Queensland Nationals Senator Matt Canavan on Monday night denied suggestions the government subsidises Australia’s fossil fuel industry. The comments prompted a swift response from some social media users, who cited evidence to the contrary.
Canavan was responding to a viewer question on ABC’s Q&A program. The questioner cited an International Monetary Fund (IMF) working paper from May last year that said Australia spends US$29 billion (A$47 billion) a year to prop up fossil fuel extraction and energy production.
The questioner also referred to media reports last year that Australia subsidised renewable energy to the tune of A$2.8 billion. He questioned the equity of the subsidy system.
Canavan disputed the figures and said there was “no subsidisation of Australia’s fossil fuel industries”. You can listen here:
So let’s take a look at what the Australian government contributes to the fossil fuel industry, and whether this makes financial sense.
What does Australia contribute to the fossil fuel industry?
Canavan said the figures cited by the questioner didn’t accord with the view of the Productivity Commission.
The commission’s latest Trade and Assistance Review doesn’t specifically mention federal subsidies. But it describes “combined assistance” for petroleum, coal and chemicals in mining of about A$385 million for 2018-19.
Subsidies to fossil fuel companies and other products can be difficult to categorise. Often there is disagreement as to what counts and what doesn’t.
Estimates by other organisations of the annual federal subsidies for the fossil fuel industry range from A$5 billion to A$12 billion a year.
So despite the disparities, it’s clear the fossil fuel industry receives substantial federal government subsidies. Earlier this month a leaked draft report by a taskforce advising the government’s own COVID-19 commission recommends support to a gas industry expansion.
Importantly, these subsidies benefit the fossil fuel industry relative to its competitors in the renewable sector.
Do these payments make sense?
The subsidies are also aimed at a sinking industry.
As Tim Buckley, of the Institute for Energy Economics and Financial Analysis, notes, COVID-19 and the falling cost of renewables are delivering a hit to the export fossil fuel industry in Australia from which it may never recover.
Fossil fuel companies such as Santos are also under extreme pressure from some super funds to adopt strict emissions targets.
Moreover, these subsidies produce very few direct jobs in fossil fuel extraction.
According to the Australian Bureau of Statistics, coal, oil and gas extraction create just 64,300 direct jobs. Only around 10% of coal industry employees are women.
If we divide the IMF subsidy figure by the number of direct jobs, the governments of Australia spend A$730,000 each year for every direct job in the coal, oil and gas industry. That equates to A$1,832 for every Australian.
Where are the profits?
Setting aside the madness of this support for fossil fuels given the climate crisis, the subsidies make no financial sense.
With so much government support, you’d think the industry would be full of profitable companies filling the government’s coffers with taxes. But this is not the case.
Australian Taxation Office data for 2016-17 show eight of the ten largest fossil fuel producers in Australia paid no tax. That’s despite nine of these companies having revenue of about A$45 billion for that period.
Not all of these benefits go to these big producers, but many of them do.
If Prime Minister Scott Morrison really wants to lessen the impact of the coronavirus on Australians and save jobs, then this gross level of subsidies must be phased out.
Money needed elsewhere
Subsidies paid each year to the fossil fuel industry could be used far better elsewhere.
It could help retrain or provide generous redundancy packages for the relatively small number of workers in fossil fuel industries and their communities.
The subsidies are unconscionable when you consider the resources so desperately needed now for health and the broader economy. The coronavirus must force us as a country to re-evaluate how we distribute taxpayer funds.
As International Energy Agency head Fatih Birol notes, we now have an “historic opportunity” to use stimulus to transition to clean energy.
Directing funds to companies that have had 30 years to prepare for their demise is simply throwing away public money. It could be put to so much better use.
Earlier this month, US President Donald Trump issued an executive order reaffirming that companies joining US mining activities on the moon would have property rights over lunar resources.
The order also made clear the US wasn’t bound by international treaties on the moon. Instead, the US would set up a bilateral or multilateral legal framework with other like-minded states to govern lunar mining activities.
This bold move by the Trump administration poses some challenging questions for Australia, given our past commitment to international space treaties and our current support the US Artemis lunar program.
Australia is a longstanding member of all five space treaties. Also, the terms “international” and “responsible” are two of the principles guiding the Australian Space Agency in designing and implementing its policies and programs.
