Nov 1, 2011

NSW’s great big coal subsidy scandal

If there is a single mechanism that stands in the way of clean energy development across the globe it is fossil fuel subsidies, writes Giles Parkinson, of Climate Spectator.

If there is a single mechanism that stands in the way of clean energy development across the globe it is fossil fuel subsidies, which amount to around half a trillion dollars worldwide, each year. That much has been recognised by the International Energy Agency and by the G20, who have promised to remove them. The IEA says that by doing that, more money can be freed up to invest in the technologies of the future. Given the course of the debate in the US and Australia, don’t expect that to happen any time soon. To understand why this is so, take a look at this exchange reported on Monday by Climate Progress. It noted that the five biggest oil companies in the world last week reported third quarter profits of $32 billion, taking total earnings for the year to date to a staggering $100 billion. Would that possibly be a signal that Big Oil no longer needs the massive subsidies that the US Congress is so keen to afford it? "Of course not," shouted the Republicans. Florida Congressman Cliff Stearns is the chairman of a House sub-committee that has been investigating (and railing against) loan guarantees being offered to clean technologies. Stearns has voted multiple times to extend oil company subsidies but says clean energy incentives pick "winners and losers" (guess which Australian energy minister uses the same language in the same context). Stearns says it is much more fun just picking winners. "When somebody is successful, then you give them the subsidies and the tax credit," he told Climate Progress, when asked if the oil companies should maintain their subsidies. That kind of logic is being repeated in Australia, where the Coalition and other established business figures have also been railing against clean energy incentives -- it’s like putting money on the horses, said opposition finance minister Andrew Robb last week -- and all the while extending support and protection for the status quo. The Tamberlin inquiry into the NSW energy privatisation has revealed how far that thinking extended into the strategy behind the state's half-baked, and half-completed electricity privatisation. In short, it found, the gentrader assets would not have attracted any buyers were it not for a massively subsidised and heavily discounted coal supply. It also found that NSW coal-fired power stations depend on  those subsidies to maintain their place in the merit order of the National Electricity Market. We wrote about that subsidy when it first came to light late last year, when it was also lamented by the government’s then climate change adviser Ross Garnaut, who said it acted against the carbon price. And the Tamberlin report released on Monday reveals that it is even worse than we first thought, and amounts to an effective subsidy of $4 billion to the gentraders that were sold by the government for just $1.5 billion. As the inquiry notes, with a degree of understatement, it’s not entirely clear that the cost of the subsidy exceeds the benefit. Of course, the NSW government doesn’t want you to know this and has taken great steps to black out the key numbers in the report. But the numbats in the Premier’s Department forgot that there’s not much point blacking them out in one section of the report, if you leave them in elsewhere, or if they are included in other reports. So we’ve put the figures together for you. One of the big issues around the gentrader sale was where they would source their future coal supplies. Contracts, mostly from Centennial Coal, were due to run out in coming years, and there was no way the would-be gentrader owners wanted to be exposed to buying coal at the current export price of thermal coal, which is around $100-$120/t. Or anywhere close to that. So the government set up a tender for the Cobbora coal mine, a massive resource that could produce up to 30 million tonnes a year and may well supply all of the state’s coal-fired power stations by 2020. Whitehaven Coal was the preferred tenderer, but even its offer of supplying coal at $55/t was deemed by Frontier Economics, an eto the NSW government, as "exorbitant". Frontier said, at this price, there would be no interest from the private sector in the gentrader contracts. So the government decided to commit to spending $1.5 billion to develop the Cobbora mine itself (reversing a near 20-year-old policy), and supply coal to the generators at a vastly lower price. The Tamberlin inquiry blacks it out, but the NSW Auditor-General’s report referenced there tells us it is at just $31.16 a tonne. Even at the state’s estimated borrowing rate of 6% (compared to the private sector’s 15%), it is not even enough to cover the cost of production, meaning that the state has got Buckley’s chance of being able to sell it, despite Tamberlin’s recommendation that it attempts to do so.The state’s advisers, including Arne Dimpfel from Credit Suisse, argued before Tamberlin that because both assets (the coal mine and the gentraders) were owned by the government, it was not in fact a subsidy. Better not try to run that argument past the IEA or the G20, who say government subsidies such as this are the most egregious; or, for that matter, the Tamberlin Inquiry’s independent adviser Donald Challen, a former Treasury secretary in Tasmania and now chair of the transmission group, Transend. Challen concluded that the subsidy was of considerable benefit to the gentraders because it reduces the volume and pricing risk. He noted that Ernst & Young had concluded that the mine’s "unavoidable costs of meeting each coal supply agreement exceeded the revenues". He also noted that any owner, government or private, should receive a return on capital commensurate with the risks inherent in the investment. And this one clearly does not. The magnitude of the shortfall of acceptable returns were also blacked out. But the revenue shortfall was not. Given that the contract is $24 less than Whitehaven’s offer, at about 10 million tonnes a year, and over 17 years, that’s around $4 billion over the life of these contracts. This number is supported by Treasury calculations revealed elsewhere in the document. Challen noted that the government still faces big risks with the Cobbora mine: these include its ability to get it up and running by 2015, when its first deliveries are due to start, that production will costs will rise, and that the mine, operating as a loss-making, state owned entity, will not be able to acquire the skills and expertise to efficiently operate at a large scale. And it may also be found that future coal prices will rise to such an extent that an even greater benefit is conferred on the gentraders. Challen’s assessment is damming: "The preliminary conclusion in considering the benefits and costs of the Cobbora development is therefore that a business case, had one existed, would have shown that the benefits of the development did not exceed the costs." The only justification, he said, was that without a massive subsidy, the gentrader sales would not have been completed as "potential buyers for the rights might well have regarded the fuel supply and price risk too high". In short, this inquiry tells us, the coal-fired power stations in NSW are unable to compete with other power sources unless their coal is supplied at around one quarter of the cost of export coal. Given that Cobbora has the potential to supply 30 million tonnes of coal to the state’s coal fired power plants by 2020, as noted by the Australian Energy Market Operator, the lost export revenue potential from the mine could amount to some $2.7 billion a year, at current prices. The similarities between Australia (the world’s largest coal exporter) and the Gulf oil states (the world’s largest crude exporters), are uncanny. Neither can afford to consume their own fossil fuels at export prices. As we noted last week, the Gulf States are now looking to invest massively solar so they can reduce their domestic oil consumption and recoup the billion of dollars in lost revenue. So here’s a crazy idea. Maybe the NSW government should take the same approach, and invest heavily in solar. Imagine if NSW tries to sell the remaining coal-generation assets, as Tamberlin recommends. As the Australian Energy Market Operator states in its report, Cobbora will likely be supplying all of the state’s coal-fired power plants by the end of the decade. We know from this report that the plants can’t be sold at beyond the subsidised cost of coal. But at its capacity of 30 million tonnes, at the current export price of  $100-$120 a tonne, the state could generate $3-3.6 billion a year in export revenue, compared to the $900 million it will receive from the state-owned coal generators at the current price. That should be enough to build a few solar power stations, but we'd better make sure the NSW government understands that this is an idea from the Saudis, Kuwaitis, Omanis and the Emirates, and not some sort of subversive green plot. But you may want to ask them this: will the government’s criteria on solar incentives, that it not cost a single dollar to either consumers or the government, now be applied to coal-fired generators? *This article first appeared on Climate Spectator

