What the forum participants said

13 Oct 2009Archived News Energetics in the News

PUBLISHED: The Deal Magazine - Jonathan Jutsen, Executive Director and Founder recently spoke at the IBM Smart Business Series forum, the following is the transcript.

KERRY SCHOTT: The water industry generally doesn't have any climate change sceptics in it and would argue that we've spent 10 years wasting our time listening to people who are leading the debate astray.

We're seeing now this winter very high temperatures and we're seeing in our catchments temperatures that are already a couple of degrees higher which means more evaporation, less run off.
All across the south of Australia, the problems that Melbourne is having with water, that Adelaide is having with water, that Perth had first with water, it's all related to quite embedded already climate change and it really is extremely serious.

So our position is to get a trading scheme in quickly. Let's get the skeletons of it sorted out and then there's going to be refinements along the way.

For Sydney Water itself, it's going to put our costs up by about $22 million a year if carbon is about say $23 a tonne - out of an operating cost budget of $700 million, so it's 2 or 3 per cent increase in costs.
We do have a policy to be carbon neutral by 2020. We're big power users and that's largely from pumping water and sewerage around, it is very heavy.

The desalination plant uses about 400 gigawatt an hour also but that's been powered by wind turbines at Bungendore.
Sydney Water itself is generating about 20 per cent of its own power through biogas and methane gas generation at sewerage treatment plans.

JULIAN SEGAL: From Caltex's point of view, we do support an emission trading scheme of some kind as a tool to reduce emissions of greenhouse gases and that's the understanding that I've got from the CPRS, that the government is suggesting.

However, the CPRS, in the form it is today I believe is flawed from two points of view, one of them it's clearly affecting our competitiveness in our refineries. We need about two and a half million tonnes of carbon dioxide in two refineries, that's 4 per cent of carbon emissions in Australia.

By imposing a cost on those emissions, a cost that is not imposed on any of our competitors in the region, it's simply putting us at a disadvantage which means that we will not be able to invest in these refineries, which means that in time Australia is going to left without refinery facilities.

Another interesting part that is affecting Caltex is the fact that we have to levy this cost on behalf of our customers. According to the CPRS, for the first few years the government is going to accept the increased cost by reducing the fuel excise. In fact it will be reduced by more than the cost and therefore you'll have an incentive to buy more petrol and burn more petrol.

The reality is it the earliest you are going to see a positive impact will be 2025. In the meantime the economy is going to churn $20 billion worth the permits. Now I'm sure the bankers are rubbing their hands but how the emissions are going to benefit out of this, I have no idea.

GLENDA KORPORAAL: what are the major flaws in the legislation?

DAVID KNOX: The emitters have to be able to pass the costs on to the end users who then make the decision whether they are willing to use that or whether they wish to use less or whatever. If you don't have that, then of course there’s no result in reduction.

SEGAL: If we are going to say this scheme is about reducing gases, we need to be genuine about it and there are many ways to do that. One of them is to encourage the technologies.

But if all that you are going to do is to push, for example, manufacturing to the manufacturing powerhouse of the world which is China today … all that you are doing is taking care of your emissions here in Australia but you are buying a pump that is coming from China. Well, in making that pump you actually emitted carbon dioxide. Have you taken that into account?

JONATHAN JUTSEN: what we'd like to see is a consistent policy structure which says our aim is to reduce carbon emissions at the lowest cost to the economy, and then have a cost of mitigation curve that we'll gradually work our way through the lowest cost opportunities first before we start getting up the curve.

If you have a look at the cost effectiveness, there is virtually no incentive for large businesses, manufacturing, mining, to improve their energy efficiency and reduce emissions, whereas there is $4.5 billion going into residential insulation.

We have a real problem about the lack of a consistent framework for trying to mitigate carbon emissions as rapidly as possible, as cost effectively as possible. There doesn't seem to be any sort of underlying structure by which policies are being delivered for that.

