Canary in the NSW coal mine

Business Spectator
Tuesday 2/11/2010 Page: 1

Even as the NSW government is cracking down on subsidies for renewable energy generation such as rooftop solar, it is ramping up the level of subsidies provided to its coal-fired power stations by ensuring the cheap supply of coal for the next few decades. Securing a cheap source of coal has been one of the key issues for the NSW government as it seeks buyers for its energy assets and tries to keep a lid on energy costs - something that is set to emerge as a major issue in the upcoming state election.

But its decision to retain ownership of the Cobbora coal project in order to guarantee long-term fuel supplies at well below market price has sounded alarm bells, and could translate to a subsidy that is worth more than $1 billion a year - or even as much as $3 billion. Professor Ross Garnaut said in a speech in Canberra last week that the move could undermine the impact of a carbon price. "Media reports that New South Wales is considering allocation of coal to electricity generators, on the condition that the coal is not sold on the open market, are of note and concern", Garnaut said. "The implicit subsidy to coal-based generation within these arrangements could work against a carbon price, and be much larger than the highest carbon price that has been suggested in the Australian policy discussion".

Garnaut's review into carbon pricing and climate change in 2009 suggested that the price of carbon emissions would need to rise to around $40 a tonne if Australia were to meet its share of the abatement required to cap global emissions at 450 parts per million. The review said the price of carbon would likely move well beyond that over time.

Thermal coal, which is used for electricity generation, is currently attracting prices of around $100 a tonne on the export market, nearly triple the amount the generators are believed to currently pay for their coal supply. In an effort to shield the power stations "from the march to export parity", as one spokesman described it, the NSW government sought to have Cobbora developed by private companies that could guarantee a cheap price for the NSW power stations. However, negotiations with the likes of Whitehaven Coal broke down because Whitehaven wanted a price of at least $55 a tonne.

The NSW government, conscious of electricity price rises caused mostly by the upgrade of transmission and distribution networks, announced three weeks ago that it had decided to retain ownership of Cobbora and "pursue alternative development strategies in order to deliver greater certainty of long-term fuel costs for electricity generation". The government is likely to bring in a contractor to deliver the coal at an agreed price and not allow any of the Cobbora production onto the export market, thereby seeking to insulate the project from market forces.

By deciding to retain ownership, the government forgoes the possibility of generating revenue from the sale of the mine and it is not clear what, if anything, the generators will contribute towards the development costs of the mine. According to the NSW government website, Cobbora is located near Dunedoo in western NSW, and it is proposed that the mine will provide 30 million tonnes of coal per annum for use in the state's power stations to generate electricity.

The government will not reveal the price it will guarantee to the power stations, but even at $45 a tonne it represents a potential $300 million annual saving for the generators over the price proposed by Whitehaven, and some $1.5 billion a year below export price levels. These are numbers that dwarf the subsidies offered renewable energy developers. As one CEO lamented this week: "The more you emit, the more subsidies you get".

This article first appeared in Climate Spectator on November 2.