The Regional Effects of Pricing Carbon Emissions: an Adjustment Strategy for the Latrobe Valley

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

THE REGIONAL EFFECTS OF PRICING CARBON EMISSIONS: AN ADJUSTMENT STRATEGY FOR THE LATROBE VALLEY

FINAL REPORT

REGIONAL DEVELOPMENT VICTORIA

SALLY WELLER

PETER SHEEHAN

JOHN TOMANEY

NOVEMBER 2011

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

THIS WORK IS COPYRIGHT. APART FROM ANY USE AS PERMITTED UNDER THE COPYRIGHT ACT 1968, NO PART MAY BE REPRODUCED FOR COMMERCIAL PURPOSES WITHOUT THE PRIOR WRITTEN PERMISSION OF THE AUTHORS. REQUESTS AND ENQUIRIES CONCERNING REPRODUCTION SHOULD BE ADDRESSED TO THE CENTRE FOR STRATEGIC ECONOMIC STUDIES, VICTORIA UNIVERSITY, PO BOX 14428, MELBOURNE, VICTORIA 8001.

AN APPROPRIATE CITATION FOR THIS REPORT IS:

WELLER, S., SHEEHAN, P. AND TOMANEY, J. (2011) THE REGIONAL EFFECTS OF PRICING CARBON EMISSIONS: AN ADJUSTMENT STRATEGY FOR THE LATROBE VALLEY. REPORT TO REGIONAL DEVELOPMENT VICTORIA. CENTRE FOR STRATEGIC ECONOMIC STUDIES, VICTORIA UNIVERSITY. NOVEMBER.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

EXECUTIVE SUMMARY

This report examines the social and economic impacts that a carbon price is likely to produce in Victoria’s Latrobe Valley and in the wider Gippsland region. The Latrobe Valley, the brown-coal rich area that generates most of Victoria’s electricity, is acknowledged as one of the principal areas likely to be affected adversely by the introduction of a carbon price in 2012 and the planned introduction of carbon trading in 2015.

The report’s content is based on a review of reports and submissions on the regional effects of emissions-reduction policies, interviews with key stakeholders in the Latrobe Valley, detailed analysis of ABS Census data and critical examination of other statistical data. The Latrobe Valley is one of Victoria’s key economic regions and in 2009 was home to over 75,000 Victorians. Its power stations, which dominate Victoria’s electricity generation sector, are fuelled primarily by the area’s plentiful but emissions-intensive brown coal resource. The introduction of a carbon price aims to increase the cost of electricity produced using fossil fuels, in proportion to their emissions intensity, and will therefore reduce the competitiveness of the Valley’s brown-coal power generators. The Federal Government’s 2011 Clean Energy Future plan recognises this reality and provides compensation for generators, for trade-exposed high-emissions industries and for low income households. It also offers modest regional adjustment assistance to regions, such as the Latrobe Valley, that will bear more than their fair share of adjustment costs.

This report views the Latrobe Valley economy as a part of a more diversified Gippsland economy, reflecting efforts in the region to consolidate a Gippsland-wide vision, identity and model of governance. Nonetheless, since the highly specialised economy of the Latrobe Valley faces the largest immediate adjustment pressure, it remains the report’s primary focus. The strategies proposed in this report aim to strengthen the Valley’s integration with other Gippsland towns and increase the extent to which its industrial trajectory is articulated with that of wider Gippsland.

Various attempts to model the impacts of policy change using general computable equilibrium modelling agree that the Latrobe Valley will be one of the regions most affected by the carbon price and subsequent emissions trading systems. This report argues that because modellers begin with optimistic assumptions about population and economic growth rates, they exaggerate regional economies’ capacities to adjust to policy change. This is because the new jobs required to redeploy workers displaced by structural change are less likely to be created when growth is slow. Moreover, in computable general equilibrium modelling, the assumption of costless inter-regional transfers of capital and labour underestimates the impacts of policy change in more geographically isolated places. Although skilled workers are likely to move in search of better jobs, less skilled workers and already disadvantaged groups are ii

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

more likely to remain in places with fewer job opportunities. This may lead to the creation of entrenched pockets of disadvantage, as witnessed in the United Kingdom’s coal mining regions in the 1980s. It is important that regional responses to the carbon price avoid such outcomes.

The Latrobe Valley is familiar with the local effects of State and Federal scale policy changes. Its economy was slow to recover from the structural adjustment processes associated with the privatisation of the electricity sector in the early 1990s. It faces multiple challenges in addition to the stress that will accompany the introduction of the carbon price. This report highlights a number of areas in which the Valley has under-performed relative to other places in Victoria, including its relatively low labour market participation rates and relatively high rates of unemployment, its depressed housing market and its limited supply of local jobs. The interaction of low incomes and comparatively inexpensive housing suggest that the Valley’s more vulnerable residents are unlikely to be in a position to relocate out of the area in the event of adverse consequences arising from the carbon price and its effects on the area’s core economic activity of producing electricity from brown coal.

This report shows that despite significant economic diversification in recent years, particularly into the retailing and community services sectors, the Valley’s economy continues to be dominated by power generation. By reorganising ABS Census data to identify electricity, mining and ‘related’ industries, this report estimates that in 2006 these industries accounted directly for over 3000 jobs in the Latrobe Valley, or almost 11% of all local employment. Importantly, almost one in three of the Valley’s higher paid jobs were held by the employees of the electricity and associated industries. In the context of a local labour market dominated by public and community services employment, the decline or loss of these industries would have adverse effects across the local economy through the loss of income spent locally in retail sales and services. Every job in the electricity and related industries could sustain as many as four additional jobs in retail and service sectors.

The new context of the carbon price also creates opportunities for the Valley. Its electricity and related industry workforce is highly skilled and already services national and international clients. This workforce is one of the Valley’s key competitive strengths. There are sound arguments for maintaining this area as Victoria’s centre of electricity production and heavy industrial specialisation. If there is to be any major technological breakthrough that would reduce the emissions of electricity production, distribution or use, that innovation is likely to come from people who know about and care about electricity. Economic theories of agglomeration anticipate that such innovations are more likely to occur when people with a high level of knowledge, expertise and commitment are working proximately, where a plethora of cooperative and competitive processes work to stimulate new ideas and new applications of old ideas. Moreover, despite privatisation, many among the Valley’s energy workforce retain a public service ethos that could and should be harnessed to the task of reducing the emissions generated in electricity production. The least cost means of transitioning to a low carbon economy should seek to maximise the utilisation of the Valley’s electricity-related

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resources. This implies maximising the extent to which new developments utilise the State of Victoria’s investments in transmission infrastructure in the Valley and in the corridor linking it to Melbourne.

At the time of writing, the Federal Government’s Clean Energy Future package, which includes a set price on carbon emissions, has passed through both Houses of Parliament. The broad outline of related policy initiatives have been established (Australia, 2011b). However, the fine details of the various initiatives are yet to be determined. The government has announced that the carbon price will be transformed into an emissions trading scheme in July 2015, but its parameters have not yet been agreed upon. Under these plans, the pressure on the Latrobe Valley economy will increase incrementally, as the floor price of permits to emit carbon increases. However, programmes within the Clean Energy Future package, if combined with existing Victorian state initiatives, have the potential to contribute to the revitalisation of the local economy.

This report argues that the magnitude of the adjustment task – to achieve lower greenhouse emissions and simultaneously revitalise local economies – is likely to be larger and more complicated than anticipated by the Commonwealth. These are uncertain times. The outcomes of the carbon price for the electricity sector in the Latrobe Valley will depend on many unknowns – how energy firms and investment markets react to the carbon price; whether and when planned closures of high emissions plants are implemented; when technologies to reduce the emissions arising from brown coal are perfected; whether new industrial uses of brown coal can be identified and commercialised; which new renewable technologies emerge as commercially viable base load sources of electricity; whether emerging technologies are able to build on existing electricity and gas infrastructure, and whether they can be located in the Latrobe Valley. The likelihood and timing of technological breakthroughs depends on the level and success of investments in research and development. Whilst the carbon price will not be high enough to stimulate that investment in the short term, the carbon price does signal to firms that such investments will have to be made. In addition to the incentives for energy innovation contained in the Clean Energy Future package, the Federal and State governments are supporting various initiatives to reduce the emissions produced in the coal-based electricity sector. Among renewable energy sources, wind and solar generators are unlikely to locate in the Valley, but other sources such as biomass and geothermal energy show promise.

In its Clean Energy Future package, the Federal Government has provided $5.5 billion over six years to assist electricity generators to adjust to the carbon price. Generators in the Latrobe Valley are likely to be the main beneficiaries of this compensation. Other initiatives, including loans to generators, will be put in place to guarantee energy security and to protect against the risk of unexpected closures or capacity reductions. A new Energy Security Fund will negotiate the closure of up to 2,000 megawatts of high-emissions coal-fired generation capacity, with the Valley’s Hazelwood Power station likely to be an initial target. A “structural adjustment support package” will be provided for the workforce of plants that are contracted by the

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

government to close down. The assistance package appears to offer help accessing training but no additional training places. Assistance will be available to direct or ‘first order’ job losers. A modest $200 million over seven years from 2012-13 has been set aside to assist regional areas affected by the introduction of a carbon price. The Latrobe Valley’s share of this fund is not known. While encouraging a positive transition to a low emissions future, planning must also commit to minimising adverse impacts. The Latrobe Valley’s experiences after the privatisation of the energy sector in the 1990s demonstrate that market processes are unlikely to ‘clear’ this geographically isolated local labour market. Moreover, in an isolated labour market, programs designed to assist workers directly affected by a decline in brown coal electricity production could induce the displacement of less skilled and less able workers in a sequential ‘ratcheting down’ job reallocation process. Unless new jobs are created to expand the local labour market, job placement programs offered as the regional structural adjustment component of the Clean Energy Futures package are likely to have the unintended effect of further disadvantaging the region’s least skilled workers; workers that have never worked directly in the electricity industry. At the end of this chain of effects, the unhappy combination of business disinvestment and low worker mobility risks creating entrenched pockets of disadvantage that not only allocates an inequitable share of the cost of adjustment on the communities of the Latrobe Valley, but creates long-term costs for the Victorian and Australian community through welfare transfers. To avoid this outcome, mitigation strategies will need to focus on the revitalisation of the regional economy and on the creation of new jobs, and to expand the scope of the adjustment effort beyond the ‘first order’ effects as measured by the re-employment of displaced electricity sector workers.

The report argues that the long-term regional policy approach in the Valley should be to build on the region’s existing strengths in electricity production and its related industries, focus on creating new jobs, and emphasise building up the local social and economic infrastructure. Part of this process must involve strengthening the entire Gippsland economy and improving the articulation between the Latrobe Valley and wider Gippsland economies. Theoretically, the report draws on the notion of related variety—an approach that advocates economic diversification by building from existing strengths—to support its regional development strategy. The report proposes a focus on:  Preventative interventions to manage the transformation of the electricity sector;  A commitment to maintaining the Latrobe Valley as a centre of energy production and expertise;  A commitment to developing new industries in the Valley that build on its electricity, gas and coal-related expertise;  The development of a strategy for achieving that goal;  The development of facilities that support the export of the Valley’s energy- related expertise;  Increased concentration of energy and coal related research and development; v

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

 Revitalisation of education and training activities within the Latrobe Valley and adjacent regions;  Support for transitional infrastructure projects; and  Support for community capacity building. This report argues that to facilitate a smooth adjustment process that will secure long- term prosperity in the Latrobe regional economy and maintain the value of its community and private assets, the use of the new funds provided in the Clean Energy Future package must be integrated with existing local and State initiatives and supported with complementary policies that strengthen regional communities, economies and structures of governance. The report’s conclusion proposes a suite of coordinated programs to facilitate adjustment in the electricity sector, to train a new generation of workers with expertise in electricity and power generation (including renewable sources), and to build a prosperous and low-carbon regional vision in Gippsland.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

ABBREVIATIONS

ABS Australian Bureau of Statistics AEMC Australian Energy Market Commission AEMO Australian Energy Market Operator AER Australian Energy Regulator ARENA Australian Renewable Energy Agency CCGT Combined Cycle Gas Turbine CCS Carbon Capture and Storage CEFC Clean Energy Finance Corporation COAG Council of Australian Governments

CO2-e CO2 equivalent CPRS Carbon Pollution Reduction Scheme DPCD Department of Planning and Community Development EGWW Electricity Gas Waste and Water EITE Emissions Intensive Trade Exposed ESAA Energy Supply Association of Australia ESAS Electricity Sector Adjustment Scheme ETIS Energy Technology Innovation Strategy ETS Emissions Trading Scheme GDP Gross Domestic Product GHG Green House Gas GLNG Gippsland Local Government Network GNI Gross National Incomes

GtCO2-e Gigatonne of CO2 equivalent GW Gigawatt GWh Gigawatt hour IDGCC Integrated Drying Gasification Combined Cycle IEA International Energy Agency IPCC Intergovernmental Panel on Climate Change LGA Local Government Area LNG Liquefied Natural Gas MCE Ministerial Council on Energy MMA McLennan Magasanik Associates MRET Mandatory Renewable Energy Target MW Megawatt MWh Megawatt hour NEM National Electricity Market NEMMCO National Electricity Market Management Company NET National Emissions Trading Task Force vii

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

OCGT Open Cycle Gas Turbine OIR Old Industrial Region ppm parts per million RCAF Regional Communities Assistance Fund RDV Regional Development Victoria RET Renewable Energy Target REC Renewable Energy Certificate SECV State Electricity Commission of Victoria SCGT Simple Cycle Gas Turbine SLA Statistical Local Area SSD Statistical Subdivision VEET Victorian Energy Efficiency Target VRET Victorian Renewable Energy Target

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Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

