Hazlewood power station in the La Trobe Valley in Victoria

All Australian export businesses have had to cope with a large increase in the Australian dollar. And they didn’t ask for compensation.  So why is a much smaller carbon price such a tragedy? That and other mysteries are ripe for scrutiny, says Alan Pears.

24 March 2011 – Opinion: It has certainly been a wild summer of contrasts, with fires, floods and cyclones causing mayhem. But the Australian government has the solution: a carbon price. In a remarkable decision, energy efficiency and renewable energy programs have been cut to fund repairs.

Does this tell the sustainable energy industry it’s expendable? Does it encourage climate denialists? Does it show that econocrats who believe price signals drive everything are winning in Canberra? Have the pragmatists just tidied up some politically risky programs without thinking about the signals they’re sending? Or is it policy on the run? I’m bemused.

The complexity of carbon pricing impacts was highlighted recently for me, when the NSW government announced it would provide cheap black coal for privatised power stations. Some have suggested that this undermines emission abatement. But it’s not straightforward.

Before this announcement, it seemed likely that global coal price pressures would drive up black coal prices. So black coal plants would face both a carbon price and an increased coal price. Victorian brown coal plants would face only a carbon price impact 30 per cent higher than black coal. So the overall outcome might well have made brown coal power stations cheaper to run than black coal.

At expected carbon prices, they would still be cheaper than gas and renewables at the margin – especially because gas prices are expected to trend towards much higher international prices when LNG export facilities are built on the east coast and compete for local gas. So the NSW government subsidy may undermine the financial viability of higher greenhouse impact brown coal power stations while increasing the financial value of black coal plants.

All Australian export businesses have had to cope with a large increase in the $A exchange rate. This has been a far bigger problem than any carbon price. But how many have received compensation? So why does a smaller environmental cost require generous compensation? There is a double standard here.

The way a carbon price will influence any business, household or government will be complex, because it has to compete with many other powerful forces. It will only be one element of a package of measures needed to deliver effective, equitable outcomes.

Carbon farming Initiative – a step in the right direction?
I am keen to see the Australian government treat voluntary abatement action appropriately by cancelling Kyoto permits to ensure it is “additional” – that is, it should count as global emission reduction instead of just making room under the Kyoto cap for others to emit more.

It has been a challenge to get the government to acknowledge the importance of empowering Australians and mobilising voluntary abatement. So I was fascinated when the government recently announced its carbon farming initiative.

The CFI sets an important precedent: the government will cancel Kyoto permits equivalent to certified additional abatement from activities within Kyoto covered sectors (as well as other activities outside Kyoto) in agriculture and forestry.

All we need now is for them to apply the same approach to sustainable energy and waste management. Then we can get on with serious abatement instead of battling with econocrats.

Building code in hot water?
From May 2011, the new national six star residential building regulations will be introduced – with variations in some states. Plumbing is being integrated into what becomes the national construction code. It will include not only building energy performance requirements, but also requirements on maximum lighting energy capacity and greenhouse gas emissions from hot water systems.

This reflects recognition that, while building envelope performance is uniquely important because of its long life, high upgrade cost, and impacts on health and amenity, other aspects, particularly hot water and lighting, are major contributors to emissions.

Only hot water services that generate less than 100 grams of greenhouse gas per megajoule of heat delivered will be allowed. About eight litres of water heated from 20C to 50C (the legal delivery temperature) absorbs 1 MJ.

Most people interpret this to mean that resistive electric hot water services will not comply, although one bedroom homes and “second” HWS units of 50 litres or less storage capacity are exempted. This will presumably drive households towards gas, LPG, solar-electric (with at least 70 per cent solar contribution), heat pump (with COP of 3 or better), or solar-gas.

While superficially, this looks like a sensible “performance-based” approach to regulation, it creates some issues.

For HWS systems with high fixed losses (eg storage units, shared HW systems, homes with pumped ring mains), a product may meet the requirement at the “standard” daily draw-offs (125 and 200 litres per day). But for water-efficient or small households, fixed losses may push actual average emissions above the 100 gram limit.

The exemption for small electric HWS units is problematic. A large proportion of apartments, units and granny flats have these units, while second HWS units are typically installed in the largest homes, so substantial emissions may result. But there are situations where resistive HWS units can make practical, financial and environmental sense.  Indeed, instantaneous electric HW units can also avoid most standby losses.

We could require overall compliance with the 100 gram limit for appropriate delivered hot water volumes via either on-site technologies or purchase of lifetime renewable energy certificates at the time of HWS purchase.

This would be a comprehensive performance-based approach. The last of these options would encourage growth of the renewable energy industry by removing a lifetime’s worth of RECs from the market today for each HWS, creating scarcity and driving the REC price higher. This is the opposite of past government approaches, issuing lifetime RECs for PV and solar hot water, which drove REC prices down and damaged the broader renewable energy industry.

(Declaration of interest: Through my work at RMIT Centre for Design, I have been working with a developer of an innovative instant electric water heating technology.)

EEO mid-term report
The energy efficiency opportunities program requires large Australian energy users to assess their energy use efficiency and report publicly on identified improvements, and what they do about them. There has been some scepticism about the program: econocrats think energy intensive business is already efficient, while interventionists think you need to mandate action to get results.

But EEO is unusual. It mandates a very thorough assessment process, requires preparation of formal business cases and board sign-off. It makes energy efficiency a corporate and reputation issue.

After two rounds of reporting, cost-effective (ie negative carbon cost) savings of 93 petajoules of energy had been identified (7- 9 million tonnes a year of emissions), of which over half were being implemented and only 10 per cent were not to be pursued. Overall, savings of over 8 per cent of assessed energy use have been identified.

A survey showed that the percentage of firms with good documentation and analysis of energy use had risen from 20 per cent to 60 per cent. Existence of barriers to energy efficiency declined markedly.

Having no-one responsible fell from 45 per cent to under 5 per cent while lack of senior management engagement fell from 32 per cent to 12 per cent.  At the same time, most of the measures identified and implemented delivered payback periods of under two years: so there are still lots of negative cost abatement options to be found.

This is very exciting. It shows that there are real barriers to energy efficiency, even in supposedly efficient energy intensive industries, and that carefully designed programs can change corporate culture and deliver significant outcomes.

This is based on an article first published in Alternative Technology Association’s magazine ReNew February, 2011

Alan Pears is  Adjunct Professor at RMIT and is co-director of consultancy Sustainable Solutions

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