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SELECT COMMITTEE ON FUEL AND ENERGY
01/04/2009
Issues relating to the Fuel and Energy Industry

CHAIR —I welcome the Hon. Dr Hamill, Mr Van Rooyen and Mr Rice from Envirogen. I invite you to make a brief opening statement after which the committee will ask you some questions.

Dr Hamill —Thank you. It is probably appropriate to explain who and what Envirogen is. Envirogen is an environmentally friendly power generation business. We actually generate power through providing emissions abatement. We use waste coal gas, which would otherwise be vented into the atmosphere or flared. I stress that this is a waste product. It is methane but it is of such poor grade that it is not suitable for piping in the form of coal seam methane. So it is truly a waste product; it has no use other than the use to which we put it, which is power generation.

We are not an adjunct to the coal industry but we do provide greenhouse gas abatement. For the committee’s information, I would like to point out that fugitive emissions occur through mining activity. They continue to occur even after the mining activity has ceased. During the period of mining activity, of course, mines need to remove methane on safety grounds alone, so we actually are providing both a productive safety solution and gas abatement. Importantly, we can continue to draw methane from mines that have ceased production where that gas would otherwise vent to the atmosphere.

In 2007-08, Australia abated eight million tonnes of fugitive emissions. Our industry—that is, Envirogen and EDL together—were responsible for 6½ million tonnes of abatement, which is over 80 per cent of the fugitive emission abatement. We have been abating fugitive gases since 2000. To put it in some context, this year our industry had a total installed generating capacity of 215 megawatts. That has enough to provide sufficient power to 110,000 homes. That is a city of around 1½ times the size of Canberra. At the same time—and this is the important part of our operation—while providing that amount of power, we are also removing the impact of emissions of 1½ million cars from our roads. We believe, given the regulatory environment, we have the capacity to double that contribution.

The reason we are very pleased to be here to speak to the committee this afternoon is that when the green paper was released there was no mention made of our industry. Landfill gas was mentioned but waste coal gas was not. We made representations to government departments. There was still no mention of our industry when the white paper was released and still there was no mention of us when the draft legislation was produced. Our concern is that state based arrangements to promote renewable energy are due to expire in 2012 and with them goes any incentive for mines to use productively what would otherwise be a waste product. In other words, mines will seek to abate by flaring gas, which we believe and have demonstrated we can use for power generation. In short, there are both negative environmental and economic impacts from the omission of waste coal gas from the CPRS or indeed from the renewable energy target. The result of that will be that our industry will have no future.

There is a solution. We would like to talk to you at length about that this afternoon. We believe that generation from waste coal gas ought to be included in the proposed expanded renewable energy target and we point to international precedents to support us in that regard. As I said, we have been debating waste coal gas since 2000. It was interesting therefore that in 2000—and, Senator Cormann, you will probably pick me up on my accent here—the Erneuerbare-Energien-Gesetz of Germany was enacted by the Social Democrat-Green coalition, legislation which now enjoys bipartisan support. In that legislation waste coal gas was included under the renewable energy source. In fact, the energy sources that were included under the legislation included energy from hydrodynamic power, wind energy, solar radiation energy, geothermal energy, gas from sedentary landfills, sewage treatment plants, biomass and, importantly, mines. The rationale for including the use of mine gas for electricity generation was because:

The use of mine gas for electricity generation will improve the carbon dioxide and methane balance, relative to the release of these substances into the atmosphere without utilising them. For this reason, mine gas was included in the scope of application of this Act.

They are the words of the federal Ministry for the Environment, Nature Conservation and Nuclear Safety of Germany. Other countries have taken a similar approach. We believe very strongly that Australia should do likewise or to do other than that would lose not only the advantages that we can deliver in terms of abatement and energy supply but also investment and jobs that would flow from the destruction of what is a niche industry in this country.

The burning of waste coal gas for energy certainly does produce carbon dioxide but so does flaring by mines. The big difference is that we actually generate power through the process. There is a real benefit there consequently. We believe that waste coal gas, which is used for power generation, could be classified as a zero rated fuel source under a renewable energy target. We believe, as I said, that there is a clear precedent for the inclusion of our industry under an expanded renewable energy target. Importantly, also, should the power generation which industry provides be lost because of the regulatory environment changing, there will no doubt be a need to substitute that power with generation from other sources. The likelihood is that waste coal gas source power would be replaced by other fossil fuel generated power with all of the environmental implications of that.