JUTSEN: The sort of carbon pricing we're talking about is far from adequate to drive major changes in energy efficiencies across the economy. You've got to do a whole bunch of other things as well, both regulatory and incentives.

If you have a look the $23 a tonne, or even $50 a tonne, we're talking about an equivalent of the sort of price increases we see quite regularly in our energy supply system, and they're not enough because there's a fairly high inelasticity in energy use. They're not enough by themselves to drive major and rapid changes in carbon emissions. So you have to do other things as well and we're not doing them yet.

SHEPHERD: If you shield the consumer from the impact of it, don't even bother: It's the Australian magic pudding concept. You know, the pudding will just keep growing and it's a government that wants to go down this path but hasn't got the nerve to tell the consumer what the impact is. The consumer is us, it's not big business, it's not the manufacturers, it's the people at the end of the queue who are the ones that are going to have to pay. If we think we can go through this reducing our carbon imprint significantly without any impact on the consumer we're fooling ourselves. And the government has bitten off on this. It's convenient to attack the polluters, these people who bought power stations off the government over the last 20 years, convenient to attack them, and the aluminium producers and the fuel producers. .

But really, the problem is, is the consumer prepared to pay two or three times the cost of their electricity?

KORPORAAL: What you're saying is it's important that the government educate the public and to say ‘this is going to cost you’.

SEGAL: It's more than education. You look at the global financial crises, it's a complex thing. To try to explain it in a sound byte on television for 20 seconds, it doesn't work.

SCHOTT: In water, in Sydney we've saved 24 per cent through water efficient things like aerated taps and dual flush toilets. The electricity utilities have done very little in households and right across the country we're blessed with grossly inefficient water heaters. They use a whole lot of power and if they were replaced by more efficient water heaters, it sound crazy but it would make a huge difference. There's no incentive.

JUTSEN: They are planning to ban electric resistance water storage heaters. There are fairly substantial incentives for solar water heaters now.

KNOX: You've got to get energy efficiency, transportation, power generation, dare I say nuclear, et cetera. You've got to tackle all these things if we've got any chance of getting the world's emissions down to stabilising at 2 degrees centigrade.

SHEPHERD: Coal, in its current form, even with the leading edge technology, is finished. That means to replace and assuming that we don't grow very much any more in terms of electricity consumption, we'll probably need to invest in the order of $30 billion in new generation to replace it.

So again that transition is vital. But I don't think people appreciate the day that this bill becomes law, coal generation of the form that we have in Australia now, is finished.

KORPORAAL: Clean coal, is that going to work?

SHEPHERD: If clean coal works, it will, and that will be part of the $30 billion that we'll need to invest in the new technology.

JUTSEN: we're already seeing a rapid escalation in energy prices as we start going towards global parity in natural gas, for example. The problem that we've got as an economy is we've built our houses and our infrastructure around the fact that we had very low cost energy and we have an inherited, long term energy efficiency deficit compared to the rest of the OECD.

So as we start going rapidly to high carbon prices, parity pricing on natural gas and low carbon fuels, then all of a sudden we start to recognise we've got a competitive disadvantage on energy.

KORPORAAL: how much of an answer is desalination?

SCHOTT: Well, in the southern part of the country, leaving Tasmania aside, every city now is putting desalination in. In Perth the reliance of desalinated water will be well over 50 per cent shortly and they no longer are going to factor in a dependence on any dam water whatsoever. Adelaide is reliant on trying to get some water from irrigators down the Murray, which hasn't been such a successful strategy. Their desalinated water plant will provide quite a large proportion of their water too.

In Melbourne they're going to build that new plant so it can supply a little more than what they will initially put in. In Sydney the catchments are a little different. The coastal dams which are relatively small and which were built at the start of the last century, tend to fill reasonably easy. The big dam, Warragamba, which supplies about 75 per cent of Sydney's water, I doubt it will fill again in my lifetime.

KORPORAAL: What about black water harvesting?

SCHOTT: We're actually doing that in the building at Parramatta. Brookfield Multiplex built this water efficient building for us and this is more and more happening in Sydney. There's a little black water recycling plant in the basement and it's used for toilet flushing and non potable use in the building and it's fine. They're very efficient little plants.

