Citation: Sharon Beder, ‘Electricity, generation, climate change and privatisation’, Australian Options no. 57, Winter 2009, pp. 18-20.

This is a final version submitted for publication. Minor editorial changes may have subsequently been made.

Sharon Beder's Other Publications

Around half of Australia’s emissions of greenhouse gases come from stationary energy sources. About 70 percent of these are from electricity generation, making it the largest contributor to greenhouse emissions by far, contributing some 200 Mt out of Australia’s total 576 Mt in 2006.[1]

In 2006 stationary energy sources generated 40 percent more emissions than in 1990.[2] This massive increase has been aided by electricity privatisation and deregulation in Australia, which has provided little incentive for electricity companies to promote energy efficiency or renewable electricity.

During the 1980s many environmentalists in the US supported the deregulation of electricity as they were persuaded that deregulation would remove incentives from the regulated electricity monopolies to increase electricity sales and build large new power plants. They also believed that an electricity ‘free market’ would provide more opportunities for companies offering alternative power generation from renewable sources.[3] However this turned out to be a false hope.

Private companies are hardly likely to encourage energy efficiency and conservation when their profits depend on maximising demand. In the US it is the public utilities that have led in conservation efforts while private power companies have cut their conservation budgets. Electricity deregulation caused the energy efficiency budgets of North American power companies to be cut by 42 percent between 1995 and 1999.[4]

Electricity markets positively deter investment in conservation and energy efficiency because they choose electricity supply on the basis of “lowest up-front price” rather than the “lowest price over the lifetime of a product” or the environmental cost of the supply.[5] As a result, new generating capacity around the world continues to be dominated by fossil fuels.

In the US the Energy Information Agency predicts that new power plants will be mainly gas-fired in the shorter term and increasingly coal-fired in the longer term as gas prices increase.[6] Similarly Europe’s new power plants are likely to be gas-fired for the short-term future. Worldwide, the use of natural gas and coal has surged.[7]In Australia, 41 percent of the new investment in electricity generation between 2002 and 2006 (both private and public) Australia-wide has been in coal-fired power stations and 42 percent in gas-fired power stations.[8]

Privatisation allows, and in many instances encourages, the maintenance of old polluting coal-fired power plants that contribute smog, mercury and particulate matter to the atmosphere causing thousands of deaths annually.[9] In Australia, deregulation and privatisation have led to the increased use of the most polluting type of coal, brown coal, and by 2001 there had been a 31 percent increase in greenhouse gases as a result of energy deregulation.[10]

In NSW the Greenhouse Abatement Scheme issues certificates to those who reduce greenhouse gas emissions that can then be sold to electricity retailers who have to meet mandatory emissions reductions. However a study by researchers at the University of NSW found that 95 per cent of the certificates issued in the 18 months leading up to June 2004 were for projects established before the introduction of the scheme.[11]

By 2007, although the scheme had cost NSW consumers $450 million, around 80 percent of the reductions that had been recognised by the scheme were for previously established projects. Two Queensland coal-fired power stations made millions of dollars in the NSW scheme while at the same time producing 9 million additional tonnes of pollution each year.[12]

A government spokesman defended the scheme, which is predicted to cost rate payers some $2 billion over 9 years, saying: “It is not possible to distinguish between production or investment decisions made as a result of the scheme and those that would have been made anyway”.[13] Moreover the benchmark for assessing emissions reductions is set by assessing the average emissions in the state – which is mainly made up of the emissions of coal-fired power stations – so even gas-fired power stations earn abatement certificates.[14]

Like emissions trading, mandatory renewable energy targets tend to be set too low, to be too slow, and to be subject to rorting and uncertainty. In California utilities are now required by the government to meet 20 percent of their supply with renewable sources by 2017.[15] The NSW state government has set a target of 10 percent by 2010 and 15 percent by 2020.[16] The federal government’s Mandated Renewable Energy Target (MRET) has even lower targets.

The Rudd government is now proposing a market-based scheme to reduce greenhouse gas emissions. The idea of emissions trading is that firms which can reduce their emissions more cheaply can make profits from their ‘excess’ reductions by selling credits for them to other firms for whom making these reductions would be more expensive.

This is fine if minor pollution reductions are all that is required. However in the case of global warming the required reductions in emissions of carbon dioxide cannot be achieved by merely undertaking the cheapest reductions. There is little point in setting up markets that enable some firms to avoid making more expensive reductions so as to minimise their costs if those more expensive reductions are necessary.[17] In other words, the more rigorous the emission reduction the less scope there is to find cheap solutions and sell excess allowances or reduction credits.

The European Union has the only functioning greenhouse gas emissions trading scheme but it has not reduced emissions and it is estimated that emissions actually rose by between 1 and 1.5 percent in the first two years of its operation.[18]  The market for emissions allowances opened at 8 per tonne and settled around 23 a few months later, far less than would be necessary to provide an incentive to reduce emissions.[19] The price is currently only about 10 per tonne because of the economic slowdown.[20]

In the UK, electricity generators have made up to £1.3 billion by increasing electricity bills in 2005 by 7 percent, supposedly to cover the cost of the scheme, even though they received their emissions allowances for free and have not invested in environmentally sound technology.[21] Given that electricity price increases have been approved in NSW to cover the cost of global warming measures, and the emissions trading scheme includes compensation for electricity generators, the same thing is likely to occur in NSW.

