will also expose east coast Australia to world gas prices. We expect the combination of significant deployment of gas generation and the exposure to world prices to be the main driver pushing up electricity prices over the next five to 10 years.

The experience in Europe is that, because gas is a much more flexible generation technology, it is much more suited, along with hydro, to matching increased deployment of technologies like wind. So, as the wind abates in parts of Australia, gas is much nimbler at filling the gap as required. So they are actually quite complementary technologies, rather than being competing technologies.

Senator EGGLESTON —There is a view that the MRET program and CPRS work at cross purposes in that a well-designed ETS should deliver the most economically-efficient reduction in carbon emissions, whereas MRET effectively forces dollars into technologies which are currently cost effective but may not be the most efficient in the longer term or the most efficient at producing reductions in global emissions. This is particularly of concern to the gas power generators, as they see the combination of MRETs and CPRS as having the potential to undermine investment in gas production, and gas generation will be substituted for coal-fired generation and actually result in an increase in emissions in the medium term. What do you say to that?

Mr Warren —In effect, the RET is an industry development policy tool. Ideally, we should have deployed the RET process more aggressively prior to considering the introduction of the emissions trading scheme, because it is the way in which you explore and discover what the lowest cost is for those clean technologies and on what scale they can be deployed. That has not happened. The opportunity was provided in 2003 and was passed up. In a sense, we are now deploying the RET as the same time as the proposed CPRS.

The second point is that—I think the same point was made again—I do not see that there will be an increase in coal generation under a CPRS or a RET. I think that gas, as a lower emission technology to coal, will start to increase and it is demonstrating its increase in its market share on the Australian market over the next decade and will continue to do so. I do not think the RET will crowd out gas deployment. I think that, while it will increase renewables it will also, bearing in mind that it is an increase in renewables as part of an overall larger energy market, there is plenty of scope for gas to continue to increase its deployment. We would probably expect to see the retirement of some of the older and less efficient coal-powered stations sooner rather than later—I am thinking maybe one in South Australia. But that will be dependent on how the policy deploys. Gas that is not sold by the gas industry will be exported, so it is a good business to be in either way, I suspect.

Senator JOYCE —This is not a tricky question but just general curiosity. Of the renewable sources like wind and solar, how much of this plant is actually made in Australia?

Mr Warren —Probably the standout would be solar hot water systems. About 80 per cent are made in Australia. The wind technology is all imported. Most of the PV panels, to bring costs down, are sourced out of lower cost production facilities. So the PV is largely imported. Obviously the hydro is indigenous. The geothermal technology, if it is built at scale, will be constructed partly here and partly imported. It will depend from case to case, but we would expect to see, as with most other industries, costs driven down as much as possible. I think all of the gas turbines and most of the technology in coal-fired power stations is also imported. I do not think we make any of it.

Senator JOYCE —Has there been any study on how many units of labour there are per megawatt of power? If you compare coal to gas to solar to wind?

—That is a good question. We are getting some work done on that at the moment, so it is a pressing question. Wind generation is a bit like gas and coal. They are not particularly big employers. We expect, with the renewable energy target, that there will be about three jobs per megawatt of energy in the wind industry, in the construction of those sites. That is something like 3,000 jobs in regional Australia. The numbers are much bigger for the manufacture and deployment of insulation and solar hot water, because they are much more labour intensive; they are in lower cost technologies.

We suspect the big growth will be in the transformation of the retail energy business from a relatively hands off and technical process to a much more service-oriented one: the deployment of skilled men and women into households and businesses installing PV panels, insulation, solar hot water and very smart meters, and providing a much greater service component as retailers move from just selling electricity to actually selling the service of managing energy efficiency. We suspect that will be a very large employer and a great substitute over the next decade.

Senator JOYCE —Basically, it will be an increase in the service industry by reason of the deployment of renewable energy?

Mr Warren —We think the retail electricity market will evolve so that service will be a much larger component. That will obviously be a much better employer than the just read-the-meter once-a-quarter kind of business they have at the moment.

Senator JOYCE —So we are looking at retail and service industry jobs?

Mr Warren —Yes. We suspect energy efficiency will be a lot more hands-on and there will be a much more evolved relationship with customers than is currently the case. That will be a way for the retailers managing the decline in the amount of power they sell to increase the level of service that goes.

Senator JOYCE —If coal is our nation’s major export and major employer and if what we believe is right for Australia should be right for everybody else, what exactly will be put in its place if we move away from coal?

