Australia faces double shock on electricity prices: Kohler

It’s hardly a surprise that the G20 finance ministers did not agree to splash cash on developing nations to help get a climate change treaty across the line in Copenhagen in a month’s time. Their bosses, the prime ministers and presidents, won’t agree next month either.

The full horror of imposing a serious emissions trading scheme on their own industries, at the same time as compensating the world’s developing nations for doing the same thing, while also ‘exiting’ from fiscal stimulus, is dawning on them.

Copenhagen is an excruciating dilemma for western political leaders, and the last stand for industries in the West that use a lot of electricity.

Most citizens want something done about global warming, but developing nations have decided this is their big chance to get ahead.

To get a deal on climate change – not just next month, but ever – energy costs in the West will have to rise more than in emerging nations.

The only question now is whether this will be borne only by energy-intensive industries and their employees or by the whole community through taxes.

That is, it’s about whether countries like Australia tax their industries with an emissions trading scheme while their competitors in China and India don’t, or whether there is an equal global ETS that uses cash transfers between countries – financed by taxes – to lower the burden on emerging nations.

The fact is those emerging nations can’t be forced to introduce emissions trading – only coaxed and bribed to do it. If they don’t, and we do, there will be a massive transfer of employment to their businesses from ours.

The only way around this, it seems, is cash transfers from developed to developing nations, financed by taxes.

That is what’s at stake for us in Copenhagen: higher taxes or higher unemployment – or, of course, a global weather disaster.

The extent of the disadvantage for trade-exposed industries in this country was contained in the report on infrastructure produced two weeks ago for the Business Council of Australia by Rod Sims of Port Jackson Partners, but then widely ignored – including by the BCA.

It predicted that Australian electricity prices will double in five years.

That chapter of the BCA report has gone completely unnoticed. It was based on an earlier report from another Port Jackson Partners principal, Edwin O’Young, also unnoticed at the time, which calculated that the average electricity prices would increase from 11.1 cents per kilowatt-hour now to 21.5 cents in 2015.

The proposed Carbon Pollution Reduction Scheme is about half of the reason for this increase, the rest is due to the massive capital expenditure required on networks, partly to reverse past under-investment and partly to connect to new generators (only some of which would be shared with other countries).

Edwin O’Young predicts a doubling of the wholesale electricity price from 5c/KWh to 10c in 2015 for four reasons: the CPRS, rising gas prices, rising coal prices, and generators holding back investment because of the uncertainty.

Network charges are expected to rise from 4.3c/KWh to 9c by 2015 to pay for new capital expenditures, especially in NSW. Regulators have recently approved an 80% increase in capital investment in NSW distribution networks and an 88% increase in allowable revenue caps.

In addition, says O’Young, “there will be significant transmission costs required to connect new remote renewable technologies such as wind and geothermal”.

Even if the BCA’s report is even half right, it is a nightmare for Australian companies: energy intensive trade exposed industries (that is, most of them) pay about 20% of their costs on electricity, on average.

Those businesses will be wiped out if their foreign competitors in developing nations electricity costs do not also go up.

The problem is worse for Australia because so much of our power comes from coal and because NSW, in particular, has been under-investing in electricity networks.

This article first appeared on Business Spectator.