SHEPHERD: No problems?

SCHOTT: No, it's a little GE plant and it's about a quarter the size of this room but it's a real goer.

SHEPHERD: We should just make that in the building code.

SCHOTT: Yes, it is coming, but it gets back to price signals again. As water prices go up, it makes these things more cost effective.

SEGAL: listening to this discussion really makes me wonder what is the role and balance between free markets, and we like the free market and put a lot of faith into it, but my view is there's a role for government in this because there are some decisions where the market is not the best actually.

There was a time where it was right to have a rice growing industry in Australia, The question for the government, not for the market, (is) is this alright in today's climate? If it isn't, how do you compensate these people - then you unlock a really big solution into this issue. But the free market is not going to do that.

JUTSEN: Regulation has become a dirty word but the reality is that regulation has a role and can sometimes provide a very economically efficient outcome.

This is what turned me around. About 30 years ago we started putting in place incentives, well not incentives, regulation and labelling on refrigerators and white goods. There was a huge argument back then between the economists and some of the policy people about whether they should just have standards or whether they should have labelling and information. The economists said it should only be education and information and then let the consumers make their decision and if you don't do that you're making it more expensive for some consumers that can't afford it.

We ended up regulating. So we got rid of the worst performing refrigerators. The irony was it was a very low cost project to implement. Because it was implemented nationally, it actually simplified the manufacturers' lives because there was a standard baseline right across the economy. There was less dumping of product onto the market.

In California and in Europe now, they're bringing in regulations to require new housing developments to have zero net energy. It's driving an enormous amount of innovation because once you've set a regulation like that in your planning code, people have to think of market solutions to achieve this outcome.

KORPORAAL: Everyone seems to agree there is some carbon trading or some scheme should be introduced but do we wait till we get it right or do we just get going on it?

SHEPHERD: I'm not for unnecessary procrastination, but I think it's important we get it right.

SEGAL: I agree. It's the first time we're doing it, we're going to learn and improve in time. There are certain issues that are obvious to everyone here. We don't agree on everything but I think we do agree there are some fundamental issues like make sure the consumer pays, otherwise they're not going to do anything.

SEGAL: I'm sure the government understands that, I sure the opposition understands that, so we just need to get beyond the politics. I don't think we lack intelligence in this country.

KNOX: Once the scheme is in place, once others are coming on board, you can turn the dial up. But nothing in my mind suggests we shouldn't start to move forward.

It's extremely important that we do because otherwise we run the risk of a lack of investment into critical pieces of infrastructure. That's not a strong place to be, Australia's economy does depend on basically stable supplies of reasonably priced energy and if people stop to invest in that because they're uncertain about a scheme, then that's actually going to be very unsuccessful. So they should get the scheme in place, a reasonable soft start, make sure it's designed so it can dovetail into global schemes and then move forward.

SCHOTT: One of the things that Infrastructure Australia spoke about over the course of the last year was the electricity grid from a national point of view and how it's really a carbon grid, it's structured around the big carbon based generators, and if we're moving to a world where we're going to have more gas generation and more geothermal and wind, we need to have the grid where it needs to be because it's not near our renewable sources.

GEORGE: None of our wind farms have an element of the grid nearby. Everyone single one of them has required a new part of the grid to be put in. So none of the renewables are where transmission is.

SCHOTT: Or geothermal.

GEORGE: In terms of the regular links between the states, the connection between Victoria and NSW in electricity transmission as a pro rata is far less than the connection between east and west Germany at the height of the cold war. So the reason that we have this vast investment in coal fired generation in all the states is state parochialism which is a disaster. Efficiency of capital is just as important, we really need to vastly strengthen the grid between the states on the east coast.

KNOX: We have to start to consider not building any more coal fired plants, replacing them with gas fired plants, and we could argue that that would actually be Australia's next comparative advantage in energy.

