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Environment and Communications References Committee
09/11/2016
Retirement of coal-fired power stations

CAMPBELL, Mr Roderick, Research Director, The Australia Institute

JOTZO, Associate Professor Frank, Private capacity

O'SHANASSY, Ms Kelly, Chief Executive Officer, Australian Conservation Foundation Inc.

[13:09]

CHAIR: Welcome. I understand that information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. Is there anything any of you would like to add about the capacity in which you appear today?

Prof. Jotzo : While I am a professor with the Australian National University, I am appearing today in a personal capacity.

CHAIR: I understand, Professor Jotzo, that you have provided a submission, which we received a little bit late last night, so I am not sure if the committee members have had a chance to digest it yet, but we will certainly do so. It is on the committee website as submission No. 4. I will invite you each to make a brief opening statement and we will then ask you questions. We are running a little tight on time, so if you could make a brief to moderate opening statement rather than a lengthy one, that would give us lots of time for questions. Ms O'Shanassy, would you like to start?

Ms O'Shanassy : Sure. Thank you very much for the opportunity to speak to you today. There are five major points which I will not go into, to be brief, many of which you have heard. The transition is necessary to meet the temperature limiting goals that the globe has agreed to in the Paris Agreement. As to coal generation in Australia, switching from coal to clean sources of energy is fundamental to meeting those commitments. The evidence that you have before you is that it is necessary to do that by about 2035 in order to have a chance of meeting those temperature levels in the Paris Agreement. The coal plants are very, very old already and are going to change, no matter what actually happens in our future. So this transition is unavoidable. We can either plan that transition and have an orderly transition where we grow jobs and our economy and can actually meet our international expectations and, I would expect, into the future, expectations of us as a trading country as the rest of the world moves to clean energy, or we could not do anything, let the market create the change and have a chaotic future where we will in fact lose jobs, and our economy will be severely disrupted.

On Monday, a report was released called Our energy future: a plan to transition Australia to clean energy. It brought together a group of 17 eminent Australians, or 16 and me—I always feel a bit bizarre about being in the company of people such as Ian Jacobs, the Vice-Chancellor of the University of New South Wales; Dame Quentin Bryce; the head of AGL, Andy Vesey; Mark Burrows, who is an international, global expert in energy investment; Jillian Broadbent, the chair of the Clean Energy Finance Corporation; Sam Mostyn; Miles George, the head of Infigen Energy, and the list goes on. This group of very eclectic people, who are representing very different parts of the Australian society and parts of Australian business and academia, who are also grandmothers and parents and sons and daughters and friends, came up with eight actions to transition our energy system, two of which are directly related to this inquiry.

The first action is to facilitate and accelerate the inevitable closure of coal-fired power plants, and the second is to make sure that that is done in an orderly way. So in this document we list those eight actions and, under each of those, we have a number of actions that are required to be taken. Fundamentally, we are calling on the federal government to lead the development of a plan to facilitate the phased closure of coal electricity in Australia.

As key elements of that, there are options here as to how that could be achieved. One of those is a market mechanism, and Professor Jotzo will elaborate more on that. But we are very supportive of that approach. Otherwise, you could have emissions intensity standards or age based regulations for power plants. There are many options. But the key call is that, without this national plan to transition, the second future, of great disruption, will be the future that we will have in Australia, and the group was very clear that this is not a choice between transitioning or not; it is a choice as to how you transition and: do we look after Australians and Australian businesses, keep energy prices as low as we can, raise jobs and build our economy, or do we allow the market to create great disruption?

The second major element of this is ensuring a just transition. You have the unions before you later today, but there is a clear need for some form of national body that guides this energy transition. It is best it is an independent body, but it is very important that that body talks to the communities and workers that are affected and makes sure that it is a just transition with transitional assistance, economic diversification for coal affected communities and community collaboration. When the unions came and spoke to this group, they had a profound change in what they were thinking about coal closure in that, fundamentally, it did need to be just and that they felt that we had not really had that call in Australia before. That is a very important part of this action plan, which we will put in a submission from that forum to this inquiry.

