Political uncertainty clouds future of energy

February 18, 2014

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Researchers from Murdoch University are investigating how the Federal Government’s efforts to repeal the carbon tax are affecting investments in Australia’s energy sector.

Lead researcher and PhD candidate Matt Shahnazari said even if the carbon tax was repealed in the short-term, the industry still faces uncertainty.

“Labor and the Greens hold the balance of power in the Senate until July, and are refusing to back the Government’s attempts to abolish the tax,” he said.

“The effect of the electoral cycles and more stringent global mitigation efforts mean that a carbon price may be reinstated in the future.”

Mr Shahnazari said this uncertainty over future policy settings influences current investment decisions in long-lived assets, such as electricity generation facilities.

Researchers developed a decision framework to investigate one potential business response to carbon pricing.

The scenario considered the options of a private investor in an existing coal plant – spend money to convert the facility to a lower emission combined-cycle gas turbine plant (CCGT), abandon the plant, or do nothing.

“The findings show that although the current political uncertainty may delay investment in CCGT conversion, the expectation that carbon pricing will be reinstated reduces the amount of option premium to defer the decision,” Mr Shahnazari said.

“Those who are serious about meeting carbon policy objectives need to create a more stable political environment, as the uncertainty around the carbon tax is hindering investment in cleaner technologies.

“If that stability can’t be achieved, policy makers should consider setting a higher carbon price to improve the business case for converting to lower emission systems.”

The research team consists of Mr Shahnazari and supervisors Dr Jonathan Whale from Murdoch University’s School of Engineering and Information Technology, Associate Professor Bryan Maybee from Curtin University and energy economist Adam McHugh from Ernst and Young.

Some of this work has been published in the latest edition of Applied Energy, available online here.

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