THE security of electricity supplies would be at risk and power prices would be likely to rise under a carbon price if assistance measures failed to prevent the financial collapse of coal-fired generators, a report has warned.
A tax on carbon emissions could undermine investments in new low-emissions generation, if the viability of generators was undermined, according to a confidential report by investment bank Morgan Stanley.
The report warns that energy retailers could face higher costs and increased financial risks.
It found it was possible that the introduction of a carbon price – given that it was a radical change in the cost structure of the entire generation sector – could result in some unpredictable shifts in electricity prices, as it could alter the behaviour of electricity generators bidding into the national electricity market.
The Morgan Stanley review, which was conducted in 2009 as the government developed its compensation package for Kevin Rudd’s carbon pollution reduction scheme, has never before been released because electricity generators threw open their books to the investment bank for the analysis.
A summary of the report, prepared by the Department of Climate Change and obtained by The Australian, was circulated to generators this week for the first time.
The generators had demanded the information as they continued their talks on an adjustment package for Julia Gillard’s carbon pricing plan, which is being negotiated with the Greens and the rural independents.
The report is relevant to the current negotiations because the government has made clear the CPRS is being used as the foundation for the new negotiations.
The report will intensify calls from coal-fired power stations, particularly the brown coal-fired Victorian generators, for financial assistance. It underlines the difficulties facing the multi-party climate change committee as it negotiates the final details of the carbon package. The government will need a concession from the Greens, who have opposed providing financial assistance to coal-fired power stations, if it is to be able to offer a package to the coal-fired power stations.
The Morgan Stanley summary emerged as business groups continued to eye a campaign against the carbon tax.
The Australian Coal Association has been sounding out advertising agencies as it examines a potential advertising campaign against the carbon tax.
The Australian understands other business groups are also considering the move.
Electricity generators are due to meet the government again today before the Prime Minister’s multi-party climate change committee’s weekend of negotiations on the details of the package.
The Morgan Stanley report – which modelled the impact of a carbon price on the Victorian plants of Hazelwood, Yallourn, Loy Yang A, Loy Yang B, South Australia’s Flinders and Millmerran in Queensland – identified three primary risks to the operation of energy markets under a carbon pricing regime.
It warned of “physical threats to system security”, weakened investor confidence and disruptions to normal operations in energy-contracting markets.
On the threats to the electricity supply, the Morgan Stanley report said “physical supply reliability could be affected by unco-ordinated plans across the market for the withdrawal of large amounts of generation capacity potentially in advance of when new generation capacity might be available”.
It said there was potential for a steady decline in reliability if financially distressed power stations reduced maintenance, either because they were in the hands of their lenders or faced with investment difficulties for assets with uncertain economic lives.
The report also warned that significant reductions in asset values in a concentrated sector of the generation market “may make investors less willing and able to invest in new low-emissions generation and dissuade other investors (particularly foreign investors) from providing capital to provide such new investments”.
“Such an outcome could jeopardise Australia’s medium- to long-term energy security by delaying critical investments,” Morgan Stanley found.
The ability of power stations to pass on the carbon cost would depend on whether there was unutilised capacity in the market.
“If this spare capacity is able to be ramped up, then higher-emissions generators would have difficulty passing their full carbon costs through as lower-emissions generators will be able to profitably increase their output,” Morgan Stanley found.
Generators might also be unable to pass on carbon costs if demand for power fell because of the higher electricity prices.
More rapid deployment of low-emissions technology would also lead to a lower carbon price pass-through.
And the closure of existing power plants could force up prices, the report said.
“As existing capacity is retired, the balance of supply and demand will tighten, which may lead to higher market prices and higher pass-through factors for the remaining plant for a period of time,” it said.
The report said higher gas prices would require higher levels of carbon price to ensure the long-run marginal cost of new gas-fired generation was competitive with the short-run marginal cost of existing coal-fired generation.