Best solution? Buy Hazelwood and mothball it

Age
Saturday 24/10/2009 Page: 2

Actually, for $2 billion, it makes sense for the Government to step in.
HELP me out here. Analysis by think tank the Australia Institute shows paying up to $2 billion for the world's dirtiest coal-fired power station - Hazelwood, in Victoria's Latrobe Valley - to shut it down is actually a pretty cost-effective carbon abatement strategy.

It would work out at between $6.72 and $16.81 per tonne of CO2 avoided - depending on whether the decommissioned power station would have continued to burn coal and emit 18 million tonnes of CO2 annually for another 25 years (in which case, we're avoiding a huge amount of pollution with the purchase, at an effectively cheaper rate per tonne) or for just another decade (which would be more expensive abatement per tonne).

That's well below the projected carbon price of $20 to $25 per tonne under the proposed emissions trading scheme and in line with world markets. On this basis, according to the institute's senior research fellow David Richardson, "it's a good deal to buy back Hazelwood and mothball it". Similar analysis might show it is worthwhile buying back a string of coal-fired power stations.

Richardson describes the prospect as "tempting". His first proviso is that, for the purchase to be useful, the cap on carbon emissions set by the proposed carbon pollution reduction scheme would have to be reduced by the amount that would otherwise have been emitted. "Otherwise it's pointless," he says. Richardson's other proviso is common sense. It's about price.

Hazelwood's owner, International Power - a cashed-up British utility, one of the world's biggest and most profitable - is pleading the difficulty of refinancing about $440 million in loans secured against the power station by February. It is scaremongering bluffing - about the security of Victories energy supply. IP has about £2.4 billion ($A4.3 billion) of assets in Australia including Hazelwood, Loy Yang B, Kwinana and other projects. The company has said the pre-CPRS value of the first two assets alone is $4 billion, but that includes debt.

Richardson describes his $2 billion Hazelwood valuation as an "upper limit". IP also has enough cash (about £1 billion) on its balance sheet to refinance Hazelwood itself, lie says, if it comes to it. Yet IP is what you might call a motivated vendor. They are talking about "handing back the keys". So why on Earth would the public buy Hazelwood? It is a depreciating asset, not because of the proposed (, missions trading scheme but because climate change is now actually occurring, most people don't like it, coal-fired power stations are causing it and they will soon be a thing of the past.

"No one I know actually believes that these power plants will still be going in 2035, assuming the CPRS comes in," says UBS utilities analyst David Leitch. Leitch has some sympathy for the buyback idea. He says the brown coal-fired power generators are less competitive once the carbon price exceeds $20 a tonne, and cannot simply pass on the cost of the CPRS. "I think the Government could minimise the carbon cost by buying Hazelwood, Loy Yang and Yallourn and closing them down," he says.

But minimising the carbon cost isn't the only relevant issue, Leitch sees several major problems, mainly around replacing the brown coal in the short to medium tern and the difficulties with government operation of generation assets. "Just closing down the power stations really isn't an option," he says. "It's useful to look to, say, the clothing industry and how tariff protection was reduced to see an example of how reduced government support works in practice."

brown coal will probably be replaced by combined-cycle gas turbines. Energy Strategies managing director Hugh Saddler says electricity costs would be a bit higher, depending on the capital cost of the gas plant. "Even so, the costs of abatement will come out at less than $20 a tonne," he says. But I can't see why IP should get a single dollar. Were tobacco companies compensated for the introduction of taxes on cigarettes? No. Did we bail them out? Buy their factories? Not a bit of it.

So, to reduce greenhouse gas emissions, do we ban coal-fired power? No. Bring in a carbon tax? No. Plan a switch to renewables? No. What we do is try to put a cap on carbon emissions by only issuing a certain number of tradeable pollution permits to major polluters, then compensate them by giving them buckets of free permits and/or buy back their polluting assets (which we sold off years ago), so we can shut their down and then invest in clean energy. Go figure.

IPA is already sharing in $3.5 billion in free permits to help the dirtiest coal-fired power stations adjust to the CPRS under the transitional arrangements for the first five years. With Opposition backing, the industry is arguing for more like $10 billion and want that extended out to 15 years. Professor Ross Garnaut, remember, originally opposed any compensation for coal-fired power generators and said a carbon tax would be better than a heavily compromised emissions trading scheme. When the Government softened the CPRS he said it was "line ball" whether it was worth implementing. He now describes the whole thing as the worst major policy-making process he's seen.

paddy.manning@fairfaxmedia.com.au