LIST OF FIGURES

Figure 2.1 Expected Change in the National Energy Mix 13 Figure 2.2 Treasury’s Expectations: Latrobe Valley Energy Production 14 Figure 2.3 Latrobe Valley Futures Under Different Carbon Price Scenarios 15 Figure 3.1 The Latrobe Valley in Victoria 19 Figure 3.2 The Latrobe Valley: Coal and Community 20 Figure 3.3 Power Station Ownership Structure 24 Figure 3.4 The Structure of the Brown Coal Energy Sector 26 Figure 4.1 Population Trends, Latrobe Valley Townships 33 Figure 4.2 Proportion of Residents Aged Over 65 years 34 Figure 4.3 The Valley’s Population Structure 35 Figure 4.4 Gippsland’s Population 36 Figure 4.5 Gippsland’s Expected Population Change 38 Figure 4.6 Gippsland’s Expected Workforce Growth 38 Figure 4.7 Labour Market Participation Rate, Latrobe SSD, 2006 39 Figure 4.8 Labour Force Status, Latrobe SSD, 1996, 2001, 2006 40 Figure 4.9 Unemployment Rates (%), Latrobe Valley Postcodes 41 Figure 4.10 Health Care Card Holders 41 Figure 4.11 Median Weekly Household Income 42 Figure 5.1 Industry Shares of Income and Employment 48 Figure 6.1 Persons Employed in EGWW by Post-code, 2006 52 Figure 6.2 Percentage Employed in EGWW by Post-code (%), 2006 53 Figure 8.1 EU Coal Production and Consumption 72 Figure 9.1 Orderly Adjustment 87

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

LIST OF TABLES

Table 2.1 The Efficiency of Energy Sources 6 Table 3.1 The Privatisation of Latrobe Valley Generators 22 Table 3.2 The Efficiency of Latrobe Valley Coal-fired Power Stations 27 Table 3.3 Direct Employment in Electricity Production in the Latrobe Valley 28 Table 4.1 Latrobe’s Age and Gender Profile 35 Table 4.2 Expected Growth Rates and Population Growth 2026 37 Table 4.3 Median Housing Prices 43 Table 5.1 Industry of Employment of People Working in the Latrobe Valley, 2006 45 Table 5.2 Employment by Industry and Gender, 2006 47 Table 5.3 Sectoral Contributions to Income and Employment, 2006 48 Table 5.4 Industry Income Distribution, Latrobe Valley, 2006 49 Table 5.5 Household Structure by Industry, 2006 49 Table 5.6 Regional Economic Multipliers, City of Latrobe 50 Table 6.1 Age Profile of Men in the Electricity Workforce, 2006 53 Table 6.2 Occupations of Electricity Production Workers, Latrobe Valley, 2006 54 Table 6.3 Occupation by Industry, Electricity Related Sectors, Latrobe Valley, 2006 55 Table 6.4 Highest Level of Education, Working Population, Latrobe Valley, 2006 56 Table 6.5 Household Structure, Electricity Related Workforce, Latrobe Valley, 56 2006 Table 7.1 Possible Coal Initiatives in the Latrobe Valley 61 Table 7.2 Possible Futures for the Latrobe Valley Power Industry 67 Table 8.1 Production of Hard Coal in the EU, 1996 to 2004 72 Table 8.2 Coal Production and Employment, Selected Countries, 1980-1995 73 Table 8.3 Varieties of Restructuring 74

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

TABLE OF CONTENTS

EXECUTIVE SUMMARY ...... II LIST OF FIGURES ...... IX LIST OF TABLES ...... X TABLE OF CONTENTS ...... XI

CHAPTER 1: INTRODUCTION ...... 1 1.1 BACKGROUND ...... 1 1.2 AIMS AND OBJECTIVES ...... 1 1.3 APPROACH AND METHODS ...... 2 1.4 STRUCTURE OF THE REPORT ...... 4 CHAPTER 2: AUSTRALIA’S CARBON PRICE ...... 6 2.1 THE DESIGN OF THE CARBON PRICE ...... 7 2.2 THE ANTICIPATED IMPACTS OF THE CARBON PRICE...... 10 2.3 REGIONAL AND EMPLOYMENT IMPACTS ...... 13 2.4 CONCLUSION ...... 18 CHAPTER 3: ENERGY IN THE LATROBE VALLEY ...... 19 3.1 INTRODUCING THE LATROBE VALLEY ...... 19 3.2 THE COAL-FIRED ELECTRICITY PRODUCTION ...... 20 3.3 THE ENERGY INDUSTRY: CONTEMPORARY PROFILE ...... 23 3.4 OIL AND GAS IN GIPPSLAND ...... 29 3.5 ENERGY SECTOR AND COMMUNITY RELATIONS ...... 30 3.6 CONCLUSION ...... 32 CHAPTER 4: GIPPSLAND’S POPULATION AND WORKFORCE ...... 33 4.1 RECENT POPULATION TRENDS ...... 33 4.2 POPULATION PROJECTIONS ...... 36 4.3 THE LOCAL LABOUR MARKET ...... 39 4.4 INCOMES ...... 43 4.5 HOUSING PRICES ...... 43 4.6 CONCLUSION ...... 44 CHAPTER 5: THE ELECTRICITY SECTOR IN THE LABOUR MARKET ...... 45 5.1 EMPLOYMENT STRUCTURE ...... 46 5.2 A GENDERED LABOUR MARKET ...... 47 5.3 INCOME STRUCTURE ...... 48 5.4 HOUSEHOLD STRUCTURE ...... 49 5.5 EMPLOYMENT MULTIPLIERS ...... 51 5.6 CONCLUSION ...... 52 CHAPTER 6: THE ELECTRICITY INDUSTRY WORKFORCE ...... 53 6.1 RESIDENTIAL LOCATIONS OF EGWW WORKERS...... 53 6.2 EGWW WORKFORCE AGE CHARACTERISTICS ...... 54 6.3 EGWW OCCUPATIONAL PROFILE ...... 55 xi

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

6.4 EGWW EDUCATIONAL BACKGROUND ...... 56 6.5 HOUSEHOLD STRUCTURE ...... 57 6.6 CONCLUSION ...... 58 CHAPTER 7: THE MAGNITUDE OF THE ADJUSTMENT TASK ...... 59 7.1 INNOVATIONS IN BROWN COAL AND ELECTRICITY PRODUCTION ...... 59 . 7.2 THE IMPACT OF THE CARBON PRICE ON OTHER INDUSTRIES ...... 63 7.3 FOUR SCENARIOS FOR THE FUTURE OF THE LATROBE VALLEY ...... 64 7.5 CONCLUSION: THE STRUCTURAL ADJUSTMENT TASK ...... 69 CHAPTER 8: BEST PRACTICE IN AUSTRALIA AND OVERSEAS ...... 69 8.1 INDUSTRIAL RESTRUCTURING IN EUROPE ...... 69 8.2 NEW REGIONALISM IN NORTHERN ADELAIDE ...... 77 8.3 THE LABOUR ADJUSTMENT EXPERIENCE ...... 79 8.4 CONCLUSION ...... 81 CHAPTER 9: KEY POINTS AND POLICY OPTIONS ...... 83 9.1 THE PRINCIPLES OF STRUCTURAL ADJUSTMENT ...... 83 9.2 VICTORIA’S POSITION ON REGIONAL ADJUSTMENT ...... 84 9.3 MANAGING AN EVOLUTIONARY TRANSITION ...... 85 9.4 SHORT-TERM LABOUR ADJUSTMENT ...... 86 9.5 LONGER TERM REGIONAL DEVELOPMENT ...... 88 9.6 CONCLUSION ...... 91 REFERENCES ...... 92 APPENDIX A1 COAL IN GIPPSLAND ...... 104 APPENDIX A2 POWER STATION UNITS ...... 105 APPENDIX B SYNTHETIC INDUSTRIAL CLASSIFICATION ...... 106

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CHAPTER 1 INTRODUCTION

This report “The Regional Effects of Pricing Carbon Emissions: An Adjustment Strategy for the Latrobe Valley” was commissioned by Regional Development Victoria to explore the likely consequences of the Commonwealth’s planned introduction of a carbon price for the Latrobe Valley in Victoria, to design an approach for the Valley’s transition, and to establish a baseline of data from which to measure the regional impacts of the carbon price and associated interventions in future years. The paper focuses on the medium term; that is, on the years 2012 to 2026, but with a view to securing the region’s longer term future.

1.1 BACKGROUND

This report updates and expands on a report prepared for the Victorian Government in late 2009, as part of the preparations for the Commonwealth’s (then) planned Carbon Pollution Reduction Scheme (CPRS). The original project brief had recognised that the Latrobe Valley was likely to be exposed to significant structural adjustment pressures following the implementation of carbon pricing. The CPRS was expected to reduce the competitiveness of the region’s high-emission brown coal fired power generators relative to more carbon-efficient energy sources, producing adverse effects for regional industry, employment growth and community wellbeing. Consequently, successive Victorian Governments introduced a range of initiatives in the years 2009 to 2011 that aimed to assist the State’s vulnerable Latrobe region’s transition to a low carbon future, including initiatives to support economic diversification, to enhance local systems of governance and to improve local capacities for economic planning. This report forms part of the Victorian Government’s continuing effort to identify a path by which Victoria and the Latrobe Valley can make this transition as smoothly and as effectively as possible.

1.2 AIMS AND OBJECTIVES

This report expands and updates the earlier report, with the aim of promoting greater understanding of the scale and nature of the likely effects of the Commonwealth’s new carbon pricing and related policies, as described in its Securing a Clean Energy Future blueprint. After considering the situation of the region and assessing the magnitude of the adjustment task, the project proposes a range of options for providing structural adjustment assistance in a way that promotes the long-term economic viability of the Latrobe Valley and Gippsland economies. The project’s terms of reference were to provide:  A detailed analysis of the impacts on the Latrobe Valley that might be expected to arise following the implementation of the Commonwealth’s Securing a Clean 1

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Energy Future initiatives. The analysis would complement macro level estimates of the regional impacts of the Commonwealth’s policies by providing a ‘bottom- up’ picture of the likely impacts for businesses, individuals and communities in the Latrobe Valley and central Gippsland. This analysis would pay specific attention to likely impacts in the townships of Churchill, Morwell, Moe and Traralgon.

 An assessment of the structural adjustment ‘task’ likely to face the Victorian Government and the local community. This should include consideration of: . The likely resilience of the Latrobe Valley; that is, its capacity to withstand potential adverse impacts, given its existing economic prospects and the Government support already committed to the region; . The prospects for a longer term economic transition based on clean energy technologies; . The likely timing of the structural adjustment issues in the region, including identification of any particular potential crisis points.  A review of structural adjustment strategies, implemented by governments both in Australia and overseas, that have proved successful in managing impacts of a similar scale and nature as those identified, with an emphasis on measures that could assist communities to make a successful transition to a revised economic base.  Provide recommendations about the most effective measures available to Government seeking to assist the Latrobe Valley during the transition to a low carbon future. These should be developed with a view to improving regional outcomes over the short to medium term and the longer term.

1.3 APPROACH AND METHODS

The likely impacts of the Carbon Price in the Latrobe Valley depend on many factors. These include the final design parameters of the price, the reactions of the firms that currently operate brown-coal-fired power stations, the extent to which new energy sources and businesses locate in the Latrobe Valley and the extent to which other types of industry are able to develop. The impacts on the local labour market will depend on the trajectory of the Latrobe Valley’s industries and their ability to use the skills that currently exist in the local labour market, the region’s capacity to deliver the new skills and expertise required by emerging industries, and the extent of population movements into and out of the region. The key problem for the structural adjustment of any economy is that labour is relatively immobile, whilst capital is relatively mobile. Currently, the energy businesses that constitute the core of the Latrobe Valley economy are locked into place by their reliance on an immobile resource (brown coal). The location ‘fix’ secured by brown coal has forced energy producers to accept certain other costs (for example, transport and labour costs). This anchor will not affect firms that shift their activities to new energy sources in response to carbon prices. Less reliance on brown coal is likely to prompt a reassessment of other factors that influence industrial location. The future is therefore 2

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley uncertain. On the one hand, the carbon price might create an unprecedented opportunity for the Latrobe Valley to build from its existing energy expertise to revitalise its outlook, economy, skill base and communities. On the other hand, new technologies might be attracted to different locations, weakening the energy sector’s association with the Latrobe Valley. This report’s approach to understand the Latrobe Valley’s likely future involves first analysing its historical trajectory and then reviewing its current situation. Next, it identifies possible scenarios for the Latrobe Valley and Gippsland and assesses their implications for energy-related businesses and their employees, the local labour market and local communities. This provides an appreciation of the possible extent of the adjustment task. The report then draws on overseas and interstate experiences to develop a suite of policy recommendations. The work program included: Assessing the Valley’s Economic Trajectory Documenting the history of electricity production, privatization and its effects on the local labour market provides a context through which to comprehend the contemporary configuration of the Latrobe Valley and Gippsland economies. This understanding is important because the region’s historical trajectory constrains and shapes the range of its possible futures. Profiling Latrobe Valley Employment, Households and Communities An analysis of data from the Australian Bureau of Statistics and other data sources was undertaken to understand the composition of the Latrobe Valley and central Gippsland communities and labour markets, to estimate the importance of the electricity production sector to the local economy, to identify the numbers of workers and households that rely directly or indirectly on either the energy or coal sectors, and to identify other local businesses that might be adversely affected by the introduction of carbon pricing. Developing Impact Scenarios This task involved a review of debates around carbon-related policy changes and their predicted effects in regions and on the electricity generation sector. In the earlier project, this information was complemented by interviews with energy sector firms, community stakeholders and unions.1 The interviews and desk research aimed to better understand the perceived or likely impacts of policy changes on firms’ strategies, competitive positions and technology investments. In addition to examining the likely impact of emissions-reduction policies on individual firms, this assessment considered how policy change might trigger other institutional changes in relationships among electricity generators, distributors and retailers; between the energy industry and host communities; and among different levels of government.

