The heavily political and therefore somewhat compromised carbon pricing package unveiled by Julia Gillard at the weekend does at least map out a path towards a less carbon-intensive future, albeit at significant cost, and a trajectory towards the Green’s vision of a non-fossil fuel future.
One could argue about whether the package produces the most abatement at the lowest cost (it doesn’t) or whether the big investment in picking future winners in the renewables sector is, given the history of government interventions, a sensible approach.
Given the nature of those around the table in the multi-party committee, however, the package was always going to be a political compromise and therefore compromised.
At a practical level, there is an important question as to whether the package can be implemented in a way that creates a seamless transition towards the Greens’ nirvana over the next 30 or 40 years. If it isn't, it is conceivable there will be supply-side shocks.
That prospect has been elevated by the one of the many “direct action” elements of the government’s plan, the proposed buy-out of the dirtiest 2000 megawatts of brown coal generating capacity, presumably in either or both of Victoria (Hazelwood) or South Australia (Playford).
The carbon pricing regime would by itself (with or without the compensation envisaged by the package) lead to the gradual withdrawal of brown coal generation, although in the absence of a direct buyout it is probable that the generators would continue to operate for as long as possible but would be run to maximise profitability – they would shift from being baseload providers to peaking plants.
It would also be a natural progression for brown coal-fired capacity to be displaced by slightly less dirty black coal-fired output. The bigger NSW generators have spare capacity that could be transmitted via the national grid to make up for baseload shortfalls in the near term. In the medium term, of course, they too would be rendered uneconomic.
What’s missing from the discussion is the role of gas as a source of baseload capacity to replace black coal-fired capacity as the rising carbon price renders it uneconomic over time. That may be because the Greens regard gas as just another, only slightly less dirty, fossil fuel.
For the moment, however – and it could be a “moment” measured in decades – gas is the natural and most efficient/cheapest and reliable substitute for coal as a source of baseload generation. Neither the $23 a tonne starting point nor the retention of the grab-bag of high-cost but effectively heavily subsidised mandatory renewable schemes will encourage new gas-fired baseload.
It is probably unlikely that the lack of incentive for gas will lead to significant disruptions to supply in the near term. What it could do, however, is encourage the building of small open-cycle peaking plants rather than large combined cycle gas-fired baseload plants.
The introduction of a carbon price is being overlaid on electricity prices that are in any event rising, particularly in NSW. If baseload is withdrawn from the system and replaced in the medium term by peaking plants (whether gas or coal-fired plants that have switched strategies from baseload to capturing peak prices) and/or high cost and unstable capacity from renewables, prices will inevitably rise further and become far more volatile.
There would be significant economic and political risk if that were to occur.
Having designed its carbon pricing regime and the complex compensation packages and subsidies tacked onto what could have been a simpler and much lower cost scheme if abatement was the only objective, there should be a focus on managing the lengthy transition from the structure of today’s generation sector to tomorrow’s. This should be done to avoid risks to energy security but more particularly to minimise unnecessary pricing and economic shocks by failing to ensure the use of the obvious, lowest cost and less carbon-intensive intermediate source of baseload.