As such, Australia will need to decide how it plans to respond to Trump’s move and how this will shape its future space policies. Will it continue to hold an “international” view toward the exploitation of resources from outer space?
Or can Australian companies “responsibly” take part in mining of the moon without contravening the country’s treaty obligations?
Space resources as a ‘common heritage of mankind’
The Trump administration’s proposal is potentially at odds with a key principle in the 1979 Moon Treaty known as the “common heritage of mankind” (CHM).
The CHM principle is an important part of other areas of international law, such as the UN Law of the Sea Convention, which sets restrictions on the mining of deep seabed areas that lie outside national marine boundaries. Specifically, it allows commercial mining, but only if the benefits are shared among different countries by the International Seabed Authority.
Under the Moon Treaty, the CHM principle similarly does not give exclusive property rights to any state or individual companies. Instead, it provides for the “equitable” international sharing of space resources.
The treaty also requires its state parties to negotiate international rules governing the exploitation and use of these resources.
As party to the Moon Treaty, Australia is obliged to follow these provisions. However, the US has never joined the treaty. It has criticised the CHM principle several times, and essentially does not support the idea of “equitable” sharing of space resources.
This is why the Trump administration is pursuing a separate framework to govern the exploitation and use of resources on the moon.
A difficult balancing act for Australia
There are now some concerns Australia could shift from its commitment to the CHM principle and side with the US view that states and companies should be permitted to freely exploit space resources.
Perhaps due to Australia’s obligations under the Moon Treaty, Prime Minister Scott Morrison did not say anything about the possibility of Australian involvement in mining on the moon when promising to support NASA’s Artemis program last September.
Instead, Morrison vaguely pledged $150 million investment into Australian businesses and new technologies to help the country become more competitive in the space industry and better support future US space missions to Mars and the moon.
…the lunar missions will rely on turning hundreds of millions of tons of mined water ice recently discovered on the moon into liquid forms of hydrogen and oxygen to power spacecraft. That autonomous capability of extracting resources is something that Australia has in its toolkit.
Although there have been no clear messages from the Australian mining industry about whether they have interest in mining on the moon, companies such as Rio Tinto have already been developing the relevant technologies.
When finalising a specific plan to implement its $150 million investment in space research, the Australian government needs to think carefully about how to comply with its treaty obligations, including CHM, while still supporting its approach to NASA’s lunar program.
Australia needs to decide what it values more – an outer space shared by all, or the profits from possible mining deals that come from a more exclusive approach to space.
We have just witnessed an oil price crash like never before taking prices of West Texas Intermediate into deeply negative territory.
The spot price of West Texas, the US benchmark, reached minus US$40.32 a barrel and the May futures price (which is deliverable in a physical form) went to minus US$37.63 a barrel, the lowest price in the history of oil futures contracts.
There has been no better indicator of the extent of the economic impacts of coronavirus. With borders closed and much of the world’s population being urged to stay at home, transport has come to a near halt.
How can a price turn negative?
The industry has not been able to slow production fast enough to counter the drop in demand. The other mechanism that normally stabilises prices, US oil storage, appears to be nearing capacity.
Cushing is said to be able to hold 62 million barrels of oil – enough to fill all the tanks of half the cars in United States.
That’s why prices have gone negative. Traders with contracts to take delivery of oil in May fear they won’t be able to store it. They are willing to pay not to have to take it and have nowhere to put it.
Not all oil contracts went negative. West Texas Intermediate contracts for June and subsequent months are still positive, reflecting a feeling that the supply and demand imbalance will soon be corrected.
Brent, the international price benchmark, remained positive, dropping to US$25.57 – a fall of about 9%. Unlike West Texas Intermediate, Brent deliveries can be put on ships and transported to storage facilities anywhere in the world.
Not confined to the US
There is no guarantee the problems of storage evident in the US won’t spread to other markets.
This is despite the decision of OPEC-Plus (the mainly Middle Eastern member of the Organisation of the Petroleum Exporting Countries plus Russia and other former Soviet states) to respond to the free fall by cutting output by 9.7 million barrels per day, ending the recent duel over production levels between OPEC and Russia.