An emissions trading scheme in Australia may see the price of electricity and manufactured goods go up but that is no guarantee that the market will invest in carbon-free alternatives. This is especially the case given that many polluters will get permits for free and others can pass on the extra cost to consumers, some of whom will be compensated by the government for the higher costs. Those not compensated are high income earners, able to afford the higher costs without bothering to change their consumption habits.

Another reason that companies are unlikely to invest in production changes and renewable energy is that the Rudd emissions trading scheme allows companies to buy unlimited offsets from within Australia and overseas. Companies will therefore be able to offset any emissions they do not have permits for, by paying for carbon reductions elsewhere. Offset projects favour cheap and uncertain methods of reducing carbon emissions, such as funding tree plantations, rather than renewable energy projects. This is because renewable energy is more expensive for investors, even though it offers more benefits to the local community and the nation.[22]

Renewable energy will not be encouraged by emissions trading either. Currently electricity generators offer quantities of electricity into the National Electricity Market at a particular price for each time period the next day. If they have to pay for emission permits, their offer price will presumably be higher. The system operator choses the cheapest electricity for supplying the predicted demand for the next day. It will, therefore, only chose electricity generated by renewable energy if it is cheaper or if there isn’t enough other electricity available. For any significant switch to renewable energy, carbon credits have to be expensive enough to make coal and gas-based electricity more expensive than renewable energy. Given the lobbying on the part of industry and the resulting low cap, compensation to coal-powered generators, and availability of offsets, this is unlikely to happen.

In contrast, some nations in Europe have a feed-in tariff for renewable energy, whereby any available renewable energy has to be bought by electricity retailers for a fixed price. This provides the certainty for investors that electricity markets cannot provide, and encourages investment in renewables. As a result, Germany, which has such a system, is now a world leader in wind and solar energy and the costs of producing renewable energy there have fallen dramatically.

Nevertheless there is a limit to what can be achieved in Germany because electricity has been privatised, which precludes direct intervention and investment by government. Consequently renewables still provide only a fraction of Germany’s electricity consumption. The only sure way to ensure that alternatives such as solar and wind energy are more rapidly developed is for government to invest in those alternatives.

A government is able to put environmental considerations ahead of short-term profit when choosing the method of electricity generation in a way that no private company would. Moreover governments are in a better position to research and develop emerging technologies that have great potential to reduce greenhouse gas emissions such as hot rock technology.

It is a pity that the federal government has wasted its stimulus package on shopping vouchers rather than investing in renewable energy so as to set the nation up for the future and provide hundreds of thousands of jobs at the same time.[23] Although private companies have invested in a few token renewable energy plants, only governments, which don’t require high short-term returns on their investments, can make the concerted effort to invest in the sort of technologies necessary to prevent further global warming.

References

1.‘Australia's Greenhouse Gas Emissions’, Canberra, Australian Government, December 2008

2.Ibid. 

3.Sharon Beder, Power Play: The Fight to Control the World's Electricity, Melbourne and New York, Scribe Publications and the New Press, 2003, p. 97.

4.Robert Melnbardis, ‘Power Dergulation Fueled Pollution - NAFTA Agency’, World Environmental News, 19 June, 2002.

5.Donella Meadows, ‘Deregulation in California Didn't Help Consumers, or the Environment’, Grist Magazine, 22 January, 2001, http://www.gristmagazine.com/grist/citizen/citizen012201.stm

6. ‘Annual Energy Outlook 2005’, Energy Information Administration, 2005, http://www.eia.doe.gov/oiaf/aeo/electricity.html

7.The Worldwatch Institute, Vital Signs 2005: The Trends That Are Shaping Our Future, New York, W.W. Norton, 2005.

8.KPMG, ‘Impediments to Investment in Australia's Energy Market: The View of Investors’, Energy Reform Implementation Group (ERIG), November 2006, pp. 13-14, 17.

9.Charlie Higley, ‘Disastrous Deregulation’, Public Citizen, December 2000, p. 5.

10. Electricity Supply Association of Australia cited in ‘Pollution up Down Under’, Earth Island Journal, Spring, 2001, p. 3.

11.Cited in Wendy Frew, ‘Green Millions Squandered’, Sydney Morning Herald, 14 September, 2005, p. 1.

12. Cited in Wendy Frew, ‘It Pays to Pollute in This Trade’, Sydney Morning Herald, 5 June, 2007

13. Frew, ‘Green Millions Squandered, p. 11.

14.Frew, ‘It Pays to Pollute in This Trade’.

15.‘California Passes Strong Renewables Standard’, Environmental News Service, 16 September, 2002.

16.‘Renewable Energy Targets Double: Iemma’, The Age, 9 November, 2006.

17.Sharon Beder, Environmental Principles and Policies, Sydney, UNSW Press, 2006, chapter 10.

18.Julian O'Halloran, ‘Carbon Trade Scheme Is 'Failing'’, BBC File on 4, 5 June, 2007.

19.Fred Pearce, ‘A Most Precious  Commodity’, New Scientist, 8 January, 2005, p. 6.

20.Joseph Dunn, ‘Green Projects Face Carbon Credit Crunch’, The Times, 8 March, 2009.

21.O'Halloran, ‘Carbon Trade Scheme Is "Failing"’.

22. Beder, Environmental Principles and Policies, pp. 180-2, 189-90.

23. ‘Green Gold Rush’, Australian Conservation Foundation and ACTU, 2008, http://www.unionfiles.com/green/Green_Gold%20_Rush_final.pdf