1 This update report does not incorporate additional field research. However, review of recent documents confirms that some informants have changed their stance since the earlier research was undertaken. 3

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Assessing the Scope, Scale and Duration of the Structural Adjustment Task Four scenarios describing the unfolding of the scope, scale and duration of the structural adjustment process were developed. A matrix framework was developed to assist in developing systematic responses to them. Reviewing International Best Practice The project’s review of international best practice focuses on the longer term development of the Valley and on measures that could assist its communities to make a sucessful transition to a revised economic base. This discussion is framed by an analysis of the restructuring of coal-mining regions in Europe. Documenting Existing Initiatives The project then documents the range of existing interventions and programs that have been established by different levels and areas of government and which could contribute to the adjustment effect. This section considers the extent to which the compensatory aspects of the Securing a Clean Energy Future package complement these existing initiatives. Developing Recommendations on Effective Policy Measures The final stage of the work involved identifying longer term strategies for regenerating the Latrobe Valley in preparation for a less carbon-intensive future. Accordingly, the recommendations developed at the project’s conclusion seek to promote the Valley’s economic revitalisation while incorporating interventions to mitigate any negative effects that carbon pricing might produce.

1.4 STRUCTURE OF THE REPORT

The structure of the report follows these objectives and stages. It is organised into the following chapters. Chapter 2 describes the policy context, the Carbon Price and its likely outcomes. It highlights the uncertainties inherent in predicting the long term outcomes of policy change and critiques the way that econometric modelling conceives the regional structural adjustment task. Chapter 3 describes the history of coal-fired electricity production in the Latrobe Valley. It profiles electricity generation and related businesses with an emphasis on interdependencies among the coal mining, energy production and related businesses. Chapter 4 describes the Gippsland region’s population, workforce and communities. It highlights the persistently low rates of labour utilisation and high rates of unemployment, which are observed across the region but are concentrated in the Latrobe Valley. The chapter establishes the Valley’s disadvantaged socio-economic status relative to regional Victoria and metropolitan Melbourne. It argues that the market alone will not resolve the 4

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Latrobe Valley’s problems nor disperse its pockets of entrenched disadvantage. Chapter 5 establishes the importance of the electricity sector in the Latrobe Valley’s labour market. Chapter 6 details the electricity industry workforce and identifies its strengths and vulnerabilities. Chapter 7 presents an understanding of how carbon-price-induced restructuring of the Australian energy sector might play out in the Latrobe Valley. From this, it assesses the likely magnitude of the structural adjustment task. Chapter 8 examines experiences in Europe and Australia that provide possible models for supporting the Latrobe Valley’s development trajectory. Chapter 9 concludes by describing interventions that might assist the communities of the Valley to adjust to a low emissions future.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

CHAPTER 2 AUSTRALIA’S CARBON PRICE

The central objective of introducing schemes that price emissions is to reduce the amount of CO2 and other greenhouse gases (GHGs) entering the atmosphere. Australia’s new carbon price will encourage forms of electricity generation that have low or zero emissions and discourage activities that generate high emissions. The price set by the federal government to establish the intensity of these incentives and disincentives and therefore the pace at which the energy sector and the economy transform towards a low emissions future. In 2009, Victoria produced 22% of Australia’s greenhouse gas emissions. Approximately half (52%) of Victoria’s emissions were produced in the Latrobe Valley, where electricity is generated from brown coal, the fuel with the highest emissions intensity of any of the currently used energy sources in the National Energy Market (NEM). Although the Valley’s brown coal is of high quality, given its low intensities of harmful sulphur and ash, it has a high (up to 72%) water content, which reduces the efficiency of its use in electricity production compared to black coal. So much effort is required to produce power from brown coal that, on average, only 29% of the energy contained in the coal becomes electricity. Table 2.1 shows the efficiency of brown coal relative to other energy sources.

Table 2.1The Efficiency of Energy Sources

Power Source Efficiency CO2 Emissions

(%) (tonne CO2/MWh) Wind 50 0 Solar 6-42 0 Hydro 90+ 0 Gas Combined Cycle 50-55 0.35 – 0.7 Black Coal 36 0.9 Brown Coal 29 1.17 – 1.5 Source: NEMMCO (2006); DSE (2006) Note: A further 7% of generated electricity dissipates in transmission.

The federal government’s carbon reduction initiatives explicitly aim, inter alia, to restructure the energy sector and to reduce the economy’s dependence on brown coal. The nature and extent of the changes it induces in the Latrobe Valley’s brown-coal energy sector will depend on the detail of its policy settings, both at inception and into the future. Accordingly, this chapter describes the emerging shape of Australia’s planned carbon pricing and emissions trading arrangements. It briefly describes the history of policy development, then outlines the expected regional impacts of carbon pricing. The conclusion stresses the high level of uncertainty that surrounds these expectations.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

2.1 THE DESIGN OF THE CARBON PRICE

The gestation of carbon reduction policies has been slow and difficult. The impetus for an Australian carbon market emerged from the States and Territories via the 2004 Inter-Jurisdictional Working Group on Emissions Trading (later the National Emissions Trading Taskforce; NETT, 2007). The federal Labor opposition then joined with the state and territory governments to commission the independent Garnaut Climate Change Review. When the Rudd Labor administration came to power federally in 2007, the Garnaut Review became a joint Commonwealth-State project. Garnaut’s (2008) analysis incorporated a critical appraisal of the European experience of emissions trading and drew extensively on the United Kingdom’s Stern Review. It presented its preferred approach of a cap-and-trade carbon market scheme not only as compatible with capitalist development, but also as the strategy that would drive the next round of capitalist accumulation and reposition the Australian economy for future international competitiveness (Garnaut, 2008). Following Garnaut’s Report, the Commonwealth released a policy discussion Green Paper in July 2008 (Australia, 2008a). The Green Paper recognised that policies to reduce emissions rapidly must be tempered by the need to ensure overall energy security—to ‘keep the lights on’—and committed the government to addressing any adverse impacts of the policy change for workers, communities and regions. After an extensive consultation process, the detailed final form of the planned Carbon Pollution Reduction Scheme (CPRS) was outlined in a White Paper released on 15 December 2008 (Australia, 2008b). In response to industry and community concerns, it contained more generous compensation for high-emissions generators and trade exposed industries than had been proposed by Garnaut (2008) or the Green Paper (Australia, 2008a). It offered compensation for low income households to enable them to withstand electricity price increases, and foreshadowed the provision of structural adjustment assistance for adversely affected regions. It set a national policy target for reducing emissions to at least 5 per cent below 2001 levels by 2020, and at least and 80 per cent below 2000 levels by 2050. These compromises were intended to secure support for the policy from key business, community, union and environmental interests. In preparation for the impact of the CPRS in the Latrobe Valley, the Victorian Brumby state government instigated a suite of interventions to stimulate industry innovation and regional diversification (Victoria, 2009). At this point, the federal government’s policy implementation process unravelled when the CPRS failed to secure parliamentary approval. To reignite the policy process and craft a politically feasible program of action, the incoming minority Gillard government set up a Multi-Party Climate Change Committee, ‘Roundtable’ meetings for business and NGOs, an independent Climate Commission and a Productivity Commission review of carbon emission policies (PC, 2011). A series of ‘updates’ of the Garnaut Review (Garnaut 2011a, 2011b) and revised modelling by the Australian Treasury (Australia, 2011a) assessed the implications of a

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley carbon price for national, regional and sectoral economies.2 After further consultation with stakeholders, including the various State governments, new policies were developed to address concerns about energy security, industry competitiveness and the management of the change process. The upshot was a plan for a carbon price – that is, a set charge for the right to emit CO2 into the atmosphere – that would begin in 2012 but revert to a carbon trading scheme after three years, in July 2015. As set out in the policy document Securing a Clean Energy Future (Australia, 2011b), the tax would be accompanied by the creation of new institutions of governance, a set of monitoring and evaluation mechanisms to ensure that the tax did not produce unacceptable intended or unintended transformations, and a set of complementary interventions to stimulate innovation in both the fossil fuel and the renewable energy sectors. The key components of the carbon tax architecture are: . The creation of emission permits, beginning on July 1, 2012, with the initial fixed price of $23.00 per tonne of CO2 emitted rising at 5% per year (2.5% per year in real terms). This is a more moderate starting point and more modest rate of increment than had been proposed in the CPRS. . The scheme will transition to a flexible price cap-and-trade emissions trading system on 1 July, 2015. ‘Floor’ and ‘ceiling’ prices will apply until 2018. The Government will set future emissions caps with regard to a range of domestic and international factors. . The carbon price will apply to a wide range of high-emissions industries, but with a threshold of 25,000 tonnes of CO2-equivalent. The threshold implies that the policy will apply only to relatively large firms. The stationary energy sector is fully covered by the scheme. . Permits will apply to four of the six Kyoto greenhouse gases (carbon monoxide, methane, nitrous oxide and perfluorocarbons). . Emissions from agriculture, some landfill, biomass and biofuels are excluded. . Emissions from the transport sector will be managed separately, via fuel taxes. . Emissions permits will be private property and will be bankable from 2015-16. Gains from carbon permit trading will be taxable, and losses will be tax deductible. . After the fixed price period, emissions permits will be internationally tradable, both through Kyoto clean development mechanisms (or similar mechanisms introduced to replace Kyoto when it expires in 2012), and through linkages to other defined trading schemes. Not more than 50% of liabilities will be allowed to be met with imported credits. . New institutions will be created to govern the initiative. A Climate Change Authority will be created to implement, monitor and evaluate the plan. A Clean Energy Regulator will administer the carbon pricing mechanism. The Productivity Commission will review the plan’s progress. The Plan includes multiple initiatives that aim to reduce adverse impacts without compromising the scheme’s objectives:

2 The Treasury modelling updated similar work undertaken in 2008 (Australia, 2008c).The model’s parameters and predictors will be discussed in the next section. 8

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

. More than 50% of revenue from the tax will be used to offset its impact on household energy costs for low income households. This assistance will be delivered through tax cuts, a lump sum payment and income supplement. Welfare recipients will be assisted by increases in pension and benefit rates. . Under the Jobs and Competitiveness Program, permits will be issued to eligible emissions-intensive trade-exposed (EITE) industries at no cost. This subsidy will cover both onsite emissions and emissions arising from electricity use. Permits will be issued for 75% of direct emissions and 100% of indirect emissions. The Productivity Commission will review this component of the plan. . The plan creates an Energy Security Fund which will provide $5.5 billion over 7 years to facilitate adjustment in the coal-fired electricity generation sector, delivered in the form of cash and free permits. Assistance will be conditional on the preparation of ‘clean energy investment’ plans. The fund is designed to guarantee energy security and at the same time protect power generators from financial impairment. . The plan makes provision to finance the closure of the highest emissions power stations (up to 2,000 Mw by 2020). . A structural adjustment support package will be made available to workers displaced when generators are contracted to close down. The package will include job search assistance and assistance in accessing training and support via Job Services Australia. . An Energy Security Council will be created to assess, monitor and recommend responses to any emerging systemic energy risks. In addition, the package incorporates initiatives to support the transition to clean energy sources, including: . The creation of a Clean Energy Finance Corporation (CEFC) for investing in the development and commercialisation of renewable energy projects. It will be allocated $10 billion over five years from 2012-13. (It will not invest in Carbon Capture and Storage, which is funded from other sources). . An Australian Renewable Energy Agency (ARENA) will manage $3.2 billion, allocated over nine years from 2011-12, to provide competitive research and development grants for renewable technologies.3 . For existing businesses, a Clean Technology Program will provide $1.2 billion over seven years from 2011-12 to assist businesses reduce their emissions. There will be assistance to small businesses, supply chain initiatives and community groups. . A Clean Energy Skills Program, with $32 million funding redirected from other programs in the Department of Education, Employment and Workplace Relations portfolio, will help education providers, industries and workers develop the skills required to deliver energy efficient services.

3 The report foreshadows funding this initiative by diverting funds from the Jobs and Competitiveness program after it has been reviewed by the Productivity Commission. It will also redistribute dividend payments arising from the CEFC’s investments in innovation.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

. An expanded Low Carbon Communities Program will encourage households to reduce their emissions. It will be provided with an additional $250 million over four years and will assist low income and vulnerable households to better “manage their financial situation and their energy consumption” (Australia, 2011b:144). . Funding for Regional Structural Adjustment will be delivered by “a combination of additional funding to existing programs, as well as new or modified programs where appropriate” (Australia 2011b: 127). A total of $200 million over seven years from 2012-13 will be available to regions that are “strongly affected by the introduction of the carbon price” (Australia 2011b: 127). The types of intervention supported by this fund are not specified. . The package contains a suite of land management initiatives. A Carbon Farming Initiative, funded at $250 million over seven years from 2012-13, will purchase non-Kyoto compliant carbon credits to stimulate carbon sequestration and reafforestation and reduce logging in native forests. A Carbon Farming Futures Fund will work to reduce on-farm emissions ($429 million over six years from 2011-12), while a Biodiversity Fund will restore and protect carbon stores ($429 million over six years from 2011-12). A Natural Resource Management Fund ($44 million over five years from 2011-12) will help communities manage their natural resources. The government also plans to implement some additional interventions that, since they were not approved by its Multi-Party Climate Change Committee, were not included in the main Securing a Clean Energy Future policy package. These include an initiative that applies an effective carbon price to heavy on-road transport and interventions to support Australia’s steel and coal mining industries. The $1.3 billion (over six years) Coal Sector Jobs Package targets emissions-intensive coal mines. An additional $70 million will support technologies that reduce coal mining emissions. Because the region is likely to be severely affected by the carbon price and subsequent carbon trading arrangements, the Latrobe Valley and Gippsland are likely to qualify for federal government support across the range of compensatory programs, not only those related to electricity sector adjustment. In particular, the wider Gippsland region has strong interests in farming, forestry and natural resources industries that may attract the support of ancillary sectoral initiatives. The package’s transport policy also has implications for Gippsland, given its high use of road transport.