Lastly, the positive side of the switch to clean energy is an amazing thing. Last week the ACTU and ACF released a report that showed there are a million new jobs in Australia if you transition to clean energy. That is one million new jobs on top of business as usual. About half of those are in manufacturing and running those clean energy electricity plants and infrastructure. Clean energy boosts the economy. The reporting shows there is about a 13 per cent boost to the economy by 2040—those figures are by 2040. If you get that 13 per cent improvement in your economy you are actually going to create jobs across the whole economy. We will submit that into this inquiry. But also there are trillions of dollars available in the world for clean energy investment. Mark Burrows said on Monday that if we have a national plan and we have the consistency that we need in Australian policy then that money will come to Australia, but if we do not we will lose out on that investment in Australia.

There is an urgent need to change, environmentally speaking. We saw the tragic impacts on the Great Barrier Reef this year. We should very much think about the Great Barrier Reef as the canary in the coalmine, because climate change affects people. It is affecting those people and places we love. We do need to urgently phase out coal in a planned way and phase in clean energy.

CHAIR: Thank you, Ms O'Shanassy. Professor Jotzo?

Prof. Jotzo : Thank you for the opportunity to speak with you today. Firstly, I would like to say that the topic of coal transition is often approached with an extent of fear or as a negative when really it is a tremendous opportunity for Australia if it is managed in the right way. The reason it is a tremendous opportunity is that our coal-fired power fleet is ageing and there is every opportunity to replace it with renewable energy resources. In fact, these opportunities are better than in most other places of the world.

In that context, I would like to draw your attention to work that we have done, as part of the Deep Decarbonization Pathways Project modelling done by the CSIRO, that shows a trajectory to a carbon-free electricity supply by 2050 in line with the Climate Change Authority's two-degree carbon budget. That would have coal-fired power stations almost entirely phased out by the early 2030s. In that scenario the brown-coal-fired power stations, in fact, would be phased out by the 2020s. That is, of course, a very highly ambitious scenario. It needs to be that way because it is, in fact, in line with what might be expected for Australian emission reductions under the two-degree scenario. How do we achieve that? Well, at the centre of it needs to be a stable, predictable and ambitious federal policy framework. From an economics perspective, you will always come back to the point of carbon pricing—putting a price on the externality as needing to be at the centre of such a policy framework—no matter what the particular policy instrument might be, whether it be emissions trading or a more sectorally disaggregated approach such as a baseline and credit scheme in the power sector.

In addition, specific policies for orderly transition in the power sector may be necessary, such as market mechanisms for closure or regulated closure or, in fact, some other arrangements—for example, industry compacts. Why might that be necessary?

Firstly, it is quite possible or conceivable that the necessary ambition will not be achieved within a price based system in order to achieve that rapid transition. Secondly, any purely market mechanism based approach will not necessarily deliver an orderly transition, but is likely to result in sudden shutdown, such as we have seen with the Northern power station in South Australia and such as we are seeing with the Hazelwood station in Victoria.

Now, there are many different ways of how one could go about that. Late last year, we proposed a specific market mechanism for closure of emissions-intensive power stations—this was joint work with Salim Mazouz. We did not expect that such a mechanism would necessarily be implemented as part of Australian policy settings. Our primary aim—and we stated that in the paper—was to help kick-off a renewed debate about the need and opportunity for policies to facilitate orderly exit in Australia's coal fired power sector.

I would be happy to get back to details about the mechanism. I do not want to take too much time at this point. I would just like to highlight that, as part of such a mechanism, funds could be raised to help facilitate structural adjustment in the regions that are particularly affected by coal fired power plant closures. I would contend that funding for structural adjustment is an important part of orderly transition, and I would also contend that levying such funds from the industry is a good way to go, rather than relying on taxpayer funds through the general budget.

