Behind the Scenes at Global-Roam

After the internal restructuring of global-roam, somehow I ended up with responsibility for managing the deSide product (and ez2view Ontario, ez2view Australia and ez2update Australia). This means that I am now responsible for understanding everything about energy users. How they think, what they do, what keeps them awake at night and what brand of toothbrush they use. This means attending the occasional conference that is put together for energy users.

The first of these conferences was the EUAA Climate Change Briefing. Now I have attended a number of climate change briefings before (mainly around the time that the government told Tarong to switch off because Queensland was running out of water), but this was the first one that I had been to that was tailored for energy users.

Morning Session - Nuclear, NGERS and Economics

The first guest was Ed Kee, who is the Vice President of NERA Consulting and his topic was on Nuclear Energy. The first thing that I noticed about his particular presentation was that it was a teleconference from Washington, using the same software that we use to support clients here at global-roam - webex (hey guys over there at webex, you just got some free advertising!). Ed was an interesting speaker, as he was speaking on one topic that I have great interest in - nuclear power.

Ed gave a good overview of nuclear energy adoption around the world. The most interesting information that he presented was about the key players in the nuclear industry worldwide - Russia and China. That suggests to me that these two countries are positioning themselves to control most of the intellectual property and skills involved in the construction of nuclear stations, which may be of high, long term strategic economic importance. By contrast the Australian government has taken the populist sound bite approach (”it has the word nuclear, therefore it must be bad”) to nuclear power. From my own personal point of view if climate change theory is true and accurate (and I am not qualified to make that judgment) then nuclear has to be a big part of the way forward. I realise that there are strong arguments against it (such as long term waste disposal and decommissioning costs), but if the choice is between figuring out how to store a few containers of nuclear waste for a few thousand years or Brisbane ending up under water, the Great Barrier Reef dying and having to sit through even more disaster movies I know which one I would choose. This point was later shared by Dr Moran. Australia may not even need to adopt nuclear ourselves to make a significant difference to world emissions. If we started pushing hard for more countries to adopt nuclear we may effectively curtail more emissions worldwide that we ever generate in Australia.

Unfortunately, Ed highlighted, most emissions reduction schemes worldwide either ignore or actively oppose nuclear power, which is causing reduced investment in this industry. This surely must be political (why are people so ideological about where their electrons come from?) in nature rather than based on a rational assessment of the facts. Nuclear is baseload, scalable, reliable and safe. No renewables can make this claim and most are also more expensive.

Next up on the agenda was David Rossiter, who was talking about the National Greenhouse and Energy Reporting Scheme. David’s presentation was not poorly delivered, but I remember little from it as the NGERS has little relevance to anything that global-roam is undertaking. One thing though that did stick out was the absolutely absurd religious stance that a number of various groups are taking with regards to climate change. David highlighted one council was spending ratepayer dollars on doing carbon accounting for mowing their lawns. I have been known for my strange sense of humour in the past, but in this case I am not exaggerating or joking. What is worse is that it was not reluctantly that councils were doing this, but gleefully, with a number doing the reporting even though they had nowhere near the carbon footprint to necessitate it. This confirmed a number of suspicions that I have earlier had - 1) climate change in some cases has moved beyond the science into a realm more closely identifiable as religion and 2) local councils in Australia are wasteful and not held up to very close scrutiny by ratepayers. It is better to be seen to be doing “your bit” for climate change than it is to address real problems.

Coming in as the last speaker before the morning tea break was Bruce Mountain from Carbon Market Economics, who spoke on a variety of issues. Bruce was a particularly interesting speaker as he had quite a good grasp on all of the areas of policy that would effect energy users. He also had a very strong understanding of the economic ramifications of the proposed emissions trading scheme. The think that stuck out in my mind, and the mind of others (as there were several follow up questions) was the economic modeling on the carbon cost required to make combined cycle gas turbines competitive with brown coal generation. At current gas prices the carbon cost would need to be somewhere around $20/tonne. At double the gas price, the carbon cost would need to be around $35/tonne. Nobody knows exactly how much gas prices will increase, only that as demand for gas increases it will place upward pressure on gas prices. Gas would not be competitive with black coal until a much higher carbon price. One thing that I found amusing was that despite the need for carbon prices to be $20/tonne to make gas competative, the government is going to sell unlimited permits for the first year of the emissions trading scheme at $10 per tonne. I imagine that the reason for doing this is to spread the inflationary effects of the carbon tax emissions trading scheme over a number of years instead of exposing consumers to the true cost straight away. The real emissions trading scheme (the one that actually involves trading) will begin in 2012 and a step change in price is expected then. One would imagine that this will occur close enough to the 2012/13 federal election so that the true costs to employment and inflation will not yet be evident and thus have no negative effect on the governments chances at re-election. Incidentally this also happens to be when the “evil climate change denying Liberals” were supposed to introduce their (essentially identical) emissions trading scheme if they had held power (yes, my political cynicism extends to both sides).

On the market effects of the ETS, Bruce presented a number of figures on the effects of the ETS on electricity prices. When brown coal is at the margin (i.e. is setting the price), the market should expect to see an increase of between $25-$35 per tonne. Black coal will see prices increase around $25/tonne and gas should see prices increase around $15/tonne. Finally, Bruce suggested that with electric cars coming online, the electricity use of households will increase by approximately 33%, though at current power prices this would lower the energy cost of running a car by around $2000 per annum.