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20 thoughts on “NSW’s great big coal subsidy scandal

  1. go-mag

    No wonder “The rAbbot ” wants to repeal the carbon pricing. I wonder how many snouts are in the trough??

  2. Michael James

    Good one Parkinson.

    You managed to go the entire length of your article without once mentioning that the Gentrader sale was the brainchild of Kristina Kenealley’s Labour government.

    O’Farrell in opposition opposed ther deal, and keneally, on the advice of her Treasurer, Roozendaal, prorogued paliament to try and shut down the Upper House investigation into the sale process.

    If it had been a conservative government I am sure you would have heralded it as a sign of their incompetance, how about applying a little even-handedness to your coverage? Hmmm?

  3. Frank Campbell

    Yet another case of Parkinson’s Disease: a quivering jelly of false assumptions.

    “If there is a single mechanism that stands in the way of clean energy development across the globe it is fossil fuel subsidies”

    Both FF and “clean energy” technologies are subsidised- the latter proportionately far more.

    Subsidies for current renewables have led to nothing but global scams. It’s now clear to most governments that renewables are ineffectual at best and fraudulent at worst (wind). Subsidies are being rolled back world wide. The UK has just announced a 55% cut to the solar subsidy. Britain also dumped the $80 billion Severn tidal power scheme.

    The renewables scam was never going to survive GFC Mk II. Renewables are an indulgence too far in the present financial mess.

    We never hear a word in Parkinsonland about the geothermal fisaco in Australia. A billion dollars wasted in the least-prospective geothermal continent. A fiasco spruiked by the Lord Monckton of climate millenarianism, Tim Flannery.

    Renewables will remain a monument to middle-class moralism until real capital is invested in basic R and D. Something the carbon tax will never manage.

  4. Mark Duffett

    Yes, “invest heavily in solar” is a crazy idea. Never mind a few solar power stations, ‘$3-3.6 billion a year’ invested in Generation III+ nuclear generators would be sufficient to completely decarbonise NSW electricity generation within 25 years. The same cannot be said of solar.

  5. AR

    Who needs a functioning moral/ethical sense, or even the ability to do simple arithmetic, when FC & Mark the Duffer can ride their long dead hobby horses off into the rhetorical sunset?
    One of the greatest (of many) lies of the neocon era was the mantra of ‘free market’ when what was meant was massive subsidies to the status quo to maintain current troughed snouts in the style which is their Divine Rite.
    By all means let the market rule, NO SUBSIDIES for anyone. The antiquity of an abuse is no justification for its continuation.

