Funding Australia’s move to renewable energies

In 2006 it appears as though the global warming message is finally making some headway in Australia. Every other day mainstream media leads with cautionary tales that project the consequences of unchanged behaviour, while at the same time politicians are falling over themselves to announce the latest climate-friendly policies.

The need for cleaner, greener power is no longer debatable. Instead the issue has become how to make the switch. Given embracing renewable energies will require a massive investment in infrastructure, the major question for Australia (and the world) is one of funding.

The fundamental problem is that relying on traditional energy market forces to provide the necessary investment will not work, because the infrastructure for energy from renewable resources costs more than the infrastructure required for the burning of fossil fuel. This is because energy from fossil fuels requires less capital to establish while the running costs are about the same or similar to the major renewable alternatives such as wind, solar, or geothermal plants.

The other reason is that the infrastructure of petrol stations, cars, power stations and electricity grids all exist and are tuned to the burning of fossil fuels. Obtaining the required investment to shift to fuels that produce less greenhouse gases is a massive task.

Let us make the assumption that we have no choice and we must change. Who is to finance such a change and who is going to own the infrastructure that is created? At present the thinking is that funding will come from general taxation and or a carbon tax, while ownership of infrastructure will be left to those organisations that can persuade governments that they have worthwhile projects.

Neither of these approaches is viable for the enormous investment required. The first because people are loathe to pay taxes and the second because markets are better than edicts at picking winners.

Instead, the funds required should come from the users of all products that generate greenhouse gases as a by-product and who cause the problem. There are numerous sources of greenhouse gases that are not yet held accountable for their contributions to the global warming problem. For example, the 2003 National Greenhouse Gas Inventory by the National Greenhouse Office reported that Australia’s livestock industries accounted for 12 per cent of the net national greenhouse gas emissions. It is time for everyone playing a role in greenhouse gas production to work towards solving the issue.

Similarly, ownership of the infrastructure could belong to those organisations and people who supply the funds. Thus instead of creating a tax on carbon let us include a fee within the overall product price that reflects the cost of the greenhouse gas emissions generated.

Let’s make it mandatory that every carbon emitting product or service sold on the market be bundled with a Greenhouse Rehabilitation Investment (GRI) as part of the overall purchase price. GRIs will quickly be dispersed into the broader population, as consumers acquire GRIs with almost every energy purchase.

Greenhouse Rehabilitation Investments

A form of investment bond, the GRIs are special funds that can generate financial returns for owners, but may only be used to invest in processes that reduce greenhouse gas or that generate energy without greenhouse gas emissions. As GRIs accumulate among the population, Australia will create a ready source of investment funds at the same time as fostering a market for technologies that reduce greenhouse gas emissions.

Given that the GRI approach will work, the next step is to establish how long we have to reduce emissions (and perhaps even take greenhouse gases from the atmosphere). Once this has been determined, we then have to work out how much investment is required to achieve the goal for Australia.

Australians consume about 70,000 kilowatt hours (kWh) per person per year. For simplicity but to get an idea of the magnitude of the problem let us assume that all energy is electrical energy.

The present per person production and capital costs to produce this amount of electrical energy equates to approximately $3,500 or 5 cents per kWh. Governments, through GST, resource taxes, profit taxes and land taxes collect at least 5 cents per kWh in taxes. There is a further cost of distribution and profit for energy retailers. Let us either use existing taxes or add 5 cents per kWh to the cost of energy. This money should then be given back to the energy consumer as a GRI voucher, with the restriction that the GRI may only be spent as an investment in renewable energy infrastructure.

Rather than the consumption tax proposed under current thinking, the GRIs become a compulsory investment savings scheme, not unlike Australia’s superannuation scheme. Let us make this $3,500 per year per person which equates to approximately $70 billion per year which would be available immediately for investment in renewable energy. The GRI charge placed on products or services would be calculated in terms of carbon emissions and would increase over time so as to keep the total investment dollars available for renewables and to accelerate the rate of change to clean coal technologies.

How can we invest GRIs

The following are very rough estimates but give the scale of the solution.

PacHydro estimates it will cost $600 million to build a 200 megawatt geothermal power station. If this operated for a full year at 80 per cent capacity, the capital cost to produce a watt would be approximately $3.75. Thus the capital to produce 70,000kwh over one year can be expressed as:

Capital cost = (total kWh / the number of hours in the year) x cost per kW

In the case of PacHydro, this equation works out to be approximately $30,000 or 8.5 years at $3,500 per year.

The cost of wind power is less per kilowatt than geothermal sources, but wind stations average only 40 per cent capacity. Using the above equation, this means the capital cost to produce 70,000 kWh is roughly $40,000 or 11 years.

The cost of the Victorian Solar Power Station is $450 million for a capacity of 154 megawatts. However, because solar only runs for one third of the time, this gives a capital cost of $80,000 or 22 years.

The other way to generate green power is to burn coal cleanly, using ways that remove carbon before it gets to the atmosphere. This technology is likely to double the cost of coal fired power stations. If retrofitted to existing stations, the cost is likely to be $100 million per 100 megawatts, equating to a $10,000 investment per person, which would be paid in about three years.

Investment in solar hot water systems gives a return of about four years.

Given that through GRIs there will be massive amounts of funds seeking investment opportunities, it is inevitable that the market will respond, creating schemes and technologies offering some form of return, particularly if the GRIs do not earn interest making it in the best interests of owners of GRIs to invest now rather than wait for greater returns in the future.

But isn’t this just another tax?

The point about the proposal is that it is NOT a tax but it is tagged money that has to be used for a particular purpose. The GRIs can be sold on the open market and it is expected that there will be a ready market where people will buy the GRIs at a discount. Companies that want to be seen to be green will allow GRIs to be used to purchase other goods. For example, airlines like Virgin and Qantas will permit the use of GRIs to purchase airline tickets as a promotional tool. We can also expect the government to purchase GRIs directly from pensioners and others who would find the extra cost of energy too high.

Sooner or later GRIs have to be spent on investing in greenhouse abatement measures so it does not matter that they can be treated like a currency but without any interest for saving them.

The system means that consumers who did not want to bother with investing in renewables could get up to 100 per cent value from the GRIs that they had to purchase.

Won’t it cost too much?

Modern technology means that the cost of administering the system will be low. It can be expected that the total cost will be less than 0.5 per cent turnover.

Immediate and acceptable

This approach is likely to be politically acceptable and will achieve the desired result - a decrease in greenhouse gas emissions at the same time as funding a renewable energy infrastructure. It can be implemented immediately. It will not have dire economic consequences and in fact is likely to bolster market activity, as the money from GRIs will be invested locally and will lead to technologies that can be sold to other countries.

The system can be easily tuned by changing the size of GRIs charged for each ton of greenhouse gas emitted. The figures we have used are likely to add an average 30 per cent to the cost of all energy that produces greenhouse gases as a byproduct.

Investment in replacement technologies will be market driven not ideologically driven as people will tend to invest in the technologies that give the best economic return.

The direct economic effect will be the difference in the economic value of greenhouse abatement technologies versus investment in other areas. This will be substantial but given the assumption that we have no choice, it is something we have to do.