2.2 THE ANTICIPATED IMPACTS OF THE CARBON PRICE

The various iterations of the policy development process have generated many assessments of the impact of the carbon price against a variety of policy scenarios. Most of these assess the costs and benefits of policy action using General Computable Equilibrium (GCE) econometric modelling. Government agencies, universities and private consulting firms have each developed similar models, albeit with different calibrations and extensions. These models have the advantage of providing an indication of how a policy change might reverberate through the economy as changes in activity in one sector influence activities and competitiveness of other sectors.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Such models are stylized. They represent the economy’s sub-sectors mathematically, as a series of simultaneous equations that resolve as the factors of production revalue after a policy shock. In essence, the models operationalise neo- classical assumptions about the role of prices in equalizing supply and demand. Capital is assumed to flow toward those sectors that offer the best returns on investment, while labour is expected to reallocate to its most efficient use. The rate and direction of these flows are expressed in model parameters derived from current trends (for example the continuing shift of economic activity from manufacturing to services). Model outputs are projections that plot a smooth and continuous transition trajectory toward a new equilibrium (i.e. where the prices of capital and labour reflect the unfettered interaction of supply and demand). To estimate these trajectories, the models assume that pricing carbon will alter the consumption behaviour of households and the input choices of firms. The extent of change is assumed to be directly proportional to the magnitude of the carbon price.4 In other words, economic agents are assumed to respond to price signals in a straightforward and economically rational manner. There are no institutional barriers, information deficits, local allegiances or technical lock-ins to inhibit the action of market forces or close off inter-industry flows of capital and labour. The transition is smooth and complete. The models do not include the benefits of yet-to- be-identified future mitigation efforts, technological changes, nor the costs of worsening climatic conditions. Moreover, the models are static and timeless; they cannot examine the process of change, identify a developmental path or enumerate the practical interventions required to achieve target outcomes. The models assume that the economy’s new clean energy structure will evolve incrementally, uninterrupted by crises that might produce rapid changes in industry profiles and dislocate local labour markets. In this framework, the regional ‘structural adjustment’ process is positioned as extrinsic to the carbon-reduction policy framework. Adjustment costs are minimized by removing regulatory barriers or market failures that impede the flow of factors (capital and labour) to their most efficient use (IAC, 1993). When assessing the welfare implications of policy change, the only costs that are ‘counted’ as qualifying for policy attention are those that arise directly from the policy under review. In the case of the carbon price, for example, these include increased energy prices for households, the loss of asset value for coal-fired electricity generators and the potential loss of competitiveness of trade exposed firms. They also include the costs of helping workers displaced if the government sponsors the closure of particular high-emissions generators. However, it does not include the secondary costs, such as the cost of helping the workers of a contracting firm that relies on the decommissioned power station or the retail sales workers whose jobs disappear as a result of reduced sales after the

4 In the Treasury’s modelling (Australia, 2011a), 40% of cumulative emissions abatement to 2020 was expected to be achieved by curtailing demand to electricity. In reality, the effects of pricing carbon pricing will vary depending on the extent to which the carbon price leads to emissions reductions, the types of technology it encourages, the assumed direction and rate of change among sectors, and the assumed capacity of different markets to ‘clear’ (that is, return to equilibrium). 11

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley closure. It does not include the costs of the retail and services sector jobs that are abolished or not created as spending shifts to energy and energy-efficiency uses. In effect, because these models view the economy as adjusting through inter-sectoral and inter-regional reallocations of capital and labour, they both assume and ensure that the costs of adjustment are borne by the devalorising regions from which investment and jobs are lost. The benefits accrue to regions that attract new industries, new investment and new jobs. In the case of modelling emissions reduction, the models and their understanding of regional implications are conditioned by the modeller’s selection of a ‘baseline’ case against which the proposed policy change is assessed. The final preparations for Australia’s carbon price relied on Treasury modelling (Australia, 2011a) that compared two scenarios measured against two corresponding baseline cases.5 The “medium global action” reference scenario assumed that the rest of the world sets out to achieve a CO2-e concentration of 550 ppm, but that Australia takes no action. This is the reference case for the “core policy” scenario in which Australia joins the global effort to limit the concentration of CO2-e gases to 550 ppm. The “ambitious global action” reference scenario sees the rest of the world setting a more stringent target of 450 ppm, again with Australia taking no action. It corresponds to a “high price” local abatement scenario in which Australia joins global action that aspires to achieve a CO2-e atmospheric concentration target of 450 ppm. The Treasury modelling found that, overall, a carbon price in the “core policy” scenario would have small impacts on Gross National Income (GNI) compared to the reference case. This benign result is produced not only because the modelling assumes global action, but also because it assumes consistent economic growth rates and robust population growth, conditions that are conducive to an incremental and prosperous economic adjustment path. Competing models – especially those commissioned by the energy and mining sectors – anticipate much higher costs. The 2011 Treasury analysis combined multiple models to create a sophisticated representation of climate futures in the Australian national and the ‘global’ economy. To assess the impacts of carbon pricing in the energy sector and its fuel mix, the Treasury model averaged the results of two ‘bottom-up’ models of the energy sector - by SKM MMA (2011) and ROAM Consulting (2011) respectively. These models incorporate detailed information about the operation of the National Energy Market and the order in which different sources of power enter the market.6 As shown in Figure 2.1, SKM MMA model predicts that the pricing of carbon emissions will produce a more rapid contraction of brown coal-based electricity production sector than is predicted in the ROAM model, but both suggest that energy production using brown coal will become uncompetitive as the carbon price increases. Because the Latrobe Valley is the nation’s dominant brown coal production site, predictions for the future of brown coal

5 The assumption of global action has been controversial, but without it Australia’s mitigation efforts would have minimal effect on atmospheric concentrations of greenhouse gases. 6 At this scale, the market structure renders the price effects of policy change relatively more predicable. However, capital is likely to flow toward its most profitable (as opposed to its most efficient) use. 12

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley electricity map directly to expectations about the future of the generation capacity in the Latrobe Valley in its contemporary form. However, as summarised in Figure 2.2, the two models diverge in the longer term, reflecting their different assumptions about the utilisation of existing electricity infrastructure, the success of gas as a fuel source, and the pace at which innovative carbon capture and storage technologies will become commercially viable.

Figure 2.1 Expected Change in the National Energy Mix Source: Reproduced from Australia (2011a), Chart 5.19.

The Treasury analysis (Australia, 2011a) averages these expectations to conclude that coal-fired power generation using brown coal (without CCS) will have all- but disappeared from the Australian industrial landscape by 2020. Of course, these models do not take into account of all the effects of the Clean Energy Future plan. In particular, the models do not consider the effects of compensation to households. They cannot incorporate the energy industry’s strategic restructuring in anticipation of or in response to policy change.7

2.3 REGIONAL AND EMPLOYMENT IMPACTS

One explanation of the Treasury’s optimistic assessment of the economy’s capacity to adjust to a carbon price is that its modelling outcome is a product of its optimistic view of the nation’s future growth trajectory. Relatively strong growth implies a healthy rate of job creation, especially in the jobs that will be created to implement and manage the transition to a low carbon economy that the carbon price sets in motion. The Treasury’s

7 See Chapter 3.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley national scale of analysis smooths over regional differences in the rate of job creation and job destruction. Slower growth would reduce the numbers of new jobs being created, and may stall job growth. In regional economies that bear more of the costs of the carbon price, the labour adjustment process would be stymied by low growth. Similarly, in weak economic conditions the capital may not be available to build new enterprises and new industries. The Clean Energy Future’s investment vehicle recognises this potential threat to structural adjustment.8 The adjustment process envisaged by Treasury and similar econometric models depends on the assumption that, in the long run, real wages will adjust downward to expand employment and ‘clear’ any unemployment generated by shifts in industry profiles. Yet previous rounds of industry restructuring – such as the Latrobe Valley’s experience of privatisation and the clothing industry’s experiences after trade liberalisation (Weller and Webber, 1999) – have demonstrated that in practice labour markets are ‘sticky’ and do not adjust as rapidly or as efficiently as the modelling assumes. From a segmented labour market perspective, the ways the adjustment processes play out in local labour markets is uneven and contingent: it is the product of complex interactions among the profile of local industry and its demand for labour, the characteristics of the local labour supply, and the rules and institutions that govern the interaction among labour supply and labour demand (Rubery and Wilkinson, 1994). The evidence is that when the adjustment process is governed by market forces, these interactions tend to produce diverging upward or downward spirals in the fortunes of local economies (Peck and Tickell, 1995). State policies are always “spatially selective” (Jones, 1997:831); as the costs and benefits of policy change are concentrated in particular localities, the result is increasing inter-regional inequalities.

8 However the amount of funding available is not sufficient to replace private investment. There are also issues concerning the extent to which state investments in innovative businesses crowd out private capital.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Figure 2.2 Treasury’s expectations of the Latrobe Valley energy production future Source: reproduced from Australia (2011a:128), Chart 5.32

In both the SKM MMA and ROAM electricity sector models, outcomes depend on movements of capital among energy sources (by implication, the labour force is assumed to grow and re-skill on demand). As shown in Figure 2.2, both expect that the Latrobe Valley’s total generation capacity will increase to 2050, as brown coal generators are replaced by gas and renewable energy sources. In the ROAM Consulting analysis, the Latrobe Valley’s generation capacity is expected to double from 2010 levels by 2050. In ROAM’s estimates, in contrast, CCS technology will be commercially applied by 2022-23, and will be used in conjunction with combined cycle gas turbines (CCGT). As a result, ROAM anticipates that Victoria will become a net exporter of electricity to NSW and South Australia. In these capital and infrastructure based analyses, therefore, the Valley’s proximity to gas supplies and carbon storage options, as well as its existing specialised infrastructure. means that it will continue to be the least cost location for base load power generation. From these assessments, Australia (2011:127) concluded that “(t)he Latrobe Valley remains an important energy exporting region, even as existing coal plant is retired. The Latrobe Valley has significant transmission and distribution networks, making it ideal for investment in new and cleaner energy sources”. This is shown in Figure 2.2. Nonetheless, ROAM’s projections, shown in Figure 2.3., suggest that the Valley’s future is quite sensitive to the magnitude of the carbon price. The moderate prices of the Core Policy scenario stimulate the development of carbon capture and storage with combined cycle gas turbines and strong growth of generation capacity, while the High Price scenario excludes brown coal with CCS and favours renewable sources, which are likely to be located in other places.

Figure 2.3 Latrobe Valley Futures under different carbon price scenarios. Source: Reproduced from ROAM (2011); Box 2.

It is clear, also, that the Valley’s future as a site for electricity generation depends on policy settings for renewable energy sources, the manner of future 15

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley augmentations of inter-state transmission connector networks, the progress of localised ‘smart grid’ technologies, the manner in which renewable sources are incorporated into the national energy market, and the effects of the non-market stimulus policies included in the government’s Clean Energy Future package. None of these factors is amendable to local control by actors in the Latrobe Valley. To further elucidate the likely impacts of carbon pricing in the Latrobe Valley, the Victorian Government commissioned the consultants Deloitte Access Economics (DAE, 2011) to model regional futures using a regionalised GCE model that extrapolates state-level input-output interactions to the local scale. Its modelling aligned with the Treasury’s ‘medium global action’ and ‘core policy’ scenarios but incorporates DAE’s own modelling of the electricity sector, which was able to include consideration of the Clean Energy Future plan to retire high emissions generators.9 The DAE analysis found that the national impacts of the carbon price will be higher than predicted by Treasury (they put the cost at 2.2% of GDP, compared to the reference case, while Treasury estimated the cost at only 0.3% of GDP). Because Victoria has a lower reliance on mining and minerals industries and a more diverse economy, the effects of the carbon price will be slightly weaker in Victoria than in other states. The DAE report estimates the sub-regional impacts of the carbon price by applying state-wide input-output relationships to regional employment data. At best, this is an indicative method, since it assumes that aggregate relationships among sectors are reproduced at lower scales of resolution. This obliterates local differences and erases the economies of agglomeration that characterise competitive regions.10 Because it ignores regional specialisation, the method is likely to underestimate the effects of the carbon price in regions like the Latrobe Valley. Nonetheless, the DAE analysis found that as a result of the carbon price and related initiatives, regional output in Gippsland would fall by 2.3%, relative to the base case, by 2015. This is only slightly higher that the expected national effect. More specifically, the DAE concludes that with the federal government’s planned buybacks, the Latrobe Valley’s Energy Brix (Morwell) power station will close by 2016, the Hazelwood power station will close by 2020, and the Yallourn power plant will close by 2030. It expects that the two remaining generators, Loy Yang A and Loy Yang B will operate at reduced capacity. Brown coal will relinquish its position as base load power and become a mid-merit provider in the national market. The cost of this change depends on whether the capacity lost by the retirement of coal-fired generators is replaced by new power generation capacity in the Latrobe Valley.

