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SELECT COMMITTEE ON CLIMATE POLICY
30/04/2009
Emissions trading and reducing carbon pollution

CHAIR —Good afternoon and welcome, ladies and gentlemen. Thank you for your time here this afternoon. I invite you to make an opening statement.

Mr Concannon —I have an opening statement, which should take five or so minutes. I will then invite comments from the committee. We welcome this opportunity to appear before the Senate’s Climate Policy Committee so that we might explain the concerns of the National Generators Forum with the current Carbon Pollution Reduction Scheme.

The NGF represents 23 companies and virtually all of the installed generation capacity in Australia today—a total of around 45,000 megawatts. The three of us here today manage both private and state owned businesses, which have a broad spectrum of fuel types and technologies, including coal—both black and brown—gas, oil and renewables. All of us have a mixture of both Australian and international investors, including Chinese, Indian, American, Canadian and European stakeholders.

As outlined in the NGF’s submission to the Senate committee, the NGF has consistently supported a well-designed emissions trading scheme, which ensures investors confidence and achieves a smooth transition to a 60 per cent reduction against 2000 levels by 2050. This objective can be attained without destroying the value of existing capital intensive infrastructure but not using the current settings set out in the proposed CPRS. The NGF, therefore, cannot support the current CPRS unless four key issues are resolved. The first is that the number of emission permits with no charge is not enough to cover value destroyed due to the CPRS and will effectively strand multiple coal-fired power stations. There should be a more measured transition from no charge on emissions to a charge on all emissions. The second is that a 10-year period should be followed by a 10-year rolling gateway. The third is that no additional working capital should be required for the permit auctioning processes, including any relevant taxation. Finally and fourthly, the retail price regulation should be removed to allow the full pass-through of increased wholesale electricity prices to end users.

We would like to dispel some fundamental misconceptions that surround the CPRS and to explain the genuine concern there is within the industry. First, there is a claim that the majority of greenhouse gas permits need to be auctioned from day one to incentivise change; this is not true. The price for greenhouse gas emissions will be set by the cap that Australia defines for itself, not by the amount of auctioned permits from day one. The current CPRS proposes to charge for 87 per cent of emissions from the electricity sector from day one. That represents a payment to the government of between $4 billion and $7 billion per annum, depending on the carbon dioxide price or, using the Treasury’s own CO2 forecast, around $55 billion until 2020. It will increase operational costs on some coal-fired power plants by between 100 and 200 per cent and will render a number insolvent by 2015. In accordance with the Corporations Act, the ramifications of the proposed CPRS will become increasingly apparent over the next three to six months—not one year or five years, but the next three to six months.

Secondly, it is claimed that the generation sector are rent seekers; this is not true. The industry has never received subsidies from government and has operated successfully in one of the world’s most complex and competitive electricity markets for the past 10 years. This has enabled the eastern states to enjoy electricity prices that are some of the lowest in OECD countries and these have underpinned the Australian economy. Two out of the three models conducted by Treasury suggest an asset value destruction of around $10 billion up to 2020; it should be actually up to at least 2030. The government has effectively short-changed the industry by tabling only $3.5 billion in its white paper. This is likely to result in distress across multiple coal-fired assets and it will affect both debt and equity stakeholders.

Thirdly, it is claimed that the generators will receive windfall profits from the Electricity Sector Adjustment Scheme; this is not true. The ESAS scheme is supposed to reflect the loss in asset value that will result from the CPRS change in law; the current amount does not do this. The European Emissions Trading Scheme started in January 2005, with three per cent of the permits being auctioned and not 87 per cent. This has now increased to seven per cent, and some countries with coal-fired generation will have continued dispensation until 2020; that is, there will be 15 years for business and countries to adjust and not 15 months.

Fourthly, it is claimed that the transition to a low carbon state will be very smooth, as the model suggests; this is not true. The reality is likely to be far more disjointed. Electricity, beyond June 2010, already will be much lower than normal, with virtually no ability to hedge greenhouse gases than electricity being sold very warily. This is not good for either buyers or sellers and increases risks to both business and electricity customers.

Fifthly, it is claimed that there is plenty of financial capital available; this also is not true. Australia has always needed to compete on the international stage to secure financial capital, and this will continue; that is particularly relevant at present. The ESAA did a survey across all of its members and ascertained that, up to 2015, $100 billion of capital would be needed across the electricity sector. Half of that, some $50 billion, would be required for refinancing existing assets; $20 billion of that $50 billion would be for the generation sector alone. Business and investors expect both federal and state governments to be careful with the design of the emissions trading scheme, so there is a measured transition and not a step change, which would trigger large-scale distress in an industry that produces a real-time product—many outside of the industry do not understand that—which is critical for modern day life. If a government is prepared to make radical changes to its regulation and have an apparent cavalier attitude and, in turn, for adverse commercial consequences to result from such change, investors will be wary that it will do it again and again. This is sovereign risk.

