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Issues relating to the Fuel and Energy Industry

CHAIR —Welcome. I invite you to make a brief opening statement, and then the committee will ask you some questions.

Mr Ninkov —Thank you to the committee for inviting us to speak today. I understand I can make a short presentation. I will hopefully be only five or 10 minutes maximum. I am happy to take any questions as we are going through. What I would like to give you is a brief overview of the company and about biomass, and then talk about the project we are trying to develop at present, the issues that we face in developing a biomass project and some of the issues we have dealt with. Biomass in itself is a clean and reliable power station solution which does supply many industries and households throughout the world today. In Australia, however, it is not a major source of energy which is supplied from traditional fossil fuels. In Australia the primary biomass fuels at the moment are based on sugarcane up in Queensland and on landfill, gas and sewerage projects of various types. We lag a long way behind biomass in other countries of the world. Currently worldwide somewhere in the order of 100,000 gigawatt hours a year are produced from biomass, the leader being the United States, second Japan, Finland being the third major country and Canada fourth. Finland now has a high percentage of reliance on biomass fuel, given its natural resource of plantation timber available. Here the industry is still under development and very much in its formative years.

The only wood waste biomass used is where it is coal-fired in major coal-fired power stations, particularly in New South Wales but some in Queensland and WA, and there is some woody biomass used in the pulp and paper industry, but we have no stand-alone wood waste biomass power station in Australia at the current time.

Our company is a small energy company by the usual power station standards. We have three lines of business. We operate natural gas, diesel and dual-fuel power stations to supply mining loads, basically in Western Australia and the Northern Territory and soon to supply in South Australia as well. We have two hydro power stations in Victoria, called Blue Rock and Cardinia, and our major new business focus is on biomass in Western Australia at the moment, but we are looking at other projects in the eastern states and overseas. Essentially we have determined that biomass will work, and we are trying to develop a model that we can actually tailor to any particular location.

Biomass does qualify under the MRET legislation as a renewable fuel. However, to get accredited under that process is no easy task. I guess we can talk about that later, about some of the difficulties that one faces in terms of the definition of ‘wood waste’ as a renewable energy fuel.

Under the new Carbon Pollution Reduction Scheme it is zero rated. I think the reason for it being zero rated is essentially that it is part of a natural carbon cycle. Essentially the CO2 that comes out of the power station is reabsorbed by the trees through essentially the process of photosynthesis. So it does not generate any new CO2 into the atmosphere. I guess that is in sharp contrast to traditional fossil fuels, where the fuel is in geological storage and essentially you are taking fuel out of geological storage and adding it to the atmosphere at most probably four times the concentration that is there at the current time.

The advantage of biomass is that it is carbon neutral, and when we consider biomass power stations they offer two benefits. One is the benefit that they displace fossil fuels, particularly in baseload operation, and the second is that they have the benefit of stopping the residue that would decompose particularly in the form of methane—either in landfill gas or left on the ground—from going into the atmosphere, particularly with methane being 25 times more carbon intensive than CO2.

One of the reasons we are particularly attracted to biomass is that you can see that out of all the renewable energy fuels, biomass is the most greenhouse friendly of all, given its ability to sequest or take away the emissions associated with traditional fossil fuel power stations, and also it is stopping other decomposing wood waste going into the atmosphere as methane and all the wood waste that is being into landfill. So it is more effective in reducing greenhouse gas emissions than any other type of renewable fuel. By way of comparison, one mega of biomass based on wood waste is equivalent to 3.6 megawatts of wind. That is assuming a 35 per cent capacity factor for a wind farm, which is most probably around what the wind farms currently contribute.

Moving on to our project, the Perth project, the Perth project is located at a site 30 kilometres north of Perth. The project has a site secured at the moment in an industrial park. It has received environmental approval from the EPA here in Western Australia. The local government, which is the Wanneroo Shire, has approved the project to go ahead. A fuel supply contract has been signed with the Forest Products Commission of Western Australia for it to provide the base fuel requirement for the power station. We have got logistics arrangements in place, an access agreement with Western Power to put the electricity into the grid, the design is being finalised and the long-term offtake agreement is very close to finalisation.

