Wednesday, March 30, 2011

Ross Garnaut's carbon pricing plan 'naive', say energy producers By Annabel Hepworth and Sid Maher

 JULIA Gillard's chief climate change adviser has been lashed by the $120 billion energy sector, which says his latest advice is a risk to investment and could lead to a multi-billion-dollar lawsuit against the government if followed.

Ross Garnaut

 As the opposition seized on Ross Garnaut's latest report as evidence that Labor's carbon policy would lead to brownouts and insufficient electricity production, the sector slammed it as "naive", "commercially unsophisticated" and "undergraduate". 
 The nation's biggest private power producer, International Power Australia, urged the government to recognise the "shortcomings and dangers" of Professor Garnaut's update on how the electricity sector should be treated under a carbon price.
 The criticism comes as a confidential report to the former Keneally NSW government, obtained by The Australian, warns that consumers in the state face electricity bill increases of up to 27 per cent from July 1, in part because of the federal renewable energy target.
 That report finds there is a "perfect storm" of factors leading to increased electricity prices and that the cost burden of a carbon tax or emissions trading scheme could be eased by phasing out the mishmash of state and national renewable and greenhouse gas reduction schemes.
 Professor Garnaut's update rejected compensation for power stations because of a carbon price on the grounds it was "highly unlikely" to threaten physical energy security.
 He proposed commonwealth loan guarantees to keep high-emissions generators operating and an energy security council to ensure continuity of supply and avoid instability in the electricity market.
 He also found that even old brown-coal power stations in Victoria's Latrobe Valley could still be required to operate intermittently on days of very strong power demand.
 International Power - which owns the Hazelwood and Loy Yang coal-fired power stations in Victoria - said the Garnaut report was "commercially unsophisticated" and ignored the consequences to investment of destroying the value of billions of dollars worth of assets.
 "Any change to legislation that destroys equity virtually overnight would clearly be a sovereign risk issue and there is no doubt that International Power and other owners of generating assets will reserve their right to pursue full compensation for their investments," said International Power's corporate affairs manager, Jim Kouts.
 AGL Energy chief executive Michael Fraser said he "fundamentally" disagreed with Professor Garnaut's views on compensation. "We have told him that directly," Mr Fraser said.
 He warned that without compensation, there would be "significant disruption" to financial markets and higher risk premiums on new investments.
 Mr Kouts said it was "troubling" that the report suggested operators of power stations that had invested billions to run baseload facilities "can somehow overnight be turned into standby plant".
 Opposition climate action spokesman Greg Hunt said the call for an energy security council was extraordinary and was needed only "because a carbon tax increases the chance that Australia could struggle to produce enough electricity and could suffer brownouts".
 The report also came under fire from the owners of the transmission and distribution networks, which Professor Garnaut concluded were over-investing in their assets to increase the amount of returns regulators would allow them.
 Calling for an urgent inquiry into power sector regulatory arrangements, Professor Garnaut said the current arrangements had allowed too high a rate of return for power companies.
 "We've introduced an enormous incentive for over-investment and that increases electricity prices that (are) just passed right on to the consumer," he said. "It is a very big deal."
 Climate Change Minister Greg Combet said he would have a close look at Professor Garnaut's conclusions on electricity industry regulation and discuss the issues with him.
 "But ultimately that's a question for the regulators in the electricity industry," he said.
 Mr Combet said suggestions by Professor Garnaut that electricity prices would rise $4 to $5 a week were on the "high side".
 Ausgrid managing director George Maltabarow, who runs the largest network in the nation, said while major investments in the networks had driven price rises, there was not a "shred of evidence" of "gold-plating" of their assets. "I understand why he'd say it," Mr Maltabarow said.
 "He is clearly wanting to put the focus on why there are large electricity price rises because he wants to create room for further price rises through the carbon tax. That's what he's trying to do."
 "If there's a culprit for electricity price rises, he doesn't want it to be the carbon tax."
 Mr Maltabarow said state-based pricing regulators had "held prices down" because they "always had a mind to what the government of the day might accept in terms of price increases".
 "There's a catch-up, that's what Garnaut's missing," he said. "The politics is all about keeping prices down until the point comes where the investment is unavoidable."
 Australian Energy Market Operator chairman Tom Parry said he thought there were financial distortions for state government-owned electricity networks which paid tax equivalents to state treasuries rather than corporate tax to federal coffers.
 Dr Parry said he was a believer in privatisation because it removed the conflict between the government's role as an asset owner and policymaker.
 "If you can't sell them, you need to manage the conflicts in a different way by having much more robust mechanisms and . . . resolve the conflicts in an appropriate way," Dr Parry said. "That hasn't been happening."
 Dr Parry was co-author of the report to the NSW government that found the main driver of price rises in NSW was network costs, followed by the growth of green schemes recovered from customers through their bills.


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