Finally, it is claimed that off-the-shelf technology is available today to cure emissions; this also is not true. If the manufacturers’ sale hype is set to one side, the fact is that the technology lags targets set by the current CPRS. Investors are expecting the government to be patient while new reduced emissions technology is allowed to develop over the next 20 years. The electricity generator sector is running hard to transition to a reduced emissions position, but it needs time to do this. That is because the sector is starting from a position where 85 per cent of today’s energy is produced from coal, and assets have a typical design life of 25 to 50 years. The assets are not disposable; you cannot simply throw them away after a third or a half of their design life. Overturning 50 years of power infrastructure development in five years, as the current CPRS proposes to do, displays a poor understanding of how the national electricity market works and the long-term regulatory stability that is required for capital-intensive projects, such as power plant.

In summary, the NGF cannot support the current design of the CPRS, as there is a very real risk of: firstly, widespread asset value destruction, as evidenced by the Treasury’s own modelling; and, secondly, not providing the right incentives for the sector to have a smooth transition to a low carbon future. We envisage a systemic failure of the electricity market as a result of damage to balance sheets and loss of creditworthiness; we see increased price volatility and increased short-term contracting, which will impact on all electricity customers; and the CPRS is exacerbating an already difficult capital raising environment. A number of the above are already happening in business today. As I said at the outset, the objective for emissions reduction is agreed within business; it is just how we get there which requires careful deliberation. Thank you very much for listening to me. I now invite questions from the committee.

Senator FEENEY —Firstly, looking at this question of the ESAS, there is that old adage that, if you had one life to give for your country, it would be somebody else’s. The ESAS, of course, is a $3.9 billion component to this scheme. I guess my question to you is: how could the architecture of the scheme be changed so that the ESAS would increase and who do you think would pay for that?

Mr Concannon —First, there is the misconception that we are asking for more money; we are not. We are asking, ‘Please do not charge so much in the first instance’—so please do not take the money from us in the first instance. This is not taxpayers’ money.

Senator FEENEY —Let us go to that question. If you say that the ESAS would be adequate if the permits were 100 per cent and we were to change the architecture of the scheme in that respect, how would the price signal operate on your businesses and your investment decisions? I guess a corollary of that point is that you obviously have a number of members who already have commenced the process of diversifying their businesses and those investment decisions presumably have already changed and will continue to change. So, if we were keep the ESAS and give you a 100 per cent allocation of free permits, where would the price signal operate in your business?

Mr Concannon —I do not believe that anyone is advocating for 100 per cent. I think I will just reaffirm the point that I made in the opening statement: there is a misconception that you need 87 per cent, for example, in the current proposal of CPRS, in order to get a price signal; that is not true. I think that has been evidenced by one of the largest emissions trading markets in the world, which is the European Emissions Trading Scheme. For the first three years of that scheme, around three per cent were auctioned; and, currently, seven per cent are auctioned. So 93 per cent of emissions today in the European Union have no charge. I think it is a misconception that you need to have a lot of permits auctioned in order to send out a price signal.

Senator FEENEY —Are you putting to us that the European scheme has a lot to teach an Australian scheme?

Mr Concannon —I think a lot of lessons are there to be learnt in the European scheme and I think the Europeans have admitted that themselves; they will continue to refine that scheme as it goes along. I think there is no doubt that Australia will be able to see what worked well and what did not work quite so well.

You touched on one other point that I would like to refer to and then perhaps I will hand over to my colleagues here to respond. A number of businesses within the NGF also have diverse portfolios. Certainly, from an International Power perspective point of view, I have a diverse portfolio too; I have gas-fired generation, renewables generation, co-fire generation and gas pipelines as well as coal. But it is extremely difficult. What you cannot do with one stroke of a pen is write off maybe $2 billion of asset value lost due to change in law and, in the next breath, ask investors, both equity and new debt, for another $2 billion to invest in something else, with a big question mark about whether the government will change its mind again in 15 years time.

Mr Gunther —A good example is our investing in the latest technology at the time at our Millmerran Power Station plant less than 10 years ago and we will not be receiving any compensation under the ESAS arrangements. However, there is significant value loss to our business here and I think it sends a significant signal to our international investors about how to continue to invest here. So, clearly, our view is that the ESAS arrangements need to compensate for value loss and, in an appropriate way, to continue to stimulate future investment.

Senator FEENEY —If the permit arrangements remain as proposed in the CPRS legislation, how much more expensive, in your submission, do the ESAS arrangements need to be?

Mr Gunther —Our submission and that of the NGF is that we believe the ESAS arrangements clearly need to be expanded to accommodate at least—as in Tony’s opening statement—10 years, with a 10-year gateway. Obviously, the existing compensation arrangement of around $3.5 billion is not sufficient.