Finally, I note that the analysis and research in Australia on industrial transition, and coal transition in particular, is not as developed as it needs to be in order to properly inform policy. I would like to inform the committee of relevant research that is underway at ANU and our partner organisations. We run the Australian component of a new international project on coal transitions, which involves six other countries. I would also like to draw the attention of the committee to work that Professor John Wiseman is leading at Melbourne university in collaboration with us, and in the context of that project. Professor Wiseman has also made a submission to the committee.

CHAIR: Mr Campbell, would you like to make a brief opening statement?

Mr Campbell : Certainly, thank you. As I suspect you are going to hear all day, it is clear that energy markets are changing whether we like it or not, and that the lack of policy at federal and state levels is slowing this down and making it unplanned and unfair. I think there have been some great reports put out in recent times by ACF and the ACTU, and a whole range of other people looking at how to address some of these issues. I have been up close to some of these issues in my work with the planning system, particularly in New South Wales and Queensland. I have seen some of these projects up close in Lithgow and places like Dunedoo, where this lack of policy has really led to poor project proposals and a complete lack of planning at the state and federal levels. In places like Lithgow and Dunedoo, we are seeing coal companies really scrambling for position. We are seeing some disturbing developments, I think, on inappropriate project proposals, even moves to reduce redundancy pay of mine workers—which you will probably hear more from the CFMEU about—and the reductions that we have seen in vocational education and training and apprenticeships. This really is not the time to go backwards on the support of workers in these communities and in these industries.

Watching the slow-motion train wreck of the Cobbora coal project that was proposed for near Dunedoo over the last few years is an absolute shining example of where this lack of policy leads to—where a community has been promised one thing. It was not in line with economics; it was not in line with good environmental planning. People got bought out by what became an unviable stranded project. Large numbers of people left the community, putting a lot of pressures on school enrolments and other social services. Now the New South Wales taxpayer is picking up part of the tab, and there are still a lot of social impacts affecting that community. This slow, unplanned and unjust transition that we are having at the moment is increasing emissions and increasing taxpayers' and communities' exposure to risks like rehabilitation liabilities.

Over several years, the Australia Institute has made a number of policy proposals, which I am sure we will get into. I think the first and most sensible of them is a moratorium on approval of new coalmines or major expansions of existing coalmines. Ideally, this would be an international agreement. In fact, we are seeing moratoriums, or at least limits on new coal development in countries like China, Indonesia and the US, which are notably some of the major coal-producing countries in the world. The Australia Institute put out a report, which I will append to our submission, modelling the economic impacts of a moratorium on new coalmines in Australia and showing that at a national or any state level the impacts of such a policy would be trivial. Obviously at a local level, that can be different and that is part of what we are talking about with the need for a just transition.

One thing that that research turned up is something that I had never seen a number put on before: the amount of coal that we have approved. We have already approved hundreds of millions of tonnes of coal production in to the 2040s. It is pretty clear that we have already approved enough coal and it is time to stop approving it as a first point in this transition.

We have also looked at and made proposals similar to Professor Jotzo, who is looking at reverse auctions and how those can be funded and those sorts of incentives provided. We have also looked at proposals by the Climate Change Authority's proposal for the intensity markets and carbon pricing, which, as an economist, of course I think is a great idea. I would be happy to talk about any or all of those issues in the coming hour we have together.

CHAIR: Unfortunately, I think we have about 32 minutes, so we will split that equally.

Senator DASTYARI: Professor Jotzo, could you just elaborate on the characteristics of the Australian coal plants that are still operating? If you could go through the characteristics?

Prof. Jotzo : We are looking at a fleet of coal fired power stations that consist, firstly, of brown coal generators, which are now entirely located in a state of Victoria and provide the majority of the electricity produced in Victoria, and black coal generators that are predominantly found in New South Wales and Queensland. In terms of the climate change aspect of it, the parameter that we are particularly interested in is the emissions intensity of those generators—that is, the amount of carbon dioxide emitted per unit of electricity generated. That stands at between 1.2 and 1.4 kilograms of CO2 per kilowatt hour for the brown coal generators in Latrobe Valley and at an average of around 0.9 for the black coal fired plants in New South Wales and Queensland. There is some variation between the generators. With an international comparison, these are high to very high commission intensities, which is the function of the age of the generators—

Senator DASTYARI: They are old—aren't they?

