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SELECT COMMITTEE ON FUEL AND ENERGY
02/04/2009
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 Wheelihan —Thank you for the invitation to appear before you. Pacific Hydro is a Melbourne based renewable energy company which began by building small-scale hydro projects in Victoria and subsequently in Western Australia on the Ord dam and in the Philippines. With the first mandatory renewable energy target we moved into the wind industry. We built the first private wind farm in Australia, at Codrington on the south coast of Victoria, and we have now built, and we own and operate, a series of wind farms along the Victorian and South Australian coast. With the constraint in opportunity because of the small scale of the original mandatory renewable energy target, we were unable to continue to expand our business in Australia, and we have as a result expanded it quite vigorously in South America. We have gone back to hydro in Chile and we have built wind farms in Brazil.

We were taken private three years ago in a takeover battle by our major shareholder, which is in fact Industry Funds Management, an entity which represents a consortium of Australian industry superannuation funds. Effectively we have 43 industry fund shareholders, who represent five million Australian superannuants. We are probably the most broadly held company in Australia, I think, in that sense. We are squeaky green—that is all we do. We only build, own and operate renewable energy projects.

I personally have spent 44 years in the energy industry, and over the last 30 years my career has taken me progressively from coal—I was general manager of the coal division of the Shell Company in Australia—through oil, gas, having been on the board of Woodside for six years, and now latterly into renewables. So I have in fact decarbonised my own career very successfully over the last 44 years.

I will ask Dr Richards to take us through the presentation that we sent to you, but, to set the scene, as a renewable energy company we are, of course, highly motivated by the opinions of the Intergovernmental Panel on Climate Change. We believe that climate change is a real and present threat to life as we know it on our planet. We recognise in turn that significant and purposeful action needs to be taken to reduce carbon emissions by the global economy to mitigate the risk of catastrophic climate change. Specifically, here in Australia we took note of the Shergold report which the previous government commissioned just before the election and we have played an active part, as you will see from our submission, in the dialogue that surrounds the Garnaut report.

The thrust of our submission is that we are strong supporters of the expanded renewable energy target. The existing small target has been good legislation. It has worked. It has produced the result that was asked of it, within a modest target. We would like to see that target expanded and implemented, as promised by the incoming government, as soon as possible. Andrew Richards will continue.

Mr Richards —I am not sure if you have in front of you the slide pack that we sent.

CHAIR —We have it, thank you.

Mr Richards —The slide pack, which I will move through fairly quickly, encapsulates a series of submissions we have made to various government bodies recently, including the Garnaut review, Infrastructure Australia and the renewable energy target legislation review. The first slide gives a brief overview of Pacific Hydro, which I think Mr Wheelihan has covered quite sufficiently. Slide three is on the Carbon Pollution Reduction Scheme. We come to this from the position of investors in new clean energy power stations. Fifty per cent of our emissions in Australia come from the stationary energy sector, making specific policy in this area an absolute priority. If we are to address climate change, not only in Australia but around the world, then we need to tackle stationary energy. Therefore, we must aim to transform Australia’s energy sector. I note that recently the IEA’s report World energy outlook 2008 stated we need an ‘energy revolution’ and a rapid transformation to:

… a rapid transformation to a low-carbon, efficient and environmentally responsible system of energy supply.

They state that that needs to start almost immediately. We absolutely agree. Over the coming 20 to 25 years, we as a nation need to invest around $40 billion in the stationary energy sector just to keep the lights on. That is investment that will need to occur regardless of climate change policy. That is what we need just to keep the economy ticking over. We want to ensure, through the renewable energy target, that a majority of that investment is made in infrastructure that does not increase but stabilises and, hopefully, decreases our carbon liability. The key role that the renewable energy target will play over the coming 10 to 15 years is to divert that capital away from new fossil fuel generation to something that is much cleaner than it currently is. Unfortunately, we cannot see that the CPRS as it is currently designed would deliver an economic signal that would start to transform the stationary energy sector, whether that be in renewable energy, clean coal, carbon capture and storage or a whole range of other things. It will not deliver the economic stimulus that most financial models require. Therefore, the complementary measures that have been talked about briefly today are absolutely crucial, we believe, to that transformation of the stationary energy sector.

