Is new coal power really dead?

Kevin Rudd seems poised to promise that he’ll shift the carbon price to a trading scheme a year early. Even if he were to win the election and save the carbon price, it will be a hollow victory because the level of the carbon price will be largely irrelevant for investment decisions.

When you spend a lot of time hanging out with like-minded people it can be easy to lull yourself into a false sense of security. But you should never forget that there are people with a strongly different view, and sometimes their views can prevail and surprise you.  

Right now there’s a general belief amongst those in the energy sector that we won’t see another coal power station built in this country because of the threat posed by a future carbon price. Indeed I was told this by no less than Ian McFarlane, likely to be our future energy minister. But people should be careful not to lull themselves into a false sense of security. 

Back in 2008 I moved from the bowels of climate and energy policy advocacy at the Clean Energy Council into consulting with a large accounting and business advisory firm.

At the time it was simply a given in my mind that we’d implement an emissions trading scheme and the renewable energy target was fixed at 45,000 gigawatt-hours. Rudd had been elected with an explicit platform on both these measures, and indeed John Howard had also accepted the need for an emissions trading scheme. Now businesses just had to get on with it to work within these new policy parameters. 

But in interacting with large company board directors and advising some energy companies I saw a very different perspective. Directors wanted to argue with me about whether the ETS would ever see the light of day. They believed that once people realised the costs involved, the politicians would back away.  Yet for me this represented the natural end conclusion to a decade of policy debate. It was bipartisan policy I told them. Not only that, the Republican nominee for US President, John McCain, had even introduced his own bill for an ETS.

I also remember being shocked when one company wanted our valuation to include a scenario where the carbon price never happened. At the time I said this was inconceivable and we couldn’t do such a thing because it would provide a deceptive estimate of the value of the asset in question. 

I also recall how an executive from a major bank was genuinely surprised that his loans to power stations were at risk of major writedowns thanks to the ETS. ‘Where the hell had this guy been for the last few years?,’ I thought.

I considered these people deluded.

But it turns out I was the one who was fooled. 

A little while ago I wrote a piece suggesting that an Australian carbon pricing scheme tied to incredibly oversupplied EU ETS may not be enough to stop new coal power station capacity. This caused a bit of consternation, but it shouldn’t be completely counted out.

Firstly let’s imagine Europe fails to come to some kind of agreement to fix-up the oversupply in their ETS. Meanwhile individual states such as the UK implement tax measures that largely supplant the effect of the EU ETS. This leaves the EU carbon price stuck below about $A10.

Secondly, in Australia gas prices ascend to $8 per gigajoule, which seems reasonably likely. In addition the international market for coal continues its recent decline with the help of President Obama via the Clean Air Act. 

Altogether this makes coal look infinitely cheaper than gas at a 10 per cent cost of capital. Even if the carbon price were to rise to $40 per tonne, coal would still be cheaper than gas.

Thirdly, Abbott fails to get the numbers in the Senate to repeal the carbon price, but at less than $10 per tonne CO2 he decides it isn’t worth fighting over. Outraged at this event, the climate sceptic wing of the Coalition push through with a gutting of the Renewable Energy Target and energy efficiency policy.

This isn’t something the responsible Coalition ministers Greg Hunt or Ian MacFarlane have in mind. But it’s hard to know how the power dynamics might play out, and whether their more ideological caucus colleagues could overrun them.

Fourthly, China allows its currency to rise and our dollar declines to 80 US cents. In addition labour and other costs tail-off with the subsidence in the mining boom. Manufacturing consequently recovers and so does their demand for electricity.

Points 3 and 4 above then provide an opening for new non-renewable power station supply.

The Newman Queensland government, keen to create employment opportunities with the decline in mining, do a deal with aluminium interests to expand the capacity of existing coal-fired power stations. 

This might be improbable but it’s not impossible given the economics of expensive gas. And as detailed in Climate Spectator last September, Queensland’s energy minister, Mark McArdle, in a submission to a parliamentary inquiry, suggested investment in new coal power stations was necessary.

If you’re not careful things can surprise you.

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"A little while ago I wrote a piece suggesting that an Australian carbon pricing scheme tied to incredibly oversupplied EU ETS may not be enough to stop new coal power station capacity. This caused a bit of consternation, but it shouldn’t be completely counted out."

Why should our ETS policy be constrained by inflicting enough pain that new coal power station capacity not be built in this country when we have such large coal reserves? If emissions can be more cheaply curtailed elsewhere in the world then so be it.

