May 13, 2011

Budget breakdown: the holding pattern on clean-tech investment

In the first of a series of post-budget reports, Fiona Armstrong and Laura Eadie from the Centre for Policy Development explore options to encourage innovation and roll out less mature renewable energy technologies.

When it comes to innovation policy, the Gillard government relies heavily on hot air to hide its lightweight commitment to Australia’s long-term future. In February, the prime minister painted a vision for a "high-tech, high-skill, clean-energy economy that is self-sustaining beyond our reliance on mineral exports". Yet the 2011-12 federal budget is light on detail about achieving this. Given the rapid pace of clean-technology development in Europe and Asia and the pressure of the high dollar on manufacturers, developing a coherent set of policies to stimulate low-emissions technology is an essential risk management tool for any government hoping to last beyond the next election, let alone beyond the current mining boom. If Wayne Swan was serious about balancing Australia’s long-run budget, he would have cut more than $1 billion from the Fringe Benefits Tax for cars. He would have claimed back the $2 billion in diesel tax concessions we shell out to mining companies every year and put it to better use funding clean-tech innovation. Who could argue with that as a "no-regrets" way to fund the innovation commitment Ross Garnaut says we need to transition to a low-emissions economy? Instead, Gillard's first budget leaves Australia in the same holding pattern as under Rudd and Howard. While the government pretends a carbon price will be enough to drive investment in renewable energy, crucial innovation policies remain an under-funded jumble of grants and rebates that don’t align with each other and often place restrictive criteria on applicants, leading to under spending and underperformance. Neither a carbon price nor our only workable emissions reduction policy -- the renewable energy target -- will meet our manifestly inadequate 2020 target of a 5% reduction, let alone our 2050 target of a 60% reduction. We urgently need serious policies to scale up alternative base-load renewable energy technologies, such as wave, geothermal and concentrating solar thermal. Yet at a tiny $108.7 million over 14 years, the commitments in the federal budget for venture capital for development and commercialisation of renewable technologies are laughably low. There is little thought to what will drive innovation in clean energy beyond the much mauled Solar Flagships program, which has had its energy storage options knocked out, its funding cut, then restored, and now deferred for two years. Reducing our emissions is not just a moral responsibility -- Australia faces a significant risk of being left behind in the development of renewable technology globally. Investment in new renewable energy capacity first exceeded fossil fuels in 2008, and maintained this lead in 2009. In 2010, investment in wind, solar, biofuels and other renewable by G-20 countries surged 30% to almost US$200 billion. Despite current high upfront costs, a 2011 report from the Melbourne Energy Institute demonstrates substantial cost reductions in base-load renewable energy technologies are possible, assuming specific policies are in place to support their roll out. Countries with a head start in these markets are likely to benefit from their rapid growth rates and generation of skilled jobs. Building on existing comparative advantages, such as our abundant sunshine, is an important way to secure our place in the global green economy. But establishing new industries requires a coherent set of policies for innovation and commercialisation. We need to level the playing field for renewable energy, to commercialise strategically and start to innovate clean, not dirty. Australia’s current energy policies tilt the playing field in favour of carbon intensive coal, gas and petroleum fuels. In 2010-11, an estimated $12 billion per year in subsidies and tax concessions went to these fuels. Levelling the playing field for renewable energy is essential to ensuring low-emissions innovation and commercialisation policies are effective. For example, the diesel rebate applied under the Fuel Tax Credits program currently provides almost $2 billion/year to mining companies as credits to subsidise the use of diesel for off-grid electricity generation and use in heavy vehicles. So while most of us pay a levy of 38 cents per litre for diesel, mining companies get this back as tax credits. Cutting this subsidy alone would fund Garnaut’s recent call for a doubling of investment in clean-technology innovation and commercialisation. Removal of this impost on taxpayers would also encourage mining companies to shift from this very high emissions and costly alternative to clean renewable energy. To compete in a globalised market for clean technology, Australia needs to develop unique combinations of skills and industries. This requires a strategic approach to investing in technology commercialisation -- one that builds on our natural comparative advantages without picking winners or losers. Remote power generation for mines and communities not connected to the electricity grid is a potential area for such investment. About 10% of Australia’s installed power generation is currently off-grid, and this is set to expand due to the mining boom. The current use of diesel for much off grid power generation in remote Australia is absurdly expensive. Existing alternative renewable technologies are already cost-competitive in the long run, but suffer from high upfront costs. As an example, solar thermal with storage costs an estimated $270 per MWhr compared to $350 per MWhr for diesel at some sites. While the applications are not universal, there are substantial opportunities in many remote locations, such as the Midwest minerals province in WA. Policies to achieve this might include grants for site specific feasibility studies and loan guarantees. By providing information and reducing risk, government can help address the difficulty faced in financing projects using new technologies, and increase investor confidence and the willingness of banks to lend. Building competitive industries also requires investment at the beginning of the innovation chain. There are strong arguments for weighting government expenditure at the early stages of the research and development continuum towards renewable energy technologies, rather than betting on clean coal or carbon capture and storage. As fuel costs and carbon prices inevitably rise, existing industries will fund innovation in fossil fuels to improve their efficiency, and potentially reduce their carbon emissions. Clearly, there are fewer vested interests willing to significantly invest in new renewable energy technologies. As Garnaut says, public support for research, development and commercialisation of low-emissions technologies is one way of cutting the cost of reducing our emissions. At another level, it is our contribution to a global effort. In light of the current political instability around our domestic carbon policy, Australia needs a better strategy to adapt to the rapidly changing global economy. We can do this by developing an innovation policy that builds on our comparative advantages, using the wealth generated by our natural resources to build new industries and provide for our own clean energy future. Otherwise Australia risks remaining stuck in a holding pattern -- while other countries ride the wave of clean-tech investment into the global green economy. * This is the first in a series of post-budget reports from the Centre for Policy Development

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5 thoughts on “Budget breakdown: the holding pattern on clean-tech investment

  1. Dan Cass

    Good article.

