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

CHAIR —Welcome. Thank you for spending some time with us this afternoon. With our previous roundtables of this nature we have gone along the table and everyone has given a quick introduction, but when it has come to questions from the committee we have encouraged interaction across the group as well, with respect, so that if we do not know the right question to ask someone on the roundtable might know it or preferably know the answer to it. We will start on my left and work our way around to Mr Costello.

Mr Hendy —How long would you like the introduction to be?

CHAIR —For some of the emerging technologies, in particular, perhaps you can give us a slight background on the technology itself and what stage it is at so we can get a sense of that. We will go to Mr Baghaei.

Mr Baghaei —Oceanlinx has been in wave energy for the past 10 years. It is an Australian company with a number of patents registered in this country and overseas. Our business is taking advantage of the energy densities from wave motion in waters beyond 30-metre depth and converting that to energy. We are on the third iteration of the design in terms of design maturity. The first full scale model, Mark I, is currently operational in Port Kembla and has been there since 2006. We are currently completing the third iteration of that. We have gone past the second iteration. The third iteration is focusing on the size of the plant that would be capable of approximately 2½ megawatts per unit, and that will be 100 per cent matured and fully certified by DNV by next March, within nine months from now. Is that sufficient?

CHAIR —Yes, thank you.

Mr Hendy —Solar Systems is a technology manufacturing company involved in large scale solar power generation. Our technology is based on concentrating photovoltaic. We take a whole lot of mirrors, focus the sun about 500 times onto very high efficiency cells to give an overall cost-effective way of producing photovoltaic power. We are in the late stages of constructing a 500 megawatt capacity per year manufacturing facility in Melbourne to produce the core technology in our product. We are progressing very strongly with our LETDF and ETIS supported project for Mildura to produce a 154 megawatt heliostat based photovoltaic power station up there. We have recently completed the first stage of that project on time, which was the completion of a demonstration heliostat concentrating photovoltaic station, the first in the world connected to the grid and generating power, which was opened in October last year.

Other than Mildura, at the moment all of our plans are overseas. We have our 500 megawatt per year capacity facility coming online in Melbourne and we have to drive the cost down to achieve grid parity, which is the ultimate aim. Mildura represents about 10 per cent of the capacity of our factory over the next four years while we build that, so we need to be looking at larger scale deployment to continue to drive us down the cost curve. That larger scale deployment is going where the demand is and where the opportunity is. We are going to the places where there is certainty of support, such as in America and Thailand with their tax programs, and to places where there is financial certainty through the feed-in tariffs, such as in Europe and India. Renewable energy is an international market. We have a large factory and a large capacity and there is basically competition for that capacity, so we are attracted to where that capacity is. We would like to see activity in the Australian market. We certainly want to see capacity here, but we really need to move from a competitive demonstration environment into a supportive large scale deployment environment. Thank you.

CHAIR —Thank you. Ms Jeanes.

Ms Jeanes —Currently there are about 40 companies with exploration licences looking for geothermal energy around the country. They are at various stages of development, with a lot of activity in the Cooper Basin, across the central parts of Queensland and down the east coast of Australia as far as Tasmania. You will be pleased to know that there are very good prospects around Launceston. We are also looking to develop less engineered projects in hot sedimentary aquifers across Victoria, and there are a number of companies looking at the direct use of geothermal heat for industrial energy efficiency and heating applications, particularly across the southern half of the country, Western Australia, Victoria and Tasmania.

We have a couple of companies who are ahead of the pack in that they are now drilling deep holes. One of the challenges for the industry has been getting their hands on the funds to bring in the drill rigs. It costs millions of dollars to bring a rig into Australia and start drilling the deep hole. We will be drilling holes into deep granites, into sedimentary layers and into porous sandstones. It is quite a diverse industry with a diverse range of what we call players.

We are looking very much to the policy environment to provide the ongoing certainty. Any new industry needs certainty and it needs government to support until the time when the private investment market has the confidence to invest in the industry. For the geothermal industry we simply do not know when that is going to be, but we certainly believe we have to build a number of projects and a range of players with government support to get to the point where we are on our own.

McLennan Magasanik Associates produced an independent report for us last year which estimated that about 2,200 megawatts of installed geothermal capacity can be expected to be operating in Australia by 2020. That is not very far away. That is a significant proportion of the energy supply generation system by that time. A number of independent reports, including this report, predict that geothermal energy is likely to be the cheapest form of any emissions free energy operating in the market by about that time. What we need is to be sure that we get to that point with the carbon pollution reduction scheme and the renewable energy target in place. We have significant concerns about the current design for the renewable energy target. We are very concerned that it will not leave space for the emerging technologies in the second half of the measure. We have made that point on a number of occasions and we are still not clear as to whether or not we are going to get the outcome that we think we need. It is not just for geothermal energy, it is for all emerging technologies. They need to be sure that there is that incentive available when they come into the market in the second part of the next decade.

We believe that the government has through the energy white paper process an opportunity to shape the future energy supply system of this country with strategically targeted support that identifies the areas that we have the resources and the strategic advantage, including geothermal solar and ocean energy. We have been actively advocating around your halls for the sorts of outcomes that we need and we will continue to do that. Thank you for the opportunity to participate today.

CHAIR —Thank you. Professor Blakers.

Prof. Blakers —I am here to represent further upstream research development and early stage commercialisation, in particular for solar energy but renewables generally. We also represent the training of new people, which is going to be a really significant bottleneck as the renewable energy industry grows quickly. We have had a very hard 10 years and do not have enough people on the ground.

Speaking generally about solar energy, this is by far the largest of the energy sources. It is hundreds of times larger than all of the other renewables—fossil plus nuclear put together. We get about 30,000 times more solar energy each year in Australia compared with the amount of fossil fuels combusted each year. In the end it is the only truly large-scale sustainable energy source that is indefinitely sustainable with very low amounts of mining required. We could not possibly run out of the raw materials required for the utilisation of solar energy. There is no technical reason why we cannot roll out solar energy at any speed that is required. It is purely a cost issue. If the governments of the world deem that we need to go to 100 per cent renewables by 2030, for example, the current growth rate enjoyed by the solar industry since the turn of the century would be sufficient by 2027 to meet all of the world’s demand for electricity, and shortly after that all of the world’s demand for energy.

Photovoltaics and solar thermal, both high and low temperature, are a huge energy resource. In Australia we have a tenuous foothold. Although there have been welcome increases in support for solar energy, they pale into insignificance compared with what is happening in Europe and the United States. For example, one research group in Europe had a turnover last year of 50 million Euros, which is about A$100 million, which is approximately equal to the Australian Solar Institute, the entire support for research, development and commercialisation in Australia over three years.

CHAIR —Thank you. Mr Gordon.

Mr Gordon —The mission of Renewable Fuels Australia is based on biofuels research, that is, the production of ethanol, biodiesel and other potential emerging biofuel, and their distribution throughout Australia. Currently the production capacity of biofuels in Australia represents 2.8 per cent of transport fuel use, and that comes to over one billion litres of ethanol and biodiesel potential use in Australia. This industry also offers significant potential green-collar jobs in Australia and significant advancements and benefits for regional communities in Australia. These fuels are based on biomass, namely, in the form of the production of ethanol from sugarcane in Queensland and the production of biodiesel from palm oil and so on, but most particularly in New South Wales it is the production of ethanol from feed grains.