Adding another element to the COVID-19 story, on March 9, the day of the Black Monday stock market crash, the Chicago Mercantile Exchange reported a new daily record for West Texas Intermediate trading, reaching 4.8 million contracts, surpassing the 4.3 million recorded on September 2019 following the drone attacks on Saudi oil facilities.
The future does not look good. With rising unemployment, stuttering economies, and collapsing financial markets the prospects for substantial recovery in the oil markets seems far away.
As international climate action accelerates, there is a need to produce goods without the carbon emissions. The report describes opportunities for Australia to use its exceptional wind and solar resources to make zero-emissions metals.
Demand for metals is set to grow, not least because of their importance in nearly all renewable energy technologies. Wind turbines are made from steel, copper and rarer metals such as cobalt and neodymium. Solar panels and batteries use metals including silicon, lithium, manganese, nickel and titanium.
As the global economy tries to reduce carbon emissions we must change the way metals are made. Metal production is energy intensive and accounts for around 9% of global greenhouse gas emissions. Herein lies Australia’s opportunity.
Australia is already a major source of the world’s metal. It is among the top three exporters of iron ore, bauxite, lithium, manganese and rare earth metals.
A small proportion of these metals are refined domestically, but most are shipped overseas in their raw mineral form. For example, we found Australia converts less than 1% of its iron ore into steel.
By exporting raw ores, Australia is selling non-renewable resources at the lowest point of the value chain. Processed metal is worth much more than ore.
Metal needs energy
Many metals are made through electrically-driven processes so we can reduce carbon emissions by switching to cheaper renewable electricity.
One example for this approach is Sun Metals, near Townsville in Queensland. The company built a 125MW solar farm to supply a third of the energy required by its zinc refinery. It is now considering adding wind power and battery storage.
Similar opportunities exist with the production of other metals such as manganese, copper, nickel and rare earths.
Another angle for Australia is to make specialised metal products with higher profit margins. Element 25, in Western Australia, plans to produce high-value manganese metal using an energy-efficient process developed with CSIRO. The company says a 90% renewable energy mix could lower production costs and help it compete with Chinese producers.
Renewable energy could even relieve Australia’s ailing aluminium industry. The owners of three of Australia’s existing aluminium smelters said they were “not sustainable” with current electricity prices. Could cheap wind and solar energy provide a lifeline?
The usual objection is that aluminium smelters need a steady power input, not variable solar and wind energy. But, new technologies enable more flexible operation, allowing smelters to react to market conditions, while relieving pressure on the grid during peaks in demand.
Steel production presents a different kind of problem. It uses so much coal that it accounts for 7% of global emissions. But new steel can be made without coal.
Many steelmakers around the world use an alternative process, called direct reduction, fuelled by natural gas. This technique reduces emissions by about 40% and can be modified to run on pure renewable hydrogen, enabling production of near-zero emissions steel.
At least five companies in Europe are actively pursuing hydrogen-based steel production as part of their efforts to eliminate emissions. So far there are no similar plans in Australia despite this country’s unrivalled wealth of iron ore and renewable resources.
The jobs boom
Zero-emissions metals could become a major export industry. Our report explores a scenario in which Australia could double the value of its iron and steel exports to A$150 billion by converting just 18% of currently mined iron ore into steel using renewable hydrogen.
This would be a welcome boost for the national balance of trade, counteracting any reduction in coal exports due to climate and energy policies among Australia’s trading partners.
Making this amount of zero-emissions steel requires a huge amount of renewable electricity – almost double the total electricity generated in Australia in 2018.
But this demand for renewable energy is part of the point – Australia can do this, most of our competitors cannot due to their greater energy demand relative to land suitable for generating renewable energy.
A successful zero emissions metal industry would bring many thousands of steady jobs, often in regional areas with higher unemployment. It could also support towns such as Portland, in Victoria, and Gladstone, in Queensland, where metal producers are already the chief employer.
The market for zero-emissions metals is likely to be enormous. Until recently, emissions embodied in materials have been neglected. But this is changing, as hundreds of the world’s largest companies commit to reducing the emissions of their supply chains.
For example, car makers Volkswagen and Toyota are aiming for zero-carbon production.
In September the World Green Building Council challenged the global construction sector to ensure all new buildings have net-zero embodied carbon by 2050. Such public commitments are a strong signal to manufacturers everywhere.
Make it happen
Zero-emissions metals could be one of Australia’s most significant new industries of the 21st century.