In summary, we believe that ours is a case that needs to be heard and that the schemes that have been outlined are deficient because of the omission—maybe it is because we are a small industry, but nevertheless we are an important industry and one that has been critical to delivering Australia’s achievements in emissions abatement to date. We are very happy to respond to any questions you may have.

CHAIR —Thank you. Given we have gone through quite a process—we have had Garnaut, the green paper and the white paper—I assume that you have had some discussions with the government or the department along the way. When you raise with them that you are being inappropriately left out, what do they say to you?

Dr Hamill —We have sought to inform government departments; we have sought to inform members of parliament from both sides of the House and the Senate. There has been a view expressed to us—a somewhat naive view, in our opinion—by some departmental officers that in a new regulatory environment the pricing signals will change and that a company like Envirogen should not need to worry because the price of energy will change in a way which would compensate for the losses that we would have through the removal of the state assistance schemes.

CHAIR —On that point, what they are saying is that the price of other energy sources is going to increase to the extent that you will become competitive.

Dr Hamill —Yes. The problem with that, however—

CHAIR —Is that what they are saying?

Dr Hamill —That is the essence of that view. Where that view is misguided is that it fails to recognise that, as I said, we are in the business already. We have long-term contracts with energy suppliers such as Country Energy. Those long-term contracts do not terminate upon the introduction of the CPRS and are based around the regulatory environment which we are currently in. So, whilst in theory the view that was expressed by some in the bureaucracy may hold five or 10 years down the track, we will not be around in that time because the impact on us through not being recognised under an expanded RET scheme will be quite dire for our industry.

CHAIR —I am a bit naive perhaps. Would you perhaps spend a few minutes explaining your mining process and how it achieves the benefit it achieves—talk us through the mechanics of it.

Dr Hamill —I will ask my CEO. He is our mechanics man; he can explain it in detail.

Mr Rice —It is fairly simple. Most mines to date have been using large amounts of ventilation—these are all underground mines, I must say to start with. They have to get the working level of methane down, so they may use high levels of ventilation air where possible. But, as they mine into deeper coals, they mine into more gaseous coals, so they have to do what is called pre-drainage. They drill a lot of holes into the coal block and also have to get rid of the gas after the mine has gone through on a longwall operation. Historically, they have just brought that to the surface and until very recently they have just vented it for safety reasons—as soon as put flares on top of it, you have a safety issue with the blokes underground, so they have tried to avoid that.

What we do is simply connect pipes to those wells which progressively move with the mining operation and bring that gas back through polyethylene pipes of 300 or 400 millimetres in diameter to a centralised power station. That power station consists of reciprocating gas engines designed to this purpose. The ones we are using are an Austrian engine, but there are American engines and the like. These are containerised spark ignition gas engines—very similar to a large diesel engine.

The gas does not go through a long process. Dust and moisture are taken out of it and it feeds straight into these engines. These engines then generate and, through a step up through transformers, it immediately goes out onto the local grid in that general area. So it is a fairly simple process. We have stuck to nominally one megawatt generating units because they are small building blocks. So, although we do not get into guarantees of off takes under the power purchase agreement, there is an inherent safety factor in having these single one-meg units generating onto the system.

CHAIR —What I heard you say is that the whole process got underway properly because of state policy settings. Is that right?

Mr Rice —Absolutely. It was started back in the late 1990s, when the big retailers were under pressure from the state governments—who were indirectly under pressure from the federal government—to do something, and each state government put in its own regime of paying for the abatement. That is where the majority of our revenue comes from.

CHAIR —You said that that scheme runs out by 2012. So it was always a time-limited scheme, was it?

Dr Hamill —Those schemes are going to be wound up with the implementation of the CPRS.

CHAIR —So, once the CPRS is in place, any state arrangement that you are currently benefiting from will be wound up. So you are going to be worse off as a direct result of the CPRS, which I guess, as far as you are concerned, is inferior to the scheme that is currently in place at a state level?

