Saturday 17/1/2009 Page: 1
Our addiction to cheap coal is under pressure as the climate debate rages and business tries to profit from alternatives. Clancy Yeates reports.WHEN Sydneysiders flick on the power, there's every chance some of the electricity has come from a couple of coal-guzzling power plants in the Hunter Valley. Eraring power station's 200-metre-high chimneys tower over Lake Macquarie, while further west, the Bayswater station is set against beef and dairy country near Muswellbrook.
Drawing on the region's vast coal fields, these state-government owned giants share the title of biggest stations in the country, and supply about half the power in NSW. They also have the dubious distinction of being among the country's biggest polluters, and are a hot spot for environmental protesters. After entering service in the 1980s, their drab grey chimneys spew out more than 20 million tonnes of carbon dioxide a year. That's equal to the emissions of 4.6 million cars.
A US study last year said they were among the world's 100 biggest polluters, in a survey of some 50,000 stations. Amid the growing concerns over climate change, one might assume these plants were fast becoming industrial relics from a bygone era. But just last year the State Government approved an expansion of the Eraring plant to shore up its dwindling power supply, further inflaming environmental tensions.
The Nationals' Senate leader, Barnaby Joyce, this week showed the political stoush over cutting emissions has a long way to go, when he reignited fears of the economic impact. But as thousands of bureaucrats descend on Copenhagen this year to discuss greenhouse gas reductions, decisions such as the Eraring extension should become increasingly rare. It's much less clear, however, where our future electricity will come from.
Power generators - responsible for about half the country's emissions - are at the centre of this change. They have just decades to develop cleaner ways of providing electricity and are already placing bets on methods with potential. In just one illustration of the scale of the challenge, the consultancy Energetics calculates that meeting Sydney's needs alone would require some 77 square kilometres of solar panels. That's three times the area of the CBD, and it would still pose problems after dark.
The consultancy's managing director, Tony Cooper, says the Prime Minister, Kevin Rudd's decision to cut emissions by just 5% by 2020 is "disappointing" but at least it's a start. "Given all the economic doom and gloom, he could have said we'll push it back to 2020," he says. "lt's the thin edge of the wedge but money will start to flow through and change will start to occur a little faster than it has to date." But where this money will flow, and what type of changes it will stimulate, are unclear.
Every energy company boasts a commitment to "sustainability" but what are they doing to balance their books and still cut emissions? How they manage this monumental change has widespread effects across corporate Australia, and this has caught the eye of the financial sector. The number of carbon departments and consultancies is exploding as businesses cotton on to the potential cash to be made from this new industry. But the big end of town is also watching closely because of the business impacts of cutting carbon emissions from energy. Not only will it raise power prices, the energy sector is also the first and largest test case in the unprecedented push towards a low carbon economy.
Power companies haven't always grabbed so much market interest. The plodding utilities were traditionally sought out by conservative funds looking for safe rather than spectacular returns, such as superannuation managers. Power stations have an investment life of about 30 wars and produce fairly predictable earnings. The stunning rise and fall of Enron in the US went a fair way to changing this perception. And although the circumstances are different, the Babcock and Brown satellite Babcock and Brown Power has exposed local investors to utilities that appear to have put deal-making before running power plants.
Nevertheless, going green won't be easy for the electricity industry. It sources 84% of its power from coal, and emission-free, or renewable energy, makes up just 7% - the vast majority of it from hydro-electricity. But after months of corporate disaster scenarios about potential incentive not only because it will start low, but impacts of a carbon emissions trading scheme, having to cut emissions won't stop the companies in their tracks or leave them stranded with worthless assets. "It's not the absolute amount of carbon that you produce when you generate, it's the relative amount compared to everyone else," says an analyst at UBS, David Leitch. "When the price of carbon comes up, are you hurt more than some other guy, or less than some other guy?"
This leaves room for different approaches among the local rivals. 'The biggest listed power companies, Origin Energy and AGL, are competing to convince the markets they can cut their emissions most profitably. B&B Power may have more pressing concerns, after putting its assets up for sale after a review found it needed to slash debt. The other main generators are the British-listed International Power and TRUEnergy, which is owned by the Hong Kong-listed CLP Group.
