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Working paper

Will a contract make the difference? Government policy and new coal power stations

Greenhouse gas mitigation Power resources Coal Energy industries Energy Carbon emissions Electricity demand Renewable Energy Target

The recently released Finkel Review of energy security has been welcomed by most observers as a blueprint for reform to deliver a more affordable, reliable and clean National Electricity Market. But while the review’s recommendations are wide-ranging, one recommendation in particular has dominated nearly all discussion: a ‘Clean Energy Target’ (CET), which would provide incentives for new low-emissions electricity generation of any technology. There are three broad viewpoints:

· A CET is a workable, investable, reasonably efficient approach to get new generation into the electricity system and reduce emissions – though there are important arguments to be had about crucial design decisions, like the ambition of the targets or the treatment of trade exposed industry;

· A CET is a poor substitute for other policies, like an Emissions Intensity Scheme or an Emissions Trading Scheme, that may have lower economic costs, sharper incentives for emitters or energy users, or be more investable;

· A CET may be workable for new renewable or gas investment, but provides inadequate incentives for new coal generation; a complementary policy is needed to support new coal generation through long term contracts.

This working paper focusses on the approach suggested in the third viewpoint above: what would a contract policy to bring in new coal fired generators look like? What would be its costs to government and its wider effects? Should Australia adopt such a policy?

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