To make it happen, our report recommends governments acknowledge this opportunity by creating a National Zero-Emissions Metals strategy, committing serious resources to ensure it succeeds. This strategy should identify and evaluate Australia’s best opportunities within the metals sector.
If we don’t do something then, as South Australian Senator Rex Patrick put it, we’ll just continue to “export rocks” and let others reap the benefits from developing technologies to process them.
Last month, scientists uncovered a mineral called Edscottite. Minerals are solid, naturally occurring substances that are not living, such as quartz or haematite. This new mineral was discovered after an examination of the Wedderburn Meteorite, a metallic-looking rock found in Central Victoria back in 1951.
Edscottite is made of iron and carbon, and was likely formed within the core of another planet. It’s a “true” mineral, meaning one which is naturally occurring and formed by geological processes either on Earth or in outer-space.
But while the Wedderburn Meteorite held the first-known discovery of Edscottite, other new mineral discoveries have been made on Earth, of substances formed as a result of human activities such as mining and mineral processing. These are called anthropogenic minerals.
While true minerals comprise the majority of the approximately 5,200 known minerals, there are about 208 human-made minerals which have been approved as minerals by the International Mineralogical Association.
Some are made on purpose and others are by-products. Either way, the ability to manufacture minerals has vast implications for the future of our rapidly growing population.
Climate change is one of the biggest challenges we face. While governments debate the future of coal-burning power stations, carbon dioxide continues to be released into the atmosphere. We need innovative strategies to capture it.
Actively manufacturing minerals such as nesquehonite is one possible approach. It has applications in building and construction, and making it requires removing carbon dioxide from the atmosphere.
You could say this is a kind of “modern-day alchemy” which, if taken advantage of, could be an effective way to suck carbon dioxide from the air at a large scale.
Meeting society’s metal demands
Mining and mineral processing is designed to recover metals from ore, which is a natural occurrence of rock or sediment containing sufficient minerals with economically important elements. But through mining and mineral processing, new minerals can also be created.
Smelting is used to produce a range of commodities such as lead, zinc and copper, by heating ore to high temperatures to produce pure metals.
The process also produces a glass-like waste product called slag, which is deposited as molten liquid, resembling lava.
Once cooled, the textural and mineralogical similarities between lava and slag are crystal-clear.
Micro-scale inspection shows human-made minerals in slag have a unique ability to accommodate metals into their crystal lattice that would not be possible in nature.
This means metal recovery from mine waste (a potential secondary resource) could be an effective way to supplement society’s growing metal demands. The challenge lies in developing processes which are cost effective.
Our increasing knowledge on how to manufacture minerals may also have a major impact on the growing synthetic gem manufacturing industry.
In 2010, the world was awestruck by the engagement ring given to Duchess of Cambridge Kate Middleton, valued at about £300,000 (AUD$558,429).
The ring has a 12-carat blue sapphire, surrounded by 14 solitaire diamonds, with a setting made from 18-carat white gold.
Replicas of it have been acquired by people across the globe, but for only a fraction of the price. How?
In 1837, Marc Antoine Gardin demonstrated that sapphires (mineralogically known as corundum or aluminium oxide) can be replicated by reacting metals with other substances such as chromium or boric acid. This produces a range of seemingly identical coloured stones.
On close examination, some properties may vary such as the presence of flaws and air bubbles and the stone’s hardness. But only a gemologist or gem enthusiast would likely notice this.
Diamonds can also be synthetically made, through either a high pressure, high temperature, or chemical vapour deposition process.
Creating synthetic gems is increasingly important as natural stones are becoming more difficult and expensive to source. In some countries, the rights of miners are also violated and this poses ethical concerns.
Medical and industrial applications
Synthetic gems have industrial applications too. They can be used in window manufacturing, semi-conducting circuits and cutting tools.
One example of an entirely manufactured mineral is something called yttrium aluminum garnet (or YAG) which can be used as a laser.
In medicine, these lasers are used to correct glaucoma. In dental surgery, they allow soft gum and tissues to be cut away.
The move to develop new minerals will also support technologies enabling deep space exploration through the creation of ‘quantum materials’.
Quantum materials have unique properties and will help us create a new generation of electronic products, which could have a significant impact on space travel technologies. Maybe this will allow us to one day visit the birthplace of Edscottite?