Dr Hamill —The important issue here is that under the current regulatory arrangements there is an incentive for the waste coal gas to be used. Because of the structure of what is currently proposed under the CPRS and the absence of any recognition of our industry, the onus will be placed on the mine to be responsible for its own abatement and, for the coal mine, the cheapest option will be simply to burn the waste coal gas. Our argument very clearly is this: in doing that, it is a suboptimal environmental outcome and a suboptimal economic outcome. Our industry, as I said, has installed capacity of about 215 megawatts of power. We believe that the industry could double in size. There is around $300 million of potential investment in the industry which is sitting there pending the outcome of the whole CPRS/renewable energy target policy debate. If we were placed within the renewable energy target and recognised in the way in which I have described, that investment will flow—with the jobs and so on that flow with it and the additional abatement that that will deliver. It is really dependent upon the regulatory outcome.

CHAIR —I understand that the government or departmental officials have said to you that it is going to work out for you anyway, but you doubt whether that is indeed going to be the case. Why would they not just include you? Is there a downside for the government in including you in the way you have asked?

Dr Hamill —As I said, there is plenty of international precedent. I cited Germany but I could have cited the French or US precedents.

CHAIR —I understand. I am just trying to get my head around this. An official saying that it is not really necessary is one thing but an official saying that we do not want to do it because it is going to mean X, Y or Z is another thing. If it is not really necessary, it is not really their problem if it is going to do something beneficial for you.

Dr Hamill —I fail to see the logic that methane generated from landfill has been recognised—it was recognised in the green paper and the white paper—but methane derived from waste coal gas was omitted. I just think that it has been overlooked.

CHAIR —So, other than saying, ‘It is not really necessary,’ the government at the official level have not given you anything else, no other argument?

Mr van Rooyen —They have said that the forecast increase in power prices in the future as a consequence of the CPRS going forward will effectively be a make-good for us in terms of the loss of the NGAC revenue. We have done modelling and given them the detailed models that show them that that is not correct. In fact, the forecast increase in power prices by recognised experts indicate that that will only partly make up for the equivalent of our carbon footprint that we will have to pay for—which, like any generating industry, we are prepared to make that make-good in terms of the carbon footprint and we have to pay for that. However, the subsidy that we are currently getting through the New South Wales gas abatement scheme is not sufficient. In fact, it leaves us with a severe deficiency in our revenue, and they recognise that.

CHAIR —So if the government introduces you into the regulatory regime the way you have proposed and you are able to attract investment in what is an important industry, what is the cost to government? What is the cost to anybody? Is there none? I see you shake your head.

Mr Van Rooyen —No. From our perspective we have not come across any one. In fact, we have had these discussions with DCC officials, including members from the RETS side and the CPRS team, effectively. At all meetings, no-one can tell us why we should be excluded from either scheme.

CHAIR —We will ask them for you tomorrow. We are having the department here tomorrow.

Mr Van Rooyen —The latest meeting we have had with them, particularly around the German scheme, recognised that we have amongst the renewable movement probably the best scheme globally in terms of international precedent. We have commissioned experts in Germany to give us detailed studies of their scheme just to make sure we are not missing anything. Clearly waste coal gas is included as an eligible fuel in terms of meeting their renewable energy targets.

CHAIR —Let me sum up my understanding. It is environmentally beneficial. There is no downside in terms of cost for the government and—

Mr Rice —Other than through the RET scheme, yes. Under the RET scheme that has a value that attributes to those green instruments, yes.

CHAIR —Who pays for that?

Dr Hamill —At the end of the day, effectively consumers pay but what the RET schemes effectively do is actually carve out a part of the energy market for renewables. So whilst it may not be the cheapest power available there would be others who argue that in terms of the more traditional fossil fuel based power sources there are intangibles which the community pays for in other ways but not necessarily directly on the power front.

CHAIR —So how do you compare to all of the other renewable energies?

Mr Van Rooyen —The renewable energy target, which is where we think we should be—consistent with Germany, not withstanding it is a slightly different model; it is a feeding tower—is 10,000 megawatts. Our proposed expanded scheme has a 10,000-megawatt target. Our industry, as Dr Hamill said, is currently at 215 megawatts. We know that the maximum it can grow to is around 400 megawatts. That will be 400 megawatts of 10,000 megawatts that have to be achieved to reach our targets. So the notion that the renewable energy target is going to be swamped with waste coalmine gases is inconceivable. It is not practical. We will be a very small part of the expanded scheme but we will go a long way to freeing up capital which is constrained in this current environment. To actually spend the equivalent of 215 megawatts would build a $1.5 billion wind farm. We think to slot into the scheme is perfectly aligned with the notion of a diverse fuel source.