Senator FEENEY —Sure; but frighten us with a number.

Mr Concannon —I think you are looking at more like between $10 billion and $20 billion. It is $10 billion, according to two out of the three models by Treasury, to 2020. But, as Mr Gunther has mentioned, his asset is as near state-of-the-art as you can get in coal-fired generation technology. So with the life of his asset, you are looking way beyond 2020. If you also add in the value destruction with those assets, you are looking more at $20 billion-plus.

Ms In’tveld —I will put a WA perspective on that for you. In contrast to the 85 per cent coal dependency that Mr Concannon referred to, WA, in fact, depends on gas for 60 per cent. So we are in a slightly better position, at least on the face of it. But the challenge for WA is that, certainly in the next three to five years, no new gas will be coming into the domestic markets; so we have no alternative but to rely on coal-fired generation for base load power. As with my colleague, Verve Energy also has a very diversified portfolio. We are working very hard to improve the efficiency of our coal-fired plant. We are also investing in high-efficiency gas turbines. We have wind farms, wind diesel and biomass projects. So a big effort is underway already to reduce our impact on the environment.

Senator FEENEY —I understand that there are some tidal energy projects in Western Australia. Can you talk to us about those at all?

Ms In’tveld —I can. They are embryonic. I think there are two or three that are underway at the moment. But, again, they have a long way to go, and we do not see them as being a source of base load fuel.

Senator FEENEY —No. I accept that they are pilot projects, but I understand that they have just entered into bilateral contracts to provide energy into your island grid as a—

Ms In’tveld —That is right, yes.

Senator ABETZ —I have three questions. Ms In’tVeld, I think you have touched on this already: a number of people have appeared before this committee advocating that Australia could easily replace coal-fired base load generation with renewables and gas. Your Western Australian example suggests that it would not be a goer in Western Australia. Could you and possibly the other witnesses comment on that and then indicate whether that view is replicated around Australia?

Ms In’tveld —The reality in Western Australia is certainly that we will remain dependent on coal for many, many years to come. This is not only because of the limitations on domestic gas supply but also because of the vulnerability of the state to gas disruption. We have a 1,600 kilometre pipeline coming down from the North West Shelf. We have had examples just in the last 18 months of the state facing potential blackouts because of disruption to gas. The first was when the North West Shelf went down for two days in January last year. All of Verve Energy’s gas comes from the North West Shelf and we had no gas whatsoever for two days. We spent millions burning oil to replace that. We have been told by Woodside and the North West Consortium that we should not be too concerned about a two- to three-day outage; we should be thinking about a two- to three-week outage, given the age of the plant at Karratha. So that is a challenge for us and we keep that in mind.

More recently, there was the Varanus explosion. Verve Energy do not get their gas from Apache but, as the government-owned supplier of last resort, we were asked to make every effort to free up what gas we had available for the market, which we did. One of the mechanisms we used to do that was to recommission two 40-year-old coal-fired units at our Muja Power Station. These units had been retired in April 2007. We were able to bring them back and introduce 120 megawatts of coal-fired generation into the system—albeit without the pollution abatement equipment that you would have in place today—to cover us for the inadequate amount of gas coming down the pipeline.

Mr Concannon —Perhaps I can give some supplementary points to what Ms In’tVeld has mentioned. We do see a role for them in the future. We do not just see a continuing dominance by coal-fired generation; we see a place for gas-fired generation, renewables, energy efficiency and low demand-side management. So we see a place in the electricity supply and use arrangement for all these new technologies and initiatives. However, fundamentally, we still see a place for coal, particularly in the base load sector. I have assets across three states: a gas-fired asset in WA and other assets in both South Australia and Victoria. I will turn to Victoria first.

Senator FEENEY —As you should.

Mr Concannon —As we should. There are around 7,000 megawatts of base load generation in Victoria today. My understanding is that there are not sufficient gas reserves to replace, on a long-term basis, 7,000 megawatts of base load generation in Victoria; ditto for supplies within South Australia. I think that is the first thing.

As for renewables, I say again that there is a place for renewables. International Power plc is one of the world’s largest owner-operators of renewables—we are in the top 10—and we also have a renewables wind farm in South Australia; however, it is an intermittent supply. Whilst there is no existing technology for storing, on a large-scale basis, that energy, we still see renewables as part of the solution; however, we see coal, both black and brown, being a foundation running through for many decades to come.

Senator ABETZ —Thank you for that. I will move on to my second question. You took us on a bit of a tour around the world, I think, with the number of countries that are co-investing in energy production; I think China, India, Canada and the UK were all mentioned. If you are able to comment on international investors in Australia’s energy sector, can you tell me what at the moment is the international investor view of the sector and the proposed CPRS?