JUTSEN: Gas is going to become an increasingly scarce resource globally in terms of competition, and more expensive. We should be planning to use as much co generation as possible and we are grossly under invested in co generation. We are one of the lowest users of co generation in the world.

KNOX: Highly carbon resources are the things you should use valuably. The fact that Julian sells hydrocarbon for far less than you can buy a bottle of Coke seems fairly extraordinary. When it comes to gas in Australia, we're again the lucky country, we've got an awful lot of gas. So again we've got a real comparative advantage that we can use it for. It's not carbon free, it's just lower footprint, and when you combine it with a good renewable system you can switch it on quickly when the renewables aren't around. And it will give us a parity.

We should just grasp it and go or for it and get on with it. To sell hydrocarbon which is probably 40 or 50 million years old, for less than we sell a bottle of water is fairly extraordinary.

GEORGE: It's very encouraging that a group which such diverse interests as this really has consensus around the CPRS and also the need to act early. So hopefully we can get that message through to our politicians.

KORPORAAL: Who provides the incentive for people to have the smart meters in their homes?

SCHOTT: We're just going to a trial of smart meters with Energy Australia. For a water utility, it really doesn't make much sense because the cost element is just not there, but doing it with an electricity utility makes a lot of sense. Then we've got them in 300,000 homes in Sydney so it will be interesting to see what comes out of that. But the general principle here is if you can't measure it, you can't manage it, and that works.

SHEPHERD: Yes, it works. We're finding our whole sustainability policy across everything we use from photocopying through to gasoline is actually reducing our cost base. It's adding to our efficiency. We're reducing the number of vehicles we've got, the amount of petrol we consume, and it's having an impact on everything we do.

JUTSEN: We've been working with a large number of big companies like Woolworths over the last few years to implement a major carbon mitigation program in the company and the thing that companies are finding when they go down this route, they're saving money.

Our fossil fuel energy consumption has been increasing on average 2.3 per cent per annum for the last decade. So just saying we've got agreement to have a mandated reduction in our energy consumption and our carbon emissions year on through to 2020, through to 2050, that's very important symbolically. It's not just the trading scheme.

My concern is we don't have any requirements to invest in efficiency first, that a lot of the investment that's going on in infrastructure may be in stranded assets. This is a real concern.
In NSW there's a plan to invest $18 billion in new infrastructure within the transmission distribution side. A lot of our customers have faced very substantial and unexpected increases in their network charges. Some instances up to 55 per cent at two weeks' notice, and to build infrastructure which again we have no assurance will not be stranded assets.

SHEPHERD: What about gas, David, are you happy that the pipeline network can carry us through to the future?

KNOX: I'm sure it will need to be expanded as the whole industry picks up but I would anticipate that in order to move away from coal fired production and combine it with renewables, it will happen over time. We're talking 20 or 30 years so a gradual retirement of the coal fired station as they come to the end of their life.

SEGAL: we can't just look at what we do here. Yes, we are in control of what we do but we need to make sure that others come to the party.

JUTSEN: Do you think there should be trade related charges for imports of major commodities from countries that haven't got carbon prices the same way the US administration are talking about doing in the US?

SEGAL: If you actually look at our region, the other policies are very vague. There’s nothing that says this is how we're going to cost carbon, this is the kind of incentive or disincentive we're going to give you to lower emissions. As long as this is not going to happen, you are not going to see a change in behaviour of course.

SEGAL: If you look at Australia, we're actually ahead of most countries as far as our scheme is concerned. What you have in Europe of course, they started trialling some things to see how it worked, that's actually not a bad idea, with the exception of that, Australia is ahead of most countries in certain respects.

KNOX: I attended a conference at the weekend and there were a lot of climate scientists at that group, some eminent ones. One of the statements that they made clearly, and they all made it absolutely clearly, is that in Australia the Great Barrier Reef is gone. There was no doubt in any of their minds. I'm not sure that people realise how serious this is.