Prof. Jotzo : On the whole, the average age is—

Senator DASTYARI: What is the average? Do you have it off the top of your head? Roughly, how old are they?

Prof. Jotzo : I do not have the average.

Senator DASTYARI: We talking 20, 30, 40 or 50 years?

Prof. Jotzo : To my understanding, the majority of the existing generators were built in the 1970s and 1980s. They are relatively old compared to what is the case in many other countries.

Senator DASTYARI: I suppose the point I would make to the table, to all three of you, if you can answer this, is: in your opening statements—with all three of you using your own language; I do not want to put words in your mouth—effectively pointed to what you believed was an inevitability of the decline of this sector for a whole host of reasons, including market forces themselves. What do you say then to the argument that people do and have put which is: if they are going to shut down for market forces, we should, effectively, just walk away and let market forces play, and that there is not really a job or role for the federal government to be planning these kinds of transitions?

Mr Campbell : I would say it is a terrible idea. We are seeing that in places like Lithgow at the moment and over the last couple of years where there were two and is now one major coal-fired powered station. The Wallerawang Power Station was in care and maintenance for a number of years. Both the Wallerawang and Mount Piper power stations are owned by Hong Kong-listed EnergyAustralia. The Wallerawang station had been in care and maintenance for quite a number of years while the Mount Piper station was still producing.

What has occurred there over a number of years is: a small local mine that had become financially unviable and closed down was left there before EnergyAustralia took over those assets. You have since seen various proposals to try and reopen that mine, which would have significant environmental impacts on—I am not sure if they are World Heritage listed, but certainly valuable—landforms in that area. So there have been continual efforts to get some of that locally available but environmentally damaging coal back into the Wallerawang Power Station and still into the Mount Piper Power Station that have been pushed by the owners of those coal-fired power stations in order to squeeze every last drop out of assets that really should have been retired.

We have seen community groups and, obviously, miners at loggerheads over what should happen there. We have seen state planning authorities reject several proposals, but you then see, largely on environmental grounds, that there has been a range of proposals where you have seen EnergyAustralia tell state government regulators that if they would just approve the Coalpac mine extensions then they would start to produce more electricity and push down power prices. At exactly the same time, you saw them telling their own shareholders that they were trying to retire a lot of their assets and that they felt that the Australian energy market was oversupplied and that they were wanting to reduce the amount of power they were supplying. So they were telling New South Wales planners that they want to produce more electricity while they were telling their own shareholders that they intended to produce less electricity. That sort of deception is going on in a desperate scramble to get the last possible bit of value out of these assets.

I was up late last night writing a submission to the latest reboot of this Coalpac mine saga where what is mainly best known as an ethanol company, Manildra, is looking to reopen the same mine with the claims that they are doing so to produce specialty nut coal—and I am quoting here: it is a 'boutique coal'—to run their flour mills in Nowra. All the media and, indeed, the EIS—their environmental impact statement—push the idea that the key driver for this proposal is the boutique nut coal that they want to make flour out of. Of course, if you go through their economic assessment, it turns out that about 19 per cent of the revenue would come from the boutique coal and a bit over 80 per cent of it would come from flogging it to Mount Piper. So it is pretty clear that you have things like bottom-feeding companies purchasing assets that still have rehabilitation liabilities, trying to get an approval through to sell them on to energy companies that have been wanting to buy them, and it is putting enormous stress on communities like the community around Lithgow.

Returning to your question, without any sort of guiding policy at a federal or even at a state level, these sorts of conflicts—and I can tell a whole bunch of other similar stories—are bound to continue.

Ms O'Shanassy : ACF ran a forum last year with a number of energy companies and energy investors and academics, and we asked that question. There were five major barriers to allowing just the market to control the phased closure. One is what Rod was talking about: the competition between companies and the fact that we have an excess of energy supply right now. That brings down the wholesale price, so everyone is waiting for someone to close because, once one closes, the wholesale price improves. So there is that issue.