In the Australian electricity market evolution needs to occur. Under the renewable energy target we will take renewable energy from about 10 per cent to close to 20 per cent in the coming years. We believe that will take up a good chunk of the growth in demand for energy. If we are able to achieve a stabilisation of emissions from the stationary energy sector, something that we have never achieved before, that will be an achievement in its own right.

Senator HUTCHINS —You have the coloured version of the slide pack. Could we have a copy of the coloured version later on? Even though my eyesight is bad I can still make out some shades of colour—but it is a bit difficult and there are about five shades.

Mr Richards —Absolutely.

Mr Wheelihan —The big one is coal, Senator!

Mr Richards —Most of these are taken from either Treasury documents or the National Greenhouse Gas Inventory. I will move on to slide 5, which is about the renewable energy target. We believe it will drive around $25 billion of private investment in renewable energy over the coming 10 to 15 years. According to the Department of Climate Change, it reduces emissions, or projections of emissions, from 127 per cent above 1990 levels to 120 per cent. That is a seven per cent overall reduction in emissions. Again, that is against projections. Most of that will be the stabilisation within the stationary energy sector that we have talked about. It will provide tens of thousands of jobs and, when we talk about green jobs, they are not some kinds of devalued jobs in the economy. The jobs that we talk about are the same sorts of jobs that you would have in a coalmine—electrical engineers, steel fitters, concreters and things like that.

Senator HUTCHINS —Are those classified as green jobs?

Mr Richards —People can call them green jobs—

Senator HUTCHINS —We had the Climate Institute and the ACF before us. Is that what they have in mind when they refer to green jobs or is that what you have in mind?

Mr Richards —The Climate Institute would probably call every job that is created in the renewable energy industry a green job. That is the way they want to market it, which is fine. But it is important to point out that they are jobs like any other jobs. They are guys on bulldozers and concrete pourers and those sorts of things. If you go to a wind farm construction site it looks very similar to the construction site of any other major infrastructure around the country. They are highly valuable jobs and they are jobs that are easily transferable from one sector to another, which means we can actually get the industry moving fairly quickly.

Mr Wheelihan —The other thing is that they are regional jobs. Obviously, we build wind farms where the wind blows hardest, and that tends to be in regional areas.

Senator HUTCHINS —Victoria.

Mr Wheelihan —The south coast of Victoria, yes.

Senator HUTCHINS —I am just having a shot at Victoria. There are no Victorians here.

Mr Richards —Effectively, we see the renewable energy target as an insurance policy for the short term. By short term we mean the next 10 to 15 years, while we wait for the CPRS to get into its stride and to deliver that broad price across the economy that will drive emissions down. It will stop emissions from going up in the stationary energy sector, which is what is required, and it will guard against what we classify as technological failure. So if carbon capture and storage does not work for whatever reason or if new technologies do not come on, at least we will have stabilised emissions from that sector and not made the problem worse. And of course we have spoken about jobs. We believe it will play a crucial role over the next 10 to 15 years as an insurance policy, if you like, against further climate change outcomes.

I understand you have had Frontier Economics here recently. We commissioned them to do some work in 2007 looking at what would be required to stabilise emissions out of stationary energy. Again, things like renewable energy targets and energy efficiency measures that have been talked about play a crucial role in this while we are trying to retool the stationary energy sector to be less carbon intensive.

Mr Wheelihan —You might explain the acronyms at the bottom of the slide.

Mr Richards —The top red line is business as usual—what Frontier Economics believe to be the growth scenario for emissions in the stationary energy sector. EE is energy efficiency. If you do energy efficiency alone, emissions will continue to grow, but energy efficiency with what we have called a ‘clean energy target’ is the low grey line with the dots on it. That is where we think we should be getting to. It is part of the role that the renewable energy target will play in that stabilisation at around 190 million tonnes of CO that the stationary energy sector is currently responsible for.