We are a co-user of grains for biofuels production. The potential for green-collar jobs is reflected in a 2008 study of green-collar jobs in the form of renewable energy and energy efficiency industries in America that found that in 2007 these industries generated US$1 trillion in sales and created more than nine million jobs in the United States. Ninety-five per cent of those jobs were in the private industry. Seventy per cent of those jobs were in the biomass sector, primarily ethanol and biomass power. The second largest jobs were in the wind sector, followed by geothermal and photovoltaics. This is an industry that can be deployed immediately in Australia, as is being done worldwide, to produce immediate carbon pollution reductions. The difficulty in Australia is that the focus has been on fossil fuels. This is understandable, because since World War II and the Korean War the whole focus of Australia has been on producing, selling and exporting its agricultural products, minerals, petroleum and gaseous fuel resources. We have been very successful in that. The problem for biofuels is that there does not seem to be a place in the current CPRS to be able to stimulate and play a role of deploying effectively biofuels renewable technologies that will deliver immediate carbon reduction pollution benefits in Australia.

CHAIR —Thank you. Mr Warren.

Mr Warren —The Clean Energy Council is the peak body for the clean energy and energy efficiency sectors in Australia. It is the product of a merger between the Australian Wind Association and the Business Council for Sustainable Energy in 2007. It has nearly 400 members, ranging from major generators and developers of renewable technologies to small-scale deployers and clean tech companies. We represent the whole suite of technologies, solar thermal, solar PV, wind, bioenergy, hydro, ocean energy, as well as energy efficiency companies.

We have been working fairly hard on the deployment and getting the government’s renewable energy target to the table today at COAG. We see the main challenges for the sector are cost and managing the inherent uncertainty of a very fast emerging and developing industry. We are trying to craft policies that stimulate and encourage innovation and breakthroughs without trying to second-guess what the market will look like as it deploys. To that end, the next scope of work we will be looking at is how the network will begin to develop and evolve to manage the increase in supply of variable supply energy technologies. We have historically had variable demand of electricity and fairly stationary and fixed supply. We are looking to move to a more adjustable scheme. That takes a lot of change, given that is a 50- to 100-year-old framework of thinking. Given that the accelerated deployment of renewable energy technologies will drive $20 billion worth of investment, that is going to pose challenges to ensure that we can get affordable financing for those projects and that that is not impeded in any way by scarcity of capital in the current financial markets.

We are currently doing some work trying to understand and explain the nature of green jobs. That is a useful line that is bandied around, but what does it mean? Where do the green jobs exist? It is a particularly important narrative we think in the short to medium term for regional Australia, because they will be some of the big beneficiaries of the deployment of a lot of these technologies. That has added benefits because of the high rates of unemployment in those regions. There is a multiplier effect. The benefits of increased employment create a further stimulus to employment in that respect.

We want to start working on looking at how we can improve the tax system to remove impediments and reduce risk for investment in some of these emerging technologies. There are risks associated and it is unreasonable to expect that all the new technologies will succeed, but we want to ensure that we treat the clean tech sector like we currently treat exploration in the resources sector; we allow for and encourage it to grow, stimulate and drive forward lower cost solutions as quickly as possible.

CHAIR —Thank you. Mr Richards.

Mr Richards —I am here today with our policy manager, Ms Maries. I thank you for the invitation today. Pacific Hydro is an Australian based renewable energy company. Despite our name, we are rather technology agnostic. We are involved in wind and hydro, looking at geothermal and also wave power, where it is available. We take the view and our strategy is that we look at leading edge, not leading edge technologies—technologies that can be deployed in the most cost-effective way in the most appropriate region.

With that, we have just passed $1 billion worth of investment in Latin America, predominantly in Chile in river hydro power stations, but also in Brazil in large-scale wind farms up in the northeast. These projects are made possible in part by the fact that we are creating carbon credits under the European Union’s emissions trading scheme. We are utilising the Kyoto protocol to do that.

In our experience over the last five years of doing that, achieving those goals and selling those credits, we understand that emissions trading is a mechanism by which equity is happy to invest and by which banks are prepared to lend. It is something that they understand. There is a growing understanding of emissions trading and what it does internationally, in our experience.

In Australia we are heavily involved in wind energy, looking at geothermal resources in the Cooper Basin and, as I mentioned, also large-scale solar thermal and potentially wave. We see emissions trading in Australia driving the long-term price for carbon abatement. Unfortunately, we believe the current design of the scheme will not deliver the kind of price that will see anything other than business as usual investment in the energy sector, and ‘business as usual’ means more coal. We are looking to deploy clean technologies and that is why we think the renewable energy target, sitting alongside the carbon pollution reduction scheme, will drive initial investment over the next 10 or 15 years. It will effectively build a technology and financial bridge for deployers of clean technology to a point in the future where the carbon pollution reduction scheme is taking over that task. We have seen around the world that multiple policies are in place. They do not rely on one policy to do all the heavy lifting. They share that burden amongst multiple policies strategically targeted at things like renewable energy and energy efficiency.

We are obviously strong supporters of a carbon pollution reduction scheme, emissions trading, and the renewable energy target. Our company, with the renewable energy target, would invest around $2 billion over the next five years in Australia. As Mr Warren mentioned before, that is part of the $20 billion to $25 billion worth of investment that we will see. We see ourselves as a regional job creator and a regional employer of some significance in the future.

CHAIR —Thank you. Ms Maries.

Ms Maries —I am also with Pacific Hydro.

CHAIR —Who is speaking for ActewAGL?

Mr Costello —I will start off, if I may.

CHAIR —Certainly, Mr Costello.

Mr Costello —After these impressive presentations I know my place. I run a small multiutility that supplies gas and electricity to Canberra and operates the water and waste water services. As small as we are, we have very practical problems to deal with. We buy green energy. The current level is two per cent. Six per cent of the energy supplied in Canberra is green energy. I think it is the highest level in Australia. Thirteen per cent of households here use green energy, although we find that when they have used it a couple of times they tend to rethink it given the price.

We are not involved in generation ourselves at the moment. However, one of our two owners, AGL, is by far the biggest supplier of renewable energy in Australia and continues down that path. They have just spent another $1 billion on more wind power. They are a very big investor in gas generation, too. Although it is not renewable energy, it is 50 per cent more greenhouse gas efficient than coal. However, we and they are very interested in moving into solar. Their motivation is that they consider that until they have done it and run one they will not really know how to do it, that they will learn a lot from that and then they will move on to bigger and better things. We at ActewAGL have a particular problem in that the ACT government and the ACT Assembly, all three of the political parties there, are united in a view that the greenhouse gas emissions reduction target for the ACT should be a great deal higher than anything currently contemplated, that is, somewhere between 25 per cent and 35 per cent by 2020. That poses particular problems for a city that has no industry and no generation capacity. I guess they are going to look at us. What it will mean is that part of that debate will be, to the extent that we can deal with that problem, it will have to be by things we do not necessarily in the ACT but our contribution to national greenhouse gas emissions reduction.

The two things that concern us are the same things that concern every other business, and you have heard some of it here. We need certainty. If we or our partners are going to invest large amounts of money they need to know what the rules are and they particularly need to know that the rules will not change adversely to them when they invest millions of dollars in a 30- or 40-year investment. They need to know that the rules will not change in the middle and suddenly they will have a very large stranded asset. Even if they wish to do so, their bankers, particularly at the current time, will not give them the money. I am sure you have heard all of this before, but it is a simple fact that if you run a business that is the way life is.

The second thing you need to do—and even my little modest business needs to do—is you need to make some sort of return. The distribution business is a regulated business. You have a regulator who sets prices. Return on equity in these businesses is very modest, as it should be given they tend to be monopolies, but regulators are constantly tempted to squeeze. There is public pressure, cynicism and scepticism that keeps the squeeze on. Today we just got our determination for our next five years, and we have a WACC, a weighted average cost of capital, of 8.8 per cent, which is going to make life extremely difficult for us, and I think some others may get lower when they are announced in a few weeks time. Why they would invest at that return of capital I do not know.

Senator BOSWELL —Were they 8.8 per cent?

Mr Costello —That is for us, yes. We got in early. We may do very slightly better than some of the others down the track. I think they may be now in the lower eights.

Senator FEENEY —It is possibly above that?