The power station itself, again in contrast to other renewables, will be a 30-megawatt baseload power station. It will operate for 90 per cent of the time. One of the reasons for being able to sign the offtake agreement and get access arrangements has been the attractiveness of the power station being able to be dispatched both day and night. There is a feeling that it will most probably run baseload during the peak hours and run at about 50 per cent capacity off peak, because the system has a lot of excess energy overnight. One of the attractions has been that it is dispatchable at the end of the day. This plant will produce somewhere around 200,000 gigawatt hours a year.

Moving on to slide 6, you can see it is mostly arrangements such as awards finalisation. The last one is financing. We are now starting to work with the banks on the project. For the banks it is a new project. Given there has been no other biomass power station in the country, some education is required to get them familiar with it. It makes development harder with them having to come up to speed with the project—and that is on top of the issues now with obtaining finance on a non-recourse basis for new projects. However, we do have supportive banks and we are hoping to have financial closure by the end of August this year, which will enable construction to commence in September. We would hope that it will be commissioned by the end of October and in commercial operation by 1 December 2011. That is the timing at the present.

The benefits of the project are as follows. It will supply renewable energy to about 40,000 households. There will be $115 million investment in the power station and quite a number of jobs—110 jobs during construction and 50 jobs during operations both at the power station and in the collection and delivery processes of the power station. There will be a significant value-add for the forestry industry. Our estimates suggest that somewhere in the order of 12 biomass power stations can be built in Australia, which would mean somewhere around 3,000 or 3,500 gigawatt hours would be able to be supplied. That would be somewhere around seven per cent of the expanded renewable energy target for Australia. If that were to occur, you would expect abatement of somewhere around 3 million tonnes of CO2 each year and somewhere around 2,500 new jobs in Australia.

In terms of the benefits of the project, on slide 8, the project offers lower greenhouse gas emissions. Methane emissions also, as we have talked about, would be reduced. An important issue now is that fire risk is significantly decreased through both overburden and underburden of fuel in the forest. We have an issue where fuel is left in the forest after harvesting, the forest at times cannot be thinned and there is an overburden of forest residue that needs to be disposed of. There is also a significant reduction in plantation cost, and there is improved air quality—there is quite a haze over Perth when the forest commission undertakes its burning of plantation residue. The ash will be returned to the soil, and there will be a whole new industry created as a result of this.

Finally, slide 9 shows issues such as convincing people about the fact that this is an efficient technology—quite a deal of intellectual property has had to be created in order to get the biomass to a power station at an economic price to compete with other renewable energy fuels. How to ensure a consistent fuel supply has been a major issue. As a result of the power station going ahead here, the harvesting methods of the plantation will change to integrate collection with other uses for the plantation timber. Baseload generation has been an issue. Here we can supply that. The demand from offtake is to get baseload energy—but that has been overcome—and their other requirements are being able to cut back on it overnight. The renewable energy target needs certainty. One of the issues we have had is getting renewable energy accreditation, particularly for a biomass process, with the office of renewable energy. That is difficult, with all the different classes you have to apply and have all the information for and all the accreditation you need for final accreditation. The process does not necessarily recognise all the environmental benefits of a biomass power station, particularly what it avoids in offsetting other emissions into the atmosphere. And, as we talked about, financing will be a challenge. It will be interesting to see where we can complete the project. We believe that it will have benefits and that we will complete it this year. I am happy to take questions.

CHAIR —Thank you very much, Mr Ninkov. Maybe we could start off with you talking us through the issues on accreditation under the MRET legislation.

Mr Ninkov —It is an eligible fuel under the MRET legislation but because you are getting wood waste from a number of different sources you actually fit into a number of different categories. You can have an energy crop, wood waste or one of the other categories. In fact, some of the wood waste we have got actually does not naturally fit into any of the categories. So then you have to go through that. There is a fair deal of information to collect to actually get accreditation. As a company, the other issue is that there is a vast degree of information to be kept to start getting renewable energy credits, which others do not necessarily have to comply with, and it slows the approval process down.