Obviously, cost is important. Again, moving over the slide, you can see the wholesale energy cost impact from the renewable energy target. You can cut this in a number of different ways. It depends on your assumptions and on future technology that will come in—and the cost of grid connection and input to projects such as steel and concrete prices. However, looking at where things were from a cost point of view 12 months ago, essentially the renewable energy target will add approximately a cost of about 8c per week to the average Australian household in 2010. It will add about 81c per week to the average Australian household bill at the end of the scheme in 2020. We put this forward as a way of providing some context for the actual costs and benefits of something like the renewable energy target. We can certainly provide you with a full report on that if the committee wishes. We think it is a relatively cheap way to go about this. The impacts on the economy will be—

Senator HUTCHINS —Excuse me, Mr Richards, but this is on the wholesale energy cost impact from RET?

Mr Richards —That is correct.

Senator HUTCHINS —Would you go across this and explain it to me, if you would not mind?

Mr Richards —There are two scenarios. Obviously, there is the existing mandatory renewable energy target, which is on the left-hand side of that chart. That is what we currently have in place now through the federal mechanism. That in itself will increase wholesale electricity prices by, according to this modelling, about $2.27 in 2020. That will be the overall cost impact per unit of power.

Senator HUTCHINS —Where is that here?

Mr Richards —That is down at the very last bit.

Senator HUTCHINS —I see. So it is the $2.07 now and it goes up to $2.27?

Mr Richards —That is right. So moving over to the expanded RET, you have the target megawatt hours, which is the gradual target build-up under the scheme. You have the forecast renewable power percentage as the target builds up. It goes from about five per cent to up to around 18, 19 or 20 per cent. Then you have what is called the after-tax penalty, or what consumers would actually see on their electricity bill.

Senator HUTCHINS —That is per week, is it?

Mr Richards —No, that is per unit of power.

Senator HUTCHINS —So what would an average home use per unit of power?

Mr Richards —The average home uses about five megawatt hours of energy a year. So, effectively, you multiply those numbers by five. The additional cost is $4.48. That is the final cost that is passed through to consumers under this modelling scenario, which is pretty consistent with how energy retailers, who are the liable parties under the scheme, have passed this through.

Senator HUTCHINS —So if it stayed as it was it would not go up $4.48?

Mr Richards —Yes, that is right. Obviously, certain sectors of the economy have a higher energy consumption—

Senator HUTCHINS —Was that $8.48?

Mr Richards —Yes, $8.48 per unit of power. Obviously, there are sectors of the economy that have a higher percentage of energy in their total overhead. There is a discussion paper out on that now. That is particularly so for aluminium and cement. We understand that the government is looking to either exclude those sectors from the scheme altogether or provide a different transitional path. We are not against that provided that the integrity of the scheme is maintained so that you get investment flowing into renewable energy. But there are very few industries in Australia that have energy as a high-cost input, if you like.

Going over the page to ‘carbon price’, the Australian emissions price, this has come out of the Treasury estimates that McLennan Magasanik Associates have done. What we are looking for, by way of carbon pricing, is in respect of if the CPRS were the only mechanism in place to drive investment in renewable energy or transform the stationary energy sector. You would need something north of $60 per tonne to drive the transformational change. According to the current CPRS model that is out there, you actually do not start to see that price coming into the economy until after about 2035. That is on the CPRS minus five scenario, which is the very bottom line. Clearly, in that time, if that were the only thing that you did, you would see barely any renewable energy built, and the modelling done on behalf of government demonstrates that from MMA. You would need a much higher carbon price to drive any form of changing the stationary energy sector. So, we believe that taking an easier glide path, if you like, on the CPRS and providing specific assistance for the stationary energy sector, to ensure that it transforms itself, is the right policy formula. Without that mix we will not get that transformational change.