It is called "business as usual" and its inherent inertia and lack of connection with its real world consequences whether they be simply the casual crushing of local economies and hopes and dreams of individuals or the destruction of the planet makes no difference. Only financial crisis brings change and then the message has to be rammed home three times to the point these "Captains of Industry" actually start losing their own money and not other peoples before the ship starts to turn, even then they would view it as a temporary correction...

"Ian McFarlane, likely to be our future energy minister."
"a possible future energy minister" would be more correct - are you reading from the Murdoch script? Instead read yesterday's - polling applied to the states independently has Labor winning a majority of seats.

Maurice Newman’s opinion piece in yesterday’s Australian ‘Climate change science has become an expensive smokescreen’ can only give weight to Tristan’s scenario being more than just a remote possibility.

One can get rather depressed that an otherwise well-educated an informed person has such cognitive dissonance when it comes to the science of climate change.'

An ETS or Carbon price is typically something only a politician/bureaucrat would come up with to curtail emissions of CO2. Why oh why don't we just allow the electricity generators to replace their coal gas and lignite burning Greenhouse gases belching power plants with clean nuclear power a la France ? It's not hard, pretty simple really.

An intelligent leader would accept the science, consider the risks and would immediately invest in a fast transition to renewable energy generation as possible. There would be much pain financially and Australia would have to accept a lower standard of living, until such time that we build a low carbon economy. The alternative to continue business as usual will guarantee compete and total failure of our whole economy with enormous social implications for decades.

Not another coal fired station in Australia. Who cares - doesn't matter. If you are serious above "carbon reduction" what happens in Australia just doesn't count. China has 620 of the 2300 coal fired stations world wide (IEA) and World Resources Institutue says 1000 new ones on the go, 360 of which are slated are slated for China. This includes the world's largest generating 8 gigs which the IEA estimates will result a 50% increase in "carbon" over the next 20 years & estimated tobe 2.5mtpa compared to 50-100ktpa Australia is forecast to save after benefitting from international carbon credits. Don't forget India which has similar demands to China and i note the Japanese government has stepped away from their ban on new coal power stations (only 2 in the recent past) with virtually the whole of Japan's nuclear capacity shut down. What does one coal powered station in Australia mean - zip. In any case there a heap of gas generators being built; oh yeh, they produce "carbon".

Like it or not, Australia is the Saudi Arabia of coal. It is in the interests of Australian governments and people to maximise coal production until a global agreement on carbon is achieved. This is to ensure as much coal as possible is produced and the benefits flow on to Australians, rather than have the resource permanently locked up in the ground unused and worthless.

Also by maximising coal production, assuming that Australia is the most efficient coal producer in the world, this will lead to an overproduction of coal and a consequent fall in the price of coal. Falling coal prices will lead to the closure of high cost coal mines around the world, with most closures being outside Australia. The closure of coal mines outside of Australia due to low prices, will in turn make it easier for these countries to accept a global agreement on carbon. The unemployment created will force countries to look at renewables as a means of trade protection against low priced Australian coal. Just look at Germany as an example. The country has a lot of coal but due to the high cost of producing that coal, they are prepared to leave it in the ground and pursue other energy alternatives including a focus on renewables.

The environmentalists have picked the wrong horse with the idea that restricting Australian coal production will actually lower carbon output. It actually increases carbon and makes achieving a global carbon agreement harder to achieve, because it makes the domestic coal reliant industries in the third world competitive relative to expensive imported coal. Acting as a disincentive to move to a less carbon intensive economy because of the added benefits they receive as western businesses source more work from the cheaper third world, as well as avoiding the employment consequences mentioned above.

Are just making this stuff up? A few corrections;

- Australia any way you look at it is hardly the Saudi coal equivalent. We export less than 10% of China's domestic coal production who by the way now produce more coal than they consume. A scary thought for those in Australia planning to invest in new capacity. We actually rank 5th in the world in coal production behind China, USA, Russia and the EU.

- Our coal reserves are dwarfed by the USA, Russia and China's. Not that reserves are terribly important as coal is so plentiful that confirmed reserves would last the world many hundreds of years.

- There is now a considerable over supply of coal in the world market with the situation getting worse. Current coal prices reflect this with a significant percentage of Australia's production now losing money. Mark Cutifani, Anglo's CEO described the outlook as 'Grim' last week in Canberra.

- Environmentalists don't need to waste their energy stopping the Australian coal industry from adding new capacity. The bankers and receivers will look after this.

The financial benefits to our economy including enormous job growth by investing in renewables and being a world leader in energy efficiency and green building design would far out way the losses of ending our coal addiction. It's time to invest in our scientific excellence and back our renewable technology businesses or we will be left behind with nothing but Abbott and is dinosaurs.