Australia’s space industry is set to grow into a multibillion-dollar sector that could provide tens of thousands of jobs and help replenish the dwindling stocks of precious resources on Earth. But to make sure they don’t flame out prematurely, space companies need to learn some key lessons about sustainability.
Sustainability is often defined as meeting the needs of the present without compromising the ability of future generations to meet their own needs. Often this definition is linked to the economic need for growth. In our context, we link it to the social and material needs of our communities.
We cannot grow without limit. In 1972, the influential report The Limits to Growth argued that if society’s growth continued at projected rates, humans would experience a “sudden and uncontrollable decline in both population and industrial capacity” by 2070. Recent research from the University of Melbourne’s sustainability institute updated and reinforced these conclusions.
Our insatiable hunger for resources increases as we continue to strive to improve our way of life. But how does our resource use relate to the space industry?
There are two ways we could try to avert this forecast collapse: we could change our behaviour from consumption to conservation, or we could find new sources to replenish our stocks of non-renewable resources. Space presents an opportunity to do the latter.
Asteroids provide an almost limitless opportunity to mine rare earth metals such as gold, cobalt, nickle and platinum, as well as the resources required for the future exploration of our solar system, such as water ice. Water ice is crucial to our further exploration efforts as it can be refined into liquid water, oxygen, and rocket fuel.
But for future space missions to top up our dwindling resources on Earth, our space industries themselves must be sustainable. That means building a sustainable culture in these industries as they grow.
How do we measure sustainability?
Triple bottom-line accounting is one of the most common ways to assess the sustainability of a company, based on three crucial areas of impact: social, environmental, and financial. A combined framework can be used to measure performance in these areas.
In 2006, UTS sustainable business researcher Suzanne Benn and her colleagues introduced a method for assessing the corporate sustainability of an organisation in the social and environmental areas. This work was extended in 2014 by her colleague Bruce Perrott to include the financial dimension.
This model allows the assessment of an organisation based on one of six levels of sustainability. The six stages, in order, are: rejection, non-responsiveness, compliance, efficiency, strategic proactivity, and the sustaining corporation.
Using freely available information about SpaceX, I benchmarked the company as compliant (level 3 of 6) within the sustainability framework.
While SpaceX has been innovative in designing ways to travel into space, this innovation has not been for environmental reasons. Instead, the company is focused on bringing down the cost of launches.
SpaceX also relies heavily on government contracts. Its profitability has been questioned by several analysts with the capital being raised through the use of loans and the sale of future tickets in the burgeoning space tourism industry. Such a transaction might be seen as an exercise in revenue generation, but accountants would classify such a sale as a liability.
SpaceX’s culture also rates poorly for sustainability. As at many startups, employees at SpaceX are known to work more than 80 hours a week without taking their mandatory breaks. This problem was the subject of a lawsuit settled in 2017. Such behaviour contravenes Goal 8 of the UN Sustainable Development Goals, which seeks to achieve “decent work for all”.
Australia is in a unique position. As the newest player in the global space industry, the investment opportunity is big. The federal government predicts that by 2030, the space sector could be a A$12 billion industry employing 20,000 people.
Presentations at the Australian Space Research Conference by the Australian Space Agency made one thing clear: regulation is coming. We can use this to gain a competitive edge.
But such a purely financial analysis ignores the political forces driving the development of the coal industry in both India and Australia.
Mates in India, mates in Australia
In short, both are locked into what I describe as a model of crony capitalism, in which special deals are handed out to projects such as Adani that tip the scales in favour of development.
The actions of China and Japan in deploying enormous state power to export their respective coal technologies to Southeast Asia strengthens the hands of those pushing such developments.
In my recent book, Adani and the war over coal, I outline a network of power that for several decades has promoted the development of Australia’s coal resources in the interests of national and international corporations.
The mining companies, then the big four banks became part of it, lending billions in the rush to develop Australian coal mines as Asian countries sought to lock in long-term supplies. The Minerals Council of Australia, the New South Wales Minerals Council and the Queensland Resources Council, with their collective close ties to both political parties, handled public relations.
Yet they have faced resistance from the rise of an anti-Adani movement that links grassroots environmentalists, peak environmental lobby groups and progressive organisations such as GetUp!