CHAIR —More so for you than for others under the same system?

Mr Ninkov —Yes.

CHAIR —Why is that?

Mr Ninkov —If you are going to get accreditation, it has to be certified that the land was not cleared before 1989, so you have to go out. Some of the pine plantations have been planted over different periods of time. Where we are getting our fuel for this project it has been planted anywhere between about 1920 and 1990. So you have to work out and get records to show whether or not that area has been cleared, when it was cleared, what has been going on on that site over that period of time. Even our government agency, the Forest Products Commission, here has not necessarily got records about those. The Forest Products Commission also shift—

CHAIR —Why is it important for to you to show that it has not been cleared?

Mr Ninkov —Because it will not be accredited.

CHAIR —Unless it has not been cleared?

Mr Ninkov —Unless it has not been cleared before because, as I understand, under the MRET legislation what they do not want you to do is clear land to grow plantation timber and then claim an environmental credit.

CHAIR —But why is it to 1989?

Mr Ninkov —That was the year that the legislation obviously selected. It was not the Kyoto year, was it?

CHAIR —No, that was 1997.

Mr Ninkov —It might be that the Kyoto legislation uses 1989 as the year. I think it is 1989.

CHAIR —So that is the key issue that you have got?

Mr Ninkov —Yes. It is a real process for us to get that. Even the Forest Products Commission, who we get the fuel from, cannot actually necessarily vouch for all of the sites.

CHAIR —Do think there is a justification for there to be a limit of that nature so that there is not that abuse?

Mr Ninkov —I think it is reasonable somewhere, yes.

CHAIR —So what would be a better way of ensuring that there is compliance? Do you have any ideas as to how the same assurances can be given without being too burdensome in the process? Have you an alternative way that you would propose?

Mr Ninkov —The shorter the time frame the better because you know more about it. Going back in time is difficult.

CHAIR —So rather than saying, ‘All the way back to 1920,’ if we said, ‘If it has not been cleared between 1960 and 1989’?

Mr Ninkov —That is right. It is not a recent clearing. You do not have native forest on there and you have cleared it and suddenly you are using that.

CHAIR —Have you put that to government as a proposition?

Mr Ninkov —No, we have not.

CHAIR —Is the government aware of the problem that you have identified?

Mr Ninkov —We are not sure. We are just a little company developing our project. We work within the rules and just get along.

CHAIR —Sure. But if you have a legitimate issue it might be worth while. It could be well be that the government says: ‘We never quite realised it would have that sort of effect. We’ll take that on board and make the change you’re suggesting.’ It might be worth your while to write just a short letter to the government.

Mr Ninkov —I guess my other view about this is that I am not sure that biomass is necessarily the most popular fuel in those sorts of offices.

CHAIR —So why is it not popular? What would make it unpopular?

Mr Ninkov —I think the issue, particularly, is the split between plantation wood waste versus native forest wood waste. I think some people cloud the two issues of plantation and native forest. We have stayed clear of native forests to deliberately avoid the issues associated with using native forest wood waste, which there are significant quantities of and would be available.

CHAIR —In terms of an affordable, reliable, environmentally sustainable energy supply moving forward, what sort of role do you think biomass can play? What are we talking about in terms of scale?

Mr Ninkov —The issues around biomass are essentially logistics issues—how many power stations?—because what you work out quickly is that you become, essentially, a logistics company. The key is really: can you deliver the fuel to the power station at an economic price? Therefore, what you will conclude is that you can only afford to bring fuel in from a distance of no greater than 100 kilometres, and ideally from somewhere between 35 and 50 kilometres. That is why this power station will work—because the fuel is in close range. You have got to have a concentrated amount of fuel a short distance from the power station to make a biomass power station worthwhile—sites where you get enough concentration of wood density to enable a power station to go ahead. We have identified about a dozen locations where there is a prima-facie case to say that a biomass power station would be economically viable.

Senator HUTCHINS —Would people categorise these 50 full-time jobs that would have to be created when this project gets up as green jobs?

Mr Ninkov —I am not sure what the definition of a green job is.

Senator HUTCHINS —I thought you might know.