Mr Costello —No, not these days. What is forgotten is that even though the interest rates are seen to be low, banks and investors have a spread of 200 and 300 points sometimes. Whatever the nominal rate might be, on top of that there is this huge margin. We have been unable to persuade the regulator to listen to that, but perhaps others will do better.

If we have not got some certainty and some reasonable expectation of a return we will not do it. However, the ACT government has pledged $30 million to subsidise a solar power station and is going to put out request for proposals in a month or so. They have also volunteered that the feed-in tariff that exists in the city may be available at a certain level. No discourtesy to those who are supporters of a feed-in tariff, but on a domestic residential model it has certain problems. It is deeply inequitable, because the people who can afford it tend to be people with some reasonable amount of money. Here it is a gross tariff of 50c a kilowatt hour, which is pretty good. It is about four times what we sell our retail tariff for normal energy. That cost, of course, has to be borne by the whole of the community, including the poorer people of the community who spend 15 per cent of their budget on energy as against the better off people who spend five per cent of their budget on energy. There is an equity issue there and, also, it is very expensive.

Even for a modest solar power station of the kind we are talking about, a 22 megawatt one to start with—and I will come back to that—it is about 25c a megawatt hour or less. It is a more efficient way of doing it. The basic message is that unless we can build this solar power station, feed into the national grid and sell that energy, we will not do it. At the moment the technology in solar is not enough to make that work without substantial subsidy one way or another.

We also have some potential wind power assets that we are looking at, but at the moment we cannot get the prices we need to make them work. We have DAs in for that and approved. We are going to be required to find some very substantial offsets if the ACT Assembly goes down the path it is talking about, because as I said it is tripartisan. We are looking at the sorts of things that have been discussed before and putting some money in to support people doing research into soil carbon sequestration of various kinds, but of course the problems are those of measurement and accounting, which you keep coming back to and are not yet resolved. For a small utility like us it is the same as for a big utility or any business. You need some sort of certainty and you need to be able to make some sort of return on substantial investments.

CHAIR —Thank you. We have had some discussion about the relationship between regulators and companies during the day-to-day, so you have added some more to the mill as far as that is concerned. We might start with your comments on feed-in tariffs and Senator Milne has suggested that we talk about this as well. You have made some comments about how you see feed-in tariffs working and potential inequities from your perspective as a reseller. Perhaps we can throw that along the table to get some perspectives from the other energy generators.

Senator MILNE —I would like to clarify the question. Basically, there has been some discussion about whether you need a feed-in tariff to bring on renewables if you have a renewable energy target, so in this context of discussion about feed-ins I would be interested to know whether you think the current renewable energy target is going to be enough to bring on the technologies that are going to be more expensive because they are in an earlier development stage, or whether you need a feed-in tariff to do that? You may have other comments in relation to that. It is really in the context that government has dismissed feed-in tariffs saying you do not need both; the RET is enough to bring it all on. We have had a lot of discussion from others saying it is not designed to do that, that it will not bring on large-scale renewables and so on. We are interested in your collective view.

CHAIR —Mr Hendy.

Mr Hendy —The RET system basically drives the lowest cost energy provider in the market and supports that into the marketplace, but if you want to support the emerging technologies they need help to get down the cost curve. Generally, almost by definition, all of the emerging technologies that are further up the cost curve have the potential to come down, solar in particular, but will only come down with volume behind them. The energy targets only support those lowest costs so the opportunity with the feed-in tariff is to target other technologies that you want to encourage and support because of their capacity to get lower cost in the future. That is really where the strength of the feed-in tariff allows you to support those emerging technologies.

Prof. Blakers —I would strongly support that statement. If you are not going to have tranches within the larger renewable energy target then you need some other mechanism. A feed-in tariff is quite nice. You can tailor it. You can have different feed-in tariffs for different technologies. It is easy to do. I would like to address, briefly, the equity issue. While ever there is large-scale air-conditioning in an electricity system, driven by summer peaks to at least a substantial extent, which is what we have, then those who do not have air-conditioning are subsidising those who do, because electricity on summer afternoons costs more from the pool than at other times. So, until air-conditioning is abolished I think it is really unfair to complain about a decline in feed-in tariff.

CHAIR —Mr Warren.

Mr Warren —I would like to go to Professor Blakers’s point first. Air-conditioning is only two per cent of total household energy consumption, but the peak end of the grid is required for only four days a year, and so the infrastructure upgrades that we are talking about to expand the peak load capacity of the grid is all about those four hot days in summer. That is the added cost of those sorts of technologies.

I have three points on feed-in tariffs. As to the economics, in Australia we have a renewable energy target that sets the target and then allows the price to adjust. A feed-in tariff sets the price and then allows the target to adjust. They are two different mechanisms. One is based on whether you want to achieve a target or whether you want to set a price. The Europeans have gone for the price setting and we have gone for target setting. The rationale behind that is that we have a broader suite of lower cost renewables. The US and Australia are probably the two countries on earth that have a Melbourne Cup field of A-list world-class renewable energy assets. We have the best sunshine in the world, roaring forties wind, great bioenergy assets and well established hydro dating back to 1895—we have got everything. In a sense we are better placed than other economies such as Germany, which faces really critical energy scarcity issues in a carbon constrained world. That is the rationale.

Having said that, we argue that there is also a role for feed-in tariffs, particularly for distributed generation, embedded generation in the grid, such as solar PV, because it does avoid transmission losses and avoids infrastructure costs by embedding supply of electricity to the point where it is consumed.

What is missing in the current policy debate, apart from the ACT, is that most jurisdictions have gone for a net tariff, which only pays for the electricity that is surplus to the household’s requirements or business’s requirements. That is inequitable. What it means is that, if you are a retiree, have a factory, you live at home or work at home, you get almost no benefit from a net tariff because you consume all the electricity that your solar, micro wind or micro hydro has generated. If you work in the city or in some other place and consume electricity elsewhere, the net tariff rewards you handsomely because you are not consuming energy during the day when the sun is shining. We think that is an inequitable policy and we are argue for a gross feed-in tariff for distributed generation.

Mr Baghaei —I fully agree with all of the discussion, but I can talk from the wave energy aspect of it. We are capable of generating energy ultimately for most of the 24 hours of the day. Currently, our design is forecasting something around 22 hours per day generation of electricity. Because we are at the left side of the topic here currently, and for small businesses that are very innovative, particularly in this country, we are extremely dependent on feed-in tariffs and also different mechanisms of supports, such as RETs, ROCs and so on, which also enables us to secure funding up front during the development and implementation of the programs.

Currently, you can compare with Scotland. We have a number of projects across the world. We have been working with the Hawaiian government and, in fact, with the DOE in the US for a number of years. We find that there is significant support and help in terms of the availability of the fund grants—ROCs and RETs—and investments in other parts of the world, which enables us to grow much faster and get the ultimate target of the sorts of competitive prices with other renewable energy than is available in Australia. If you look at the mechanism with wave energy, it is because there is a discrepancy between what is available in terms of feed-in tariffs and other mechanism in this country with renewable energies. In fact, if you go from state to state there are also different aspects that are applicable, which makes it very inconsistent.

If I am operating from Sydney as a headquarters and I have subsidiaries—and we do have six subsidiaries across the world—it becomes more effective for me to operate probably in Scotland with five times ROCs. That makes it much more bankable for me to go to the investor and say, ‘Look, this is a guaranteed output and I need this much money to develop my project.’ That really saddens me. In that respect, I am urging the government’s support to ensure there is some incentivisation for larger industries, as Mr Costello mentioned, to be able to see what are the benefits and returns in the shorter term for them in supporting the smaller innovative companies like ours. If that return is not supported, if there is not that mechanism that is tangible and that can actually materialise in a short period, who else is going to invest in that? Strategic investors are going to be very much focussed on IPOs. Where are the IPOs going to happen? They are probably not going to happen in many respects in this country. They will be in other parts of the world.