By mid-2018, these campaigners seemed to have backed the Carmichael mine into a cul de sac by scaring off both Australian and foreign investors. They had also pressured the Queensland government to withdraw its support for a loan to the project from the Commonwealth government’s Northern Australia Infrastructure Facility.
Then Adani surprised them by announcing that it would scale back the project and fund it from its own resources. On the face of it this seemed unlikely, but it had help.
Adani and Modi have history
The chairman and founder of the Adani group, Gautam Adani, has had a long relationship with the recently re-elected Prime Minister of India, Narendra Modi.
Modi played a decisive role in paving the way for Adani’s latest mega deal: selling coal-fired power from a plant in the Indian state of Jharkhand to nearby Bangladesh.
The power for Bangladesh is set to be fired by Carmichael coal. Many Australians would be concerned to learn that our coal is to be used to power one of the most climate-challenged countries on the planet, but we have this on the authority of Adani’s previous Australian-based chief executive, Jeyakuma Janakaraj.
Twelve days before the 2019 Indian election date was announced, the Modi government gave approval for an Adani project in Jharkhand to become the first designated power project in India to get the status and benefits of a Special Economic Zone, saving Adani billions of dollars in taxes, including clean energy taxes.
The Indian state will provide land, infrastructure and water for the project and shoulder the burden of pollution. The cost of the power to Bangladesh is not expected to be cheap.
Will we be asked for more?
Adani’s form suggests it might come back to Australia for more. Following the re-election of the Morrison government it is already being speculated that the pro-coal Minister for Resources, Matt Canavan, will revisit the original proposal for a billion-dollar government-sponsored loan from the Northern Australia Infrastructure Facility to construct the railway from the Galilee Basin to the Abbot Point coal port.
The Adani saga points to a critical flaw in the Paris climate agreement. It is an agreement between nation states, but what those states do is often determined by arrangements between politicians and private companies that feel no particular obligation to keep global warming to less than two degrees.
We are pawns in a larger, climate-destroying game.
The shortlist features six renewable electricity pumped hydro projects, five gas projects, and one coal upgrade project, supplemented by A$10 million for a two-year feasibility study for electricity generation in Queensland, possibly including a new coal-fired power station.
The study is unnecessary, because the GenCost 2018 study by CSIRO and the Australian Energy Market Operator already provides recent cost data for new power generation in Australia. It shows that new wind and solar farms can provide the lowest-cost electricity, even when two to six hours’ worth of storage is added.
Hence there is no economic case for new coal-fired power in Australia. After a century of coal, it should not be subsidised any longer.
While Queensland and Victoria have state government policies to drive the rapid growth of large-scale solar and wind, New South Wales does not even have a renewable electricity target. Yet the retirement of large, old coal-fired stations is in the pipeline: Liddell, nominally 1,680 megawatts, in 2022 and Vales Point, nominally 1,320MW, possibly in the late 2020s.
Coal baron Trevor St Baker bought Vales Point from the NSW government for the token sum of A$1 million in 2015. He wants to refurbish it and run it until 2049 – and his plan has made it onto the government’s shortlist.
Given that Vales Point is now arguably a A$730 million asset, St Baker has made a huge windfall profit at the expense of NSW taxpayers, and so a government subsidy to upgrade it would be unjust.
Unfortunately, the newly elected NSW Liberal-National Coalition government has no policies of substance to fill the gap left by retiring coal stations with large-scale renewable electricity. It will therefore be up to the federal government after the May election to provide reverse auctions with contracts-for-difference, matching the policies of the ACT, Victorian and Queensland governments. Also, increased funding to ARENA and the Clean Energy Finance Corporation is needed for dispatchable renewables (those that can supply power on demand) and other forms of storage.
Driving the change
The transition to renewable electricity is already well under way, as even the federal energy minister Angus Taylor admits. The low costs of solar and wind power are driving the change. To maintain reliability, dispatchable renewables (as opposed to variable sources such as solar and wind) and other forms of storage are needed in the technology mix.
Batteries excel at responding rapidly to changes in supply and demand, on timescales of tens of milliseconds to a few hours. But they would be very expensive for covering periods of several days, even at half their current price. So there is a temporary role for open-cycle gas turbines (OCGTs) to meet demand peaks of a few hours, and to fill lows of several days in wind and/or solar supply.
