I’ve been flat out for the last couple of weeks, and haven’t had time to post. But I’ve finally found enough time to read the Finkel Review into the Future Security of the National Electricity Market (NEM). There are four inter-related points that come out of the report

1. The NEM has failed in its own terms, that is, with respect to the objective of providing reliable and affordable electricity. The Review recommends a variety of tweaks to the market rules, but the core measure is a shift to central planning by a new Energy Security Board, which effectively overrides the multiple existing market bodies. Not surprisingly, given the political environment the Review ignored my submission calling for renationalization of the Grid, but the logic is the same.

2. We need a carbon price, in one form or another, if we are to reduce emissions in line with our commitments. Given that all economy-wide options have been ruled out, we may as well start with an electricity specific policy. Within electricity, the existing Renewable Energy Target is a crude kind of price mechanism, with only two prices, one for renewables and the other for non-renewables. But, if we tweak that a bit, we can replace the largely irrelevant notion of “renewability” with emissions-intensity, and we have something like a carbon price. I pointed this out a couple of years ago. The Clean Energy Target Finkel Review doesn’t quite get there, but it goes most of the way.

3. The only way to get lower wholesale electricity prices is to expand renewables and let the owners of coal-fired power station take a corresponding hit to their profits.

4. Policy uncertainty has been at least as big a problem as bad policy. This was most obviously true of the Abbott government’s attacks on the RET, which stalled investment in renewables, while doing nothing for coal. Abbott is correctly blamed for many of our current problems. The implication is that a bipartisan compromise is better than holding out for the right policy, only to see it reversed after the next change of government. Whether that judgement stands up remains to be seen. If Turnbull does indeed face down Abbott, Abetz and the rest, and can reach an agreement with Labor, the arguments of the Review will be vindicated. And, with the denialists sidelined, it will become obvious that we need and can easily achieve more ambitious targets.

A couple of days ago, Gautam Adani made the long awaited announcement that the Adani board had decided to proceed with the Carmichael mine-rail project in the Galilee Basin. As usual there was an asterisk. Construction work won’t start until Adani can get financial backing. This was previously supposed to in June 2017 (that is, within weeks) but has now been deferred until 2018. Still, Adani has opened a head office in Townsville, promises to hire up to 250 staff and is also saying it will begin pre-construction works like land clearing in the September quarter.

But on the same day, unnoticed by almost the entire Australian press, with the exception of Peter Hannam at the SMH, the board of Adani Power, the putative buyer of Carmichael Coal, made a much more consequential decision. They are spinning off the 4GW Ultra Mega Power Plant* at Mundra, along with a huge load of debt, into a subsidiary, provisionally called Adani Power (Mundra). The plan it seems is to sell majority ownership, hopefully to the government of Gujarat, and thereby leave the slimmed down Adani Power with a manageable debt load, while it shifts further away from coal and into renewables.

But without Mundra, Adani Power won’t have nearly enough coal-fired plant to take up the output of even the first stage of Carmichael. And this “mine to plug” model was crucial to the viability of the project. Even if the modest recovery in thermal coal prices over the past year were sustained, Carmichael couldn’t cover its costs by selling on the world market.

So what is Adani up to? I’ve thought about a bunch of hypotheses and now I have one that I think makes sense. Adani doesn’t want to write off the $2 billion or so it’s already put into acquiring the mine site, but it also doesn’t want to throw good money after bad. Suppose that, Adani gets $1 billion in loans from the Turnbull-Canavan Northern Australia slush fund to build the rail line, which is owned by a separate Adani company in the Cayman Islands. They could use that money to get started on the rail line, while discovering yet more reasons not to start spending their own money on the mine.

That would buy them perhaps a couple of years during which something might turn up. The price of coal might go up a lot. abd the Hancock-GVK Alpha project might somehow be revived. If so, the rail line could be viable even without Carmichael.

And, if nothing did turn up, Adani would have bought a couple of years breathing space before writing off the losses that have already been incurred, without spending a significant amount of its own money. Adani (Caymans) would slide gracefully into bankruptcy and the Australian public would be left with a half-built rail line to nowhere and a billion dollar hole in our collective pockets.

Of all the explanations I’ve tried out, this is the one that makes most sense to me right now. Comments appreciated.

* I love this grandiose name, redolent of the great days of Soviet-inspired central planning. The UMPP program was started with great fanfare a decade or so ago, but has now collapsed almost completely.

The Energy Minister Josh Frydenberg has announced legislation to allow the Clean Energy Finance Corporation to fund coal-fired power stations using Carbon Capture and Storage (CCS), often called “clean coal”. Although there has been plenty of criticism, this is actually a Good Thing.

If it worked at low cost, CCS would solve a lot of problems, particularly for Australia. We could burn coal, and store the resulting carbon dioxide underground, fixing much of the climate change problem without changing anything else. The ease of this (hypothetical) solution is why CCS plays a big role in lots of climate change scenarios.

Unfortunately, cost-effective CCS doesn’t exist, and isn’t likely to. So, barring some great new discovery, the change in CEFC rules is purely symbolic.

What makes the announcement a Good Thing is that avoids the “bait and switch” used by Frydenberg and others in the past, where clean coal is described in terms of CCS, then shifted to included “High Efficiency, Low Emissions” (HELE) coal plants. This term refers to the fact that plants constructed today are indeed more efficient, and therefore have lower emissions per unit of electricity, than those built thirty years ago. But they are still far worse than gas-fired plants let alone renewables or (if it could be made to work) CCS.

Looking at news coverage and the emails I’m getting from climate action groups, it looks as if I may have misinterpreted the Queensland government’s move on royalties (or maybe I posted before the decision process was complete). The latest news is that the state government will take no part in processing any loan to Adani from the Northern Australia Infrastructure Fund. I’ll try to post again when I get a clearer picture on this.

What remains clear is that Adani is having a lot of trouble finding bank loans or equity investors to invest in the Carmichael mine project. Given the poor economics of the project, any money lent by Australian governments is likely to be lost, leaving the publci with a stranded and useless asset.

Update 31/5/17 The Guardian reports that https://www.theguardian.com/business/2017/may/30/adani-reaches-mine-royalty-agreement-with-queensland-government to defer nearly all of its royalty obligations for the first five years of production under the new deal, with interest charged on anything owed to the state above that. Almost certainly the interest rate would be well below what a commercial lender would charge, given the risk of default.

More noteworthy, I think, is the following

That would be the trigger for what the company has flagged would be $100m to $400m of preliminary works. But the deadline for financial close, the securing of bank backing to build the mine and rail to haul coal to the coast, is early 2018

As has been true for the past several years, the date when the project actually starts still seems to be at least a year away.

We’ll see at least some money on the table if the “preliminary works” start on the supposed schedule. But my guess is that the scale of the work will be less than meets the eye. I wonder, for example, whether the expenditure figure includes work done before Adani mothballed the project back in 2015.

That’s the self-explanatory headline for my latest piece in the Brisbane Times (reproduced in the other Fairfax papers, I think). Text is over the fold.

And, on the same theme, Richard Denniss.

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