With respect to precommercialisation, we can look at a study done recently in this country. A month ago we had an international forum by the Australian Academy of Technological Sciences and Engineering that produced a report. There were a number of countries invited—Japan, Germany, South Africa, the United Kingdom and of course academia from this country and a few renewable energy representatives. Basically, there was a very good balanced report produced. They reckoned that getting a new technology to commercialisation currently takes on average approximately 10 years. That is important to consider. If you are to create a balance in this country in terms of alternative energy, we just cannot be short-sighted and put focus only on one aspect of this technology.

CHAIR —Ms Jeanes.

Ms Jeanes —From the geothermal industry’s point of view, we have not been very clever at looking at horses for courses. We have not looked at what the resources are in this country that are capable of being used at low cost in the long term, what is in our strategic advantage and long-term national interest? We have had almost an obsession with market mechanisms and not picking winners. That has actually resulted in a lack of investment, in a struggle at every step for the renewable energy industry, to wait for the next policy outcome and really to wait for the next election.

At the moment we have a debate about whether or not we need a CPRS. A lot of people in the debate do not think we should start it next year or the year after until we provide the certainty with the frameworks, but then there are the strategically focussed policy mechanisms that address the particular industries that you want to support. Energy generation is responsible for 50 per cent of our greenhouse gas emissions. There is nothing in the market at the moment that will be rolled out on a large scale that is going to be able to meet the future targets that we will have to agree to. There is no new emerging technology that at the moment can meet it at a competitive price. If we do not have feed-in tariffs for the solar industry, if we do not have capital funding for the geothermal industry—I do not know enough about the ocean energy industry to understand what its immediate needs are to get projects up and running—then we are not particularly clever and we are going to really miss the opportunity to position ourselves.

In the geothermal energy industry, which I can speak for at the moment, we are part of an international partnership of developing geothermal technologies. We have the US and Iceland at the moment, with New Zealand and Japan coming in. The federal government is not putting any money into this, but the other governments are. If we can improve the rate at which we drill wells, if we can improve the cost of drilling wells, if we can improve our understanding of and timelines for fracturing rocks underground, we can dramatically improve our timelines for development and our cost reductions.

Senator HEFFERNAN —How will your figures go if the MBD comes to fruition and coal-fired power stations have zero emissions? At the present time MBD at Loy Yang have signed a memorandum of understanding with the power station and the Victorian government. They are doing Eraring in the Hunter and they are doing Tarong in Queensland, which if it comes to fruition—it is being proven up and is now going to the commercialisation stage—will mean zero emissions.

Senator FEENEY —Then we are all saved and they are all out of business.

Senator HEFFERNAN —Is that a reasonable question? What would that do to your business model?

Ms Jeanes —We are more than happy to compete with anybody in the market, but what we want to do is get started. We are not going to get started until we have the policy frameworks that enable that. We are started, but we are not going to get a long way down that track until we have the policy frameworks.

Senator FEENEY —Chair, before we depart the feed-in tariffs altogether—

CHAIR —I was not going to depart from feed-in tariffs. I was just to go on to the issue that we are moving towards. Mr Richards would like to say something on feed-in tariffs, too. I just wanted to throw another element in there that we have started talking about, which is how we get from precommercialisation to large scale. I think there would be several of you who could perhaps give us some information on that.

Senator FEENEY —If your answer could have regard for the historical experience of feed-in tariffs that we have within the state jurisdiction, I would be interested in hearing how they fostered the industry and how they worked—some lessons.

Mr Richards —That is where I was going to head. There are plenty of examples around the world of where feed-in tariffs have been absolutely disastrous. There are plenty of examples of where they have been fantastic and have driven the cost down of the technology and seen large-scale deployment of technology. One of the main reasons they work is that investors love it because it provides some really known outcomes. This is not only across renewable energy but a whole range of technologies.

Where investors come in, invest and get the large-scale deployment of that technology, and provided government is aware of the cost of that technology and they follow the feed-in tariff down with that cost, there are examples in Germany and elsewhere in Europe where that has been a fantastic way to drive a low-cost deployment of a broad-scale technology. It does rely on government, though, having a very close watch on the technology and its cost curve to ensure that they are not providing an oversubsidisation within the feed-in tariff.

Senator MILNE —There is no risk of that in this country.

Senator FEENEY —Net or gross?

Mr Richards —Most of the time it is gross. You get benefit for the lot. Provided you are aware of the cost curve and you follow it down, it is a very efficient way to drive technology deployment that does require you to have a very close and detailed watch on that industry to ensure that occurs.

Mr Baghaei —I can give you an example in terms of the trend across the world, in relation to some of the best tariffs on average you are talking about around 50c per kilowatt hour in today’s exchange rate and today’s money. That has been announced just recently in the US. If you come to Western European countries, some of those countries are on a similar basis of around about 50c to 55c. When you go to Scotland, which is exceptional, that translates to something like 66c equivalent per kilowatt hour. When you compare that against the maximum available for energies like ours in, say, Victoria, at the most it equates to something like 20c per kilowatt hour. At best we are almost at a third of what the Western societies are calculating their tariff on.

Senator FEENEY —It seems to me that no-one accounts for the avoided costs when they do the numbers on a feed-in tariff.

CHAIR —Mr Blakers.

Prof. Blakers —It is important to understand the purpose of the feed-in tariff. It is not because this is the greatest and cheapest source of electricity. It is a very clear-eyed decision by certain governments, notably Germany and some others, that as you drive up scale of production through a market mechanism such as this you drive down prices. For example, the photovoltaic industry has followed a progress ratio of 18 per cent for 30 years. That means for every doubling of cumulative sales the cost of photovoltaic electricity has gone down by 18 per cent. A very interesting price point is about to emerge in southern Europe. That is, within a few short years—actually right now in some countries—the cost of retail electricity is greater than the cost of photovoltaic electricity from your house roof. When that moves a little bit further north to include a few more customers the industry then starts to take off under its own steam.

Senator MILNE —What do you need to commercialise?

Prof. Blakers —To commercialise for the solar industry—and probably I speak generally—we need tranches or similar in renewable energy targets so that emerging technologies are not swamped by solar water heaters and wind. We need manufacturing support. It is amazing that, at the moment, if you are trying to go into manufacturing in this country there is nothing for you. There is market support, but not early stage commercialisation and engineering for manufacturing. Thirdly, we need a vast increase in research and development. As welcome as the Energy Innovation Fund is, it is $150 million over three or four years, which is peanuts compared with what is happening overseas in Europe and the United States.

Lastly, we need massive increase in support for education. We cannot build a huge industry on the basis of no skilled people. I can tell you, very clearly, that at the moment we are trying to recruit for some of our programs. We find it very difficult to recruit anybody who knows anything about solar energy and we have to take other people. We need a massive increase in support for TAFEs and universities to turn out the professionals required to service this industry.

Senator FEENEY —What should the R&D budget be, in terms of getting that?

Prof. Blakers —I would not advocate a huge one-off payment. I would suggest that the Australian Solar Institute running at perhaps $25 million a year is good for the first year and then going up by 20 per cent or 30 per cent per year basically for the next few decades. A substantial locked in increase that will encourage researchers and small companies to innovate, and in particular the valley of death of commercialisation should be well covered by a separate scheme so that once you have got this new toy in the laboratory there is a clear path to take it through engineering for commercialisation, support for innovative manufacturing and support for small-scale demonstration. The renewable energy demonstration fund will only support large-scale demonstrations. It will not support the small-scale demonstrations that are the lifeblood of an industry in Australia, as opposed to importing.

Senator MILNE —Are you suggesting engineering and manufacturing support by way of direct grants or is there another mechanism and, if so, how do other countries support getting that engineering and manufacturing out to scale?