Small-scale pumped hydro, in which excess local renewable electricity does the pumping, has huge potential for storage over periods of several days, but takes longer to plan and build, and has higher capital cost per megawatt, compared with OCGTs.
Small-scale pumped hydro should be the top priority for the federal program. In particular, the off-river proposal by SIMEC Zen Energy, which is part of Sanjeev Gupta’s GFG Alliance, will use a depleted iron ore pit and provide cheap, reliable, low-emission electricity for both GFG’s steelworks at Whyalla and other industrial and commercial users.
Hydro Tasmania’s proposed “Battery of the Nation” would involve building a new interconnector across the Bass Strait, together with possibly three new pumped hydro plants. It’s very expensive and is already receiving A$57 million in federal funding. Its inclusion in the shortlist is worrying because it could soak up all the program’s unspecified funding for pumped hydro.
Furthermore, the need to greatly increase Tasmania’s wind capacity to deal with droughts appears to be an optional extra, rather than an essential part of the project.
Little information is available for the other shortlisted pumped hydro projects. UPC Renewables is proposing a huge solar farm, together with pumped hydro, in the New England region of NSW. In South Australia, Sunset Power (trading as Delta Electricity, chaired by Trevor St Baker), in association with the Altura Group, is proposing an off-river pumped hydro project near Port Augusta, and Rise Renewables is proposing the Baroota pumped hydro project. BE Power Solutions, which does not have a website, is proposing pumped hydro on the Cressbrook Reservoir at Crows Nest, Queensland.
Pumping for Snowy 2.0 (which is not part of the program) will be done mostly by coal power for many years, until renewables dominate supply in NSW and Victoria. Therefore, I give low priority to this huge and expensive scheme.
To sum up, new coal power stations and major upgrades to existing ones are both unnecessary. They are more expensive than wind and solar, even when short-term storage is added – not to mention very polluting.
A few open-cycle gas turbines may be acceptable for temporary peak supply during the transition to 100% renewable electricity. But the priority should be building pumped hydro to back up wind and solar farms. This will keep the grid reliable and stable as we do away with the old and welcome the new.
A weaker domestic economy has cost the budget A$15 billion over the next four years, but booming international commodity markets are more than offsetting this. The net result is a budget that will remain comfortably in surplus for the next four years, assuming the economic situation improves rather than disappoints.
Much lower payments on a range of different programs have also given the government some extra money to play with. Lower spending on the National Disability Insurance Scheme, a big drop in debt servicing costs and lower pension income support payments are just a few of the expenditure surprises that paint a very healthy picture of federal government finances right now.
But weaker domestic economic numbers have come at a considerable cost to the budget in an ominous warning about how vulnerable the government’s finances would be to a domestic economic recession.
Since the release of the mid-year economic outlook last December, economic data have generally disappointed expectations, culminating in a much-weaker-than-expected GDP report for the December quarter of 2018. This has forced the Treasury to reset the government’s baseline for the economy and its revenues.
This has been quite small in the scheme of things, with economic variables such as consumption, GDP and wages down by about 0.25% to 0.5% for this year and next.
But these otherwise small changes to the economic baseline have had a big impact on government finances. Revisions to the outlook for wages have cost the budget $800 million in 2019-20 and a total of $8.1 billion over the four years to 2022-23.
Weaker-than-forecast consumption has knocked $1.7 billion out of GST receipts for 2019-20. It’s not a problem for the feds, but another sign that state government budgets are about to take a walloping over the next few years.
Economic story hasn’t changed, even if the starting point has
In terms of the picture the government is painting of the economy over the next three years, the economic forecasts are basically unchanged from those presented in the update in December. Sure, there have been some substantial downward revisions to the current year’s numbers and a knockdown in growth in 2019-20. But this is almost entirely the result of a weaker starting point courtesy of the soft GDP numbers we received last month.
The economic story hasn’t changed. Australia’s economy is set to ride out the bursting of the housing bubble in Sydney and Melbourne. Employment is expected to continue to grow at a pace that is strong enough to soak up new entrants into the labour force.
Meanwhile the international economy will maintain a healthy growth rate of 3.5% over the next few years. There is no US recession, no sudden shift down in China’s rate of growth.