Part of our experience is in Australian investor and developer renewable energy. Another part of our experience is as an international player in CDM markets, or clean development mechanism markets, under the Kyoto protocol. Seeing that you do not have a colour copy of this material, then the chart on page 10 probably will make no sense to you. What it actually does though is highlight all those areas where CDM activity and investment from people like Pacific Hydro is occurring. There are our Chilean projects. We have just passed $1 billion worth of investment in Chile. We are participating under the clean development mechanism of the Kyoto protocol. We are creating carbon credits. We are trading them into Europe under the Kyoto protocol. We can see, from first-hand experience, that not only emissions trading but also the Kyoto protocol mechanisms actually are working to drive investment in clean energy technologies in those areas. Latin America is one of the boom places where this is occurring. There is India and also China and other parts of Asia that are developing. It has been a boom for us and it has been a boom for the countries that we have been involved in.

On the back of that, we have created a carbon trading business called Perenia. We are looking into new markets in India as to a carbon origination business. We note some comments around CDM and the validity of credits coming from CDM. We can see some of those issues emerging as well. They are not insurmountable issues. From our perspective, we create carbon credits from renewable energy projects, so it is a pretty straightforward process for us to demonstrate that it is abatement and it is offsetting what would otherwise be in Latin America imported coal, oil and gas. I will leave it there and take questions.

CHAIR —I have the first question. I guess it is more generally about the emissions trading schemes. Do you think that whatever we do in Australia should have a net positive effect in terms of reducing emissions globally?

Mr Wheelihan —We do, but it will be small.

CHAIR —Sure, like proportionate to the importance of Australia as part of the world economy. But you think that what we do in Australia domestically should actually make things better rather than make things worse?

Mr Wheelihan —Yes.

CHAIR —Do you think that the current scheme achieves that?

Mr Wheelihan —Yes, but only at the margin. It is a very diluted scheme, in our view, which is the way that Professor Garnaut sees it himself.

CHAIR —But on what basis do you think it achieves it?

Mr Wheelihan —The cap and trade mechanism is one that has been adopted by the Europeans. It is about to be adopted by the Americans, we believe. It has been recommended by Shergold and it has been recommended by Garnaut as the most cost efficient method of encouraging our industries to set about this process. Indeed, from this very modest small-scale beginning, we are heading off in that direction. The comfort that we take from the fact that it is so small is that at least it is a start; it is not nothing.

CHAIR —But, given the way that you have just put that, that is based on a proposition that an emissions trading scheme equals an emissions trading scheme equals an emissions trading scheme. The European scheme is very different from what is proposed in Australia. The Shergold model is very different from what is proposed by the government right now. Have you had a look specifically at the implications of what the government has proposed in the white paper?

Mr Wheelihan —We have not. I believe the Clean Energy Council has—Andrew, is that right?

Mr Richards —We have not focused on the CPRS for the simple reason that we have always believed that it would come in as what we would classify as a fairly soft. So we have not dedicated a lot of our energy to that area.

CHAIR —That is understood, and I am not going to dwell on it. But, if I can summarise what I understand your position to be, you support an emissions trading scheme—

Mr Wheelihan —Yes, unequivocally.

CHAIR —Because you think it is the most economically efficient way of reducing emissions.

Mr Wheelihan —Correct.

CHAIR —However, you do think it is important that whatever we do in Australia actually has a net beneficial impact on the world in terms of reducing—that was a yes, I think.

Mr Wheelihan —Yes. I said yes.

CHAIR —You have not looked at the detail of the ins and outs of the Carbon Pollution Reduction Scheme as it is proposed in the white paper. We have had evidence that jobs could be exported into more polluting circumstances overseas, which would obviously result in a net negative affect. We have had evidence that industries like the LNG industry, which could make a significant contribution to reducing greenhouse gas emissions in the world through exports to China and Japan, are going to be worse off as a result of the CPRS. Are these things that in general terms would concern you?