Prof. Blakers —Other countries support it by the equivalent of Commercial Ready, which no longer exists. They support it by having support at state government, federal government and European government levels for research development, demonstration, manufacturing and commercialisation. If you go to Germany, for example, and say that you want to set up a company to manufacture, it is, ‘Step this way, please, Madam. How can we help you?’, at every level. REC went to Singapore. They got a square kilometre of land in Singapore. That is amazing. This is the sort of support that our competitors overseas are getting, but we are not getting here. There are companies wandering around the corridors of power and not getting any support for setting up manufacturing in Australia.

Mr Baghaei —If I could add to Professor Blakers’s comments, which I fully support. From experience with our own company, we work with research institutes at the University of Hawaii and several other universities in the UK and this country. The significant difference in terms of government support in this country and government support in those countries is the conditions that they associate with the grants that they make applicable to their research and development—at least in our case. The conditions here are more stringent, in terms of, ‘If I give you $1, you have to put up $2, $3 or $4’, as opposed to conditions in other places where we are involved that are not as demanding. They do realise you are going through very early stages of development and this is, if you like, a very risky part of the cost curve. For that reason they are reasonable in the sense of how much they can support and how effectively they control the direction of that.

Having said that, we have a grant from Climate Ready, which is from the federal government, and we enjoy that, but of course when you look at the grants at the federal government level—and we have applied for several—you see it encourages that you have to have a significant private investment for every portion of the grant they make available to you, which puts significant constraints on small business like ours to secure that level of funding. If the equation or the ratio were the other way around, it would make it much easier for some of us to actually go down that cost curve and reduce the price much sharper on an exponential type of ratio.

CHAIR —Senator Boswell.

Senator BOSWELL —I would like to ask representatives of all the different industries here: what level of subsidy will be required in dollar terms per megawatt hour to make each of your respective renewable energies commercially viable against base load, coal and gas? Oceanlinx might like to lead off.

Senator MILNE —It depends how expensive coal is.

Mr Richards —Is that base load with a carbon tax on top or a carbon pollution reduction scheme on top?

Senator BOSWELL —Just as we are at the moment.

Senator MILNE —No carbon price.

CHAIR —Essentially what you are looking for is what the general energy generation is of the relative technologies at this stage.

Mr Richards —Of the wholesale electricity price.

Mr Baghaei —You are measuring apples and oranges, with respect. I have been in nuclear power plants as well as combined cycles and fossil fuel, so I am talking from personal experience. If I wanted to really price the cost of the energy per kilowatt hours I would need to know in absolute terms so I can normalise that price. I need to see your criteria for that measurement to be able to give you a real answer. If you are talking about at face value what the consumer is using today—superficially—you are not taking into account the soft issues and other hidden implications of that carbon pollution and other criteria as to how much that costs the government in real terms. That is a different answer.

Senator BOSWELL —I am asking a very simple question.

Senator MILNE —No, but it is not.

Senator BOSWELL —It is. It is my question.

Senator PRATT —Who pays for the pollution, Senator Boswell?

Senator BOSWELL —No-one is questioning that at the moment. I am asking: what subsidy is required to bring you to a point where you can compete against gas and coal?

Mr Richards —If we were given the same conditions under which coal-fired power stations were originally built, that is, the owner of the generation asset paid for the generation asset, and then when it gets to the gate of that facility someone else paid for the transmission line, I think you would see a lot of renewable energies, particularly geothermal and some wind, coming into the market fairly quickly. At the moment, though, we are at a natural disadvantage because when we build a large-scale renewable energy project we have to pay from the asset right through to the transmission node. That was a benefit afforded to the coal-fired power station in the past that is not afforded to us at the moment.

Senator MILNE —So, is that what we need to do?

Senator BOSWELL —The next question is: who is going to pay for the renewable power where you are generating this power right out in the west and you are using it in the cities? There is going to be a lot of cost for wires and pipes.

Mr Richards —That has traditionally been paid for by the public through the transmission charges on their bill and it is spread over 50 years. That is the way that the market has been built.

Senator PRATT —Generators do not pay.

CHAIR —Ms Jeanes and then Mr Costello.

Senator BOSWELL —Can we get an answer?

CHAIR —There are people offering to answer the question so I will give them the call.

Ms Jeanes —I will try to answer the question as best as I can. The geothermal drilling fund, at the moment, provides project developers who are ready to produce a pilot plant with up to $7 million of taxpayers’ money. The average cost of a pilot plant is about $25 million, so that is roughly a two-for-one deal. The renewable energy demonstration fund has just received applications and we think that several projects will need about $50 million to demonstrate that geothermal energy works at scale. The cost of producing energy from a pilot plant is around $135 a megawatt hour and from a demonstration plant about $105 a megawatt hour. These are cost estimates for the future obviously, because we have not done them.

We ultimately think we are going to get down to an output cost of about $80 a megawatt hour. That is competing with a coal price now of about $45 to $50 a megawatt hour. We think that by 2020 our carbon price and renewable energy target certificate are going to well and truly cover the difference. What we need now is capital funding up front, and I have just given you some idea of what that magnitude is.

Senator BOSWELL —Thank you. You have answered the question. You can produce power at $105 as against—

Ms Jeanes —Ultimately $80.

Senator BOSWELL —You said coal power is $50, so that is about a $40 subsidy or something like that.

Senator HEFFERNAN —If there are no emissions from coal you are dead.

Senator BOSWELL —I wonder if I can get an answer from the photovoltaic representatives.

Prof. Blakers —I would be happy to answer that. It really depends on what market you are in. Photovoltaics will compete at the retail level—that is up against 15c, 20c or 25c a kilowatt hour—within five years in Australia and that is as commercial as anything you would like to find. In the longer term, if we continue to march down the cost curve as we have for the last 30 years, by around 2025 we will be in the $90 a megawatt hour range, which will be right in there with any other low emission technology.

CHAIR —Currently about $150 coming down on the curve to about $90?

Mr Richards —On large-scale central plants for both solar thermal and photovoltaics.

Senator BOSWELL —Where does wind power fit into the equation?

Mr Richards —We build a lot of wind energy around the world. Some of the best wind resources are on the Eyre Peninsula. If we were to pay for the wind farm asset and the connection to the grid you are probably looking at somewhere between $90 and $100. If you were to build a wind farm on a piece of grid infrastructure you would probably save yourself about $20 to $25 a megawatt hour. It really is a horses for courses situation, but generally speaking wind is between $80 and $90.

Senator BOSWELL —As against $40.

Mr Richards —That is paying for all the infrastructure.

CHAIR —Mr Costello, would you like to add to that, given that you are a buyer of all of these commodities?

Mr Costello —At the moment the retail price here for coal without a carbon impost on top is about 13c per kilowatt hour, and for our green power, which comes from wind and hydro, it is about 19c. That is the difference to the consumer.

Senator PRATT —What would that difference be if the carbon from the coal sources had been geo-sequestered? Where do you sit relative to the cost if you are comparing yourself to coal?

CHAIR —The only way that can be a fair question is if anyone sitting around the table has any expertise on the geosequestration costs. The faces do not look too optimistic to me.

Mr Costello —Can I add something on the feed-in tariff?

CHAIR —Certainly.

Mr Costello —I hope I did not convey an impression that I, in some sense, opposed the idea of a feed-in tariff.

CHAIR —No. It is just a good point for conversation.

Mr Costello —The point I was trying to make is that if you do it per household, that individual household benefits and other households do not but pay the cost. If you supply electricity to the grid then everyone pays the same. In that sense there is an equity issue. Of course, to do it even on a modest solar power station of the kind we are thinking of to start with of 22 megawatts, which is a reasonably expensive way to do it, then it is about half the price per kilowatt hour that you would pay for the 50c that you currently pay for the gross feed-in tariff. It is much cheaper.

Senator FEENEY —I accept what you say, but with a feed-in tariff you are spared the cost of building infrastructure yourself.

