Warren Buffet’s investing in electric cars, but can we afford to power them? Kohler

Any doubt that we are heading for a global boom in electric cars should be dispelled by Andrew Simpson’s fascinating article in Business Spectator this morning.

Yesterday, the Hong Kong listed shares of Chinese electric car maker BYD surged 8% (as the Chinese market was dumped 7%) on reports that Warren Buffett is planning to increase his 10% stake in the firm. BYD now says it will start selling its all-electric vehicles in the United States next year, a year ahead of schedule.

Dr Simpson’s modelling (and he is, admittedly, an enthusiast) shows that the total running cost of an electric car over its life is about half that of a petrol engine car, and that doesn’t include the lower maintenance costs.

The US provides a tax credit of $US7,500 for each electric car to soften the higher capital cost, and power utilities in the US are offering discounted tariffs for electric vehicles that use off-peak power.

As I wrote a fortnight ago, the coming boom in electric cars will lead to another surge in electricity consumption, similar to that which has occurred as a result of the boom in household air conditioning. However, unlike air conditioning the power consumption of electric cars will happen mostly during off-peak times.

In my view this puts much more pressure on Australia to move away more quickly from coal-fired power generation than the current CPRS would achieve – which, in turn, means converting the Latrobe Valley generators from brown coal to gas.

Yesterday, the business development manager of Hazelwood Power Station in the Latrobe Valley, Simon Klapish, argued that this would lead to a big increase in the price of gas and, presumably, electricity.

Klapish was pretty hard-hitting: “Unfortunately politicians on both sides of the fence are too dumb to understand the basic economics of this. Those that do understand it, such as John Brumby, are being ignored in Canberra by Labor zealots and Liberal weaklings too afraid of a double dissolution election rather than standing up for what makes sense. Meanwhile the public is being sold down the river…”

The other point Klapish made is that the Latrobe Valley power stations don’t actually get compensation under the Government’s CPRS – they simply get let off $3.9 billion of the $10 billion cash they will have to pay for permits – “hardly compensation”.

Another of the Latrobe Valley generators, Truenergy’s Richard McIndoe, has been warning that the five year time limit for this compensation, or whatever you call it, will lead to a lack of investment in maintenance by their owners, leading to power shortages.

Klapish agrees (“if CPRS comes, then the lights will go out or flicker”), although the Latrobe Valley doesn’t entirely speak with one voice. A week ago I interviewed Michael Fraser of AGL Energy, which owns a third of Loy Yang A, and he said: “Loy Yang certainly won’t be running down its maintenance”.

The reason I think it makes sense to convert the Latrobe Valley to gas is that a lot of the infrastructure, and the gas, is already there.

The usual cost of building a greenfields combined cycle gas turbine (CCGT) base load power station is $1.3 million per megawatt hour (MWh). The Latrobe Valley’s capacity is roughly 6000 MWh; to replace that with new greenfields CCGT would therefore cost close to $8 billion.

Bruce Mountain of Carbon Market Economics estimates that converting Victoria’s brown coal generators to gas would cost around $1 million per MWh, a saving of nearly $2 billion against the cost of building that much capacity in new gas-fired base load.

He also says there is roughly 5,000 petajoules of P2 (probable) gas reserves in the Bass Strait, which would fire 6,000 MWh of electricity generation for “decades”.

The key challenge for Australia in reducing carbon emissions is to move away from its reliance on high-emission coal generation for base load power – it is not to build wind generation for peaking capacity, which is the only law that has so far managed to get through parliament.

The base load power challenge is becoming even more urgent with the coming boom in electric cars, which will mostly recharge during off-peak times and will therefore use coal exclusively (and, ironically, very profitably for the generators).

At the moment the coal generators are hoping to be saved by carbon capture and storage technology, while the brown coal generators in the Latrobe Valley are also desperately working on processes to dry out their coal.

This is all pie in the sky. Researchers have been attempting to economically store carbon emissions from coal generation and to remove the water from brown coal for many years, but don’t seem to be any closer. And even if they hit on the solution, it would be very expensive – probably more expensive than the cost of gas conversion and then using gas as the input.

The fundamental problem is that the international companies that bought the Latrobe Valley generators from the Victorian Government during the 1990s not only bought the plant, they also bought adjacent brown coal mines with hundreds of years of reserves in them.

And while the above-ground equipment could be converted to gas and re-used, the mines would have to be closed and written off.

That’s why the Federal Government CPRS compensation schemes should focus on helping those companies that paid the cash to rescue Victoria from being the nation’s basket case, to deal with the fact that the brown coal they bought is no longer worth what they paid.

The mines have to be closed and their value written off because of Government policy. Australia benefited from the money that was paid for these mines not much more than a decade ago. They should be compensated.

But the current compensation scheme actually pays them to keep brown coal mines open, for fear of flickering lights. More on this another day.

This article first appeared on Business Spectator.