Mr Wheelihan —Clearly, the LNG industry is a very specific case, and it has been discussed here earlier. Karratha is one of the biggest point sources of CO in Australia, and that is a fact. Liquefying LNG is an immensely energy intensive process in itself but admittedly when it gets to Japan then Japan will emit less CO by burning regassified LNG than it would burning coal, and that is patently obvious.

CHAIR —I am going to come back to hydro and wind energy in a minute, but on that point: what I am trying to get my head around is there is a possibility that we could well do things in Australia that will increase emissions in Australia but reduce emissions for the world by more. If our scheme makes it harder for that to happen, that would be a bad thing, would it not?

Mr Wheelihan —If we are exporting 200 million tonnes of coal, which translates into many more million tonnes of CO, and we are producing 200 million tonnes of CO here ourselves burning coal, the relative impact of LNG as an industry is important, but it is tiny in those numbers. The sheer scale of CO that Australia produces for its own use, or vends internationally, is immense; we are the biggest coal exporter in the world. Okay, LNG is an important business—I love it; I was part of it—and my understanding is that Woodside has negotiated a very handsome concession from this government under the CPRS to meet its needs.

CHAIR —Sixty per cent free permit—I suspect that is what you are talking about.

Mr Wheelihan —That is not a bad concession.

CHAIR —But for an industry that, if there was a global scheme, would do very well, anything other than 100 per cent is a problem, isn’t it? I will leave that; we are probably going too far down the gas path.

Mr Wheelihan —Again, the point you make about carbon leakage and taking jobs overseas is a point that is made routinely by the energy intensive industries every time anything is proposed that is going to cost them anything. They are very well organised, they articulate their arguments brilliantly and they are very successful in resisting any form of regulation or cost. Against that, they are industries which deal with rapidly fluctuating commodity prices, rapidly fluctuating exchange rates. They work in Australia; they pay Australian wages, not Indonesian wages, they pay Australian taxes, not South American taxes, they meet Australian standards of health and safety environment and sustainability, and still compete brilliantly on the world stage. I am not sure that the threat of this very weak CPRS is real at all.

CHAIR —Any threat in the current economic circumstance, if it does not actually achieve the outcome that is being sought, would be a threat too much, would it not?

Mr Wheelihan —We are in business as well. We are in the middle of the same economic crisis. It is no fun, I recognise that. But, equally, I have lived through 10 of these cycles, one way or another, in one of those commodities.

CHAIR —You have lived through a cycle like this one before?

Mr Wheelihan —Not this particular one, no.

CHAIR —No, but a cycle like this one.

Mr Wheelihan —In 1986, when we committed to the LNG project at Karratha, the oil price fell, if my memory serves me correctly, from about $26 a barrel to $8. That commitment that we had just made to Australia’s biggest ever resource project on paper, on that day, looked like a disaster.

CHAIR —Going back to wind farms, you mentioned that you have been expanding your business in South America rather than in Australia. What happened in South America that made it so attractive for you that is not happening in Australia?

Mr Wheelihan —Specifically in Brazil, the framework there for wind farms is very similar to our MRET, which offers a very attractive government incentive price for wind farm developers. We were able to gain land tenure and permits and power purchase agreements, which put us in a position to commit to two big projects. That was the specific condition in Brazil.

Senator HUTCHINS —I was in Chile and Colombia last year. Admittedly some of them are up in the mountains, but there was so much pollution that you could barely breathe, as you have no doubt come across.

Mr Wheelihan —I assure you, Senator, that does not come from hydro stations.

Senator HUTCHINS —I would say that is one of the incentives for hydro stations in South America.

Mr Wheelihan —It is. In Chile, there is a particular set of circumstances that Chile has no indigenous fossil fuel resources at all. It does have very substantial water flows coming down the Andes and we really went there as a hydro company. We had run out off puff here in Australia. Again, we were able to secure water rights and permits and power purchase agreements that enabled us—

Senator HUTCHINS —We went up to Aguazul as well.