Mr Costello —No. We have to build a solar power station to get the feed-in tariff.

Senator FEENEY —If you are supplying the market directly.

Mr Costello —Yes. What I am saying is that if we were to win the contract to build a modest sized solar power station, it is around 25c a kilowatt hour to supply that to the grid as against 50c if you do it on someone’s household at the moment. If you want to do solar power and you want a feed-in tariff then it is a lot easier and cheaper to do it that way than it is to do it on someone’s roof. You would expect that, because one is large scale and one is small scale.

Senator MARK BISHOP —Whilst we are talking about costs, how resistant are consumers in the ACT to paying the green levy once they get used to the higher fee? Is there an issue or not?

Mr Costello —It is an issue. Quite a lot take it up and then after they get their first bill they will come off, but a lot stay. We have 13 per cent of households in the city that are using green energy and that is voluntary.

Senator FEENEY —What is the retention rate?

Mr Costello —I could not tell you. It would be reasonably high. It would certainly be over 50 per cent. It would probably be 60 per cent or 70 per cent.

Senator FEENEY —You get a quarter that sign on and then half of those drop off? Is that the kind of churn?

Mr Costello —No, not half of them would drop off. I will get you an accurate answer for that. Of those 13 per cent a small number would drop off after their first bill. We have an advantage because we are a multi-utility. We sell gas, electricity, telecommunications, phones and so on, and we actually offer a 25 per cent discount on your electricity if you bundle it all up, which makes it quite attractive to stay on. It is a bit more attractive to people perhaps than elsewhere. Price, naturally enough—guess what—affects behaviour.

Senator XENOPHON —If you have a situation where, at the moment, you have to opt in for the greener energy—

Mr Costello —As of 1 July you will have to opt out.

Senator XENOPHON —That is a question I have asked of other retailers. What is your assessment of what that will do in terms of switching things around?

Mr Costello —The model is just a guess in this case. We just do not know. We will find out. We will know after a year or two from experience whether people drop out. This is a city that basically has the highest average incomes in the country by a long way, and you would expect more people to stay here than you would in the west of Sydney.

Senator MARK BISHOP —Thirty cents to 90c is not insignificant.

Mr Costello —It is a lot. It is a 50 per cent increase.

Senator XENOPHON —Further to that, it may have been Origin that gave evidence earlier that if you had a massive switch to renewables they would not be able to provide enough green power.

Mr Costello —Certainly not.

Senator XENOPHON —I am not saying that is my position. I am just saying that is what Origin said.

Mr Costello —If you had a new mandated renewable energy target that went from two per cent to 20 per cent, people would build the renewable energy to go with it, because we retailers would be required by law to buy it. What happens if we cannot sell it is going to be the interesting thing.

CHAIR —Senator Milne.

Senator MILNE —I would like to come back to the issue that Mr Richards raised about the grid. This is something that is a real opportunity now that we are talking stimulus packages and so on. In terms of upgrading the national electricity grid to take account of bringing on large-scale renewables from around the place and also managing the demand side better—so the whole intelligent grid issue and also the rolling out of smart meters and internal display units to go with the expansion of the grid—I spoke to Mr Mills when he was here last year and he was saying that one of the big attractions in California had been where governments had declared solar energy parks or renewable energy parks, had done the pre-permitting and also took the grid out to them. That was the incentive that essentially led to investment decisions. In terms of adaptation to climate change, renewable energy provides a big opportunity for some large properties in rural Australia where they are struggling because of drought and other things. How important is it for all your technologies that we get a massive government investment into the intelligent grid and then the retrofit for energy efficiency for smart meters to actually bring on and manage your contributions? What sort of money are we talking about?

Mr Richards —This issue certainly was brought up by Dr Garnaut in his report as well. Another great example of where governments have intervened here is Texas, where currently there is probably the largest wind market in the wind. The Texas government basically built grid, and it probably had a lot to do with Thomas Boone Pickens putting money behind it as well. The issue in Australia is not only improving grids within states but improving the interconnection between states. There is no point having pinch points at the property boundary, if you like. You have to be able to create a truly interconnected national grid and then you will start to see the efficiencies rolling in.

In relation to government investment in that—putting the global financial crisis aside, which will eventually end—I think there is plenty of private equity that is prepared to invest in 50-year transmission assets, because it is a pretty solid rate of return. I think there is a role there for government to potentially assist with the upfront risk, in the form of public-private partnership, which brings in private equity over time to be the investor in that. It does not necessarily need to be all government cash. Government cash can defray some of the risk at the start and then private equity takes over in the long term. That is provided that government is also creating a regulatory environment under which you can securitise that asset. There are examples of that around the world as well.

Senator MILNE —So, we need a map to government saying, ‘These are the priority areas’? Who, if anybody, is working on putting together a proposal like that?

Ms Jeanes —We are represented on the Australian Energy Market Commission’s review of the capacity of the transmission system to take the CPRS and the renewable energy target. Firstly, I would like to say there is a perception that geothermal energy has a huge transmission challenge. It certainly has transmission challenges, but it is not perhaps the huge problem that it is often perceived to be. What is just as important is strengthening the grid from Port Augusta around to Queensland so that when geothermal projects that are close to the grid comes on stream there is a capacity for the spaghetti grid to take them. It is not just extending the grid to the Cooper Basin.

A number of our projects will grow by supplying off-grid customers, such as mining companies. We need certainty around the rules to know that when the transmission infrastructure is needed that it is going to be there. One of the things that we proposed to the AEMC is a renewable energy province within the NEM for the centre of Australia where the solar, geothermal and the wind resource is massive so that you could spread the cost basically across all users for the energy coming out of that province. We have floated it and we have a discussion paper out. I would be happy to send it to you to have a look at it. In terms of the cost, we think that a fairly small injection of funds from the infrastructure fund can assist in getting us going—perhaps only a couple of hundred million dollars.

Mr Baghaei —Again, the same institute that I referred to previously, ATSE, the Australian Academy of Technological Sciences and Engineering, actually offered to help do this sort of a study, if that is an appropriate channel to pursue. Certainly, as a result of that three-day workshop that they recently ran, they obviously agreed on expansion and stability. One of the major issues that came out of that discussion was the centralised base load as opposed to a series of intermittent, if you like, renewable energy output. As a result of that, particularly when you put another factor into that complexity, which is remote locations and the need for whole system stability, there is a significant study to be undertaken in that area to address all of that issue for the future of Australia. One of the things for sure is—and it is nothing to do with the climate—that Australia is going to be significantly short of energy in the near future. That is one of the studies they came up with and is certainly supported by all those nations who were present there as well as Australian representatives.

CHAIR —Mr Hendy.

Mr Hendy —In terms of large-scale solar, I do not believe it is a short- or a medium-term problem; there is plenty of opportunity down the inland fringe of the existing grid in the short to medium term. It is not a barrier for large-scale solar at this time.

Mr Warren —Just to answer your question, Senator Milne, we thought leadership on network development with expanded renewable energy in the grid is our next No. 1 priority issue. We have not started it because until the RET is through parliament we do not know what the initial terms are. That literally is the starting point on which we frame that work. We expect it to take probably a couple of years in staged processes. It is a huge question.

We would also support Andrew’s view that it will be an evolving process. There are upgrades that we are pretty confident we can drive now and some that will evolve as technologies move in different stages into the market. These are interconnector upgrades, particularly the Basslink with increased wind and the changing role of hydro in the grid and the interconnector in South Australia and Victoria bringing some of those great wind assets. It is almost constrained now to get more wind farms into South Australia, because there is not enough capacity to get that extra electricity into the main grid.