The Treasury has adopted a pleasingly conservative approach to international commodity prices. Both met coal and iron ore are expected to drop back to more sustainable price levels over the next year in what is an important nod to good budgeting assumptions.
Iron ore is forecast to fall back to US$55 a tonne by March 2020 and then stay at that level while met coal is expected to shift back down to US$150 a tonne over the same time frame.
The oil price, interest rates and the Australian dollar are all forecast to stay at current levels over the forecast horizon. With bond yields having fallen to near-record lows in Australia in recent weeks, this assumption has had a dramatic effect on Australia’s debt service costs, delivering the government a financial windfall of $2.7 billion over the next four years.
Blue Skies or foggy glasses?
Against this backdrop Australia’s economic expansion is forecast to go well past the 30 -year mark in 2021. Unemployment is projected to be 5% and wages growth rises back to 3.5%.
This is a rosy picture of the economic outlook. The wage growth forecasts will rightly come in for some criticism. The risks to this forecast are not evenly balanced.
At least the government can’t be criticised for being at odds with the Reserve Bank (RBA). The RBA’s latest set of forecasts, released just a few weeks ago, are basically the same. If anything, the RBA is even more optimistic than the Treasury, with an unemployment forecast of 4.75% versus the government’s 5% for as far as the eye can see.
Even though the RBA and the Treasury seem to be on the same page about Australia’s economic outlook, there is now a clear distinction between what private and public sector forecasters are looking for over the next few years.
Over the past three months there has been a substantial shift in private sector forecasts for the economy, which has not been replicated by either the RBA or the Treasury.
This has left the RBA and the Treasury at the top of the range of forecasts for the economy. You’d be hard pressed to find a private sector forecaster more optimistic on Australia’s economic outlook than our policymakers are right now.
A short-term fiscal stimulus could keep the RBA at bay
The great fear within financial markets and across the business community is that Australia’s domestic economy could buckle under the weight of high household debt and falling house prices. A run of weak economic data in the last three months has added weight to these concerns and seen a number of economists call for interest rate cuts.
Even though businesses have thus far maintained a deal of optimism about the economic outlook, the concern is that eventually business will shelve hiring and investment plans if consumer demand weakens enough.
Money markets are factoring in a half-percentage-point cut to the cash rate, taking it from 1.5% to 1% over the next year. In effect, the markets are projecting much weaker outcomes than the RBA or the government.
This budget represents a smart short-term fiscal stimulus at a time when consumer sentiment and domestic demand are under pressure. This certainly should take some pressure off the RBA to cut interest rates in the next few months and may even keep monetary policy on hold for an extended period.
The centre piece of the fiscal injection is the lift in the Low and Middle Income Tax Offset (LMITO). This offset has more than doubled to $1,080 and is effective from this financial year. This means 4.5 million Australians will be positively impacted by a higher offset when they file their 2018-19 tax returns after July 1 2019.
This is as close to a cash handout as you can get without it being a cash handout – a cash handout by a government ideologically opposed to cash handouts.
This is not only a direct cash injection for many households but a retrospective tax cut in the sense that it dates back to July 1 2018.
People won’t have the extra money until after July, but they know it’s coming and this should immediately help alleviate some financial concerns.
The next leg of the immediate fiscal stimulus is the broadening of the instant asset write-off for small and medium businesses with revenue of up to $50 million. This was previously accessible to small business with revenues of up to $10 million. The asset write-off has been increased to $30,000 (from $25,000).
This too is effective immediately and will last through to June 2020. This is a strong incentive for a vast number of businesses around Australia to increase capital expenditure in the months ahead of the end of this financial year, and then again next financial year.
Even if it doesn’t have much impact on investment plans, it will impact profitability.
Longer-term personal income tax cuts that are happening against the backdrop of a budget that remains in surplus over the medium to long term also have the potential to support consumer confidence.
A strong government financial position will help curtail precautionary saving from households worried about the future of the economy and their finances.
For financial markets the question is whether this fiscal stimulus is enough to keep the RBA at bay over the months and years ahead. This fiscal injection is smart policy and represents a much nimbler government than we’re used to.
In an environment where the effectiveness of interest rate cuts is an open question, a short sharp fiscal injection like this one might make the difference in keeping demand at a rate that will maintain our current low rate of unemployment.