Senator DASTYARI: When you say it improves, do you mean it goes up?

Ms O'Shanassy : Yes. The other issues that were identified in that forum included the high exit barriers. Once you close down a mine and coal plant, you have to rehabilitate that. That is a high cost and there is more incentive, therefore, to mothball the plant, which gives no incentive for a renewable energy company, for example, to build plant. The less emissions intensive black coal plants would close first, potentially, because the brown coal plants have a lower marginal cost of operation and are cheaper to run. There is, of course, policy uncertainty that undermines investment and, without a staggered closure, everything will close at once and then we have incredible energy security problems, which are not necessarily the responsibility of the market but the responsibility of government.

I want to add that we have information about the age of the plants. Five generators are currently more than 35 years old. Hazelwood is 50 years old and, by 2030, when we are saying that we need to have these plants by and large closed, nearly half of Australia's existing coal fired power plants will be 50 years old, and the average at that time will be over 40 years. So they are very old.

Prof. Jotzo : I would like to give you a much more positive perspective on markets and market mechanisms than we have just heard. On the whole, it is a very good idea indeed to rely on markets in the energy sector and in the electricity sector. In fact, even where policy intervenes to achieve public policy objectives, in general it will be advisable to use market mechanisms as the policy instrument. The question to ask is: what can markets not deliver and so where is policy intervention necessary? I think we will all agree—I do not know; I should not presume that—that there are two areas where markets as they are have difficulties achieving. One is emissions. The market outcome in the national electricity market is not geared to minimise carbon dioxide emissions. In fact, it tends to be the case that the highest emissions intensive plants also have the lowest running costs. So you see that capacity utilisation—the hours of run time of the plant—is much higher on average in brown coal fired power stations than in black coal fired power stations, and so there you have what you might call an emissions inefficiency, which is simply a function of there not being any incentives for the cleaner plants to run longer hours than the dirtier plants.

The second aspect where the current energy market setup may fall short of policy objectives is the orderliness or lack of orderliness of exit. I mentioned in my introduction Northern and Hazelwood. Under a pure energy market approach, a company will pull the plug typically when a plant comes up for major refurbishment, and the market has really no insight into when that might happen. Not even close competitors may know when that will happen, and so you have these situations arising where there are only a few months of lead time between announcement and closure, and that is not enough to bring additional new capacity online.

Senator DASTYARI: With Hazelwood, is it six months or five months?

Prof. Jotzo : When is the announcement?

Ms O'Shanassy : March.

Prof. Jotzo : So it is a very short amount of time—too short, in general, to deploy a new generating capacity and also a very short amount of time in order to cushion the social adjustment in the local communities.

Senator DASTYARI: I have a lot more questions, but time will not permit them.

CHAIR: Yes, I am sorry. It is all so interesting, but we are running out of time. Senator Paterson, I will give you 10 minutes—or nine, if you can keep it to nine. The bells will ring at five minutes to.

Senator PATERSON: I will see what I can do. Following up on your comments, Professor Jotzo, about the lowest running costs from the most emissions-intensive power sources: obviously, if those power sources are closed—as Hazelwood has and as others are predicted to—that will have a negative impact on household budgets for both individuals and families, and also for businesses. One of our terms of reference here it to look at affordability. What impact will that have on affordability?

Prof. Jotzo : I heard it mentioned in a previous session in terms of estimates of impacts on wholesale power prices, and I think it was Mr Jackson who observed that, whatever the current generation of ageing plants is replaced with, that will bring higher costs than what you have with the old, already amortised capital that you have running now. Inevitably, we are looking at a rise in trajectory of wholesale electricity prices in Australia. Even under the projections of very rapid decarbonisation and replacement largely with renewables that we had in our deep decarbonisation pathways report, the rate of energy price increase is less than the projected rate of growth in national income. On top of that you have sustained improvements in energy efficiency, so we can have high confidence that the expenditure on electricity as a share of household expenditure will, in fact, fall over time, even with rising costs in the electricity source.