Morning Tea to Lunch - Energy Users and discussion on MRET

Straight after morning tea, two presentations were made by energy users - Sydney Water and David Jones. Both presentations focused on how each organisation had addressed their energy costs. Sydney water is looking to go carbon neutral by 2018 by purchasing external carbon credits, at taxpayers expense. Another conference member asked why they were doing that and their response was “to take the lead on climate change”. Given that Sydney Water uses 1% of New South Wales electricity and New South Wales uses less than one third of Australia’s electricity and Australia emits less than 2% of the world’s carbon emissions, at best their leadership on climate change will result in approximately 0.0066% (at best) of the world’s carbon emissions. If this does not convince China to install new nuclear and gas plants instead of coal fired plants then I do not know what will.

Lunch was lovely and provided a lot of interesting discussion. Most of it was centering around the decision by the government to allow coal mine methane to be counted as renewable energy, but any credit for its use would be offset by an increase to the renewable energy target. Basically, from a practical point of view it achieves nothing, but from a political point of view it will boost the “renewable” energy usage. This will have the very important effect of allowing the government to tell everyone how great that they are.

After Lunch - Retailers, Risk, Risk Management and Pass Through Costs

After lunch there were several speakers. The first two were from Country Energy and Origin Energy - that is, electricity retailers. Origin spoke primarily to energy users on how they could reduce costs in both the short and long term. Country Energy spoke at greater length about the various market options for renewable energy credits and the expanded renewable energy target. The key point here is that under the new scheme, holders of renewable energy credits will become gatekeepers for the rest of the industry (why that is so was either not fully explained or I did not catch the explanation).

Dr Alan Moran from the Institute of Public Affairs spoke next. In his presentation he highlighted some scientific uncertainties that surround climate change theory. Following that he highlighted the levels of abatement that are needed to stabilise world CO2 emissions. Australia would need to reduce our carbon emissions from 16 tonnes per capita to 3 tonnes per capita. China, which has significant numbers of its population living in poverty currently releases 3.8 tonnes per capita. France, which has their power sourced almost entirely by nuclear sources has an emissions intensity of 6 tonnes per capita. The OECD average is 13 tonnes per capita.

Of even greater interest was the level of depth that Dr Moran went into about the costs that would be imposed on Australians if the emissions trading scheme is going to be successful in meeting its targets. Citing sources from Caltex, Onesteel, Alcoa and others Dr Moran highlighted the negative effect of the emissions trading scheme on a number of key Australian businesses. Brown coal generators in Victoria argue that they will be forced into closure by the scheme, which is far more biased against incumbent generators than the European or US schemes. Dr Moran then highlighted the Spanish experiment into green energy, which has cost the country 2.2 real jobs per green job created. Pages of statistics and studies were presented to highlight the danger in Australia adopting the proposed emissions trading scheme. The final point that Dr Moran made was that the treasury modeling that suggested Australia could reduce emissions extensively by 2050 was based on un-economical or undeveloped renewable technologies and carbon sequestration for both coal and gas power, both of which are not yet invented. All of these points lead to one conclusion - that Australia simply cannot achieve its goals without (at least) the adoption of nuclear power.

Second to last was the only speaker that seemed to be thrilled with the prospect of an emissions trading scheme - Jennifer Lauber Patterson who was the director of Innovative Carbon (and formerly ANZ bank). She talked primarily about what was needed for companies to hedge their risk under the emissions trading scheme (I still cannot bring myself to use the official title - carbon pollution reduction scheme - as carbon dioxide is not officially classed as a pollutant) and renewable energy target. She raised a number of interesting points, and started with a quote from Henri de Castries, Chairman of the Management Board and Chief Executive of AXA - “Climate change and the impact that it will have on key industries is as important as interest rate risk and exchange risk.” Risk management was the primary focus of her presentation and she made several suggestions for businesses with significant carbon risk. The appointment of a Chief Carbon Officer, spreading hedging across multiple approaches including permits, Kyoto compliant credits and borrowing/banking credits were all discussed.

Finally, Dr Ariel Liebman from the EUAA spoke on carbon intensity factors, carbon pass through and retail electricity contracts. Dr Liebman explained how the carbon price would eventually reach electricity users, how it would effect price and how it would change the bid stack. The average estimate of the pass through cost (i.e. the cost that is transmitted to the end user) is somewhere in the vicinity of 60-80% of the carbon price. The full figures are to be covered in a Draft Access Economics report for the EUAA, which will be released soon. His final point, which was made a number of times during the various presentations is that gas prices may vary significantly once the ETS is in place.

Final Thoughts

Overall the conference was very useful, though a little depressing from an economic point of view. Most of the speakers were not particularly impressed with the ETS legislation (one energy user reported having spent nearly half a million dollars on consulting in preparation to possibly get given compensation for the scheme - and they are not guaranteed a pay off). Yet due to the fact that a number of key aspects of the compensation arrangements are down to ministerial discretion, I imagine that we will be hearing a number of large energy users coming out in support of the proposed scheme. After all, it would not jeopardise their chances of getting compensation would it?

This entry was posted on Thursday, August 27th, 2009 at 6:23 pm and is filed under Event Review. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.