Mr Gunther —I will start out. Just to clarify, we do have a very diverse range of investors in our projects. In fact, we are 50 per cent owned by InterGen in Australia, which is 50 per cent Canadian owned by Ontario Teachers’ Pension Plan and 50 per cent owned by GMR, which is a very progressive Indian power developer at the moment. Our other 50 per cent is owned by the China Huaneng Group, which is the largest power generator in China and the fourth largest power generator in the world. In addition, in our Millmerran asset, we currently have Japanese investors. So we have very much a multinational view on the assets and the environment here.

The CPRS, as it currently stands, exacerbates further the strains of the current global economic position. In fact, right now, there is a significant shortage of capital globally and significant competition in all markets for capital. I think the CPRS in Australia, in particular, has added another significant hurdle. As we look across the globe and look to invest in countries like Mexico, the Philippines and the UK et cetera, we see right now a higher level of regulatory or sovereign risk in Australia than in any of those other markets, given the difficulty around the CPRS.

Senator ABETZ —Mr Concannon and Ms In’tVeld, do you represent companies that also have an international flavour about them; if so, given our time constraints, would you support or disagree with Mr Gunther’s comments?

Mr Concannon —We are in full support. We are seeing exactly the same evidence. It really goes back to a comment I made in my opening statement: you may think that, because the start of the scheme is still planned to take place from 1 July next year, there is time to get things right and have discussions et cetera; but, unfortunately, markets and investors do not work like that. So, firstly, there has been a reaction already—and I fully endorse what Mr Gunther has seen. We have seen that it is easier to raise capital within the United Arab Emirates than it is to raise it within Australia at this current time.

I think the second thread there is the terms of the debt. Even if you get the terms of the debt, we are finding that the banks are not prepared to offer loans for as long a duration as they have offered loans historically. In the past you may have been able to get a debt facility over an eight-, 10- or maybe 15-year term; but now, across the industry, we are seeing a maximum term of around five years. It is very easy to pin the badge of ‘global financial crisis’ on having caused that. International Power Australia is not getting that feedback. The feedback we are getting is regulatory risk in Australia has increased significantly.

Ms In’tveld —I think I can endorse that from a slightly different angle. Again a lot of this is anecdotal but, as the supplier of last resort, we are very focused on the energy supply situation going forward. It is our assessment now that Western Australia does face a supply gap in three to five years time, partly because we believe that the three coal-fired power stations that are in the pipeline may not get funding. Again this is anecdotal, but it is reinforced by our own recent experience with a joint venture partner to retrofit the Muja AB units with pollution abatement equipment; they are coal-fired units. That joint venture partner’s finance is with the ANZ Bank and they told us that the ANZ Bank advised them that that would be the last coal-fired project they would fund in Australia and the only reason they were prepared to fund it was because it is a transitional project to clean coal technology coming in with a 10- to 15-year life span. So we are certainly of the view that, with the capital constraints and the carbon constraints being compounded by the regulatory uncertainty, there is a big question mark over energy supply going forward.

Senator ABETZ —Thank you. My final question is: in your opening statement, you rejected the label of ‘rent seekers’ that some have applied to you and you said that you simply want to avoid having your asset value destroyed. I wonder whether you could flesh that out a bit for the committee.

Mr Concannon —Frankly, it circles back to a response of mine to Senator Feeney earlier on. There is a misconception that we are asking for someone else’s money; we are not. We are saying to the government, ‘Please don’t take our money in the first place.’

Senator ABETZ —Thank you for that.

Senator MILNE —I will just take up your last point where you said, ‘Please don’t take our money.’ That is, ‘Please don’t take the money which did not include internalising the cost of our pollution.’ Is that what you are saying?

Mr Concannon —The government, today, has no charge on emissions.

Senator MILNE —No, I know.

Mr Concannon —If the government wishes to change the law so that it does impose a charge on its emissions, that is clearly its prerogative. But there are consequences associated with that. If a consequence associated with that is that it destroys existing shareholder values, there should be some form of redress against government for that change.

Senator PRATT —What is the point of having redress, if we destroy the planet because we do not mitigate with climate change?

CHAIR —Senator Pratt, Senator Milne has the call.

Senator PRATT —What redress do people have for the impacts of climate change from energy generators that have caused this pollution? Sorry, Senator Milne.

Senator MILNE —I was not referring to government policy; I was saying that the profits you have are greater than they otherwise would have been if the cost of carbon had been internalised. So your industry has been a free rider on the planet for a very long time; now the community is asking you to pay. I think that is the point that was being made. I am asking two questions. The first one is: we received evidence this morning that there is a very high risk that, if you have a low carbon price resulting from a low target, money will flow into investments in Australia that create long-term liabilities. The example I am thinking of in particular is Hazelwood; that was due to be shut down and decommissioned, but a change to Victorian government licensing allowed it to go forward, which we had a discussion about that last week. Can you tell me the amount of emissions of CO2 currently coming from Hazelwood in any one year?