TRU, based in Victoria, has committed to cutting its 1990 emissions by 60% by 2050 and ruled out building any more coal plants. International Power is backing a "clean coal" project at the Victoria station, Hazelwood, which was built in the 1960s using '50s technology. Many of the country's remaining power stations are in public hands but tend to be run as profit-seeking corporations.
From July next year, these generators will have to factor a price for their future carbon emissions in to their plans. Although they will initially receive many emissions permits free of charge, the Federal Government's carbon pollution reduction scheme should provide a long-term incentive to cut emissions. All of the generators except Origin Energy have coal assets, so they will receive a share of the $3.8 billion set aside to compensate the coal sector.
Origin Energy's executive general manager of corporate affairs and public policy, Carl McCamish, says every player is busily researching likely drivers of the future carbon price. The 5% target set out in the Government's white paper for the carbon pollution reduction scheme - which is likely to result in a carbon price of $25 a tonne - will encourage investment in gas generators but it won't spark a rush of investment into emissions-free, renewable energy.
"In the short term, the 5% target, in and of itself, will make very little difference to whether people build wind or geothermal or solar," McCamish says. Companies say the carbon price is a weak incentive not only because it will start low, but because of high uncertainty thereafter. A big influence on the domestic carbon price is the price of carbon in overseas markets, because the white paper allows carbon credits to be imported. This means even movements in the exchange rate could change the carbon price. Instead, the main incentive for green investment is the mandatory renewable energy target.
A draft of the policy last month said it would require 20% of electricity to come from renewable sources by 2020. "In dollar terms, that creates a much clearer and more immediate signal for people like us than the carbon price," McCamish says. Failure to comply incurs a fine, so market analysts are carefully assessing where the energy rivals place their bets. "The key factor for us is to look at the impact of the emissions trading scheme on these companies, when combined with an expanded mandatory renewable energy target," a Citi analyst, Marie Miyashiro, says.
The legislation would require the construction of 45,000 gigawatt hours of renewable capacity, worth up to $27 billion. Wind turbines provide the cheapest new green energy and are likely to make up most of the new investment. Despite these incentives, specialist green energy companies are seen as speculative ventures. The Economist reported that amid the looming recession, money spent on clean energy projects around the world was down 25% in the third quarter of last year.
Instead, established energy companies draw cash from their main businesses to take smaller stakes in renewables that look promising. McCamish calls it a "portfolio of options". "You get involved, you build skills and you learn more about the technology and if it looks like one in particular is becoming cheaper, you invest more in that as you go along," he says.
Of the local players, AGL has placed the largest bet on clean energy, with 27% of its company's capacity in renewables. TRUEnergy has a joint venture with the Hydro Tasmania known as Roaring 40s, which operates 226 MWs of wind energy and says it wants to become the country's biggest green developer by 2010. Origin Energy's main domestic game is gas but its 51.4% stake in New Zealand's Contact Energy has a large proportion of green energy. It is developing some wind and solar assets and has a 30% joint venture interest in the main project of the geothermal developer, GeoDynamics.
The chief economist and head of corporate affairs at AGL, Paul Simshauser, describes a completely renewable system as an "eventual utopia" but the incentive to back green energy is growing considerably. "Wind remains, certainly for the foreseeable future, likely to be the most scale- efficient renewable technology available today," says the ex-chief of B&B Power.
AGL also has coal assets, which he says still have a role in meeting power demand: "I think it will be a long time before we wind down the thermal [coal] fleet in Australia, because if we turned them off tomorrow, it would take the better part of 20 years just to replace them all." However, building more coal plants is highly unlikely, and some of the country's highest-emitting plants could be switched off in next five years, he says. "To actually 'put money -into a coal power station as a stand-alone investment decision would certainly test the minds of the executive team and the board."
The growing role for green energy is a small but encouraging start in addressing our carbon dependence but there's no shortage of challenges ahead. The chief executive of the Clean Energy Council, Matthew Warren, warns against focusing purely on wind. He says the group's members, which include fossil fuel generators, are concerned that design of the renewable energy target could discourage investment into more adventurous options in the longer term.
Mature wind projects appear safe but "if you come into the market in say 2016 or beyond, you've got a much narrower time to get a return on your investment", he says. "We want it to create a pathway for those new and emerging technologies, we want to be surprised by what they can end up doing, and we want to be given the time to be able to do that." Rushing into one technology can be risky for companies, too. Some analysts say AGL's bet on wind could be a long-term concern if a new, cheaper technology emerged.