9 The DAE-RGEM is a recursive dynamic model (base year 2004) that models the electricity sector using the ‘technology bundle’ approach developed by ABARE (Cuevas-Cubria and Riwoe, 2006). Deloitte’s Long Term Model (LTM) of the electricity market iteratively models the behaviour of the Australian electricity market using a Cournot-Nash framework (which assumes oligopolistic behaviour). 10 When these models incorporate regional differences, places become simple aggregates of their share of industry sectors, each with an input and output profile identical to its state aggregate. Local shares of emission intensity are calculated as the sum of the local shares of emissions- intensities of the industries operating in the region. 16

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

The Treasury’s assessment of the labour market effects of the carbon price relies on Chapman and Lounkaew (2011), which argues that although the carbon price will reduce the demand for labour, and suppress wages as output and capital growth slows, its effect on inter-sectoral labour movements will be low compared to normal rates of job turnover (Australia, 2011a:100). 11 This supports previous analyses suggesting that a “rapid transition to sustainability would have little or no impact on national employment” (CSIRO and Allen Consulting Group, 2008). Of course, this is only true if policymakers are able to ensure that real wages will fall until any excess labour is absorbed. Regardless, a static aggregate national labour market may contain large and non-trivial shifts in regional and local employment patterns. With regard to the Latrobe Valley, the DAE modelling anticipates that the labour adjustment process will be slower and will extend over a longer time period than envisaged by the Treasury. It estimates that the cost of the carbon price in Gippsland will be equivalent to a decline of 1,251 jobs relative to the reference case. Finally, the direction of the changes induced by the carbon price will depend on how the scheme interacts with other policy initiatives, especially renewable energy policies and initiatives that aim to reduce the emissions intensity of coal-related activities. The Australian Government introduced Renewable Energy Targets (RET) in 2001 to encourage the uptake of renewable technologies. In 2007, the target was that 20 per cent of Australia’s electricity supply would derive from renewable sources by 2020. However, the Productivity Commission (2008, 2011), among others, has argued that RET schemes should be discontinued because they are a high cost means of abatement and because they dampen carbon price signals. In 2011, the price of RET certificates collapsed, compromising the position of some renewable energy firms. Although the ROAM and SKM – MMA assessments of the impacts of the carbon price in the energy market take these programs into account, it is likely that their form will change over time. The federal government’s Clean Energy Futures Package consolidates the multiple RET schemes under a newly formed Australian Renewable Energy Agency (ARENA).12 The range of already-funded initiatives to promote the development and commercialisation of emissions-reduction technologies in the coal and coal-user industries are another area of uncertainty. These initiatives, which are supported by a range of government and industry funds, were not incorporated into the Clean Energy Futures package, reinforcing the signal that the federal government’s intention is to move away from coal as a domestic energy source. Even if a technological breakthrough solved the problems of coal emissions or revolutionised the cost efficiencies of renewable sources, it would still take 10–15 years to prove the technologies for

11 Chapman and Lounkaew (2011:1) conclude that “the alleged “jobs losses” aspect of the climate change policy debate is not in any sense important to the overall discourse”. 12 The Federal Government (Australia, 2011b:122) foreshadows redirecting funds from the Jobs and Competitiveness program, which supports emissions-intensive trade exposed (EITE) industries, to the ARENA following Productivity Commission reviews. This suggests that assistance to EITE industries is intended as transitional support rather than a continuing subsidy, which in turn implies the expectation that comparable carbon prices will be introduced in production-competing countries. Funds are also expected to flow to ARENA from dividends paid by the Clean Energy Finance Corporation. 17

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley widespread commercial use. It is therefore prudent to proceed on the assumption that, in the short term at least, a technological panacea to the problem of greenhouse gas emissions is unlikely to emerge.

2.4 CONCLUSION

This policy context and its anticipated outcomes are marked by uncertainty. Econometric modelling assumes that firms’ responses to a carbon price will be governed by their profitability at different carbon prices and that prices will determine output volumes and market shares. Whilst the new generation of econometric modelling has incorporated the likely impacts of the carbon price for the national energy market and has added consideration of some non-market CO2-reduction initiatives, they are not able to incorporate wider institutional effects such as the policy’s impact on actual patterns of capital investments, economies of scale or the strategic behaviour of transnational firms (on this, see Tamaschke and Soufa, 2006). The Clean Energy Futures policy has incorporated multiple strategies to ensure that firms continue to invest in activities that are likely to face increasing stress and declining profitability. This chapter has suggested that the actual effects of the carbon price — its capacity to redirect the longer term trajectories of regional economies — will diverge from expectations derived from stylistic models. However, two key directions for the Latrobe Valley arise from the modelling. The first is that if the energy market operated efficiently with a moderate carbon price, the least cost innovation in the short term is likely to be the in situ replacement of the Latrobe Valley’s brown coal generators with gas-fired (CCGT) generation. The is a strong likelihood that this outcome will materialise via the operation of market forces in the energy sector, and eventuate regardless of regional policy settings. Such an outcome would be accelerated by the successful deployment of CCS technologies but stymied if new infrastructure investments bypass the Latrobe Valley. Second, the effect of the carbon price in the Latrobe Valley and Gippsland will be sensitive to the magnitude of the price and its rate of increase. Responsibility for calibrating the rate of increase of the prices rests with the Federal government, and will be influenced by international and national rather than by local concerns. The struggle over policy settings for emissions reduction will continue into future.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

CHAPTER 3 ENERGY IN THE LATROBE VALLEY

This chapter introduces the characteristics of the brown coal-based electricity generators in the Latrobe Valley and describes its interconnected structure of coalmining, electricity generation and ancillary industries. The chapter aims to comprehend how these industries are articulated with or embedded in the Latrobe Valley and Gippsland economic, social and political fabric. The chapter establishes the importance of this group of related industries for employment and economic development in the Latrobe Valley and Gippsland.

3.1 INTRODUCING THE LATROBE VALLEY

The Valley is located about 150 kilometres east of Melbourne, in the centre of the predominantly agricultural Gippsland region. This area is shown in Figure 3.1.

Figure 3.1 The Latrobe Valley in Victoria Source: City of Latrobe.

This part of the report focuses specifically on the Latrobe Valley as defined by the Statistical Division of Latrobe, which includes the City of Latrobe and the postcodes of Traralgon, Moe, Morwell and Churchill. This is the appropriate scale for an initial analysis of the likely impacts of a carbon price because the Valley’s industrial economy and its engineering and mining specialised labour force differ from the predominantly agricultural orientation of the remainder of Gippsland. Comparison of ABS Census ‘Place of Work’ and ‘Place of Residence’ data suggests that 86% of all Latrobe Valley residents and 95% of those that work in the energy and related sectors both live and work in the Latrobe Valley. The Valley is unusual because it has a multi-centred urban form 19

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

(O’Connor, 1977) comprising of four main towns – Moe, Morwell, Traralgon and Churchill – the first three of which are linked by the region’s main transport corridor, the Princes Highway. The newer township of Churchill is home to Monash University’s Gippsland campus.

3.2 THE COAL-FIRED ELECTRICITY PRODUCTION

The Latrobe Valley’s massive brown coal resource has enabled it to supply the State of Victoria with the abundant, reliable and modestly priced electricity that underpinned the post-WWII growth of Victoria’s manufacturing-oriented economy. The Valley’s coal seam runs broadly east-west with a mine-able area extending as far as the township of Rosedale to the east of the Valley. The seam contains 5.3 billion tonnes of commercial grade coal; enough to provide for Victoria’s energy needs for 500 years (DPI, 2008; see Appendix A). In 2005, the base-load, brown-coal-fired power stations in the Latrobe Valley generated 85% of Victoria’s energy needs (DPI, 2008). This source of electricity has been inexpensive, by international comparisons, because the coal is found close to the earth’s surface and can be mined cheaply using open cut methods. As indicated in Figure 3.2, the townships of the Latrobe Valley are located quite close to the mines and the Valley’s five coal-fired power stations (Morwell, Hazelwood, Yallourn Power Station, Loy Yang A and Loy Yang B). Each power station is located adjacent to a coal mine and accesses coal through arrangements with the Victorian State government, which owns the coal resource (or, more accurately, it owns the right to allocate use of the coal resource). Access to water for cooling is also a factor in the selection of industrial sites.

Figure 3.2 The Latrobe Valley: Coal and Community Source: Adapted from DPI (2005)

The mining of brown coal began in Yallourn, in 1924, after new technologies were developed for the commercial use of brown coal (Lignite) for generating

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley electricity (AHC, 2006). From the outset, the industry developed as a part of the state’s essential services infrastructure and operated as a public service. The Valley’s energy sector grew with the State and its industrial production. Electricity prices were set by the government in response to cost and political considerations. The communities in the Latrobe Valley were established as company townships set up by the state agency responsible for electricity production, the State Electricity Commission of Victoria (SECV), to house its then predominantly migrant workforce (Fletcher, 2002). Most of the housing in Yallourn, for example, was owned by the SECV and leased to its workforce. By the mid-1970s, the SECV had developed into a vertically and horizontally integrated government-owned authority that employed over 9,000 people - almost a third of the Valley’s labour force (Benson, 1988). The SECV adopted a typically ‘Fordist’ organisational form characterised by a robust internal labour market with its own training, promotion and recruitment priorities and “a paternalistic, social welfarist approach to employment organisation and practice” (Fairbrother and Testi, 2002:12). Employment was secure and power industry workers could reliably expect to keep their jobs for their working lifetime. The energy workforce was highly unionised, in what was essentially a ‘closed shop’ arrangement involving more than 20 different unions (Benson, 1988). The Gippsland Trades and Labour Council played a crucial role in coordinating the various unions and resolving differences among them. The commercialisation and privatisation of Victoria’s energy sector began in the early 1990s. According to Johnson and Rix (1991:17), the privatisation program was initiated to relieve pressure on stressed state government finances and also to distance the government from increasingly difficult relationships with municipal bodies across the State, which were then responsible for electricity distribution.13 The process was encouraged by neo-liberal economic thinking, as expressed at the federal scale in the Industry Commission’s 1991 review of the electricity industry (Industry Commission, 1991). It had recommended divestment of electricity generation and distribution assets, the marketisation of electricity supplies and the creation of a national energy market. This began a reform process that facilitated the internationalisation of the energy industry and fundamentally transformed the sector’s relationship with government, its forms of management and its division of labour (Fairbrother and Testi, 2002:104). Privatisation of the Victorian brown coal generators began with the sale of 49% of the yet-to-be completed Loy Yang B power station to Edison Mission Energy in 1992. Next, the SECV was divided into three corporations: Generation Victoria (which contained the power stations), National Electricity (for transmission) and Electricity Services (for distribution). This process separated the potentially competitive activities of generation and distribution from the natural monopoly of the transmission infrastructure. In 1994, the transmission business, National Electricity, was split into

13 The financial outcome was nonetheless revenue neutral as interest saved from debt reduction was offset by foregone dividends. The privatisation of government utilities is typically justified on the grounds that it reduces the state’s long term financial commitments.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley two parts to form a market regulator, the Victorian Power Exchange (VPX) and an infrastructure manager, Powernet, which would operate and maintain the physical power grid. VPX was subsumed into the National Energy Market (NEM) when it commenced in 1998 (Abbott, 2006:445). To promote competition, upstream (generation) and downstream (retail) businesses were then further disaggregated in 1993-1995 to form separate and competitive businesses. The scope and scale of each of the created businesses were determined by the State in its privatisation planning. At the local scale, reforms to improve plant productivity began in preparation for privatisation. Power stations in the Latrobe Valley slashed employment by up to 75%, achieved principally by outsourcing support functions (such as the maintenance of power transformers and boilers). After the businesses were put on a fully commercial footing they were privatised in the years 1995-97. Table 3.1 shows the privatisation schedule and the initial purchasers of the Valley’s power stations. Table 3.1 The Privatisation of Latrobe Valley Generators

Year Asset Buyer Value at Sale 1992 Loy Yang B Power Edison Mission Energy (US) $544 mill. Station (49%) (remaining 51% in 1997)

1996 Hazelwood Power National Power plc (72%) $2350 mill. (UK) Commonwealth Bank (8.1%)(Aust) Pacificorp (19.9%) (US) Destec Energy (US)

1996 Yallourn Energy Powergen (UK) $2428 mill. Itochu (Jp) Hastings Fund Mngt (Aust) AMP (Aust) Deutsche Asset Mngt (GDR)

1996 Loy Yang Power (Loy Horizon Energy (Aust) $4746 mill. Yang A) CMS Generation (US) NRG Energy (US) Source: Fairbrother and Testi (2002).

According to ABS Census data, employment in the industry sector ‘electricity, gas, waste and water’ in the Latrobe Valley fell dramatically, from over 8,000 jobs in 1986 to 1,780 jobs in 2001. As a consequence, full time employment in the Valley fell overall by 9% in the years between 1994 and 2001. The privatisation reform process also involved restructuring of the relationships between unions and management and a dramatic fall in union influence. Union amalgamations — as part of the wider national award restructuring process in the l990s — also contributed to the changing relationships among unions. As Fairbrother and Testi (2002) explain, the outcome is that since privatisation the power stations have become increasingly differentiated by their 22

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley approach to labour relations and union activity. This has created a hierarchy of job quality and wages that constrains employees’ capacity to move among generator firms. Despite this deep restructuring, the Latrobe Valley energy sector did not flourish under private enterprise control. The initial purchasing firms exited relatively quickly, an outcome generally attributed to over-confident expectations and weak profitability (Fairbrother and Testi, 2002). Yallourn Energy, for example, lost $66 million in the first three years after privatisation. The Yallourn power station’s value fell from its 1996 sale price of $2.428 billion to $2.200 billion in 2003, which was when Powergen sold its stake to China Light and Power after a “crippling” maintenance strike (Hickey, 2001; Myer, 2003). American utility GPU incurred a $450 million loss when it sold its Victorian electricity transmission business, PowerNet, to Singapore Power. NRG, part of the consortium that paid $4.8 billion to Loy Yang A, lost most of its 25% equity stake when the banks resold the station for $3.5 billion in 2002. The US firm Pacificorp paid $2.3 billion for Hazelwood Power Station but sold out to International Power in 1998. Texas Utilities sold its power portfolio (Powernet) to Singapore Power without ever paying a dividend to shareholders. In summary, many of the world’s global energy firms have already invested in the Latrobe Valley but have withdrawn subsequently. Although the creation of the National Energy Market and the deregulation of energy prices improves Victoria’s attractiveness to energy sector capital, this history continues to colour the region’s capacity to attract investment in energy enterprises.