Great article Tristan, I like you taking the flip-side scenario approach.
Even under all your scenarios Tristan, which I totally agree with as being possible, Investing in any power station one would have to consider:
1. The risk of an ETS+Carbon price coming in within the lifetime of a coal power station (30-40 years)
2. The continuation of PV uptake + price elasticity driven energy efficiency activity.
3. Increasing price of domestic coal which is increasingly becoming linked to global prices, even though the current resources slowdown is taking some pressure of this temporarily.
4. The costs of building a decent coal power station (A super critical or ultra-supercritical puvarised fuel station such as being constructed in China) is not a static number but subject to supply and demand forces. Just check one of Rohan Zauner's of SKM's regular presentations to the the Energy User's Association Conferences. The year-on-year volatility in the cost of these stations is mind-boggling.

With all those risk you would have to be a seriously risk seeking investor in Australia to build such a station.



Why does this story not surprise me? Is it not known that the coalition is owned by vested interests, including the coal miners? So the fact that the players believe that it will be business as usual should not come as any great surprise. And did not Campbell Newman, Queensland's premier, recently state "we are in the coal business".

This all leads one to the conclusion that those with significant skin in the game have no intention of becoming clean energy producers.

The following statement in the article assumes that coal cannot be converted to natural gas:
"Even if the carbon price were to rise to $40 per tonne, coal would still be cheaper than gas."

Coal-fired power stations are obsolete regardless of carbon pricing because about 20 percent less coal is required to manufacture fuel for a gas power station than would be burned by a coal-fired power station to generate the same output. Coal-fired power stations cannot compete with natural-gas power stations.

An example to illustrate is available here: "Coal and Natural Gas power plants"
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Who is this man? I made a mistake, I misunderstood?
Someone who owns up to misreading the future?
I take my hat off to you Tristan. You have earned yourself a fan.

The author does not mention the benefit of it all to the global environment, nor reference Australia's global leading climate action including our global avante garde RET - nor try to address the cost/benefit of Australia's global leading position on climate action, and that most nations of the world do not yet have a national ETS or at least one anywhere near the carbon tax price as that of Australia. Answer, as the whole world is not yet acting on climate action, the extent Australia is out ahead of the world on climate action is dead cost to the competitiveness of our industries, a drag on our living standards, and acts as an incentive for the export of jobs and investment to countries less keen on climate action - and this is the 'ínconvenient truth for proaction advocates.

No doubt there is a view supporting climate action out ahead of the world and this is merely a prescription to transform the Australian economy into the malaise of Europe or Tasmania, where heavy industry and manufacturing has been incentivised to move offshore. The problem is that as Australia becomes more like Tasmania where does Australia then get the handouts from to support it all? Tasmania - a chaser away of business - gets handouts from the rest of Australia while when Australia chases away business the handout will come direct from ourselves in the form of lower living standards and higher debt and deficit levels as we will have chased the gooses that lay the golden eggs away - just like Europe and Tasmania.

Another inconvenient truth is that while Australia has the cleanest air in our cities in the OECD, other countries who the proclimate action crowd say are not polluting as much as Australia because of a lower per capita CO2 - these countries are way behind Australia in climate action when they should be way ahead and not just because of air pollution but because of land and water pollution as well. A major hypocrisy of proaction is ignoring the air pollution that is harmful to humans today and downplaying this pollution while elevating CO2, and also downplaying water and land pollution as if it is insignificant.

In my view, Australia has not been such a smart country in terms of climate action and not just acting ahead of the world. We had advantage of very low cost coal and our industries benefited from low cost energy, and benefit from decades of future supply of coal. The uncontrolled and unsufficiently regulated energy companies have jacked up the price of energy way more than was smart for the country, and this by itself crimped demand for energy. Then the climate action people had to place on top of this the carbon tax to make the energy costs higher and then pretend that the higher energy costs were not a major impost on the budgets of households and industry. Then these same people such as the author like to completely avoid the question of the benefit of Australia's advante garde position on climate action. Spain was in the advante garde position as well and the 'green jobs' and clean energy have not saved them from depression.

In terms of the authors worry about Abbott scraping the RET, this will not be done in a way to scrap RE. It will be in recognition that the 20% goal has been reached and exceeded and no longer needs to be incentivised; and in recognition that it is prudent to take a breather and wait a bit for the world to catch up, and also in view of the current economics showing most RE way more expensive and less reliable than coal.

There is only one real viable alternative to coal fired electric power generators. It is called nuclear. For Australia, rich is uranium, it is a natural. Ops! Forgot the Greens and politics.