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.