Mr Ninkov —The jobs here are going to be in the power station: operating the power station, operating units, operating trucks, operating forwarders in the forest; truck drivers and things like that. We have had a huge amount of interest, even though we are not even at the financial-close stage, from people wanting to work in the power station. So there has been interest partly because it is a green power station and partly because of the area that the power station is in—there are a lot of people in that area who want to work in that region. So there has been a lot of interest for those two reasons from the phone calls I have fielded.

Senator HUTCHINS —And you say that we have got potentially another 12?

Mr Ninkov —Yes.

Senator HUTCHINS —Are they in any particular area? Is where you are setting up in Perth unique because of access?

Mr Ninkov —As to the one in Perth, these are the things we looked for, and they are no different from what we would look for in any other location in Australia: have you got a site that people want a power station on? Is the site close to transmission lines? Transmission costs are huge, particularly on these small power stations. These are not 600 or 700 megawatt units; they are only 30 megawatt units. So you have got to be able to defray the cost of transmission connections over a very small unit. Are you close to the fuel source? You want to minimise the distance you have to bring that fuel. It is a trade-off between those three. As to the other sites we have looked at, there is, prima facie, evidence to suggest those three variables are there in a positive way to make a biomass power station go.

Senator HUTCHINS —Is the cost of your energy to the consumer set by the regulator over here?

Mr Ninkov —No. That has been directly negotiated with what you would call ‘off-takers’, one being a retailer here, as the price at which they believe it is economic for them to purchase the energy. What people want to get from us is not only the capacity—because here it is a capacity market and an energy market—but also the environmental rights associated with the power station; there has been a keenness to get all the environmental rights.

Senator HUTCHINS —So does that mean that the cost of energy to householders and to industry in this area will be higher than it might be in other areas because you are meeting these standards that people have asked you to meet?

Mr Ninkov —In this state—and on this there are people who are far better informed than I am—the government recently announced major price increases in the cost of electricity. I think in the state budget papers they indicated price rises of about 87 per cent for residential customers and about 57 per cent for business customers over the next three years, the circumstances being that the power industry here has been significantly subsidised anyway over the last few years, with the losses it has had.

So I guess the first point is that we do not have economic prices in the first place for electricity in the state. What is happening here is that the off-takers are assessing what is likely to happen in future gas prices, coal prices, gas transmission charges, electricity transmission charges and the total cost of bringing electricity. On top of that, you have issues such as the emissions trading system requirements that say: what is an economic price for delivering energy to a customer? On their sums, the price we are negotiating with them is an attractive economic price for them against the alternative.

Senator HUTCHINS —So it will be the standard whatever it is?

Mr Ninkov —They will buy at wholesale and then sell it to retail at whatever price they choose. We found that, given the number of constraints that are currently on the electricity system, a number of people are interested in mining the electricity out of the project. So we are finding that there is a demand for it.

CHAIR —What do you think is going to be the potential contribution of biomass as part of our overall national energy mix? Have you got a handle on that?

Mr Ninkov —I cannot say that I am an expert, but I think it will end up being pretty small; it will be a niche player.

CHAIR —As a niche player, what is the advantage that you are bringing to the market?

Mr Ninkov —We think there is enough there to support a growing industry over the next 20 to 50 years, particularly if the area under plantation continues to grow, because then you could have 16 or 20 or even more power stations, depending on by how much the plantations continue to grow. If you believe that people will be planting trees, there will be a role for biomass power stations.

CHAIR —Western Australia is obviously a particular market. Are there other areas around Australia?

Mr Ninkov —Yes. The green triangle could be a very attractive area to build a biomass power station.

CHAIR —Which is where?

Mr Ninkov —On the border of Victoria and South Australia. That could be a very attractive area, for example.

CHAIR —Any other areas? There is Western Australia and the Victorian and South Australian border.

Mr Ninkov —There are attractive areas in New South Wales that have plantations. There are areas in Tasmania which could be attractive for a biomass power station. So there are areas which are attractive. Then there are other areas where, for example, you might be competing not against traditional power stations but against oil-firing, and you could maybe afford to make an economic proposition on the basis of the opportunity cost of a different type of fuel. So there are other places in Australia where it could be viable. It would not be viable in another location because of the fuel they are currently using—for example, oil, which could be viable.