Mr Wheelihan —It is one of the most brilliant sights on earth, Senator.

Mr Richards —One of the things that we do notice, being an international player, is that no matter what the jurisdiction—whether it be Latin America, Europe, the United States—one thing they all have in common is they are doing a hell of a lot on domestic policy, particularly domestic energy policy, to start to change the way they do things. In the United States you have close to 30 states that have some form of feed-in tariff or mandatory renewable energy target in place. In China you have huge incentives to install renewable energy. India is the same. Obviously, right across Europe they have similar mechanisms to ours here in the MRET. So even though a lot of these countries are not participating in global emissions trading, they are doing a lot to prepare their economy, and specifically their energy sector, to be able to deal with it sometime in the future in a meaningful way. That is something that Australia has fallen behind in during the past few years, not putting that insurance policy in place.

Mr Wheelihan —We see the real driver for MRET is to guarantee the establishment of a renewable energy industry in Australia.

CHAIR —But you said that the emissions trading scheme is the most efficient way economically of reducing emissions.

Mr Wheelihan —Exactly.

CHAIR —Conversely to that, we have had evidence that while that might be true for an emissions trading scheme, it is not true for a renewable energy target because, essentially, rather than to go for the lowest cost way of reducing emissions, you force a more expensive avenue. What is your response?

Mr Wheelihan —Garnaut has been quite explicit on that matter. He says that the redeeming feature of the renewable energy target is that it does guarantee that Australia will establish a renewable energy industry.

CHAIR —But it does reduce the efficiency of an emissions trading scheme.

Mr Wheelihan —In the short term, but at least something happens in the short term. Under the emissions trading scheme, very little is going to happen in your lifetime, Senator.

CHAIR —So under an emissions trading scheme very little is going to happen in my lifetime?

Mr Wheelihan —Correct.

CHAIR —Except people are going to pay for it in our lifetime.

Mr Wheelihan —Slowly. Progressively. Manageably.

CHAIR —We were in Wollongong yesterday and BlueScope Steel said that its entire workforce, including the 12,000 to 16,000 indirect jobs related to their operation, was at risk, so there are a lot of people who might pay for it very quickly.

Mr Wheelihan —I had lunch with the chairman of BlueScope Steel yesterday; I thought he looked pretty comfortable.

Senator HUTCHINS —We didn’t, we worked through our lunch.

CHAIR —We were not very comfortable at all.

Mr Richards —When you listen carefully to what the pure economic arguments are about, and you listen to Garnaut, they talk about—even the Productivity Commission talk about an effective emissions trading scheme. We would argue: what does an effective emissions trading scheme do and what does it look like? We would argue that this current one does not drive the sort of changes required in the economy.

CHAIR —Even the government was having second thoughts about it. They referred the question of a choice of an emissions trading scheme to a House of Reps inquiry before pulling it within a week.

Mr Richards —Exactly. We are facing a situation where, if you were to price in a future carbon price for Australian wind farms, you would have to price in that as zero because there is no guarantee that anything is going to happen under the CPRS.

CHAIR —Something that is continually raised with me when we talk about renewable energies, and in particular solar and wind energies, is the question of: is it going to be able to provide large-scale baseload power in Australia? I am sure that you have heard this question before. Can you give us your perspective on that?

Mr Wheelihan —Yes. The answer is no, you can’t; it is intermittent. We only generate electricity when the wind is blowing and we have not worked out a way of storing it yet. But every time one of those great big beautiful wind turbines rotates down at Portland, it means there is not a great big dirty coal fired turbine rotating in the Latrobe Valley. So when they are rotating and they are generating electricity, we are not emitting carbon dioxide.

CHAIR —The way it has been put to me by somebody from a power distribution company in Western Australia is that when there is peak demand, the wind is not blowing, and the way the wind comes on and off puts a lot of pressure on the network. I am inviting you to comment and give your perspective.

Mr Wheelihan —Thank you. On those super hot days that we had in Victoria this year, before the tragic bushfires, we had huge power demand. We did brilliantly because the wind was blowing like hell.