Mr Rice —As far as costs go, the government are so far saying they want 20 per cent by 2015. By virtue you have said that. You have said you are trying to achieve that no matter what the cost is. So the cost will rise and fall on what the alternatives in the market are. All we are asking is to be included in that, so we can then compete with wind farms or landfills or whatever. So it does not really come to asking something additional from the government. We just want to be included—

CHAIR —You want to be able to contribute towards the 20 per cent.

Mr Rice —to be able to compete in the marketplace. Meeting that target is going to be tough anyway.

CHAIR —As it is, so you would like to put in as many people as possible.

Mr Rice —Why would you rule out someone that is saying: ‘We will compete. Just put us under that umbrella, if you like’?

Dr Hamill —Again, the important point is that it is not a case of being all future tense. We are. We have been. As we speak our four generating plants are currently abating gas.

Mr Rice —Can I add a point. In the Senate the other day, there was a question to Penny Wong—and I do not want to go into the details of that—and this came up: waste coal gas and Envirogen. You might like to look at the detail of that, but the answer was that this is a transitional matter. With due respect, we do not see it as a transitional matter at all in the schemes. We want to continue in the long term in a business that provides abatement. There is a big difference between that and a transitional matter between a state government and a federal government scheme.

CHAIR —If the federal government does not make the change that you are seeking, what will happen to your industry?

Mr Rice —We will basically fold up. The reason is—

CHAIR —How many people do you employ? Sorry, the reason is?

Dr Hamill —The industry currently employs around 100 people. As you imagine, it is capital intensive. In the case of Envirogen, we actually outsource to other companies to provide services. A major contractor to us is Clarke Energy, which delivers the on-ground services for our power plants. We have four plants—Tahmoor, Teralba and Glennies Creek in New South Wales, and one at Oaky Creek, near Tieri in Central Queensland. EDL, the other company and a bigger company than ours, operates over a number of other sites around Australia. Our contribution to that employment number of 100 is about half. As I said before, there is around $350 million of plant on the drawing board which could be brought on line between the two companies—EDL and Envirogen. We project that there is around 300 jobs in the construction phase and obviously fewer in terms of the ongoing operation. It would increase the greenhouse abatement from around 6½ million tonnes as it was in 2007-08 to probably around 12 million tonnes, which is a useful contribution.

CHAIR —Very. You said your industry would fold. What would be the reason for that?

Mr Rice —The numbers being quoted by ACIL Tasman, who advise the government on numbers, indicate an uplift on power pricing as high as 15 per cent. We are well in excess of 50 per cent of our revenue in needing to come from a green vehicle, if you like, to pay for the abatement. And that is what we are getting in excess of now. We are well in excess of the 50 per cent levels. We need that. If you talk about uplifts for power pricing in the order of 15 per cent to 20 per cent, whatever that number is, it is nowhere near enough to compete. As you can appreciate, this generation is not cheap generation. Its primary purpose is twofold: to use the waste resource and to provide abatement. We see ourselves in the abatement business and we would like to continue there.

Senator HUTCHINS —You have three mines in New South Wales?

Dr Hamill —We have three power plants. We do not own any mines—just to make that very clear.

Senator HUTCHINS —Where are they?

Dr Hamill —We have two in the Hunter and one down this way.

Senator HUTCHINS —Your major client is Country Energy?

Mr Rice —It is one of them. Energy Australia is also one.

Senator HUTCHINS —Do they have a view about the predicament you have been placed in?

Mr Rice —They do not have a view. In this scheme where you are moving from state instruments benefiting the abated to taxing the emitter, they do not see themselves in the future of the whole scheme anyway, nor is it their place to comment.

Senator HUTCHINS —With the expiry in 2012, unless this scheme recognises your contribution, you will be out of business by then anyway—is that correct?

Mr Rice —The simple answer is yes.

Senator HUTCHINS —I imagine that what you are currently generating will have to be taken up by some other source.

