Published in The Australian Financial Review, Monday 16 July 2012
In less than four decades, Australia must transform its electricity sector from one dominated by coal and gas with high greenhouse gas emissions towards one of near zero emissions. A carbon price is vital to the transition, but to make it at lowest cost, the carbon price needs support.
A new Grattan Institute report, Building the bridge: a practical plan for a low-cost, low-emissions energy future, sets out the steps to address the limits of the carbon market.
With a carbon price alone, developers of low-emissions technologies are reluctant to invest on the scale required to reduce emissions substantially. The costs and risks of taking these technologies to market are too high. Developers need a long-term, reliable carbon price to underpin investments and make their technologies competitive with traditional sources of electricity.
But the carbon price is uncertain as it depends on government decisions. If they do not keep a commitment to emissions constraints, the carbon price will stay too low, and investment in low emissions technologies will remain critically inadequate.
The Grattan report proposes governments enter into long-term contracts with developers to deliver electricity at a price that makes efficient technologies viable.
The contracts would be awarded through monthly auctions, held over 10 years. Developers bid to provide low-emissions electricity and low bids succeed. The scheme could produce about 5 per cent of Australia’s power – not a large amount, but enough to get low-emissions projects started at the lowest possible cost. The goal is to get a portfolio of technology options at lowest cost over the long haul.
A developer who won an auction would receive two payments: one for the risk of investing in an unproven technology, the other for the risk the carbon price will not be high enough to match the long- term climate change targets that would make the technology commercially viable.
Developers must have secured finance before they bid and be as close as possible to beginning work.
As costs come down and technologies become viable, the government will withdraw support, beyond a well-managed carbon price.
A 10-year period and rules for the auctions provide companies with a predictable investment environment, and multiple opportunities to invest. But in turn, developers must show over multiple auction rounds that the cost of their technology is low and falling. Those that do will get more opportunities to build projects.
The proposal complements a carbon price. It addresses barriers and market failures the existing carbon price cannot.
A change of government may lead to policy changes, including possible repeal of the carbon price legislation.
The opposition has proposed an emissions reduction fund as the central element in its direct action plan if it wins government. Grattan’s auction proposal could assist this objective, again by delivering lowest cost, low-emission technologies.
Grattan’s auction proposal has a cost – but if we do nothing, the cost will be much higher as the emissions reduction task gets harder.