KNOX: I think there's still actually quite a scepticism about this whole issue. We still have to tackle that, and this is obviously where The Australian can really help in making sure the science is understood. Because our politicians can only reflect the people and if people don't realise this is a actually a critical issue, then it's very hard for them to put schemes that are going to cost money into place.

KORPORAAL: Is there any future for solar, economic wise or geothermal power or others?

GEORGE: Other renewables technologies are not cost competitive with wind at the moment, by a large margin. However, in the medium to longer term, yes, there's definitely potential for those technologies and we see that as both an opportunity and a threat to wind. We're a renewable energy business. We look at other technologies as well, and as and when those technologies become competitive, we'll be investing in them too. But that would require a significant reduction in costs, for example, of photovoltaic solar.

Also geothermal has substantial development risks associated with it. The resources tend to be a long way away from the grid, and there's a lot of technical issues to overcome. There's other forms of renewables but they're difficult to implement. For example, it's very hard to get new hydro plant built because of environmental concerns about dam building.

SHEPHERD: Well there's not enough rain either. Renewables won't hit their straps until we find a cheaper way of storing the energy. As you found with your desal plant, you need to build three times the capacity to run anything reliable and then you still need the back up of gas and coal to do it. So the biggest problem with renewables still is you can't store wind and you can't store sun.

GEORGE: I disagree with that. Because at the level of penetration we have of wind energy, which is like 1.5 per cent in Australia, that wouldn't be a problem.

SHEPHERD: If it gets 25 per cent, it presents a challenge then. But again, the investment is coming. In solar, there's huge international investment now in solar and the early signs are that they are going to dramatically reduce the costs of solar energy generation and there's some plants being built in Europe which are half the cost per unit to what they were 10 years ago.
But I guess the question for Australians is, should we go nuclear? We've got the world's biggest source of uranium, we've got the technology, why not go nuclear?

KNOX: We may not need to. There may be many less expensive, more economic ways to do it.

SEGAL: When people talk about nuclear they've got a certain idea which is nuclear bomb and really they are talking about fusion technology. It's up to governments to keep on working because even if it happens in fifty years time, there is the lingering solution.
I still believe technology is the answer to our problem. Part of it is going to come from business and the free market, part of it governments need to take the lead.

KORPORAAL: But nuclear, will that ever be politically palatable here?

SEGAL: It might take another 30 to 50 years but this is an example of future technology I believe would be developed and will be the ultimate answer to our energy needs.

JUTSEN: It's important, too, that leaders of the community, including business and media and the like, try to create a vision of 2020, 2050, with a decarbonised world. It's not all scare. There's an enormous amount of opportunity. There's no doubt the atmosphere, and the local environments are going to be much cleaner and quieter than they are currently.

We know we're going to run out of oil and by starting to act now on energy efficiency on the oil use, it's going to have a beneficial effect and saving a later economic catastrophe. We've got global issues around water, we've got global issues around fisheries. This is just a reflection of there's a whole series of activities that we need to act on and it's important that we provide a vision of what might be and not just allow a scare mongering around, you know, it's back to the caves and financial catastrophe.

SHEPHERD: The Minister for Finance in Australia said "I don't care if you lose your equity in your power station, you deserve to." That's not the sort of attitude. By the way, there is $30 billion in new technology, trust us.

JUTSEN: We're trying to explain to the government too that we need investment now to accelerate rapidly in our existing businesses so that they transition to be able to operate in a low carbon economy. Reinvestment in technology, in manufacturing, in our mining industries to be world very best practice in terms of their energy and carbon efficiency.

SHEPHERD: What about the way we live? When are we going to get rid of the quarter acre block? The biggest factor in domestic consumption is the spread of Australian cities. As a toll road operator I'm scared to say this but the quarter acre block is the killer. It kills the public transport business, it increases the unit cost of everything we do.

The most efficient OECD city in the world of carbon is Manhattan. We never think of Manhattan as being green, it is uber green because they all live on top of each other, they all get public transport and if they don't they walk. Because they're stacked, they use less heat, less cooling, less water than anybody.