Mr Concannon —Obviously there are a couple of threads to that. The first is the ‘free rider’ suggestion; we do not agree at all with that.

Senator MILNE —I am not surprised. That is fine. It is a difference of opinion.

Mr Concannon —I think, if anything, in terms of having a free ride, probably it is the Australian economy. The lowest form of electricity generation comes from the highest producing CO2 fuels, which Australia has. It has hundreds of years worth and it has burnt them for decades, way before the private sector or even some of the state owned sector. The first point is: the Australian economy—the aluminium sector, the minerals sector and the manufacturing sector—has enjoyed and been underpinned by that for decades. Still today, Australia has some of the lowest electricity prices in OECD countries; as I recall, they are second only to Greece. Again, all of that has continued for many, many decades and has underpinned the electricity sector. That is my first point: not a free rider.

The second point regards your mentioning one particular power station. Out of 45,000 megawatts, you asked about one particular power station.

Senator MILNE —Yes, because I understand that it emits five per cent of Australia’s total greenhouse gas emissions. Therefore, I am interested in that one particular power station, which could have been decommissioned and which has taken a capital flow that will leave it as a stranded asset, which you would like us to pay for.

Mr Concannon —As I mentioned the other day, that asset was freely sold by the state government. It had been owned and operated for decades before being sold in the mid-1990s.

Senator MILNE —I know that.

Mr Concannon —It was sold by the Victorian government, with a full life of 40 years, and it was sold before Australia signed on to the Kyoto protocol in 1997. Furthermore, as I mentioned the other day, it also went to a 2½-year exhaustive public inquiry and was blessed by both federal government and state government—

Senator MILNE —I am asking you what its greenhouse gas emissions per year are.

Mr Concannon —with a life to 2036. Its emissions, as you have mentioned, are around four per cent of the NEM and it typically emits, depending on its load factor, anywhere between 10 million and 15 million tonnes per annum, which is consistent with other brown-coal-fired power stations within the Latrobe Valley.

Senator MILNE —Thank you. I understand that, under your arrangement with the Victorian government, you have to reduce your emissions by 34 million tonnes and have a cap on your greenhouse gas output at 445 million tonnes over the life out to 2030 or 2031. Where are you up to in terms of that budget of 445 million tonnes?

Mr Concannon —Well on track.

Senator MILNE —What does that mean? Where are you up to?

Mr Concannon —We are well on track in meeting everything set out in that deed that we agreed with Victoria in September 2005.

Senator MILNE —So I am asking you: where are you up to in terms of the reduction by 34 million tonnes and your budget of 445 million tonnes over the life of the project? Apart from being on track, could you give me some figures on that or take it on notice?

Mr Concannon —I can take it on notice at this particular moment in time. One thing I would like to mention is that the life of the deed that was entered into, which you have just referred to, was to 2036. That was the 40 years with which the asset was sold by the Victorian government; that was from 1996 to 2036.

Senator MILNE —The other risk that was identified this morning in Treasury’s evidence is that, by setting a low target carbon price, you end up with global capital flows bypassing those investments. Is that what you were saying before in terms of the Western Australian example: had you not been able to claim carbon capture and storage, you would not have got that capital flow investment?

Ms In’tveld —I am not sure that I can answer that. I do not fully understand what you are saying.

Senator MILNE —From what you said a minute ago when citing the Western Australian project, I understood that you would not have got the capital for that if you had not been able to link it to carbon capture and storage. Is that what you were saying?

Ms In’tveld —No. Carbon capture and storage is not yet viable technologically. The project that I mentioned, if it was the Muja AB joint venture project, is based on conventional supercritical technology. We will be retrofitting that plant with pollution abatement equipment for a 10- to 15-year life span, the thinking being that, within that time frame, carbon capture storage technology will be proven. That was the only project that the joint venturer could get funding for because of the 10- to 15-year life frame and—

Senator MILNE —Okay. So, notwithstanding that 10- to 15-year life span, I understand that the ZeroGen project in Queensland, which supposedly is our only plant that is expected to go to large-scale generation in 2017, is about to fall over. Can you tell me what the story is with ZeroGen? Are we on track to have a large-scale generation plant feeding energy into the system by 2017?

Mr Gunther —Our assessment, as set out by Ms In’tVeld also, is that carbon capture and storage is not commercially viable currently. I do not have the full details as to why they are not continuing, but that would be a significant reason: the costs are currently prohibitive to moving forward.

Senator MILNE —So our only plant is not continuing. There is no viability in it, is there?