CHAIR —Maybe the wind patterns in Victoria are different from my home state of Western Australia.

Mr Wheelihan —Western Australia has great wind potential.

CHAIR —It does, but apparently the wind is blowing at the wrong times.

Mr Richards —That argument misses the whole point of renewable energy.

CHAIR —But if you cannot store it and it blows at the wrong time—

Mr Richards —It misses the whole point. If you were trying to put a non-traditional energy generator into a traditional energy system, then you are not going to fit with the norms of that system. But we are not trying to fit with the norms of that system; we are trying to reduce emissions from the stationary energy sector across a period of time. That is the objective. If your objective is to provide baseload power and try and make it a little cleaner, then you would install gas. But that is not going to do it by itself, so you need a combination—

CHAIR —Because that would be the most cost-efficient way of reducing emissions in the short term.

Mr Wheelihan —They are still emissions.

Mr Richards —They are still emissions, and if the gas price stays where it is—

CHAIR —But you reduce your level of emissions.

Mr Wheelihan —Sure, you reduce, but—

CHAIR —There are going to be emissions just by us being here. Even if we do nothing else other than just exist and survive, we will still be responsible for some emissions.

Mr Wheelihan —Sure, but it is pretty trivial compared to 200 million tonnes of gas from our coal fired stations every year. That is a lot of—

CHAIR —Do you have a view on nuclear?

Mr Wheelihan —Yes, I am strongly in favour of it, but I am also a realist—I am a businessman. I am very pleased to be chairman of a company that is building renewable energy projects, because that is very popular with the electorate. They like that; they do not like nuclear.

CHAIR —Which energy sources are the backup when the wind is not blowing?

Mr Wheelihan —Right now it is coal and gas and hydro. Hydro is quite a good backup, in fact.

CHAIR —Can you give us proportions on that?

Mr Wheelihan —It ebbs and flows. It is intermittent; I cannot—

CHAIR —Okay, but in terms of backup energy sources, what proportion is coal?

Mr Richards —It depends on the time of day. I will give you two examples—

CHAIR —But an overall aggregate, on average—

Mr Richards —A majority of it will come from hydro and gas because they are fast start, fast response type technologies. I will give you two examples. In Australia we are very lucky that we have a very robust national electricity market that is incredibly well managed and looked after.

CHAIR —Except that Western Australia is not party to it.

Mr Richards —Except that Western Australia is not party to it.

Mr Wheelihan —We would like to see that better managed. We would like to get in there with some wind farms.

CHAIR —We have to move on from calling these things national when they do not include the nation.

Mr Richards —The eastern seaboard electricity market then.

CHAIR —That is a better description.

Mr Richards —In South Australia, they currently have about 12 or 13 per cent wind power installed. The reserve capacity margin in South Australia, which is your backup supply, has actually fallen over the last five years, so they have been able to manage the system without this so-called need for backup. There have also been a number of studies done by the University of New South Wales and the University of Sydney to look at the amount of wind energy you can get into the Australian electricity market without needing to make wholesale changes to the way it operates. They are saying between 10,000 and 12,000 megawatts. We currently have 1,000 megawatts.

CHAIR —You are not really prepared to answer my question about how much coal is used to back up wind farms.

Mr Richards —It depends on the day. You do not know.

CHAIR —You do not have any data or figures?

Mr Richards —No.

CHAIR —You do not collect that data?

Mr Wheelihan —On a certain day it could be 100 per cent; on other days it could be zero per cent.

CHAIR —But across all wind farms—

Mr Wheelihan —The beauty of the little MRET we have had—mini MRET—is that it has given us experience. It has given the generators, the distributors, the retailers and us as producers experience with connecting these machines to the Australian grid, and it works. In fact, we are so impressed with the legislation—we like it—that we have made presentations to the governments in both Chile and Brazil suggesting they take this into account in their future renewable energy legislation. But the fact of the matter is that this is an intermittent source of energy, and so is solar.