Senator PATERSON: I take your point on efficiency. That is an important consideration, but the experience in recent years has not been that energy costs have been falling as a proportion of household income. Why should we have confidence in the predictions that it will fall in the future, given that that has not been the recent experience?

Prof. Jotzo : That is a very important point. The very large rises in retail electricity prices that we have seen are, to a large extent, a function of inadequate regulatory settings that have facilitated a gold plating of infrastructure, with consumers not really being asked as to whether they were happy to pay for this in the process. Looking forward to the transition of the coal-fired power sector, what that emphasises is that a lot of thought needs to go into proper regulatory and policy settings to facilitate this in a way that leads to various objectives. That does, in fact, need the right balance between achieving environmental objectives, social objectives and in meeting the objectives of retaining competition and putting a lid on price rises.

Senator PATERSON: I do understand your point about gold plating but, putting aside the debate about renewals, South Australians might feel that gold plating is not such a ridiculous luxury, when transmission towers were a real issue. The better redundancy that other states have in their transmission of electricity is one of the reasons why they are not expected to have the experience that South Australia had.

Prof. Jotzo : There are important trade-offs here between reliability of the power supply with regard to extreme weather events such as in South Australia and, conversely, the aspiration to fulfil all power demand during a few short periods of absolute peak demand—typically during afternoons in the summer. In my analysis, in Australia we have not struck the right balance between demand management and the provision of additional infrastructure that meets peak demand.

Senator PATERSON: Could you explain, for the benefit of Hansard, what demand management is?

Prof. Jotzo : Demand management is a whole bag of different approaches that you can use to curtail electricity demand during times of peak demand. For example, it is entirely possible to shut off high electricity-using industrial installations on days when peak household demand, because of a heatwave, is expected. Managing a system in that way will tend to be more cost effective than just providing additional generating and distribution infrastructure to meet whatever demand peak might arise without demand cycle—

Senator PATERSON: But that would require quite a degree of central planning. That seemed to be in conflict with your earlier statements about your faith in market mechanisms.

Prof. Jotzo : This can usually be done through pricing approaches and through market approaches. At present, households do not see the cost of the energy they are using during peak demand.

Mr Campbell : Yes, a particularly good example of demand management and where markets could and should be used and our electricity market could and—in our view—should be improved relates to what is generally known as the five-minute rule. In the National Electricity Market, electricity is sold in five-minute blocks, but prices are set over half-hour periods and what we are averaging over that period. So what we often see, and particularly where large generators are able to act strategically, is a short, large, price spike followed by relatively low prices for the rest of the half-hour period. Really, the question is: how could a market mechanism be used to flatten out that spike?

There is a perfect proposal that has been given to the Australian Energy Market Commission in recent months that, if we could change to not only selling electricity in five-minute blocks but also pricing it in five-minute blocks, then that could bring in a lot of demand management options of people closing down not for a day but for five minutes to really flatten down those spikes. This proposal came from a nickel smelter, Sun Metals, in Queensland, who want to be able to bid demand management into the National Electricity Market and to be paid for that. They are able to do that. That has been put to the Australian Energy Market Commission. They have taken a lot of submissions on it, and, rather than making a decision and getting on with decent reform of the NEM, they have given themselves essentially another year to think about it.

Senator PATERSON: I have one final question before I hand back to the chair. A number of you have mentioned, and an earlier witness mentioned, how old these power plants in question are—30 or 40 years old. Obviously there have been improvements in technology in energy efficiency and generation, not just in the renewables sector but also in coal. Brand-new coal power plants that you would build today—a supercritical power plant, for example—can be 80 per cent more efficient than some of the ones they replace. From the point of view of emissions—anything which reduces emissions I assume you would concede is a good thing—is another option, other than just closing these power plants, replacing them with better, more efficient coal-fired power plants?