Mr Warren —I think we are appropriately investing substantially in development of clean coal technologies. If we can make that succeed, that will certainly help sustain the coal business in Australia at a cleaner level. So that is a valid investment. The likely substitute in the medium and longer term will be LNG, I suspect. As you would be aware, the curious nature of the Russians supplying gas to their European neighbours and then turning the taps off in the middle of the winter makes the world pay a premium for more reliable sources of LNG. I think we would expect to see the export of gas as a substantial substitute in the medium term in regard to our terms of trade, and that would be welcome. The model we see for the renewables industry is probably something like IKEA, in that we would expect to be designing, developing and selling the IP from Australia and we may find that we manufacture and keep the costs down to develop global businesses in other parts of the world. We have the advantage of being able to develop really low-cost and highly efficient industries here. So we might be quite surprised at how we can deploy that if we get the right policy settings in place.

Senator JOYCE —I live in the Surat Basin. The good thing about gas is that once it is out of the ground and the capital is invested, it looks after itself. You put the pipeline in but you just need a maintenance crew to look after that, and you have the fields and you possibly need a maintenance crew to look after that. It is not labour intensive; in fact, its labour requirements are quite frugal.

Mr Warren —Most low-cost energy is not going to have a high labour component. As I said, the exception will be the extent of the management of energy efficiency because of the nature of the business. We are not in the business of being opposed to gas. We think it is a great fuel and will provide an important transition. Deutsche Bank got it right when they predicted the world carbon price will largely be the cost of switching from coal to gas and will be so for the next 10 to 15 years if not longer which means the carbon price will track the oil price because gas is a direct substitute for oil. I think we saw that last year with the heightened foreign investment and interest in Australia’s gas businesses. It is hard to see how gas businesses will lose over the next decade or two, providing we get the specific treatment of LNG and value add and the emissions profile of the business itself right, so we do not undermine its ability to contribute to the economy in a substantial way.

Senator JOYCE —The coal industry is one of the highest paying blue-collar jobs in Australia, isn’t it?

Mr Warren —It is, although it is not a substantial employer. The ratio of coal extracted compared to the number of people employed has been falling steadily for the past 30 or 40 years as it becomes mechanised. That has also been a big driver in improved safety with fewer people down the mines so that has made a substantial difference to the improved performance of industry. They are not substantial employers, although obviously they are very important in regions like the Hunter Valley and the Bowen Basin. But, in and of themselves, they tend to have substantial multipliers more because of the nature of the fuel and the economy than the direct employment benefits from those workforces themselves.

Senator JOYCE —So the emissions trading scheme could be a mechanism that allows people who have the licences on those coalfields to move to a return to gas, which is less labour intensive? As long as they are getting a margin from it, it could be a cost saver for them?

Mr Warren —It is probably outside our expertise, to be honest. As you would be aware from the numbers, the well-paid jobs in the coal industry do not require particularly high skill sets. And then there are mining engineers and those related skills. I think those skilled employees will be able to move fairly easily across different sectors, but it will evolve and I expect the CPRS, like any other major structural change, to have some regional impacts, both positive and negative, and that needs to be managed.

Senator JOYCE —One industry that obviously will expand is the people trading the permits. Who are some of the companies that you would suggest would be involved in the trading of emissions trading scheme permits?

Mr Warren —Right now, the retailers like AGL and Origin and TRUenergy are running fair books. You would see that major financial institutions—Macquarie Bank, ABN-AMBRO—

Senator JOYCE —Macquarie Bank, ABN-AMBRO, Deutsche Bank.

Mr Warren —Yes, all of those. The debate, which I do not think we would want to weigh into, is about international linkages and how you can stop them. If another country decides that they will recognise Australian permits then there will be international financial institutions buying Australian permits, or they will want to hold them in anticipation of them being recognised. There would be business in trading like that as well. It will evolve. You would expect that having scale and being able to hedge and do all the derivatives that are required would be an advantage, so the major trading houses will pick up and see with other commodities and schemes.

Senator JOYCE —A nice little bastion of conservative voters. That is a great idea. I am getting on board with this idea!

CHAIR —Mr Warren, Senator Xenophon has some questions he would like you to take on notice. If you are not in a position to write them down or hear them very well, the secretariat will be able to advise you what they are at a later date if you care to ring them.

Senator XENOPHON —I will put them in order, Mr Warren. Your website is a five-point plan. Firstly, why do you think energy efficiency targets and regulations and a $2 billion fund of support are superior to market mechanisms such as the CPRS or other emissions trading schemes? Secondly, why does the Clean Energy Council want a weaker emissions target than that proposed in the CPRS—that is, no reduction from 2000 emissions by 2020 compared to a five to 15 per cent reduction in the CPRS, and calls for stronger cuts by most environmental groups? Finally, would an emissions trading scheme or carbon tax removing the subsidy to fossil fuels be one important, tangible step towards, to use your word, ‘incentivising’ the use of renewable energy?

Mr Warren —Okay.