CHAIR —You say it changes from day to day. A lot of things change every day.

Mr Wheelihan —Sure.

CHAIR —Would you be able to tell us what the proportion of energy sources have been used to back up wind generation throughout 2008?

Mr Richards —You could do that. It would be an enormous piece of work.

CHAIR —Why is that?

Mr Richards —Because energy is dispatched every five minutes, so you would need to go back—

CHAIR —So there is nobody across the national electricity grid or whatever that keeps that sort of data?

Mr Richards —I do not think anybody has bothered to keep it because, to be frank, it is not particularly relevant to the discussion around renewable energy. The fact is that when the wind blows or the sun shines—

CHAIR —But, if we need more coal in order to keep a wind farm going at certain times during the day, that is relevant, isn’t it?

Mr Richards —But history so far has demonstrated that that is not the case.

CHAIR —History cannot demonstrate it because we do not have any data.

Mr Richards —We have the South Australian example where reserve margins are—

Senator HUTCHINS —We do have the data that there needs to be a coal fired power station just in case you can’t—

Mr Wheelihan —In case we can’t.

Senator HUTCHINS —But you will still always have to be to have the investment. It does not matter how much is there; there is going to have to be coal used; isn’t that right? You are never going to be able to wave a magic wand, and you are going to have to spend millions and millions of dollars to make sure you have got that power station there.

Mr Richards —We are not purporting to say that wind energy does the whole job, but—

CHAIR —No, but the point is this: as a result of the CPRS there is going to be an increased cost to invest in coal fired and gas fired power stations. They are always going to be needed to back up the good work that you are doing. Until we come up with some sort of solution where we can store the energy that it generates, we are not going to be able to rely on it on its own. The question then is: what sort of R&D is currently happening and what sorts of time frames do you think are the most realistic time frames within which we actually might be able to store it?

Mr Wheelihan —The best way to store it is as hydro, quite frankly. A company like AGL, for example, which owns Southern Hydro and has also got wind farms, are in an ideal situation within their own corporate structure to not flow water when the wind is blowing and to flow water when the wind is not blowing. Again, I take the point that 80 per cent of Brazil’s electricity comings from hydro, so they are the ideal example of how best to store wind energy effectively, because you simply do not flow water. Here we do not have that benefit. We do not have that huge hydro back-up. So in fact, right now, coal has to be there. I do not believe another major coal fired power station will be built in Australia, for carbon related reasons. We will see big gas fired generators go in. They are much quicker to start up than coal. It is likely that we will trend towards nuclear as a back up. If you look at our submission, we say that when MRET is implemented the big supplier of baseload renewable power about 10 years down the track will be geothermal from central South Australia. That needs significant transmission investment by the government. We have contributed to the debate on that particular rationale as well.

So, right now, you are right: some of the back-up comes from coal. Nobody is going to get carbon-free energy for nothing. Everything is more expensive than dirty coal. Clean coal does not exist. It certainly will not exist in my lifetime. The problem is just immense, physically immense. You have to collect all those molecules, concentrate them, liquefy them and pump them underground somewhere—hundreds of millions of tonnes of the stuff every year. I come out of that industry. I have been engaged in projects which over decades have produced hundreds of millions of tonnes of liquids from underground. It is a huge industry to get that stuff up. Putting it back when it is useless and dangerous is not going to work. The long-term future in renewables will be geothermal for baseload, in our view. The long-term carbon-free source of electricity for the world will be nuclear.

Senator HUTCHINS —Yet we have had evidence to say that it will cost too much to introduce it in Australia.

Mr Wheelihan —Nuclear?

Senator HUTCHINS —We have, yes. I think it was evidence from Professor Vincent.

Mr Wheelihan —I think the community resistance is going to be a bigger issue than cost.

Senator HUTCHINS —We have already heard that.

CHAIR —Thank you very much, Mr Wheelihan and Mr Richards, for your contribution to the committee.

[12.04 pm]