3.3 THE ENERGY INDUSTRY: CONTEMPORARY PROFILE

The contemporary ownership structure of Latrobe Valley’s coal fired electricity generators is depicted in Figure 3.3. Most of the power stations are now integrated into the portfolios of large and diversified transnational energy sector businesses. These parent firms are involved in multiple gas and oil, uranium, and renewable energy ventures in multiple countries. Yallourn Power station is now operated by TruEnergy, which is a wholly-owned subsidiary of the Hong Kong based conglomerate CLP (China Light and Power) International. Hazelwood Power Station is owned (92%) by International Power, which joined with GDF Suez Energy International in February 2011 to form a large diversified global energy firm. International Power also owns 70% of Loy Yang B, in cooperation with Mitsui, which owns the remaining 30% share. Loy Yang A is owned by a consortium of investors that form the Great Energy Alliance Corporation (GEAC). AGL and Tokyo Electric each hold a 32.5% share, supported by RATCH Australia (14%) and three superannuation funds (MTAA Super Fund 12%, Statewide Super 2.5% and Westscheme 5.7%). Morwell Power Station, owned by HRL, is the only one of the five power stations in local ownership. The adjacent cogeneration plant, Energy Brix, produces briquettes.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Figure 3.3 Latrobe Valley’s Coal-Fired Power Station Ownership Structure Source: Company websites

The Clean Energy Future plans weaken the competitive position of the Valley’s power stations relative to other power sources. One generator estimates that the carbon price will cost in the vicinity of $450 million per year (Loy Yang, 2011), only part of which can be passed on to consumers. At the same time, the new policy arrangements put in place frameworks intended to avoid any abrupt loss of supply and to ensure that the transition from coal-based power is managed in an orderly way. Brown-coal fired power generators will receive compensation to offset losses of asset value (a one off cash payment, which will be a share of a pool of $5.5 billion) followed by free carbon credits for the first five years of the Plan, from 2012 to 2017. Eligibility for assistance will be contingent on firms undertaking to submit Clean Energy Investment Plans that identify emission reduction opportunities and promise investment in research and low- emissions technologies. The Clean Energy Future Plan includes an Energy Security Fund that will assist power generators to obtain capital to refinance their operations. In addition, the plan offers a ‘contract for closure’ avenue for orderly closure of the highest emissions power stations.14 These steps are designed to allay the fears expressed about the impact the earlier CPRS scheme would have had on their short and long term viability. Some commentators have been critical of the parts of the Clear Energy Future package that appear to ‘pick winners’ rather than encourage market-led responses. Nonetheless, local generators’ responses to these new policies will be influenced by the interests of their parent firms. For example, International Power’s London office released the following appraisal of Australia’s carbon pricing policy:

14 It is believed that the owners of Hazelwood, Yallourn and Morwell Energy Brix responded to the October 2011 request for expression of interest in closure. However, the detail of this initiative remains undisclosed, and there is a world of difference between the decommissioning of a high emissions plant and its sequential conversion to gas-based production.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Based on a preliminary assessment, this regulatory intervention by the Australian Government is likely to result in a shorter asset life for brown coal-fired generation. Brown coal-fired generation in Australia represents some 5% of International Power's global (net) generating portfolio. Consequently, should the proposed Plan be approved by Parliament in its current form, it would be important to our Australian business and its employees but is not expected to be material in the context of the Group. … The Plan is expected to be cash flow positive and broadly earnings neutral over the initial five year period (Loy Yang, 2011). This statement implies that decisions about future operations will be made in the context of firm’s international portfolio interests, where national emissions policies are taken into account in assessing the relative merits of investing in different energy sources and different locations. Transnational firms in the energy sector have a high level of knowledge about the likely impacts of carbon pricing in different regulatory settings and could withdraw from the Australian market if returns on investment are compromised. It is likely that firms will behave strategically to realign their operations to the new policy environment before increasing emissions permit prices force them to act. This is another reason why the sequence and pace of actual responses to the carbon price are unlikely to follow the smooth, price-driven path envisaged by econometric models. For example, in May 2010, before the Clean Energy Future initiative was announced, Yallourn Power station had already started the process of applying for permission to convert its turbines to gas (CCGT). A recent report has also noted that firms are responding to the new environment by tightening their vertical integration (MMA, 2008b) and locking in long-term supply contracts (Loy Yang, 2010). Victoria’s energy firms are already deeply vertically integrated. Figure 3.4 shows the sector’s configuration in relation to upstream and downstream businesses. It depicts the generators as one component in a sequence of activities that includes coal mining, power generation, transmission and electricity retail distribution. The three energy retailers shown in Figure 3.4 accounted for 79% of Victoria’s retail market in 2008, when the Victorian market included 14 active retailing firms (AER, 2010). Increasing vertical integration is conducive to securing inward investment, limiting the effects of price volatility and reducing the risks associated with an uncertain policy context. It may also prove to be a means by which firms can maximise the extent to which price rises associated with the carbon price are passed on to consumers. Figure 3.4 includes the Maryvale Pump and Paper Mill as a part of the Latrobe Valley energy complex because: first, it is integrated with the power industry through shared use of specialised service providers including transport services; second, it is a power generator with the potential to contribute to the national energy grid; and third, the competitiveness of its trade exposed production will be weakened by the carbon price (although the impact may by offset by credits for trade-exposed sectors). It is also a major employer in the Latrobe Valley.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Figure 3.4 Structure of Brown Coal Energy Sector in the Latrobe Valley Note 1: Generator boxes represent their multiple turbines. At the same time as energy firms integrate their operations from the mine to the household, they are becoming increasingly interconnected horizontally through originally ‘outsourced’ but now independent specialist services and expertise (such as research facilities, technical services, quality assessment services, training initiatives, political associations and emissions accounting services). The expansion of emissions measurement and accounting services will further unify the sector horizontally as it develops shared mechanisms for the management of the new policy arrangements. In addition to reducing the competitiveness of brown coal relative to other energy sources, the carbon price will alter the competitive position of the Latrobe Valley’s generators relative to one another, creating an emissions-intensity hierarchy among the Valley’s five generators that reflects each power station’s capacity, age and technical sophistication. In general, older power stations using older technologies are less efficient and produce more CO2 per unit of output then newer power stations (Table 3.2). Emission-intensity and efficiency also depend on the quality of each station’s coal resource, which varies across the Latrobe Valley, as well as on the characteristics of each power station’s maintenance regime.15 Moreover, each power station operates a number of generator units, some of which are more efficient than others. The existence of multiple units within plants (denoted by the boxes in Figure 3.4) implies a potential for divisibility, where the options available to owners include partial closure or partial

15 According to firms, generator units resemble a ‘grandfather’s axe’: although they may be quite old, each component has been replaced, and perhaps more than once, so the true age of the unit is indeterminate.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley refurbishment as well as simple entry or exit. Appendix A2 lists the units within power stations and their anticipated retirement dates before the imposition of the carbon price.

Table 3.2 The Efficiency of Latrobe Valley Coal-fired Power Stations

Power Capacity Generator LRMC at Efficiency Emissions Station (MW) Units RRN % tonnes

($MWh) CO2/MWh Morwell 195 5 49.38 n/a 1.50 Hazelwood 1675 8 43.63 13-14 1.50 Yallourn 1480 4 43.19 24-25 1.35 Loy Yang A 2200 4 41.16 n/a 1.20 Loy Yang B 1026 2 44.57 n/a 1.20 Source: DPI (2008); Tamaschke & Soufa (2006) Note: ‘LRMC at RRN’ is Long Run Marginal Costs at Regional Reference Nodes in the NEM, expressed as $AUD per Megawatt Hour.

With privatisation, the power stations narrowed their scope (and direct employment) by outsourcing non-core activities. These firms now form the horizontal linking services that support the Latrobe Valley power stations. These specialist energy sector services firms have also expanded and widened their client base, and now service a wider geographical area from the Latrobe Valley. Many of these firms were originally part of the SECV’s Morwell and Yallourn workshops, which were outsourced during the privatisation process. Key contractors include: RTL (owned by Theiss) which manages and operates the Yallourn mine and provides mobile plant and earthmoving services to the Hazelwood and Loy Yang mines and Silcar Gippsland, a joint venture of Theiss and Siemens, which provides maintenance services to power stations. Other important contributors are GDH, Andrica-Hurl, Velas, Vac-Tech (refractory services), MEC machine workshop; BMC Welding, John Holland; Hydropump, LVE Machinery; Johns Valves, Austral Engineering (valves), Access One and Gippsland Scaffolding. Although the larger of these service firms are owned by multinationals and service a national and international client base, they continue to derive a significant proportion of their income from the Valley’s generators. Many of these firms also provide services to gas production firms in the Gippsland basin area. Table 3.3 highlights the importance of these outsourced services to the sector’s employment structure. It shows that direct employment numbers, at November 2009 and as reported by firms, stands at more than 2500 people. With the exception of Loy Yang B, about half the employees of each power station are employed on a “permanent contract” from a labour hire firm. Cyclical maintenance services are provided by outage crews that comprise a large number of workers that are employed for repeated short periods and rotate through the sector (which means that the 250-300 outage employees listed for each power station, some of whom are likely to be the same people in multiple short-term engagements).

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Table 3.3 Direct Employment in Electricity Production in the Latrobe Valley

Direct Permanent Total Casuals Employees Contract employees (Outage Crews)* Employees Energy Brix 80 40 120 50 Hazelwood 500 300 800 250-350 Yallourn 327 300 627 250-300 Loy Yang A 520 340 860 300-350 Loy Yang B 140 16 156 200 Total 1567 996 2563 Source: National Generators Forum. Note: * used at multiple stations

The skills that were outsourced from the SEC are not only highly specialised, but are also in demand globally. Consequently, this segment of the Valley’s skilled labour force undertakes contract work internationally on a ‘fly-in, fly-out’ basis across Asia and beyond, making it a competitive strength of the Valley, Victoria and Australia. These firms are not locked into the Latrobe Valley economy to the same degree as generator firms, since they have modest ‘sunk’ costs in fixed plants and do not rely on the coal resource. Therefore, a reduction in the local proportion of their work (for example, in the event that power stations reduced their maintenance regime in preparation for planned closure) might prompt relocation to a site that better supports specialist electricity services provided on a fly-in fly-out basis. One further important legacy of privatisation has been an excess of skilled and experienced workers in the Latrobe Valley. This has enabled generators to meet many of their labour needs without investing in entry-level training. Very few apprentices have been trained in recent years. Electricity apprenticeship training capacity for generation no longer exists in the Valley (the main electrical trades training facility is located in Central Gippsland TAFE’s Chadstone Campus, where it is accessible to both Melbourne and Gippsland residents). Yet the existing workforce is ageing and many workers are approaching retirement (see Chapter 6). In recent times, generators have become aware of a looming skill shortage, but they have found it difficult to recruit students into apprenticeship training, electrical engineering degree courses or post- graduate electrical engineering and related courses. The generators have established a modest scholarship program to address this issue. If the Latrobe Valley power stations continue to operate beyond 2015, they will face significant skill shortages – especially in middle-level supervisory roles that require experienced personnel able to manage crisis situations (see also EE-OZ, 2011). Some initiatives are already been implemented to address this issue (see Chapter 9). The future investments, and the location choices of power generation firms, will be judged on commercial grounds. The value of the Latrobe Valley as an industrial location for electricity production is the value of the right to mine coal, the sunk costs in 28

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley plant and equipment, access to the existing transmission infrastructure, and the skills of the Valley’s workforce. Power stations will continue to operate in the Latrobe Valley if their plants provide an adequate return for investors in comparison with the returns available in alternative ventures that lie within their operators’ areas of specialisation. At the time of writing, it is not clear whether the compensation and other safeguards that have been incorporated into the Clean Energy Future package promise a sufficiently long viable lifetime to justify investments in new technologies or routine upgrades.

3.4 OIL AND GAS IN GIPPSLAND

Whilst the Latrobe Valley is specialised in coal based electricity production, other energy sources play a crucial role in Gippsland’s future. If the likely direction for the Latrobe Valley is towards gas-fired electricity production, then it is likely also that closer links will develop between the Valley and the gas production activities in the Gippsland basin. This development may prove to be an important driver of innovation, since breakthrough innovations often develop in the spaces created by the interaction between two of more socio-technical systems or ‘regimes’, with the catalyst for change found in the creative frictions that prevent overlapping systems from meshing together (Geels, 2006). Crude oil and natural gas production in the Gippsland Basin began in 1969 with the production of natural gas in the Barracouta and Marlin fields. In 1985, at the peak of its production, Gippsland provided about 90% of Australia’s crude oil output (Malek and Mehin, 1998).16 In 2010, the Gippsland Basin contained 21 active oil and gas fields, and supplied 22% of Australia’s gas consumption (AER, 2010). It is estimated that the Basin holds a further about seven trillion cubic feet of retrievable gas, with represents 4.9% of known national reserves. Esso Australia Resources Pty Ltd (EARPL) is the designated operator of oil and gas joint ventures in Bass Strait (of which Gippsland Basin is a part). It controls 98% of production and employs about 1000 people in the Gippsland area. Current major oil and gas projects in the Gippsland region include: • Esso’s Kipper gas project ($1.4 billion) commenced after the field was discovered in 1986. The Kipper unit joint venture partners are EARPL (35%), BHP Billiton Petroleum (Bass Strait)(32.5%) and Santos Offshore Pty Ltd (32.5%). When the Kipper gas field comes into production in 2011, its output will be piped from Longford to Tasmania, South Australia and New South Wales. • Exxon Mobil with BHP Billiton’s Turrum oil and gas project, a $4.4 billion project. The Turrum field holds approximately one trillion cubic feet of gas and 110 million barrels of oil and gas liquids. • Longtom gas project ($315 million) is owned by Nexus Petroleum. The field was discovered in 1995 and commenced production in 2009. It will produce 435 petajoules of gas and 5.2 million barrels of condensate at a capital cost of $230m. The gas it produces is transported by the Patricia Baleen offshore gas

16 Information in this section is drawn from http://www.offshore-technology.com and company websites. 29

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

pipeline to the Patricia Baleen gas plant in Orbost, in the East of Gippsland, then through the Eastern Gas Pipeline to Sydney and the main Victorian pipeline to Melbourne and Shell’s oil refinery in Geelong. • West Seahorse oil project will produce 5.8 million barrels of oil and 4.5 million barrels of contingent resources. The Seahorse field has been producing since 1990. • The Basker-Manta-Gummy gas project, by Anzon Australia will produce 380 petajoules of gas and 19 million barrels of liquids. • In addition to these projects, there is potential for new generation shale gas fields to be developed at sites in Eastern Victoria. Gas processing infrastructure is located at Longford, on the coast to the south of the Latrobe Valley. It is owned by the Gippsland Basin Joint Venture (GBJV), which is a 50:50 partnership between ExxonMobil Australia and BHP Billiton. The Eastern Gas Pipeline transports gas from Longford to Sydney and regional centres en route. It supplies the Bluescope Steel facilities at Port Kembla as well as gas-fired power stations in New South Wales. The Jemena VicHub links the Eastern Gas Pipeline with the Tasmanian and Victorian gas distribution systems. Jemena also operates some Melbourne electricity supply networks. The existing high pressure gas pipeline linking Melbourne and Longford runs through the Latrobe Valley about 13 kilometres north of Morwell. There are three existing branch lines into Latrobe city proper. The first supplies the Loy Yang power station and the Morwell township, the second the disused Lurgi gas plant and Jeelarang gas-fired peaking plant, and third the HRL Morwell power station (City of Latrobe, n.d). Links between enterprises in the Latrobe Valley and the Gippsland Basin are likely to expand as Carbon Capture and Storage (CCS) projects look to inject and store CO2 in the undersea voids created at exhausted gas extraction sites. Reciprocally, plans to convert Latrobe Valley power stations to gas imply stronger ties with the gas fields as a fuel source for electricity production.