Mr Gunther —That is right. Without significant subsidy, ongoing voluntary subsidies or government subsidies, that would be correct.

Mr Concannon —Perhaps I could make a supplementary point to that. I have no association at all with ZeroGen; however, we competed for part of the low emission technology fund that was set up around 2005-06 and Hazelwood won around $80 million worth of both Commonwealth and state government funding. Part of the bid that we put together included a pilot carbon capture plant, a state-of-the-art facility, to be built at Hazelwood Power Station. I am delighted to say that is about to be opened at the end of next month.

Senator MILNE —When can we expect that to be operating at commercial scale?

Mr Concannon —I think you can expect that within the next 15 to 20 years.

Senator MILNE —Fifteen to 20 years from now is well beyond the time that the IPCC says that global emissions have to peak and come down. Isn’t that the case?

Mr Concannon —I am just telling you that what we have installed today is state-of-the-art technology. It is the best technology that man has been able to devise, using amine solvent technologies. But it just gives you a flavour of how difficult it has been. It has taken 50 to 100 years to develop the infrastructure we have today across many countries, and it will take more than 15 months to change that technology.

Senator XENOPHON —Mr Concannon, you say that the scheme needs to be well designed. What do you say would be a better designed scheme, considering the public policy imperative of reducing greenhouse significantly? Secondly—I will roll two questions into one—in your evidence, you referred to a systemic failure of power generation in this country. What do you say are the practical consequences of that and what can you say to back up that fairly blunt assertion?

Mr Concannon —I will answer your second question first and then go back to your first question. In answer to the first one, under the Corporations Act, directors have a number of fairly onerous fiduciary duties. A lot of those duties are not retrospective looking; they are very forward looking. So, at any particular moment in time, you continually have to see whether or not your business is able to pay its debts when they are due and payable. We are aware that some of the forward-looking covenants within the loan arrangements et cetera of some of our members are very close to being breached, are being breached or will be breached. That is No. 1.

No. 2 is that already we are in discussions with ASIC regarding that and, again, with some generators who are connected with that, as well as with regard to the financial services licence. In order to trade in the electricity market, you need to have a financial services licence. So, again, you are finding that some of these trip wires are forward-looking covenants and other financial instruments, which are beginning to raise questions with directors today about whether or not, looking forward, they have a going concern or a solvent business. That is a very real issue today. You will see a crescendo of fairly comprehensive disclaimers by auditors et cetera, as we go through the next three to six months and they begin to be far more cautious about the forward-looking consequences of this new legislation. That is that.

As Mr Gunther mentioned before, we are already seeing increased concern over equity and debt and potential impairment—and multibillion-dollar impairment, not just a few tens of millions. I have mentioned previously that we also are seeing potential loss of creditworthiness in some of the participants in the national electricity market. There is one very tangible piece of evidence of what is beginning to happen. Historically, the national electricity market has traded on a one- to three-year forward basis; therefore, if I was a manufacturer, I could go and get a three-year contract for my electricity or gas or maybe electricity and gas.

Senator CAMERON —All of this evidence is on the record already from Mr Corcoran. This is a bit repetitive, to be honest.

CHAIR —Senator Cameron.

Senator XENOPHON —I think that has been answered. The other issue concerns better design.

Mr Concannon —Clearly, I am not privy to what has been said before. I will turn back to ‘better design’. I think it is relatively simple. Firstly, an extension of the term from five years to at least 10 to 15 years would allow a smoother transition; and, secondly, 15 years is more in line with what the European scheme provides for countries with coal-fired generation. That is No. 1. I think the second point is that, if the number of free permits—‘permits with no charge’ is a better description—is increased, again we will see a smoother transition for current assets towards a reduced emission state over the next 10 to 15 years.

Senator PRATT —You have said some pretty strong things about the stranding of assets, but I want to say something strong back to you and see what your reaction is. If you fail to take the benefit of a moderate scheme like this one and Australia fails to take action on climate change—we need to make cuts that are much steeper and more dramatic and to make them quicker—I fail to see how any of your assets with a carbon intensity attached to them will be able to transition. Where do you think this debate is headed in the long run? The globe, including Australia, needs to make emissions cuts, and we have to do that by targeting the emitters. So, if you do not cut a deal and run now on something reasonable, in the future you will be facing a much steeper and greater carbon liability.

Senator IAN MACDONALD —To put it another way: agree with us or we will break you!

Mr Concannon —I think that probably has some resonance with some of the members of the National Generators Forum but no resonance with others, because, as far as they perceive the current settings in the CPRS, they are already broken.

Ms In’tveld —Perhaps I can put a government owned perspective on that also. In the case of Western Australia, if the scheme were to go ahead in its present form, Verve Energy is already losing money at—

Senator PRATT —Where will the future cuts come from then, if you cannot even cope with a scheme like this—

Senator IAN MACDONALD —Senator Pratt, let the witness answer your question.