But AGL's Simshauser points to the company's other renewable investments and says electricity prices should continue to rise, protecting the value of wind farms. "Provided you spread your investments out, you usually do OK in the long run," he says. Despite companies' warm and fuzzy clean energy slogans, their more immediate bet is on gas - a fossil fuel. Last year's bonanza in Queensland coal seam gas projects - worth more than $15 billion - was partly to meet surging gas demand from growing Asian markets.
More deals are likely in the coming years but even gas has its risks. The director of NabCapital's Carbon Solutions Group, Sean Lucy, says the likely wave of gas investments are bets that in 25 years a more efficient, cleaner generation method won't have arrived. "The challenge is that you are making in- vestments in an area of evolving policy and scientific understanding and you are also taking a view about how fast the world is going to feel it needs to move with emissions," he says.
A final business gripe is the effect of cutting carbon on retail margins. The executive director of the Energy Retailers Association of Australia, Cameron O'Reilly, says state-run price regulation of electricity prices could prevent them passing on higher prices. State energy ministers have acknowledged the issue, and it looks likely to be resolved. JPMorgan says Origin Energy and AGL's retail business will also benefit in the early years of emissions trading because the compensation to generators will limit the volatility in wholesale markets. As with any extra cost, business lobby groups are frantically pointing out possible risks.
However, an exodus from polluting fuels remains a long way off, reflecting the Government's slow start to cutting emissions. True to the industry's safe reputation, the big players are unlikely to gamble any more on clean fuels than they see as profitable. Even the managing director of renewable-heavy AGL, Michael Fraser, did not rule out buying NSW coal power assets when they were possibly up for sale last year, though he said it was "not a preference for the company".
Amid the burgeoning interest in carbon there's a rare positive story, of sorts. While the rest of the economy falters, a thriving industry of consultants has sprung up within the big financial and advisory firms. Banks have been expanding their carbon trading desks and are eyeing the potential windfall from advising the thousand businesses that must record and, eventually, pay for their emissions. But this attention is more than the banks spotting commissions. Large companies are tracking how the energy sector adjusts, because electricity is a cost that few businesses can avoid, though it has often been taken for granted.
The white paper released last month said electricity prices would rise by about a third, with generous compensation for households, which use about a quarter of all power. Businesses use nearly all the rest and are preparing for the rise. "The one thing that seems very certain about it all is that the electricity price is going to go up, and somewhere along the line that is going to put a lid on consumption growth," says UBS's Leitch. To deal with the rise, energy efficiency - using less energy to get the job done - is becoming a much bigger focus.
As unlikely as it may sound in any other industry, the retailers are trying to convince their customers to use less of the product they sell. This might mean switching to a different type of light bulb, or co-generation: using a heat engine to produce electricity and heat to drive down power costs. AGL did this with the brewer Coopers, building a plant that supplies electricity and steam to the brewery, with surplus electricity sold to the grid.
NabCapital's Lucy says it could be relevant to businesses with banks of computers that need large stable power supply. "We're seeing more and more people coming and talking to us about how can they improve their carbon efficiency or productivity by investing in their own generation assets." Listed companies' greenhouse and energy performance is also under greater shareholder scrutiny. The executive director of the Investor Group on Climate Change, Joanne Saleeba, says fund managers increasingly cross-examine companies about reducing their emissions or their energy use.
The group's members, fund managers responsible for $550 billion, are putting pressure on corporate chiefs to provide "long-term scenario planning" over what they think carbon or energy prices will be and how they will react. Saleeba is unaware of investors ditching a stock or sector purely because of poor carbon performance but the pressure is on companies to become carbon literate. "If the investor knows more about the risks and opportunities to the business than the business itself, then that's a risk," she says.
And it seems many of the country's businesses still have a lot to learn about carbon. In November 2007, a PricewaterhouseCoopers survey of more than 300 Australian businesses with an annual turnover of more than $150 million found only 20% were factoring a carbon price into their capital expenditure decisions. Energy companies were better prepared than most, it said, but even in the last year carbon has become a burning issue too large for businesses of all shapes to avoid. If they haven't already hired a carbon consultant to do it for them: financial chiefs across town will be closely watching as the energy sector takes the first steps in changing.
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