Ms Maries —I just wanted to follow up on that comment that Susan made earlier about strategic resource zones. One of the key strengths of the Texas system is that they identified these key areas and then built transmission to those areas. We support what Susan said about the South Australian Cooper Basin geothermal area, but the whole of South Australia in general is going to be a renewable energy strategic resource zone. It has fantastic wind down in the Eyre Peninsula in particular. It has the geothermal and the solar thermal and it also has some of the wave resources there. It has possibly the weakest transmission and distribution system in the NEM currently and the interconnectors across to Victoria are constrained quite often. So, it is really an island grid at the moment. Even if we wanted to build significantly more energy in South Australia we would be faced with those constraints. If you want to identify a strategic resource zone, South Australia is a good place to start.

Senator FURNER —What would the different mix be for renewables for RET in your state and in particular on those announcements?

Ms Jeanes —The mix, sorry, in South Australia?

Senator FURNER —In South Australia.

Mr Richards —You are probably going to see—depending on what you do, obviously, with the NEM—an initial push for additional wind to make it commercially viable. But I do not think you would see geothermal fast-tracked pretty quickly behind that.

Mr Warren —I just have a point on the interconnectors. It does not have to be Victoria. The concept of a New South Wales interconnector makes it a lot easier to pick up both geothermal assets in the Cooper Basin, and there is a very large wind farm being proposed at Broken Hill. It saves a lot of costs by putting a different kind of connector across those parts of Australia.

CHAIR —Is there any sense of that cost?

Mr Richards —That is the work we are going to do.

Senator MILNE —Do we know what the central zone proposal would cost, to transition to that?

Ms Maries —No, we have not looked at that.

Mr Richards —That is probably the $64 million question.

Senator MILNE —I just hate it when opportunities arise and you do not have a project on the table with a cost to put it there.

Senator BOSWELL —Wind power is renewable and it is cheaper than geothermal and it is cheaper than wave. If power is power and renewable power is renewable power, why would people buy Ms Susan Jeanes’s power—thermal power? What would be the motivation to buy dearer power?

Ms Jeanes —I am not sure that you have characterised our costs compared to the other renewable resources. In terms of what benefit we add, we add base load power.

Senator BOSWELL —There is a RET, which has encouraged the use of renewable power. As I understand it, wind power is the cheapest renewable power. Is that correct?

Ms Jeanes —Available in the market at this time.

Senator BOSWELL —Why would anyone then buy dearer wave power or geothermal power or photovoltaic cell power? Mr Costello, you are interested in getting the cheapest power to sell to your green constituency.

CHAIR —Even the non-green ones.

Senator BOSWELL —Why would you go and buy Ms Jeanes’s power when you can buy renewable wind power?

Mr Costello —We would go to the market and we would buy whatever the cheapest green energy was, naturally.

Senator BOSWELL —And that would be wind power. Where is the market for these dearer powers?

Mr Costello —For the solar energy proposal generation capacity that we are talking about, the ACT government is putting up $30 million. They have applied for federal funding under their system, for another $50 million, and as part of our tender the government has said, ‘You can bid a price for a feed-in tariff.’ In other words, whoever bids the lowest feed-in tariff will probably win the contract; instead of their setting a price. In other words, what I am saying is that we will need a heavy subsidy, which wind power does not get.

Prof. Blakers —The reason, of course, that we would invest in something that is not the cheapest right now is that in the future it well might be the cheapest or because its resource base is just mind-bogglingly huge and you cannot do without it if you are going to go to a fully sustainable energy future. Certainly solar power for both PV and solar thermal is in that category. I think another reason that you might invest heavily in these technologies is: do you want a manufacturing industry in Australia in these areas? We are not going to get one under current policy settings. Or are you prepared to import virtually all of the equipment that we require to generate virtually all of the energy? If we go down that latter path we are going to have a very difficult balance of payments in the future, when our coal exports drop off if we have a seriously carbon constrained future and we are not replacing them with local manufacturing. That is a real policy question.

Mr Warren  —Broadly, we are representing three types of technology here today. There is proven low-cost renewable energy sources—hydro and wind. Hydro is even cheaper than wind, which is constrained by capacity. Then there are proven falling cost technologies. Solar technologies and PV fall into that category. Their costs are currently higher, but they are coming down. In a sense, we are really talking about different policy mechanisms for different technology bands. With regard to the low-cost proven technologies, their biggest way of driving cost out now is by changes to the grid on the network. Revaluing the way that you use those variable technologies or, in the case of hydro, how you can maximise its potential as a complement to variable technologies will increase their net value. In terms of the falling cost technologies, obviously giving them both access to capital to keep developing technology and scale; in the case of PV, policies that just perpetuate rooftop deployment of PV is politically popular but does not drive the scale and scope needed to get it down the cost curve.

Then there are the developing technologies that offer promise and potential but are not yet proven in terms of cost. You clearly have to develop those and take them as far as you possibly can, because you will have some incredible breakthroughs and you will have some failures. It is like any other R&D space. But you need to find out, ‘This is an accelerated process to find the lowest cost to remove carbon from the energy system as quickly as possible.’ You do not know what those technologies are going to do in, say, 10 or 20 years time, but you need to find out quickly.

Mr Richards —There is a fourth reason, and that is that when you find a resource that has such huge potential you really do need to try to follow that to see where it could lead you. If you only pursued the cheapest technology you have today, say, you would not have gone and chased natural gas 30 years ago for energy generation; you would just keep on burning coal. But the potential of gas as a future strategic asset for the nation was recognised, and there was heaps of it. So, you put a lot of money into it to see if it was going to work and extract as much as you can. Now we have a fantastic LNG industry because of it.

Mr Warren —Coal-seam methane is exactly the same in Queensland and in far north New South Wales. It was not considered particularly valuable until five years ago. It was only through the development of the resource that now it is augmenting a major expansion of LNG facilities in Gladstone and will probably replace coal as the major export earner for Australia over the coming decades—a critical transition fuel for a low-carbon economy.

Mr Richards —If the potential and the volume are compelling, you really do need to pursue it.

Mr Hendy —I do not think anyone at this not so round table would suggest that any one technology is going to provide the answer. For all the benefits of wind, it alone will not meet the challenges that we have ahead of us. Other technologies have to be brought along. There will not be one winner, there will be a range of technologies to provide our future energy needs, and we need to make sure that there is more than one—and there is no finish line—that makes it through this evolution.

Mr Baghaei —I am just following your comments. I totally agree. Of course, the most important buzzword is ‘sustainability’. None of these energies singularly is going to be, in their own right, fully sustainable for the next not decades but centuries; we have to really think long term. If you look at the wind energy, just look at Western Australia and what has happened over the past few years. The studies and statistics from CSIRO—and I will refer to those as studies and they are widely available—suggest that the wind has dropped at the rate of five per cent to 10 per cent over the past several years. In fact, if you look, for instance, at wave energy—and I am not advertising wave—regardless of climate wave statistics have been increasing over the past 40 years. These are the sorts of things where we have to look at sustainability and how to bring these various energies simultaneously to low cost and to the right hand side of the cost curve. That does need a significant effort.

Ms Jeanes —I just wanted to respond to your question from the geothermal industry’s viewpoint. We cannot respond to Mr Costello’s tender for about another four or five years at any scale. It is not just me sitting in a chair around this round table; there is a huge effort behind this industry running out of the universities around Australia and the CSIRO, all of whom believe that we will be providing base load, reliable and cheap power, and cheap comparable to any other form of energy at all in the market by about 2020. A problem at the moment is that we are all looking short term about what is around in the market next year or the year after, but we are wanting to get those costs down and, importantly, that scale up from about 2020 onwards.

Senator PRATT —I wanted to ask about our energy targets. Today COAG endorsed the RECs. They also agreed about the phase-out of the target, saying that it needs to be changed to 45,000 gigawatt hours up to 2030. I want to know how that changes, if at all, investment opportunity for the renewable energy sector? I know that the earlier phase-out for that was an investment problem.