CHAIR —Let the witness answer the question, please, so that we can stick to time.

Senator PRATT —I beg your pardon. Thank you, Chair; I apologise.

Ms In’tveld —In addition, the state is just coming out of a 10-year tariff freeze. So, whilst electricity prices to date have been fairly reasonable, they are about to start to climb to fairly high levels fairly rapidly, even without the carbon impost.

Senator PRATT —I know that.

Ms In’tveld —It would be very hard to imagine any government putting tariffs up by 100 or 200 per cent in a matter of years. Verve Energy will need to increase our debt. That then will be funded indirectly not by electricity consumers but by every Western Australian taxpayer. That means that you are not getting that price signal out to those using the energy in the first place, which defeats the purpose of the scheme.

Senator PRATT —My prices have gone up by two cents per unit—this is before the CPRS—just last week. I accept and understand that. The question goes to the issue of abatement in line with our environmental requirement and where that comes from; the need for deeper cuts, if we do not take reasonable action now, and what that does to your carbon liability; and that greater capacity to strand assets versus the risk as you judge it now.

Mr Gunther —It is a good question. The issue for us is that this industry has been built over many years and we are 85 per cent coal-fired; we cannot just turn it off today without it having a significant impact on the economy. So how do we transition appropriately? We say that it is clearly inappropriate to make a change on day one and it is appropriate to make a considered change over time and transition appropriately. If the change is too dramatic and the impact is too severe on investment, that will impact the Australian economy significantly. As we said earlier, it is important to continue to incentivise in order to have people investing in the sector, not only to bring new capital in but also to bring innovation and new ideas—

Senator PRATT —I accept that. But, if that is true now, surely it becomes even more so in the face of inadequate action and the need for deeper and sharper cuts and a much steeper and greater liability in the future, if we fail to act adequately now.

Mr Gunther —Yes. Again, I believe that clearly there needs to be adequate compensation for investors to ensure that we can move towards dealing with those cuts. As we outlined earlier, Australia has limited natural resources from renewables. With the Queensland position, there is significant gas, which means there is a transitional fuel, but clearly we do not have that from wind and solar. Ultimately, right now no source of fuel in Australia is available commercially to transition to accommodate those cuts.

Senator BOSWELL —We were told today by Treasury that the CPRS and the RET will put the price of power up between two and four per cent. Mr Concannon—I do not know whether you also said this—ERM power said that they will go up by 60 per cent. Who is right: the generators or Treasury? This is a fairly significant question for the punters out there: will household power go up by between two and four per cent or by 60 per cent, when you add in the ETS and the RET?

Mr Concannon —It is quite difficult to give a response to that, for a couple of reasons. One is that new regulation keeps adding to the pile. It is not just the renewable energy target, neither is it just this proposed CPRS. There is a whole raft of both state and other federal schemes—energy efficiency and solar feed-in tariffs—that keep adding to the pile. Our analysis suggests that it will be more like a 50 to a 100 per cent increase in the tariff.

Senator BOSWELL —You can have a discrepancy of one or two per cent or even five or 10 per cent, but this is a discrepancy of 100 per cent.

Ms In’tveld —I think there is general consensus within the NGF that it is between 50 and 100 per cent, which is very broad in itself.

Senator BOSWELL —I will follow on from that question. If it will go up by 50 to 100 per cent, what will happen to factories and various manufacturing industries? I always use Golden Circle but use, as an example, an abattoir; by how much will the power go up there?

Mr Concannon —Again, I think you will see potentially wholesale energy prices almost double and the erosion of all of the economic advantage—putting to one side what Senator Milne mentioned before—that has been enjoyed by the manufacturing sectors for many decades.

Senator IAN MACDONALD —But, with your lack of investment, you will not be able to produce the power let alone double the cost, are you? Are you going to have brown-outs? Is that the issue?

Mr Concannon —There is a genuine concern in Victoria this year. Notwithstanding that Victoria sustained an unusually high demand for four days and had dreadful bushfires, which did affect a number of powerlines, we saw the highest demand for energy there that we had ever seen. The degree of uncertainty coming through, particularly from the CPRS, is causing the industry genuine concern. We do fear that, if that uncertainty is not resolved quickly and in a manner that ensures a smooth transition—not as a jolt to both our business and the Australian economy—there is a very real risk of having—

Senator IAN MACDONALD —Of having massive brown-outs.

Mr Concannon —Potential brown-outs and black-outs.

Senator IAN MACDONALD —What, for three or four days at a time?

Mr Concannon —I cannot quantify it; all I can say is that it happened this year in Victoria.