3.5 ENERGY SECTOR AND COMMUNITY RELATIONS

There is no doubt that the experiences of privatisation soured the relations between generator firms and the Latrobe Valley communities. Fairbrother and Testi (2002) describe the communities as having been ‘demoralised’ by privatisation. In 2001, the Latrobe Valley Ministerial Task Force (LMVTF, 2001), which was convened to identify solutions to the Valley’s escalating economic and social challenges, concluded that the reform process and its repercussions had generated a victim mentality in the Valley (see also Ballis and Munro, 1992; Birrell, 2001). This perception arose, in large part, from the difficulties that former SECV workers experienced when attempting to re- enter the labour market. Local views of the Latrobe Valley’s energy future are coloured by the experiences of the SECV privatisation, with its attendant worker displacements and regional decline. Still-vacant commercial properties in Morwell are a constant reminder of this time in the Valley’s history. The Valley is now seen as having “turned the corner” with a rejuvenated local identity that is no longer dominated by the energy

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley sector (Tomaney and Somerville, 2010), although many of its labour market challenges remain unresolved. There is a long-standing stereotype of the Latrobe Valley as a union stronghold. This perception is said to derive from the community’s support for a long-running strike by SECV maintenance workers in 1977, more than 30 years ago. The community has been keen to dispel this representation, and Monash University Gippsland has compiled evidence to show that it is no longer accurate (Rainnie et al. 2004). Nonetheless, Loy Yang B’s recent industrial agreement with the Australian Services Union (ASU) and the high use of contract labour in other plants suggests that industrial relations issues continue to colour firm strategies.17 The Gippsland Trades and Labour Council remains a strong advocate of local interests, and now works closely with community groups to identify a viable path for the Valley. One outcome of recent debates about carbon pricing has been a closer relationship between generators and the local community, especially the local City of Latrobe, as they work toward a workable transition plan. This effort has spawned the creation of multiple new activities and organisations that are attempting to bring together community, business and local government across Gippsland and to identify solutions to the multi-dimensional problems of climate change mitigation and adaptation. The coordination of transition arrangements that accompany the carbon price are also likely to produce new arrangements among Federal, State and local governments (see Chapter 9). A central problem for governance is that the drivers of economic prosperity – the power stations and coal mines – do not obtain their ‘license to operate’ or make key management decisions locally. In fact, local agents have very little authority over the policy settings that create local outcomes. A related issue concerns the appropriate scale at which issues of regional development should be examined. The Victorian state government is increasingly attracted to viewing the Latrobe Valley as a part of the larger and more diversified Gippsland economy. This strategy has merit. However, the larger scale also tends to divert attention from the unique problems to the Valley townships, and restricts discussion about the way that the Latrobe Valley is articulated with Gippsland and Victoria. The overarching reality is that under current institutional and political arrangements, the political decision-makers that provide electricity generators with their licence and capacity to operate are based in Melbourne and Canberra, and not in the local jurisdiction. The enormous wealth created by the Latrobe Valley’s power stations and Gippsland’s gas fields leaks out of Gippsland to other places. This is a similar problem to that faced by mining communities in the north, which the Western Australian government is addressing by committing a percentage of mining tax royalties to support local host communities.

17 As Herod (1991) discusses, firms often exploit stories of militant unionism to justify their lack of investment in certain places. Firms may also use the threat of mobility to escape militant labour organisations, to gain concessions from them, or to extract subsidies from governments. 31

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

3.6 CONCLUSION

The history of the Latrobe Valley’s electricity generation industry has created a complex set of institutional relationships. Barriers within firms, among firms and between firms and the community will shape the way that the carbon price impacts on the future trajectory of the Latrobe Valley. Perhaps more importantly, planning for the future is altering the relationship between governments, firms and community organisations in the Latrobe Valley, Gippsland and Melbourne.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

CHAPTER 4 GIPPSLAND’S POPULATION AND WORKFORCE

This chapter shifts the focus to the characteristics of the Latrobe Valley and Gippsland communities. It explores the age, gender, occupational, educational, family and wealth characteristics of individuals that work and usually also live in the Latrobe Valley. These attributes shape workers’ positions in the labour market and condition their employment prospects. This chapter’s overview of the population and workforce also aims to provide a baseline for future analysis of the Valley’s adjustment trajectory.

4.1 RECENT POPULATION TRENDS

In 2009, Latrobe Valley was home to about 75,000 people. As shown in Figure 4.1, most residents live in the towns of Moe, Morwell, Traralgon and Churchill. Traralgon is the largest town in terms of population, and it has also been the centre of population growth since 1996. The Valley’s outlying townships have comparatively small populations. As a result of out-migration after the restructuring of the electricity sector, the City of Latrobe experienced a decline of 4710in people in the years from 1991 to 2006. The City of Latrobe (LGA) was the only Victorian regional local government area to have experienced a decline in population in the years 1991-2006.

Figure 4.1 Population Trends, Latrobe Valley Townships Source: ABS Census 2006.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Figure 4.1 also shows that the population loss has been concentrated in the energy-industry townships of Moe and Morwell. Traralgon’s emergence, as the region’s retailing and administrative centre, has been fuelled by the expansion of public sector and public sector-dependent employment. Although Monash University Gippsland campus and other amenities have been located in the township of Churchill, its population has not grown appreciably. Many of the Latrobe Valley’s higher income employees commute from Warragul or from farming areas adjacent to the Valley. The population of the Latrobe Valley is ageing rapidly. This outcome reflects the ageing of the existing population, out-migration of younger people and inflows of retirees from surrounding districts and other places. Figure 4.2 shows the increase in residents aged 65 years and older across the townships of the Valley since 1981.

Figure 4.2 Proportion of Residents Aged Over 65 Years Source: Unpublished ABS Census data.

Figure 4.3 compares the 2006 population profile of the City of Latrobe to the profile of all Victorian residents. It shows that, by 2006, Latrobe had higher proportions of people aged 50 to 69 years, fewer people in the prime working age groups, but higher proportions of teenagers (10 to 19 years) than the Victorian average.18

18 More recent estimates of the Latrobe Valley’s population (such as VIFF, 2009) are projections derived from the 2006 Census data. New data from the 2011 Census will be available in 2012.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Figure 4.3 Latrobe Valley and Victoria, Population Structure by Age and Gender Source: ABS Census data, 2006.

To further highlight the Latrobe Valley’s skewed age structure, Table 4.1 shows a detailed dis-aggregation of the Latrobe LGA population in 2006 by age and gender, compared to other regional centres, regional Victoria and Victoria as a whole.

Table 4.1 Latrobe’s Age and Gender Profile in 2006

0-15 yrs 15-24 yrs 25-44 yrs 45-64 yrs >65 yrs Population

Men % % % % % (f) Latrobe (SSD) 21.6 14.2 24.7 26.6 13.0 35,899 Gippsland (SD) 20.9 12.8 23.3 27.6 15.4 77,941 Melbourne 19.7 14.6 30.3 23.8 11.5 1,760,909 Regional Victoria 21.3 13.0 24.2 26.9 14.6 655,912 Women Latrobe (SSD) 20.9 14.3 26.6 26.8 16.1 37,577 Gippsland (SD) 19.4 12.0 24.0 27.2 17.4 81,544 Melbourne 18.0 13.6 30.3 23.9 14.1 1,831,683 Regional Victoria 19.6 11.9 24.8 26.4 17.3 677,524 Source: ABS Census data, 2006.

The table shows that the Valley has relatively higher numbers of children, but similar numbers of teenagers as Melbourne. The Latrobe Valley has similar proportions of prime working age adults (25-44 years old) as other parts of regional Victoria, but this is a much lower proportion of the population than in Melbourne. Conversely, Gippsland

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley has higher proportions of 45 to 64 year old and over 65 year old residents than Latrobe Valley, Melbourne or regional Victoria. 4.2 POPULATION PROJECTIONS

Population projections (ABS 2008, DPCD, 2009, ABS, 2010) suggest that Gippsland’s population will grow strongly in the years to 2026. However, most of that growth will be concentrated on the outskirts of Melbourne, in the Baw Baw and Bass Coast shires, and in Gippsland’s largest urban centres of Traralgon, Sale, and Bairnsdale. These expectations are shown in Figure 4.4.

Figure 4.4 Gippsland’s Population: 2006 and Projections for 2026 (SLA). Source: Victoria in Future Regional Fact Sheets (DPCD, 2009)

Population projections are based on expectations about fertility and mortality rates, based on ABS ‘moderate’ assumptions, plus expectations about intra-state, interstate and overseas immigration rates. Estimates of internal migration rates are based on Census data. The estimates extrapolate population trends and do not take into account the effects of policy change or changing regional economic fortunes. Therefore, they indicate how the population would grow under ‘business as usual’ assumptions.

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Table 4.2 Expected Growth Rates and Population Growth, 2026

Area (SD) 2006 Expected 2026 Anticipated Growth Rate Actual Growth Rate Predicted Growth 2006-2009 n (%) n n (%) Bass Coast 27524 1.7 – 2.8 41919 14395 2.5 Baw Baw 38484 1.6 – 1.7 53769 15285 5.9 East Gippsland 41361 1.2– 1.5 54224 12863 1.8 Latrobe 72075 0.3 – 0.4 77505 5430 1.5 Sth. Gippsland 26675 0.6 – 0.8 31024 4349 1.4 Wellington 41591 0.6 – 0.7 47283 5692 1.3 Source: ABS (2008), DPCD (2009), ABS (2010).

The final column of Table 4.2 shows the ABS’s (2010) estimates of actual population growth in the years 2006-2009. This new data indicates a more rapid than expected rate of population increase, especially in Baw Baw district, which reflects the population surge that accompanied the federal government’s short-lived ‘big Australia’ policy settings and the consequent housing affordability crisis in Melbourne in 2008-09. Updated population projections for the Latrobe Valley (forecast.id, 2010) anticipate a higher rate of growth, with Latrobe (LGA) expected to reach a population of 86,726 by 2026 (2.3% per annum). This report is more cautious. If Melbourne’s high housing prices and shortages of low income housing persist, then Gippsland’s population growth patterns might change in unanticipated ways. Population in regional Victoria might expand as more relatively low income households are pushed out from Melbourne and as young people from regional Victoria find it more difficult to secure affordable accommodation in the city. With a high number of overseas immigrants settling in Melbourne, employment options for less skilled intrastate migrants might contract. Still, the effects of increased migration might also be offset by lower fertility rates: in figures released in October 2011, Victoria’s fertility rates had fallen below the 1.8% figure used in ABS’s moderate growth predictions. Outcomes over the next fifteen years will also depend on rates of job creation in Melbourne and Gippsland. If, on the other hand, real housing prices in Melbourne return to more affordable levels, then more moderate growth predictions (column 3 in Table 4.3) are more likely. Ideally, the rate of population growth would mirror the region’s capacity to create additional employment. Dividing the DPCD (2009) population growth predictions into five age-based cohorts reveals that, with the exception of Bass Coast and Baw Baw, most of the projected growth across Gippsland in the next fifteen years will be among people who are over 65 years of age, most of whom will be retirees. This is shown in Figure 4.3. Locations closest to the Latrobe Valley – Latrobe, South Gippsland and Wellington – are expected to have weak or negative population growth in productive age groups (15-64

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley years of age).19 If these predictions prove to be correct, there will be a dire need for the expansion of health, preventative health and aged care services across the region.

Figure 4.5 Gippsland’s Expected Population Change, 2006-2026, Age Cohorts Source: Source: DPCD (2009) detailed spreadsheets.

Figure 4.6 groups the data in the previous figure to show that the number working age (15 to 64 year old) residents in most parts of Gippsland is not expected to grow. The working population in the energy-specialised townships of the Latrobe Valley is expected to fall sharply.

19 Forecast.id’s (2010) revised predictions anticipate a higher rate of growth in productive age groups, which has the effect of rebalancing this profile to some extent.

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Figure 4.6 Gippsland’s Expected Workforce Growth Source: DPDC (2009) detailed spreadsheets

Population predictions do not take into account the effects of policy changes, such as the introduction of the carbon price, or the effects of changing industry profiles. If the carbon price and other sustainability initiatives alter the structure of economic activity and employment in Gippsland, they will also alter the region’s population trajectory.

4.3 THE LOCAL LABOUR MARKET

For most working people, labour markets are localised, and extend as far as workers are able to travel from their homes, given travel costs and household responsibilities. Each localised labour market comprises multiple submarkets related to different clusters of occupations and skills. Segmented labour market theories (Rubery and Wilkinson, 1994) suggest that the characteristics of jobs and their occupants evolve together in ways that discourage transferability between occupational groups. As a result, there is limited permeability among submarkets. More highly skilled workers face higher inter- occupational mobility barriers, especially if their skills are firm-specific (as is likely for people who have worked for one employer for many years). Different types of labour markets also have different spatial characteristics. Jobs in lower skill categories tend to be closer to home, especially for those (women) that manage both work and household responsibilities. In contrast, very highly skilled work and workers tend to cluster at (urban) centres of excellence, which then attract skilled labour from other places. It follows that regional areas face persistent difficulties in attracting and retaining skilled workers. 39

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

The labour market ‘participation rate’ describes the number of people in a local labour force who are either employed or unemployed as a proportion of the total working age population (people aged between 15-64 years).