Senator HUTCHINS —You are a niche player.

Mr Ninkov —Yes.

Senator HUTCHINS —Does that mean your sources of energy are reliable?

Mr Ninkov —We—

Senator HUTCHINS —Sorry to interrupt you, but I say that because a number of people have talked to us about the renewable energies, but a number of the power stations are less than impressed by the reliability of the alternative of renewable energy. Because you are a niche player, that is very different, is it?

Mr Ninkov —Correct. That is why I said during the presentation that we are guaranteeing 91 per cent availability. We can guarantee that we can be dispatched. So you can turn us up or turn us down as you wish. The contract that we are negotiating is that flexible that we can be controlled like a normal coal-fired or gas-fired power station. That is different from the likes of wind or solar, which are basically dispatching energy only, whereas we can guarantee supply. In fact, the contract that we are guaranteeing at the moment is 91 per cent availability, which is basically the norm for coal-fired power stations in Australia. In fact, some of them do not do that well.

Senator HUTCHINS —Thank you.

CHAIR —You mentioned accreditation under MRET legislation as a regulatory issue. Are there any other state or federal regulatory or taxation related issues which you think that your industry is at a disadvantage or are there some changes that might improve the prospects of biomass as an energy source?

Mr Ninkov —We have undergone two or three years of development and understanding exactly what we are trying to do and trying to optimise, particularly, the fuel and logistics system. We have got to a point now where we think we have a project. I guess the reverse of that is that we have been caught up in that global financial crisis, and the long lead item now is educating the banks and getting their understanding of a new technology and project. That is probably the single barrier. The actual government barriers are more time delays than actually delaying the project. We have worked through all the EPA approvals, the local government approvals and the Office of Renewable Energy on accreditation. You work through all those issues and—

CHAIR —Is it fair to say that you are a growing or a reasonably new industry?

Mr Ninkov —Yes.

CHAIR —So I guess sometimes new industries as they develop are faced with a regulatory framework that was designed around a previous circumstance. This is sort of an opportunity for you to say, ‘Of course we work within the law and we do what we are required to do; however, we are coming across some regulatory arrangements that really do not make sense for us, even though we can understand that in the past it may have made sense for others.’ This committee is trying to look at the challenge of ensuring an affordable, reliable, secure and environmentally sustainable energy supply for Australia into the future, and whether our regulatory, taxation and other frameworks are assisting in achieving that or whether there are some issues that need to be addressed. This is your opportunity to tell us, ‘We work within the law but there are some areas where we think there could be some improvements to the ways things are done.’

Mr Ninkov —It is almost the burden of the totality of the regulatory system and the number of agencies that is the most difficult thing. You have got so many different agencies to work with. That is probably singularly the burden. You understand that people want an environmental approval, that local government want their approval and that state governments want various things. They are worked through but it is the length of the time and the number of them that actually burden you. Each one needs their own separate submission, and they each have their own set of forms and everything else. It is the totality. None of them individually can be criticised.

CHAIR —It is probably not a problem that is unique to the energy industry. I hear what you are saying. So you are saying that we could streamline the processes?

Mr Ninkov —Yes. There is no central way, and no-one is there to help you. You have to negotiate with each one individually—each organisation and each officer. Here in the state during the last couple of years it was like the person at one of the agencies could change every three weeks and you have to start again and explain it to the next person. It is difficult. We have found that the volume and the number that you have to deal with is the most difficult thing with government.

The other interesting thing is that biomass seems to have got very little support from any of the governments. In contrast to geothermal, wind or solar, there has been, I think, very little support at all for biomass. It has basically come from the developers themselves. In my view, the government has set no target for biomass, nor has it set any target for any of the others. The MRET is just a general target and really has not provided much support to get the industry going.

CHAIR —Thank you very much, Mr Ninkov, for appearing before us today.

Proceedings suspended from 2.29 pm to 2.45 pm