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Monday, 7 November 2011
Page: 8272


Senator WONG (South AustraliaMinister for Finance and Deregulation) (10:48): I will first give a response on the ESAA modelling, which I think was referenced by Senator Xenophon. The advice I have is that it was a hypothetical exercise rather than an attempt to estimate what will actually happen to electricity contracting under the package. The modelling report itself says:

The study does not purport to project what will happen in terms of contracting levels, as they are influenced by numerous and countervailing influences.

The government remains confident in the findings of the Treasury modelling which shows the impact of a carbon price on electricity prices to be an increase of around 10 per cent, or about $3.30 a week, for the average household. I can say to Senator Xenophon that there was certainly a lot of consultation with this sector both in the context of the CPRS and in the context of this package. As part of the package before the chamber there is a very significant allocation to the Energy Security Fund of some $5½ billion.

The policy issue that you are referring to is the purchase of future carbon units and how that is managed. It is correct that under the CPRS there were a range of deferred payment arrangements in relation to the auctions of future vintage carbon units. The advice I have is that deferred payment arrangements increase the administrative complexity of auctions and inhibit the development of secondary markets to manage carbon pricing risk. The government is offering loans to emissions intensive generators who are otherwise unable to secure finance on reasonable terms to buy future vintage carbon units at auction. This addresses working capital constraints directly without interfering in the functioning of the auction.

There is a different mechanism that is being proposed in the package before the chamber to that which was previously proposed, both of which deal with this issue. But the advice I have is that the loan provision to which I have referred addresses working capital constraints directly without interfering with the functioning of the auction. The Energy Security Council can advise the Treasurer to provide further assistance to generators, such as loans, if that is required to safeguard energy security. The policy question here is how the companies manage their carbon price exposure. The expectation the government has is that the private sector will continue to offer hedging services to generators and there are the additional safeguards to which I have referred in the energy security package.

You invited the opposition to respond as well. If there is a concern about volatility in the short term and the impact on the electricity prices, I would make the point about—I cannot recall if it was the ESAA or some other industry association that said this—the likely price impact of the oppo­sition's commitment to repeal. If they retain their position—I do not think they will, but if they do—that is likely to have two potential consequences. The first is it makes it more difficult to engage in long-term contracts, which obviously has an impact. The second is that it also makes hedging more difficult because of the inherent uncertainty. But really the issue goes to what the policy mechanism to manage this is. You are correct to say there is a difference between this and the CPRS, but the advice I have is these other arrangements deal with this in an appropriate way. I am also reminded that obviously there is a three-year fixed period, which is relevant here.