Mr Warren —We have been working pretty hard on this with the government for the last few months to get that right. The draft exposure bill released in December proposed a tapering of the trajectory after 2024. Basically, we think it was based on modelling that assumed a carbon price would be driving the market through the latter half of the next decade and would work to substitute for the REC price. In theory that is great, but if you are an investor in about 2014 or 2015 looking to try to deploy these technologies, you are asking someone to predict a carbon crisis 10 years hence in order to guarantee your rate of return needed to get the project up. Our modelling showed that basically it stalled investment in these technologies after about 2014, which was lethal for the geothermal industry, in our view, and other technologies that might be entering the market in that space. We have been lobbying pretty hard to get the trajectory flattened after 2024, because the price of RETs collapses at that point if it does not. We are very pleased that the government and the department have listened to our concerns and made that adjustment. We think that is crucial for the legislation actually delivering its target. Without that, we think it would be about a 15 per cent rather than a 20 per cent renewable energy target.

Senator PRATT —I wanted to ask about—

Ms Jeanes —I have made it clear that I need to leave now, because I have a flight to catch. I am sorry, but I would like to respond to say that we are not quite so pleased; until I see the shape of the announcement today we remain very concerned that all the emerging technologies, if nothing else has changed, may still be limited in terms of their entry into the market post about 2015, because the incentives will still not be there. We are also very concerned that the direct heat use applications for geothermal are not covered in the RET. We will obviously want to have a look at the final shape of what has come out of today, but it still has a long way to go and we will no doubt be talking to all of you.

Senator XENOPHON —Can you elaborate on that, that it is not covered in the RET?

Ms Jeanes —Solar water heaters are a displacement technology, not a generation technology, and they are eligible under the RET. Direct heat geothermal projects have the potential to provide much cheaper displacement and much greater levels of displacement across particularly Perth and Victoria. For example, you can use geothermal heat to improve the emissions performance of coal in the La Trobe Valley considerably. There will be no incentive for any of that under the scheme. We felt that, given that solar water heaters were eligible, direct heat projects should be eligible. And there is nothing. There is no policy incentive at all to kick-start this new industry. I am sorry, I need to catch a flight.

CHAIR —Thanks for your time. We appreciate it.

Mr Gordon —I now know what a fish would feel like with no water to swim in. This has been a very interesting and important discussion and a forum basis, but we represent the second or third largest source of carbon emissions—the transport sector. This is an exceedingly important issue and I do not wish to interrupt the discussion at the moment and I would suggest that you finish those on the RET. However, I would ask you that the interest in transport fuels, transport emissions and the fact that we are approaching—and it will be going in a few years—the transition from oil, which will occur at exactly the same time that the transition in terms of greenhouse gas emissions will play out, is noted. All I do is apologise for interrupting but just suggest to you that you do not forget the importance of the transport sector. I am a genuine renewable representative, but obviously I am asking: why am I sitting here?

Senator MILNE —Mr Gordon, one of the issues I have with biofuels is the actual lifecycle analysis, because it depends on what your feedstock is. There is a whole lot of issues about displacement of agricultural food and there is also the issue of conversion of tropical forests for palm oil and so on. What I am interested in is second generation of biofuels, lignocellulose. What work are you doing on that? Where is the research? Are we any closer to producing ethanol essentially from cardboard and other waste product?

Mr Gordon —I would suggest that this would take a bit of time to discuss. I am happy to discuss with you what I can—

Senator MILNE —Perhaps if you could take it on notice. If there is something you can provide to us that would be useful.

Mr Gordon —at the moment. I think it would be more appropriate to give you the sort of response that you would deserve on this issue. That is why I was reluctant to interrupt this discussion about a RET.

Senator MILNE —Thank you. If you could take it on notice, that would be good.

Mr Gordon —I will, most certainly.

Mr Warren —In Susan’s absence—but it may be prudent—on the way in I was trying to update on what came through the COAG meeting today. I understand there is a review of the technologies eligible under the RET in 2010. That may appease some of the concerns she has about the heat from geothermal technologies being incorporated or at least considered in some way, shape or form.

Mr Richards —Can I just add something on transport? The RET can actually start to play a significant role in transport fuels by creating hydrogen. Hydrogen is probably the best storage vessel for variable winds that we could possibly have. If you are converting wind power into hydrogen, which then fires a hydrogen bus fleet, for example, I would have thought that would be an ideal process to head down. But getting the RET in place first so you actually start to establish an industry that can deliver the primary energy aspect of that secondary energy is very important.

Mr Gordon —It is a possible option in the future, but we are talking about the next 15 to 20 years. The benefit of biofuel is that we already have proven instruments or fuel technologies that can significantly reduce carbon emissions. It rates about No. 3 on the scale nationally and worldwide. Again, all I would say is that we would be happy—and it may be better—if we had a separate discussion on this.

Prof. Blakers —I would just like to briefly touch on transport. I personally think the future of transport—apart from perhaps sea and air flights—is electric powered cars and public transport running off renewable energy electricity. I would like to briefly address the closely related issue of storage. We have heard in this country a vast amount of nonsense about the alleged inability of renewables to meet base load, and it is just nonsense. There is any number of ways in which you can shift renewable energy from one time to another. For example, you can shift loads from night to day instead of from day to night, which is what we do at present with off-peak water heating. The batteries in electric cars represent a massive energy store that you can draw on and charge up as time goes by. There is also a number of options that are completely off the shelf, and I would talk about pumped hydro.

Pumped hydro is where you have a pipe and you have a turbine. During the day the water pushes up the hill and at night it comes back down the hill. You probably envisage with pumped hydro huge lakes. This is seasonal storage. If you are after day-night storage, the lakes are tiny. When you do the sums, the area of lake required to provide 24-hour storage of Australia’s electricity production and consumption is two square metres per person—tiny, tiny lakes. There are lots of pipes with turbines in them, but the lakes are very small. You do not even need a river; you can use the sea and you can use stored water. It just goes round and round in a circle. The round trip efficiency is 80 per cent, which is much better than going through, say, the hydrogen route. It is a completely off-the-shelf technology. You can ring up and buy one tomorrow. There are lots of them already in Australia and all around the world. It solves the day-night storage problem.

CHAIR —That comes with the reduction in cost of the renewables that we are working on at the moment?

Prof. Blakers —Yes. And it solves your peaking plant problem, too.

Mr Costello —Just looking at this from an electricity purchaser point of view, if there is a 20 per cent target now, that we will have to buy 20 per cent of our electricity from renewables, we will buy the cheapest renewable, because our customers will say, ‘I’m happy to buy renewables, but I want to buy the cheapest renewable’, not, ‘I’m happy to subsidise a more expensive one.’ If wind power is the cheapest renewable on the grid, that is what we will buy. The point I am trying to make is that the only way to make the others more competitive is if they bring their prices down, and that will probably require a subsidy for them in some way such as the way I have talked about with solar. It is a fact that the way the market works our customers will want the cheapest renewable energy they can get, and you can understand why from their perspective.

Senator FIELDING —To some extent you would be obliged to climb up the price curve as you exhaust the cheaper—

Mr Costello —That is correct, absolutely. As the wind energy is not available on the market, NEMMCO will have to go up the next one and then the next one. It just depends how much it can provide. My point is that price will play its part and in the end someone has to pay for whatever this is. Either they pay through prices or they pay it through subsidies or through R&D. Someone has to pay somewhere.

CHAIR —Colleagues, I am determined to try to keep on time. We have just struck our completion time. I thank you for your forbearance. I am sure there are still some questions floating around. I thank members of our panel, roundtable, or whatever shape we would like to agree on, for your time this evening. We certainly appreciate it. It has added something to our inquiry. I think there are a couple of questions on notice outstanding. If you could assist us with those we would appreciate those answers so they can further inform the deliberations of the inquiry. Thanks very much for your time this evening. I now call witnesses from the Australian Council of Superannuation Investors.

[6.17 pm]