Ms O'Shanassy : I do not believe it is, because what we base our work on, and the international work on, is the notion of a carbon budget—the amount of emissions you have left in order to reach those goals in the Paris Agreement—and it is very clear that we need to get to net zero levels of pollution by mid-century to have a chance of the two degrees. You are not going to get the 1.5-degree goal—you needed to do it much earlier if you were to get the 1.5-degree goal or as close to that as possible. Therefore, if you are thinking about building plant now, in that time frame, it is 2016 now, so it is within the lifetime of whatever plant you build, and you need to have net zero levels of emission by that time or much earlier. So it is a better option to replace the current fleet, which does need replacing, with plant that does not produce those net levels of emissions right now. The technology is showing that renewable energy sources are our best opportunity.

I would also point out that there are a number of reports that have been done, including for the government for the Warburton review, that show that, if you replace plant with renewable sources of energy, you put lower pressure on household electricity bills than if you replace it with fossil fuel generation, because once you build the capital, which needs to be done anyway, the sun and the wind, for example, do not cost a lot, but the cost of digging up fossil fuels and burning those is a significant, ongoing cost.

Senator PATERSON: I guess it depends on your view about whether the net zero emissions target is realistic or not, because, if we get a few years down the track and we realise that that was not a realistic target, then we have missed an opportunity to reduce emissions in the meantime by installing better, efficient use of our existing resources.

Prof. Jotzo : As a thought experiment: if, in the short term, you were to replace the Latrobe Valley generators with ultra-supercritical technology, you would make something like a 50 per cent saving in emissions in rough terms. But, of course, you are locking in that investment for a very long time and that is fundamentally incompatible even with the existing Australian 2030 emissions target.

Stepping back from environmental policy objectives, the current levelised cost of electricity, in terms of new build of renewables and coal-fired power, are just about on par. With stagnating electricity demand at the moment, we do not really need large amounts of extra capacity right now or in the next few years. Essentially, the capital costs of coal-fired power stations are not changing over time whereas renewable's costs are falling. Add to that that most investors would be factoring in the probability of some form of carbon constraint or cost of carbon at some point in the future, and I would judge it highly unlikely that you would see commercial investment in coal-fired plants in Australia at any point in the future.

Senator PATERSON: Duly noted, but that is partly because of the signals that we are sending them. The question I am raising is: should we be sending them different signals?

CHAIR: Ms O'Shanassy, in your opening statement you mentioned a report of the energy transition leadership forum and you mentioned some of the signatories. In that report, which you said signs up to the recommendation that we should facilitate and accelerate the inevitable transition out of coal-fired power generation, how significant is it that we have Australia's largest emitter and largest electricity generator, as well as Australia's largest solar generator, that have signed up to that recommendation?

Ms O'Shanassy : AGL is Australia's largest climate polluter, but we chose to work with them on this forum because they have also made significant commitments to completely phasing out their coal plant by 2050. We would argue that needs to be much earlier, but they have shown that type of leadership and we chose, therefore, to work with them. They are doing that purely for financial reasons—for why they exist: to produce energy to make money. I am sure that there are other reasons among the people within AGL, which, of course, used to produce only renewable energy. I know that the staff, for example, were quite horrified when they found out that the plant which they had bought in recent years had turned them into the largest polluter. The energy companies are telling us that they want to transition out of coal and into renewables and therefore they will do that. But what they are not responsible for is the wellbeing of Australians, and not necessarily responsible for energy prices and for jobs and for communities that depend on those jobs. That is a responsibility of our governments.

CHAIR: As inadequate as I and many scientists believe the targets set by Australia's government to be, but accepting that those targets have been set by this government, can we even meet those targets unless we close coal-fired power stations?

Ms O'Shanassy : The information that I have seen, and no doubt has been submitted to the inquiry, shows that it is not possible that energy transition to clean energy that does not produce pollution is required to meet even the targets that the Australian government currently have—which are terribly inadequate to do our fair share to meet our international commitments and will, in fact, need to be reviewed under the Paris Agreement by 2019. As a country, we will be forced to review those targets, but they are unlikely to go down. The commitment to the Paris Agreement was to ratchet targets up, and we have to transition energy if we are to meet those.