Dr Hamill —That is correct. That was the point that I was making: fossil fuel generated power is more likely to step up in that time. Not only will that involve a significant investment in additional power plants somewhere else; it will bring with it all the issues—

Senator HUTCHINS —I imagine there will be more flaring, as you call it?

Dr Hamill —There will be flaring: for the gas that we currently use and the gas that EDL currently use as waste coal gas for power generation, the mines producing that gas will simply be burning it into the atmosphere, producing CO.

Senator HUTCHINS —Have you had an opportunity to speak directly with representatives of government rather than of the Public Service on these matters? I will not ask whom, but have you had the opportunity to speak directly and to highlight to them what is occurring?

Dr Hamill —We have spoken to backbench members of parliament. We have spoken to ministerial staff and to departmental personnel. We have endeavoured to seek to meet with anyone who will meet with us, frankly. I will say here that I intend to write to MPs, senators and ministers.

CHAIR —Have you met with Penny Wong?

Dr Hamill —I personally have not.

CHAIR —Have members of your company met with Penny Wong?

Mr Rice —We have met with her staff a number of times.

CHAIR —When Penny Wong answered the question in the Senate, and both Senator Hutchins and I were there and listening carefully, she had not had the benefit of a direct briefing.

Mr Rice —Yes.

CHAIR —Have you sought a meeting with the minister directly?

Mr Rice —Yes, we have.

Senator HUTCHINS —So it would be your observation that the people you have spoken to are fully aware of the predicament, for want of a better word, that you are in?

Dr Hamill —I think we have been very clear in the information we have imparted. We imparted the same information that we have sought to share with the committee this afternoon. We provided that information in written form as well—indeed, we would like to leave with the committee this afternoon some relevant documents we have cited in our evidence before the committee.

CHAIR —Thank you. Is there anything we have not asked you about which you think we should be aware of?

Senator HUTCHINS —As the Chair has said, bear in mind that we will have representatives from Treasury and the Department of Climate Change before us tomorrow. If you have anything you feel we need to make them aware of, do not hesitate to put it to us right now, or think about it overnight and give us a note.

Dr Hamill —I think Jonathan may have a comment, but I also have one.

Mr Van Rooyen —One point that I think is worthy of consideration is that the government’s $42 billion stimulus package is very attractive to a company like ours, and indeed to our competitor in the industry—that is, Energy Development. That provides a significant incentive to invest in capital equipment up until 30 June this year. As Dr Hamill said earlier, there are a number of projects, in the order of $350 million, which include the creation of around 100-odd direct construction jobs, which are all in regional areas. For example, the owners of Envirogen, the industry super funds, have money available to deploy into those projects, and indeed are committed to the fugitive emission abatement sector. Consistent with the $42 billion stimulus package that is an attractive opportunity; however, the uncertainty created by the CPRS and the notion that we will no longer be given a financial incentive consistent with the safe-abate schemes will mean that those projects will not proceed and those jobs will not crystallise, which is in contravention of the notion of the incentives associated with the government’s stimulus package.

Dr Hamill —My comments were really on similar lines. As chairman of the company, I obviously have to be very sensitive to the desire of the shareholders, and industry funds are the key shareholders here. Those shareholders have made a deliberate investment to support what was an environmentally constructive industry. Currently, the waste coal gas power generation—this is Envirogen and EDL—occurs around the following locations: the Tahmoor mine at Picton, New South Wales; Teralba, Newcastle; Oaky Creek, the one I mentioned, at Tieri and Emerald in Queensland; Glennies Creek, Singleton in New South Wales; Appin, Picton; Tower, Picton; German Creek, at Emerald, Queensland; WestVAMP, Picton, New South Wales; and Moranbah North, at Moranbah in Queensland. The $345 million of potential investment is for Bulga, at Singleton; Mandalong, near Wyong, New South Wales; and Helensburgh, at Helensburgh, New South Wales; an expansion at German Creek, Emerald; Ellensfield, Moranbah; Appin, West Cliff; and here in the Illawarra, in Wollongong.

So it is real investment. It is real economic activity, and we do not want to be an industry that is adversely impacted. We want to be an industry that continues to deliver into the future what we have been delivering—and that is, greenhouse gas abatement.

CHAIR —I think that is an appropriate closing statement. Thank you so much for your contribution to the committee. We thank all those who have given evidence to the committee today.

Committee adjourned at 4.46 pm