Two birds, one little black rock

2 Dec 2015

Outlines a solution to the twin problems of incentives for retirement of coal fired generation and funding rehabilitation liabilities.

The cost to rehabilitate sites used for coal mines and coal fired power stations are large, lack transparency and are under provided for by these industries. An inquiry into the 2014 Hazelwood fire found estimated rehabilitation costs for the aging Victorian mine and power station at $100 million. In general, the rehabilitation bonds that companies pay are far too low to cover these costs – the Hazelwood owners have posted a bond of just $15 million.

Perversely, it is the cost of the clean-up that is prolonging the life of some mines and generators. The oldest power stations stay in operation well past their intended life. They remain operating not to make money – they often run at a loss – but to defer and avoid their rehabilitation costs. The result is excess capacity of coal fired generation delaying a transition to cleaner energy sources. In the meantime, communities and the environment bear the costs – the health impacts of the Hazelwood fire caused the partial evacuation of the town of Morwell.

Worse still, as coal companies and coal fired generators are facing difficult economic conditions, there is an increasing risk that governments and taxpayers will be left with these liabilities. Rehabilitation costs that once seemed small compared to the value of these companies are now serious liabilities. Coal major Peabody Energy, for example has lost over 95 per cent of its capital value since 2011 and has US$2.5 billion of rehabilitation liabilities across its Australian and American mines.

Policies to address these two issues must be implemented. First, incentives need to be provided to the owners of inefficient power stations to exit the industry in an orderly and planned manner and get on with cleaning up their sites. Second, the costs of providing these incentives and of covering unfunded rehabilitation need to be secured. A solution can be found through the following policy mechanism.

1) Australian governments should impose a site remediation levy on all Australian coal. A levy of $0.50 per tonne would generate over $200 million per year.

2) AEMO data should be used to identify the amount of coal fired generation capacity that could be retired without imposing risks to the stability of electricity supply in each jurisdiction.

3) The funds collected from the site remediation levy should be directed into a fund to contribute to the costs of remediating power station sites. For example, this amount could contribute to the difference between the actual cost of rehabilitation and the amount currently held as a bond.

4) The funds should be distributed through a reverse auction, where generators compete as to which would accept the smallest rehabilitation subsidy to exit the industry. The auction should continue until the funds for each State have been spent or the identified capacity of coal fired generation capacity to be retired has been reached.

The policy could be extended by phasing in a fee for leaving mines and power stations mothballed for long periods. Increasing fees depending on how long an asset is in care and maintenance would provide incentive to either restart production or begin closure as well as raising money for the remediation fund.

This approach would reduce the substantial risk to taxpayers and communities of mines being left inadequately rehabilitated. It would also create jobs – rehabilitation is more labour intensive than mining or power generation - as well as reduce greenhouse gas emissions by retiring some of Australia’s dirtiest generation. The scheme would be simple to administer and easy to introduce.

Costs would be borne by coal mine owners. Importantly, if previous and current mine owners had made adequate provisions for site remediation such a levy would not be necessary. The levy simply ensures that mine owners, not Australian taxpayers, meet the cost of remediating coal sites.

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