$60 carbon price key to cutting CO2: power retailer

SINGAPORE (Reuters) - An A$80 ($60) cost of carbon within the next decade will be needed to drive clean-energy investments, an Australian gas and energy retailer said on Tuesday, underscoring potentially high costs for consumers.

It also lays out the challenge power firms face in trying to cut their own emissions as carbon liabilities steadily increase under the government's planned emissions trading scheme.

The task is even harder for state-funded Synergy, Western Australia's largest power retailer with more than 900,000 customers, because it is indirectly liable for emissions by the generators it buys power from.

Simon Middleton, Synergy's wholesale business development manager, said the retailer faced a carbon cost of about A$100 million from July 1, 2011, if the emissions trading scheme was passed by parliament this year.

In the scheme's second year from mid-2012, the liability could rise to about A$250 million, assuming official estimates of an initial free-market carbon price of A$25 a metric ton hold true.

"Over the medium term -- 10 to 15 years -- you'll see the price moving to about A$80 a metric ton. And the reason for that is what is the required price that encourages emissions reductions technology," Middleton told Reuters in an interview.

"So if you at look at carbon capture and storage and renewables, what's the price that you need to bring about those technologies? Those technologies are likely to be the price setters," he said.

The A$80 cost was based on an internal analysis that assumed people would exploit the cheapest source of emissions reductions first before switching to more expensive options to achieve on-going reductions, Middleton said.

Synergy's combined gas and electricity purchase liabilities were about 10 million metric tons of CO2 per year.

"At this stage we believe about 7 percent of the electricity we buy would be covered by free permits. So for all intents and purposes we're very exposed," he said of emissions trading.

JUGGLE

In 2008, Synergy bought 12,387 gigawatthours of electricity, with about 60 percent coming from gas, 35 percent from coal and the remainder from renewables, such as wind.

Middleton said generators had "change-in-law" clauses in their contracts, allowing them to pass CO2 liability to retailers.

"We, by default, end up managing that liability even though we're not directly liable," he said.

Adding to the cost juggling was a growing customer base and rising average household power consumption, which meant customers needed a strong price signal to curb carbon emissions.

"Ultimately the cost of carbon will be passed to customers," Middleton said. "And that pass-through is the key risk that retailers face because we have fixed electricity tariffs. There needs to be a regime that enables tariffs to reflect the cost of carbon."

To help manage costs, Synergy is looking to source more power from renewables, has rolled out energy efficiency programs, and signed MOUs with geothermal and wave power firms.

The retailer has also signed a deal with the state-funded Forest Products Commission to plant an initial 5,000 hectares (12,500 acres) to earn forest carbon offsets.

The contract lets Synergy opt to quickly ramp up investment by a further 10,000 hectares by 2010 and increase the acreage still further each year until 2019.

Under the planned emissions trading scheme, the government has allowed the forestry sector to start first from July next year, making it the first to generate Australian Emissions Units that can be used by big emitters to meet their carbon reduction obligations.

"The shape of our business will be radically different in the future, in 2020. Largely, people have not appreciated electricity is a precious commodity," Middleton said.

(Editing by Clarence Fernandez)

(A$=76.5 U.S. cents)