JUTSEN: And Tokyo similarly.

SHEPHERD: Now we are we ready in Australia for that big change?

SCHOTT: urban development in Sydney is certainly going up and not out because it's so expensive to service those outlying areas. So the Department of Planning used to think that the split was 70 per cent urban infill and 30 per cent new growth, but what we've been observing with sewer connections it's more like 90/10.

SHEPHERD: Is that right? That's a fantastic improvement, I didn't realise that.

SCHOTT: Yes, but that then gets back to the whole public transport issue because people need to be able to get around the city.

KORPORAAL: do you think that the federal system is also holding us back in terms of some of these more progressive ideas?

SCHOTT: I've been in infrastructure a long time and it's a bit like groundhog day every time I look at this stuff because it's just those lack of uniformity around things where there is absolutely no reason to not have national licensing. Those things are really easy to fix if the states would just sign up to it. Often they don't because there's revenue behind it somewhere and the age old approach to getting reform like this has been Commonwealth bribery.

But it's actually very heartening to see the Commonwealth government taking a national view of infrastructure because it's the first time for a long, long time that people have sat back and thought well hang on, how would you do this and look at the grid nationally and not from a state jurisdiction perspective.

KORPORAAL: what would you advise the Prime Minister, Kevin Rudd, or how would you’d change the world?. Are you sort of optimistic or pessimistic that Australia will come to terms with some of these challenges we've been discussing.

GEORGE: I would hope the government is listening to the people who elected them with this mandate to basically get on with it. I'm talking about Parliament as a whole, not just the Rudd government. I'm very optimistic that will happen.

KNOX: Industry, supported by hopefully the media, needs to do a better job of explaining things so that people can really set that in context and start to decide for themselves how important this is. Australia has the opportunity to really show some leadership here without damaging its competitiveness.

SHEPHERD: we've just got to get on with it but we must recognise that we have a heavily carbon based economy and therefore the transitional arrangements for industry must be very carefully thought through. I would recommend that we over compensate rather than under compensate because under compensating could have a serious effect on industry. Financial (compensation) for the transitional arrangements. They shouldn't be there forever, they should be pushing the right behaviour. The CPRS scheme is the best scheme and the right way to go. But the message should be getting through to the consumer sooner rather than later that they will pay extra. Early signs from the government would make me cautiously optimistic that we may get this right, but we've got a long way to go.

JUTSEN: We must act now, we need policy certainty immediately. The level of uncertainty is creating a lot of delay. We're currently fighting a war against climate change using rubber bullets. Lot of talk, no carbon mitigation. The fossil fuel emissions are rising much more rapidly than any policy measures that have already been implemented so we're still heading in the wrong direction.

We need a national energy and carbon policy framework so that we've got consistency across all the different jurisdictions and across the different policies so that all of the arms of government are acting in the same direction, and that's not the case yet.

SCHOTT: I'm cautiously optimistic about Australia and I'm deeply pessimistic about tackling climate change globally (because) we haven't got time. People ask why doesn't Sydney put the dam in at Welcome Reef? It would take 30 years to fill it now and it would evaporate. The world is different. People don't realise how bad it is actually. So that leaves me deeply pessimistic and I get worse actually every time I talk to a climate change person or someone from the CSIRO, I just feel like going home and drinking a bottle of whiskey.

SHEPHERD: With no water.

SCHOTT: with no water.

JUTSEN: I'm very optimistic on one basis, not because I trust the politicians but because I trust engineers and the scientists and I'm confident that we will come up with solutions. But maybe because I'm an engineer myself and an optimist.

(At Caltex) we are an energy intensive trade exposed company so when you talk about electricity and all the issues around it, you cannot import electricity. In our case whatever we make can be imported so that's why we're trade exposed.

We support an ETS scheme of some sort to reduce emissions, but I think one should be careful when you give away competitiveness. When all that you're doing is exporting emissions into China, I don't think you achieve anything.

I finish by being optimistic because I believe in people's capability to come up with solutions, in spite of politicians.

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