  6. Dogs breakfast

    “In short, this inquiry tells us, the coal-fired power stations in NSW are unable to compete with other power sources unless their coal is supplied at around one quarter of the cost of export coal.”

    Game, set, match.

    In fact, subsidies to coal, diesel and petroleum products generally amount to billions per annum, but that won’t sway those bastions of the free market, such as the likes of FC and the Mr Duffett.

    As someone closely connected to the leading edge of solar research, an investment of the likes of 3 to 3.6 billion a year in solar will see us free from fossil fuels for all time within 25 years.

    All that nuclear will produce is more carbon emissions from the production of the facilities, and decades of wasted time while nobody wants to live near one, along with huge problems of decommisioning these behemoths.

    Nuclear is the answer to a question nobody is asking, and nobody wants answered.

    Solar and Wind, not a fraud. Current technology could see them having a few cleaner gas fired generators for backup only while the bulk of power is renewable.

    But we would have to wean the mining industry off the govt teat, and god forbid that.

  7. Bo Gainsbourg

    The IPAs silence on the fat subsidies to coal speaks volumes. The only subsidies the so called ‘free marketeers’ never seem to want to talk about. Take the poleaxe to them and we might believe the opposition to any support for alternative energy is something other than the ideological position that it is. Until then lets keep shoveling the money to the miners and big coal companies…they obviously need us to pay for them.

  8. michael r james

    Give it a rest Frank. Where do you get all that negativity? Where do you get the “billion dollars wasted on geothermal”? The feds have assigned up to $200 million to the main companies but so far have only allowed $11 million to be drawn! (Remember, as Giles P says, it is Martin Ferguson running this portfolio.) And you blithely ignore what could be done with the near trillion dollars of fossil fuel subsidy.

    I am not aware of the UK cancelling a (presumed new, or renewed? $80 billion? only the Brits can so inflate costs but I don’t believe you since that would be many times more than the Three Gorges Dam–the world’s largest hydroproject and largest single green power source on the planet) Severn barrage but the here is a description of the world’s first and oldest tidal generator. OK, tidal is not going to substitute that much power generation but still it adds up and–unlike your pet hate of wind–extremely reliably. It has been producing power for 46 years–longer than any coal-generator (usual lifespan is not much more than 30 years, often less).

    [The Rance Tidal Power Station is the world’s first tidal power station and also the world’s second biggest tidal power station. The facility is located on the estuary of the Rance River, in Brittany, France. Opened on the 26th November 1966, it is currently operated by Électricité de France, and is the second largest tidal power station in the world, in terms of installed capacity. With a peak rating of 240 Megawatts, generated by its 24 turbines and a capacity factor of approximately 40%, it supplies an average 96 Megawatts, giving an annual output of approximately 600 GWh.
    In spite of the high development cost of the project, the costs have now been recovered, and electricity
    production costs are lower than that of nuclear power generation (1.8c per kWh, versus 2.5c per kWh for

    And that cost of nuclear power, that too is subsidized in all kind so ways.

  9. michael r james

    Frank, the Severn Tidal Power feasibility project shortlists 5 project from $3 to $4 billion and the mega-project of $32 billion (see below). It never ceases to shock me (after 30 years) of how the UK manages to make everything and anything so humungously expensive. This is more than the 3 Gorges dam cost and it will generate 26 GW.

    Anyway its cancellation seems to be an entirely political decision leveraged off environmental uncertainties. But stay tuned because did you not notice that they also just cancelled the first CCS because it was so much more expensive than planned (in this case the cost of full scale capture from a real FF generator is horrendous). Then do we still expect them to go ahead with their huge nuclear plans? 5% of all the UK’s energy needs is pretty damned impressive. My guess they will return to this (and maybe get the Chinese or maybe the French to build it.)

    [The Severn Estuary has the potential to generate more renewable electricity than all other UK estuaries. If harnessed, it could create up to 5% of the UK’s electricity, contributing significantly to UK climate change goals as well as European Union renewable energy targets. The proposal for a hydro-electric barrier to generate 8.6 GW and meet five percent of Britain’s power needs, is being opposed by environmental groups.]

  10. michael r james

    As far as I can tell the Severn Tidal decision was October last year. I suppose the $30 billion for 8.4 GW is not so bad (you’d only get half that power from funding nuclear, not counting all the hidden subsidies of course) and especially as the installation has an estimated life 3 to 4 times that of nuclear at up to 120 years. I think we might hear from this again in the next few years (I mean, relying on CCS & nuclear……)

    [The costs and risks for the taxpayer and energy consumer would be excessive compared to other low-carbon energy options. Furthermore, regulatory barriers create uncertainties that would add to the cost and risk of construction. The Government believes that other options, such as the expansion of wind energy, carbon capture and storage and nuclear power without public subsidy, represent a better deal for taxpayers and consumers at this time.]

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