CHAIR: Professor Jotzo, we will have a close look at your proposal that you submitted to us late last night. Could you briefly outline the structure of your proposal for a managed transition? Could you also contrast that with the model proposed by the Australia Institute? Could you also contrast that with the model that the Climate Change Authority has spoken to, using, I think, Jacobs' modelling? Could you give us an overview of those three different policy mechanisms to achieve a managed transition?

Prof. Jotzo : Just to put some numbers around what Ms O'Shanassy just said, one of the large Latrobe Valley plants accounts for about three per cent of national emissions, and, together with energy efficiency improvements, these are the most easily obtainable large-scale actions to reduce Australia's national emissions on the way to the 2030 target of the existing order, or in fact, something more ambitious that is probably more in line with international expectations.

Our proposal, in a nutshell, is for a market mechanism whereby existing power stations submit bids as to financial compensation required to shut down according to a pre-agreed time line. A government or regulator would choose the most attractive bid, which may well be the bid that delivers the greatest expected emission savings per dollar of compensation required. This is a competitive process—best bid wins—and the money is then levied on the remaining power generators. The logic behind that is that these are the power generators that will benefit through increased capacity utilisation of their plants and, to some extent, through increased prices in the wholesale market. This would enable for exit according to a timetable. It would create a source of funding for structural adjustment, and possibly also for improved site rehabilitation above and beyond the level that is required by law of the exiting companies.

In terms of contrasting or comparing it with other mechanisms, the regulated closure approach is a more long-term approach. I would not necessarily see the two approaches as alternatives; they could live side by side. The regulated approach, according to a timetable, age or emissions intensity would obviously give great predictability of the schedule of exit. In my view, it has the disadvantage of not being the least-cost pathway. Almost by definition, the least-cost pathway of exit will deviate from 45 years out or whatever it may be. If a government wanted to go down the regulatory closure pathway, you would want to combine that with flexibility instruments such as tradeable operation rights.

Lastly, when you referred to the Climate Change Authority proposed instrument, I think, you were referring to baseline and credit scheme for the electricity sector?

CHAIR: Yes, that as well as their modelling, which looks at, if I recall correctly, the phase out of coal fired power by 2030 rather than 2035. But I will bow to your superior expertise.

Prof. Jotzo : Yes, that is right. The Climate Change Authority has put forward a suggestion that has been quite intensively debated in policy and research circles which is effectively a pricing instrument for the power supply sector only with limited cost pass-through to electricity prices. A given level of emissions intensity would have to buy credit from other generators that remain below that baseline. That would effectively establish a price on carbon in the electricity supply sector. That would be a cost-effective way of providing incentives within the electricity supply sector. It has the disadvantage of not being harmonised with pricing instruments with the rest of the economy. But if a government were to implement such a scheme and if a government were to be willing to infuse it with sufficient ambition, then it could be effective in driving that transition.

CHAIR: It sounds like there are quite a few options for achieving that transition if the government and, ideally, all parties work together to dedicate ourselves as a country to that task. I think we are going to have to suspend proceedings—

Mr Campbell : If I could make one closing take-away point—

CHAIR: In less than 30 seconds, yes, Mr Campbell.

Mr Campbell : in less than 30 seconds. If I could expand on some of what Professor Jotzo and Senator Paterson were talking: the wholesale price and retail price difference here. There is a lot of hand-wringing going on about what will these closures mean for wholesale prices. Average annual wholesale prices in New South Wales and Victoria have not changed this century. Average retail prices in New South Wales and Victoria have doubled this century. In terms of what all this closure means for households, very little is the take-away message from the data of the last 16 years.

CHAIR: Thank you. I think that is a really important point. Unfortunately, everyone else has had to go, so I have to suspend proceedings.

Proceedings suspended from 13:59 to 16:35