    PM Gillard is in a difficult position. Energy Minister Ferguson seems to hate renewable energy. This makes it almost impossible to have a credible climate and energy policy.

    Witness a comment by Ferguson and note that is was made to the cleantech sector – imagine what he says behind our back, when he’s talking to his mates at Big Coal?!

    “I am very firmly of the view that a price on carbon is going to create
    a huge growth opportunity for gas. It is the really only form of
    alternative clean energy in Australia at the moment…”


    Like some other Labor / union figures, he has become a tragic figure – more boss than the bosses, less Labour than Labor.

  2. nicolino

    With Ferguson at the wheel and this ghastly apology for a government in power Australia will still be mining coal when the rest of the world has moved on. Well, at least we have football to make Julia comfortable.

  3. Frank Campbell

    “Australia risks remaining stuck in a holding pattern — while other countries ride the wave of clean-tech investment into the global green economy.”

    Religious fantasy. There is no “wave of clean-tech investment into the global green economy.” But there is a tsunami of heavily subsidised, politically-driven flood of capital into energy dead-ends like wind and domestic solar.

    Basic R and D into renewables is farcical, as the authors say:

    “Yet at a tiny $108.7 million over 14 years, the commitments in the federal budget for venture capital for development and commercialisation of renewable technologies are laughably low.”

    $8 million a year until 2025. 2025! Holy shit- isn’t that well past Armageddon according to Kevin Anderson, Prince Charles and other climate hysterics? And $8 million is just lolly money, innit?

    Indeed. So no one is really taking Imminent Armageddon seriously, are they? So let’s postpone it.

    Meanwhile, the authors know what to do:

    “We urgently need serious policies to scale up alternative base-load renewable energy technologies, such as wave, geothermal and concentrating solar thermal.”

    Come again? “Scale up”? What about “proving up” first? Britain has just abandoned its $100 billion Severn tidal barrage- not proven, insanely expensive and wouild massacre the Severn wetlands. Geothermal? Works in Iceland and NZ for obvious reasons. Yet to get to first base. “Concentrating solar thermal”? Has potential but hasn’t won over this distance.

    This piece gets us nowhere. It’s political, economic and technological naivete.

    First, you have to kill off magical, wasteful “solutions” like wind- which get all the capital now. Second, you have to kill off the climate hysteria which generates these crippling, futile gestures. Third, real money- not loose change- has to be invested in proving new renewable technologies. Even headbanging AGW deniers can sign up to that.

    A new political coalition is essential- or the hard Right will assume power in the near future. And that’s bad news for everything, not just the Savonarolas of the climate cult.

  4. shake up

    “Geothermal? Works in Iceland and NZ for obvious reasons. Yet to get to first base”

    Frank, much of what you say makes sense, but what is the logic in your dismissal of geothermal? That because it is not already producing on a large scale it is not proven. It is proven to work and big mainstream energy companies are farming in to existing projects with significant amounts of their cash but I think everyone agrees the investment climate for renewables in Australia over the last few years has been terrible (GFC, delayed carbon price, etc.)

    Geothermal has MASSIVE potential in Australia, as in, it could easily replace coal for baseload power in 15- 20 years with major investment, including in grid connection. Fiona and Laura are right to argue for government investment to scale up wave and geothermal. I would like to see a big chunk of the carbon tax revenue go to this, but sadly the government hasn’t the ticker for that. Killing off the diesel rebate and putting the money into the most promising renewables like wave and geothermal is an absolute no-brainer. Even without connecting to the national grid, there are thousands of mines that are off-grid and are paying a fortune for their diesel power (albeit heavily subsidised by the government).

    The government needs to stand up to the vested interests, push the carbon tax through and look to support cutting edge renewables, with a view to exporting the technology and expertise as the rest of the world transitions to cleaner energy.

    I am so sick of the vested interests (from the polluters, to the corrupt scientists making a motza out of ‘sceptic’ books and talks, to the Murdoch press, to Abbott’s self-interest) holding so much sway over the public on this. If we don’t act now we will only be dropping even bigger problems on our kids. The ‘market,’ left alone, will NOT solve this. Hazelwood and the like could still be running in 30 years if the government doesn’t intervene on this.

  5. Frank Campbell

    Shake Up

    I’m not dismissing any technology at all (except wind- a premodern proven failure).

    Geothermal is the most elegant technology, theoretically speaking. It appears to have minimal negative environmental effects (vs for example the idiotic $100 billion Severn tidal barrage, now abandoned by the UK govt).

    And the diesel rebate has been a monster rort for decades…(undermines the sickening agribusiness mantra “the most efficient farmers in the world..unsubsidised”)

    But the carbon tax will not knock coal off- unless it is very steep in which case gas is the next choice. Gas is FF though, and the climate cult can’t bear that- even though it would lead to a sharp drop in CO2 emissions.

    politically, a high carbon tax is a dead duck. Even $20 is parachuting the Naked Jesuit into the Lodge…

    So would a huge carbon tax drive renewables? It would certainly drive fuel efficiency, but that won’t make a huge difference to emissions…it might cause a rapid expansion of domestic solar and wind- both absolute disasters (piddling amounts of power at great cost- a cost dumped on the poor and the remnant industrial economy, and a fat subsidy for middle-class rentiers)

    This is why direct R and D of renewables is the only solution. Big bucks. Now. Long overdue. Typical capitalist behaviour- why bother if we’re making a shitload of money using FF? No need to invoke climate Armageddon- peak oil etc is reason enough to get on with it.

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