Senator BOSWELL —I do not know how industry can plan, when generators say that power will go up 100 per cent and the Treasury says it will go up between two and four per cent; anyway, we will pursue that later. The government is releasing updated details regarding its plans for a RET. Are you aware of these plans? Can you comment on the costs and benefits of the 20 per cent renewable energy mandate? In addition, who is going to pick up all the infrastructure for the lines that feed into the grid; will you be picking that up?

Mr Concannon —Ultimately, the end users will have to pay. You mentioned two main threads there, one of which is the network. That is ultimately charged out to everyone’s bill as a network charge. My first point is that the end users will pay for network charges and investment in that. Secondly, on the renewable energy target, I noticed yesterday a proposal that certain users do not want to pay it. Clearly, that means that other users—domestic and small to medium business, in particular—will to have pay. Someone has to pay.

Senator MILNE —So are you asking for or supporting that exemption for your members?

Mr Concannon —No exemption is required or being requested by generation; it is end users that are using for an exemption.

Senator CAMERON —Could you supply the committee with a copy of the econometric modelling and the market analysis that has been done to indicate that a number of power stations will close as a direct result of the CPRS? You do not need to go into any detail about that; either you can supply it or you cannot supply it. Could you also comment on the statement by the Australian Energy Regulator, the Australian Energy Market Commission and the Electricity Market Management Company, who have indicated that there are no threats to supply as a result of the CPRS? I just wonder why your analysis is so different from that of the independent regulators. Have the independent regulators got it so wrong? Are they so incompetent that they cannot see this disaster that you are now telling us is going to happen from the CPRS?

Mr Concannon —You have asked for two main documents there and I will respond back to those two main documents and give evidence. The first one is relatively easy because that analysis was done 15 months ago and I think it has already been tabled by the ESAA. It was done by ACIL in mid-2008. As for the second point, I think it is true to say that, within the industry, our read of it is that there is not a unanimous view across all the regulators.

Senator CAMERON —That is not the impression you get—

Mr Concannon —Our understanding is that a number of them, particularly the system operator, is watching very carefully what is happening.

Senator CAMERON —Then perhaps you can comment on this—and you can take it on notice. The general view from the regulators was:

… the risks to energy security have been significantly mitigated. The AER noted that it considers the risks of Scheme-related plant shutdown are low.

The ESAS assistance package was considered an important mitigating factor, with the AEMC commenting that the exogenous contribution to capital of $3.9 billion, targeted at the most emissions-intensive plant, significantly reduces financial risks that might impact on operational decisions by generators.

That is the independent regulator’s view, which is completely at odds with the evidence you are giving here. This needs to be addressed.

Mr Concannon —I agree. From an International Power Australia perspective, I do not agree with either statement that you have just mentioned by the AER or the AEMC. We have very real and genuine concerns. It has been misinterpreted as being intransigence by some people, but it is not. It is genuine concern within the business—and we are the largest privately owned generator in Australia. Mr Gunther, I do not know whether you would like to respond to that as well.

Senator CAMERON —These are the regulators; they have made an independent assessment and they say that there is no disaster on the horizon. Why have they got it so wrong?

Mr Concannon —I think we should ask them that question.

Senator IAN MACDONALD —They are probably mates of Kevin.

Senator CAMERON —Did you say that these are mates of Kevin?

CHAIR —If you want an answer to your question, Senator Cameron, you will not argue across the committee room.

Mr Gunther —Yes, I think we will take that on notice. I would make one comment though, if I may, just in relation to the quantum of the ESAS, which I think we did comment on earlier: it is clearly inadequate. If the regulators are saying that it is adequate, we strenuously disagree with that.

Senator CAMERON —Are you arguing for full pass-through? Is that your position?

Mr Gunther —Ultimately, full pass-through would be the best outcome but, ultimately, we are arguing for just enough to cover our loss in investment.

Senator CAMERON —Why should the government have to make up your losses because you have failed to plan properly in terms of what was clearly visible, which is the implementation of carbon schemes around the world?

Mr Gunther —That is a very good question. I would just refer again to our Millmerran investment, into which we ultimately injected equity in 1999. Obviously that was done before the government had committed to Kyoto and, in fact, the types of standards in place were energy efficiency standards. We worked on this in association with our international investors, the banks and independent advisers. In fact, the government’s own adviser advised us at the time that the probable or maximum amount of carbon impost would be as much as five dollars a tonne of CO2. On that basis, we invested in the most advanced technology available at the time. We have made a 40- to 50-year investment on that basis, which the government endorsed, and we are now suffering significantly.

Senator CAMERON —The regulators say that it is not in danger. That is the issue that you have to deal with.

CHAIR —Thank you for your evidence; we appreciate the time that you have spent before the committee.

Mr Concannon —Thank you very much.

Mr Gunther —Thank you.

Ms In’tveld —Thank you.

Proceedings suspended from 1.37 pm to 2.07 pm