Senator ABETZ —Mr Warren, you indicated earlier that clean or renewable energy was making up about eight per cent of our power needs in Australia, and that was to be increased to 20 per cent. What sort of carbon price do you think needs to be factored in to make that a viable option to get the renewable sector up to 20 per cent?

Mr Warren —A carbon price is not required under the renewable energy targets, but I presume your question is: if there was no renewable energy target, then at what price would that level of deploy occur? Is that right?

Senator ABETZ —Or the take-up of renewable energy given the cost of it. As I understand it, it becomes somewhat cheaper if the more traditional sources of power have a carbon tax, for want of a better term. And what level would the CO emission cost per tonne need to reach, do you think, for the renewable energy sector to be able to compete effectively in the energy market?

Mr Warren —Under current, known technology, it would probably be a minimum of $40 a tonne or thereabouts, possibly higher. One thing we observed in some of the forward planning is that the real cost of renewable technologies can improve as the dynamic of the grid improves. At the moment we have a grid which is a network that is built around coal-fired generation to a large extent, so we optimise it because we have large base-load power stations. As we see the deployment of more variable technologies, and as the grid can find ways of managing that intermittency better, we think that some of those costs can come down.

Senator ABETZ —Somewhere along the way you indicated to us the computer analogy—that is, you would never buy a computer if you are always waiting for the latest model. I thought that was a very interesting analogy. Is there a functional emissions trading scheme in the world that you would say has the basic requirements of an emissions trading scheme?

Mr Warren —Easily the most evolved scheme is the European scheme. There is reference made to some trading schemes operating in a few US states and other parts of the world, but I think the European model is the most advanced. While they were heavily criticised at the time, the Europeans ended up taking up a fairly risk adverse approach so they could get the scheme in. If I could make an observation: this is being drafted in a fairly hasty fashion. The Europeans took five years to design their scheme—we have taken one—but by taking a risk adverse approach they discovered there was whole lot—and they are phasing the scheme in over 15 years, so there are a series of phases where they adjust the rules every time. In the first phase, while they were criticised for over-allocating permits to major emitters and trade exposed industries, it ameliorated a lot of the opposition to the introduction of the scheme and gave them significant upgrading and improvement on information. It is really a third-best policy environment at the moment. We have very weak information about the consequences of a carbon price. Australia is a highly trade exposed, carbon intense economy, so it is more vulnerable and more sensitive to this kind of policy than Europe. There is a case to say, ‘Let’s start’. If we start and have the least amount of risk, but we start understanding at least what really happens and what the true costs and impacts are and we start improving that data flow, then we can begin to evolve the scheme over time and keep updating it.

This idea of designing a scheme in 2009 and that is going to be in law for the next 30 years is incredibly ambitious. As we see an international dynamic and as the US begin to evolve their policy more aggressively, we are likely to see a range of good ideas continually filtering into the debate and we should accept those because the idea is to solve the problem, not to stay wedded to a scheme which may be five or 10 years out of date. But if we do not start, we will never start because there will always be the sense that there is a better design coming down the track. We are generally of the view that there is as much lost as gained by deferring or putting off the deployment of the CPRS to sometime in the future whereas, if we start now, taking into consideration there are too many concerns in industry to expect that all of them are just whimsical, then we do it to minimise risk so we can start finding out what we know and what we do not know, and that would be the best way to proceed.

Senator ABETZ —I hear what you say but, with respect, you say that the European model is the most advanced scheme. Can I suggest to you that it has fallen, if not into disrepute, into disrepair—and substantial disrepair. You also, I think, agree that there was weak information about the various impacts of the scheme, and you also acknowledge that Australia is more trade exposed than the European Union. Given all those factors, would it not be wiser—to use a term—to ‘hasten slowly’ than to commence at a politically asserted date, namely 2010, rather than a date when you have all your ducks in a row and you can have some certainty that the impact will be minimal?

Mr Warren —I hear what you are saying, but in the scheme the Europeans had in the first phases the effective price of carbon actually became zero once they realised they had overallocated. While that was criticised in that phase, they learnt an awful lot more about the specifics, the risks and the nature of what they needed to take into account for the second phase.

Senator ABETZ —Alan Bond learnt a lot from his mistakes as well, I am sure, but sometimes mistakes have huge economic consequences, and that is something that we want to guard against in relation to this.

Mr Warren —Absolutely. That is understood. The introduction of the scheme in Europe did not drive or cause significant economic dislocation, but it did give them the ability to improve the scheme and evolve it. We are just suggesting—and there are a range of voices in the energy debate who agree—that it is better to get going and start with a less risk averse approach than to try and create the perfect scheme and then find that it is not as perfect as you thought.

CHAIR —Thank you, Mr Warren, for joining us by phone this afternoon and thank you for your evidence.

Proceedings suspended from 3.02 pm to 3.18 pm