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Energy companies will build more coal-fired power stations rather than switch to cleaner gas if the carbon price remains low when it floats next year, warns Origin Energy CEO Grant King.

 

The federal government plans to move to an emissions trading scheme one year early, which would see the price plummet from $25.40 to $6 a tonne based on Treasury estimates.

 

“If the price was always going to be $6, you’d be building coal-fired power stations,” Mr King told the ABC on Sunday. “A carbon price of more like $40 a tonne is necessary to really swing the economics from building coal to gas. 

 

“And in so far as we rely on carbon price to cause different decisions to be made . . . $20, let alone $6, will not change the decision to build coal versus gas.”

 

Treasury predicts the price will reach $38 by 2020, but Mr King raised doubts it would come near the behaviour-changing $40 a tonne mark. The price of carbon in Europe will have the most influence on the price in Australia under current policies, he said, and cited cuts to renewable energy subsidies in Germany and Spain.

 

“The Europeans recognise that many of their industries are uncompetitive around energy costs and I think they will be very sensitive to burdening those industries with higher costs.”

 

Certainty needed on carbon

 

 

Mr King warned of delays in investments until there was more certainty on carbon policy, which could have an impact on power supply in a decade.

 

“It’s very unclear as to what other forms of generation you ought to invest in.

 

“We invest for five [to] nine years out, so somewhere towards the end of the decade, even into the early 2020s . . . that’s where we’ll see the consequence of uncertainty that sits around these sorts of policies today,” he said.

 

While there was no issue of power shortage in the next seven to 10 years, there was a danger of complacency in building for time periods beyond that, Mr King warned.

 

Last week, the Rudd government announced it would switch to an emissions trading scheme on July 1, 2014, dumping the carbon tax a year earlier than planned. The government will issue a fixed number of permits – falling a little every year – for the right to emit each tonne of carbon, the price ultimately set by market. 

 

Emitters will be able to buy up to half of their permits from the European Union scheme. Prices under that scheme have been volatile: in 2008 they hit highs near $30 and lows of $4.

 

Scheme is flawed, says council

 

 

The Business Council of Australia, while backing an ETS, has criticised the planned scheme as “flawed” and warned that it did not include safeguards to ensure industry competitiveness or low-cost cuts to emissions.

 

The Australian Chamber of Commerce and Industry has criticised the shift for failing to give any certainty or guarantee of sustainable lower costs.

 

But Mr King said the government’s early ETS policy and the Coalition’s plan to dump the carbon tax were similar in that they both sought to cut the cost of carbon to consumers. Both were committed to a 5 per cent cut in emissions levels by 2020 as well, he said. Hinting at support for an ETS, he said: “If we thought carbon price was going to be $6 and you know we’ve got a carbon trading scheme, we’d broadly support that.”

 

However, the ability to buy offshore permits under the government’s ETS meant that abatement would occur overseas instead of in Australia.

 

Industry could delay decisions until the election determined a carbon policy outcome, but it could not “wait forever”, Mr King said. 

 

As the carbon price lowered, it would disadvantage the renewable energy target of 20 per cent by 2020, he added, by pushing down other energy costs besides renewable sources.

 

One of the largest electricity and gas retailers in Australia, Origin expanded its base this month by purchasing the NSW coalition government’s Eraring Energy power stations for $50 million.

 

Last month it announced plans to forge ahead with a $1 billion-plus coal seam gas project in Queensland.

 

On ABC, Mr King called for NSW and Victoria to free up more coal seam gas resources, to put downward pressure on gas prices. Acknowledging community concerns, he expressed confidence that they could largely be addressed by talking with people, with the exception of a few with “very strong views”.

 

 

Source:Financial Review