Figure 4.7 Labour Market Participation Rate, 2006, Statistical Local Areas Source: ABS Census data, 2006, Working Population file.

Figure 4.7 shows that in 2006, according to ABS Census data, the labour market participation rate across Gippsland and the Latrobe Valley was low when compared to Metropolitan Melbourne and other Victorian regions. Individual labour market participation is shaped by individual skills and attributes and household responsibilities. With increasing proportions of households including more than one income earner, local labour markets need to provide employment opportunities for both men and women. Figure 4.8 shows the trend in labour market status for men and women in the Latrobe Valley (SSD) in the Census years 1996, 2001 and 2006. It reveals that only about 20% of women and 50% of men held full-time jobs in 2006. 20 Figure 4.8 also shows that the overall proportions of full-time workers have changed little since 1996. Part-time work has expanded and unemployment has contracted since 1996, but the category ‘not stated’ has also swelled. This suggests widespread under-employment.

20 An important caveat is that women are often classed as ‘not in the labour force’ when in reality they contribute significantly to the operation of a farm or trade business. In addition, many people listed as part-time employees may also be part-time or full-time farmers. Uncertainty arises because the Census records a main occupation and not all occupations. 40

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Figure 4.8 Labour Force Status, Latrobe (SSD), 1996, 2001, 2006 Source: ABS Census data. Although Figure 4.8 suggests that unemployment was less prevalent in 2006 than 1996, this outcome may reflect more onerous requirements and more stringent surveillance of joblessness since 1996, which has tended to push those with weak employability to other social categories (such as ‘not in labour force’, disability and carer pension). Nonetheless, on official counts, unemployment in the Latrobe Valley has been consistently high compared to other parts of Victoria. High employment is concentrated in the Moe/Newborough and Morwell areas, which were the areas most affected by changes in the electricity production sector. Figure 4.9 shows that since the late 1990s, official unemployment rates in Morwell and Moe have been consistently higher than those in surrounding towns, and that Gippsland’s larger towns have experienced consistently higher and more volatile unemployment rates than metropolitan Melbourne (and higher than the Victorian average, which is not shown in Figure 4.9). This suggests a relatively high proportion of jobs that are sensitive to the business cycle (i.e. casual and other forms of precarious work). Figure 4.9 also shows a sharp rise in unemployment in the Valley’s smaller outer townships since 2009.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Figure 4.9 Smoothed Quarterly Unemployment Rates, 1998-2011. Source: DEEWR Small Area Labour Markets (smoothed series) and ABS (2011). Note: In July 2010, the ABS changed the population benchmarks used to compile their labour force figures. Therefore, DEWR estimates before and after the September quarter 2010 are not strictly comparable. In addition, there were breaks in the series in March 2002 and March 2008 due to changes in geographical boundaries. Data for Melbourne was calculated from ABS (2011) by calculating a 12 month moving average of the unemployment rate for each quarter.

Figure 4.10 Health Care Card Holders, % of population Source: Centrelink, 2008, unpublished data Policy changes at the cusp of work and welfare mean that unemployment rates are becoming a less useful indicator of disadvantage. A more accurate indicator of low income status is the proportion of people holding a Commonwealth Healthcare card. This is shown in Figure 4.10. Because eligibility for the Healthcare Card is means tested against both income and wealth criteria, it provides a reliable estimate of personal fortunes. In most of central Gippsland, between 15% and 20% of the adult population holds a Healthcare card.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

4.4 INCOMES

As would be expected given low labour market participation rates and a high incidence of part-time work, median incomes in the Latrobe Valley and Gippsland are relatively modest compared to Melbourne and Victoria.

Figure 4.11 Median Weekly Household Incomes, Postcode Areas Source: Unpublished ABS Census data

Figure 4.11 shows that median weekly household incomes in the Latrobe Valley postcode areas in 2006 were $653, compared to $1022 for Victoria as a whole. This summary statistic may under-estimate the extent of disadvantage in particular neighbourhoods given the relatively large geographical reach of postcode areas. Low incomes add further weight to the conclusion that a relatively high proportion of the Gippsland region’s population struggles on low incomes or at the cusp of work and welfare.

4.5 HOUSING PRICES

Table 4.3 shows that housing prices in the townships of Churchill, Moe and Morwell are well below regional Victoria average prices. In the late 1990s, one of the repercussions of SECV privatisation was an appreciable decline in local housing values. This means that the local economy’s restructuring after privatisation did not only impact on the livelihoods and careers of retrenched workers, but affected everybody who owned property in the Valley as the net worth of their assets declined. Table 4.3 Median House Prices in the Latrobe Valley (1995-2011) Regional Churchill Glengarry Moe Morwell Traralgon Victoria 1995 60,000 105,000 55,250 52,500 78,750 85,000 1997 56,000 92,500 55,000 45,000 78,000 88,000 1999 46,000 80,250 54,000 53,000 84,200 100,000 2001 51,000 111,250 55,000 59,500 90,000 121,000

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2003 90,000 165,000 85,000 94,500 147,500 174,000 2005 115,000 205,000 120,000 119,250 180,000 210,000 2007 129,500 216,500 130,000 127,500 215,000 230,000 2009 151,500 230,000 135,500 140,000 230,000 245,000 2010 170,000 243,000 150,000 152,750 256,750 252,750 Prelim 2011 180,000 250,000 168,750 162,000 254,250 N/A Source: DSE (Land Victoria), various, A Guide to Property Prices.

Relative housing prices are an important indicator of population mobility. When people move from a depressed to a vibrant labour market, they generally also move from a lower housing cost to a higher housing cost location. As a result, it is difficult for homeowners in low value locations to relocate to find work. People living in public housing are especially immobile. Although the interaction of housing and labour markets is complex, it often results in poorer residents becoming trapped into locations with poor prospects (see Clark and Whiteman, 1983). At the same time, high housing costs in Melbourne increase the likelihood that Gippsland’s inexpensive housing will attract low income in-migrants regardless of employment prospects.

4.6 CONCLUSION

Benson (1988:120), writing more than twenty years ago, described the population of the Latrobe Valley as ‘similar to that of Victoria as a whole in most respects’ but with more children, fewer older people, fewer migrants and, importantly, a higher male labour market participation rate. These characteristics have been replaced in the contemporary Latrobe Valley with higher unemployment rates and lower labour market participation rates than comparable towns in other parts of Victoria. The population is growing slowly and ageing rapidly. The Valley’s residents have comparatively low median incomes and in some areas, more than one in five adults of working age holds a means-tested Commonwealth Government Healthcare Card. There is now widespread acknowledgement that the Valley has essentially “recovered” from the effects of electricity sector privatization. However, this chapter has shown that the legacies of privatisation continue to shape a regional trajectory framed by persistent labour under-utilisation.21 This suggests that, in the event of adverse labour conditions, the region will have little capacity to absorb newly displaced labour.

21 In segmented labour markets, labour under-utilisation often co-exists with skill shortages. 44

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

CHAPTER 5: THE ELECTRICITY SECTOR IN THE LABOUR MARKET

This chapter is concerned with the extent to which the Latrobe Valley’s contemporary economy relies on the electricity sector and electricity-dependent employment. Before privatisation, the Valley was dominated by the electricity industry. At face value, the contraction of direct electricity-related employment, and the rise in employment in occupations unrelated to electricity (e.g. retailing) could be taken to demonstrate that the local economy has now diversified enough to withstand the retirement of one or more brown coal generators without ill-effect. This chapter shows that the Latrobe Valley is still reliant on the energy industry and argues that, in the absence of planned labour market interventions, the retirement of electricity generators would have a considerable adverse impact on the local economy. The chapter’s starting point is the observation that the energy sector’s now ‘unbundled’ or disintegrated local form has reallocated numerous electricity dependent jobs to other industrial categories in a way that inadvertently conceals the sector’s continuing importance to the local economy. Using disaggregated ABS employment data manipulated to create synthetic industrial categories, the chapter shows that electricity- dependent employment continues to shape the Latrobe Valley economy. The data used in this chapter are based on the 2006 Census’s Place of Work tables, and so is not directly comparable to the previous chapter (which was based on Place of Residence).22 This chapter’s categorisation of employment data is based on an understanding that views regional economies as comprising two sectors of activity: the ‘Basic’ and the ‘Non Basic’ sector. In brief, the “Basic” sector includes the components of the local economy that meet non-local (i.e. export) demand. It includes industries that bring income into the region by exporting goods and services (electricity, paper or dairy products for example) as well as those that attract income by providing services to visitors (tourism). The Basic sector for our purposes includes activities that contribute to the export effort indirectly (e.g. those providing services to the basic sector). Because the Basic sector brings in income from elsewhere, it drives growth in the local economy. The “Non-Basic” sector, on the other hand, produces goods and services for the use of the region’s population. It essentially circulates income internally, and its size reflects the region’s population and income characteristics. This approach views the basic sector employment as generating a multiplier effect that governs the size of the non- basic sector. A limitation of the approach is that it does not incorporate externally funded public sector activity or welfare transfers. Although superseded by growth theories that focus attention on business services and high technology firms (such as

22 As noted previously, the ABS Census asks only about each person’s main job. This excludes multiple jobholding. Self reported data may also oversimplify occupational specialisation.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Florida, 2002), a basic/non-basic analysis remains a useful means to identify the challenges facing resource oriented economies.

5.1 EMPLOYMENT STRUCTURE

The first step is to consider the importance of electricity production in the overall structure of employment. Using synthetic categories, Table 5.1 shows the industry sector of employment for people who worked in the Latrobe Valley (SSD) in 2006. By this estimate, electricity production directly employed 1691 people, or 5.9% of the employed workforce. Table 5.1 lists Coal Mining, the main input to the Latrobe Valley’s electricity production, as employing 170 people. Together, direct employment in electricity production and coal mining accounts for 1861 jobs or 6.5% of the Latrobe Valley’s total employment.23 Defining a second group of “Electricity Dependent” industries increases the size of the energy sector by a further 1260 jobs to a total of 3121 jobs, or more than one in ten jobs in the Valley (10.9%).

Table 5.1 Industry of Employment, Latrobe Valley workforce, 2006.

Industry of employment Number % Electricity production: 1,691 5.9 Coal mining and directly linked industries 170 0.6 Other heavy and civil engineering construction 617 2.2 Electricity-linked technical services 297 1.0 Electricity-linked logistics 254 0.9 Electricity-linked manufacturing 92 0.3 Electricity Dependent Sub-total 3,121 10.9 Manufacturing (remainder) 1,956 6.8 Tourism-related 1,775 6.2 Business services 1,372 4.8 Paper and forestry 1,141 4.0 Agriculture (remainder) 592 2.1 Professional, Scientific and Technical services (remainder) 590 2.1 Electricity, Gas, Waste and Water (remainder) 323 1.1 Mining (remainder) 117 0.4 Transport services (remainder) 254 0.9 Other Basic Industries Sub-total 8120 28.4 Retailing, wholesaling and transport (remainder) 5,224 18.3 Public and community services (remainder) 9,119 31.8 Construction (remainder) 1,832 6.4 Other services including gambling (remainder) 965 3.4 Population-Dependent Industries Sub-total 17140 59.9 Not stated or inadequately described 249 0.9

23 This probably underestimates the coal industry workforce, which is estimated at about 300 people. 46

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Total 28,631 100.00 Source: ABS Census 2006, customised tables. Note: Assumes 50% of logistics jobs are power related. See Appendix B for synthetic industrial categories. The next group of industries in Table 5.1 are “Other Basic Industries”: the most important of which are manufacturing, tourism, paper and forestry, business services and agriculture. In these figures our estimates relate to a ‘remainder’ that is not electricity-related. These other basic industries account for more than a quarter (28.4%) of the Latrobe Valley’s employment – almost three times the size of the electricity sector. In all, our Basic sector includes nearly 40% of jobs in the Latrobe Valley (39.3%). Some of these industries will be affected by the carbon price and some will qualify as emissions-intensive trade-exposed (EITE) under the Clean Energy Future plan. The majority of jobs in the Latrobe Valley (59.9%) can be classified as Non-Basic or ‘population dependent’ jobs. These include retailing, public administration, community services and personal services. Construction has also been included in this group.24 Because these services rely on population and income levels, they are likely to contract if employment in the basic sector contracts, if real incomes fall, or if the Valley’s population declines. More than 30% of all jobs in the Valley (31.8%, 9,119 jobs) are in the public sector and community sector, and almost one in five jobs are in the retail sector (18.3%).

5.2 A GENDERED LABOUR MARKET

In segmented labour markets, occupations tend to be defined as being either ‘men’s’ or ‘women’s’ work. The previous chapter revealed the gendered nature of labour market participation in the Latrobe Valley and the dearth of full-time employment for women.

Table 5.2 adds detail to this picture by disaggregating the industry of employment of Latrobe Valley workers by gender. This table confirms that the Valley features a rigidly gendered division of labour. The electricity-related and other ‘heavy’ industries are male-dominated, while women tend to work in public and community services, tourism and business services. In such a gendered labour market, it is likely that among two-income households, husbands are working in heavy industry while their wives work in community or retailing services. In turn, this suggests that changes in sectoral employment could produce complex labour market impacts.

24 Essential Economics (2009) reports that about half of construction employment is domestic construction and half is large project work. 47

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Table 5.2 Employment by Industry and Gender, Latrobe, 2006

% within Industrial category Persons industry employed Men Women Electricity production 1,691 94 6 Other heavy civil engineering construction 617 92 8 Paper and forestry 1,141 92 8 Mining (remainder) 117 91 9 Coal mining - and directly linked industries 170 90 10 Electricity-industry-linked manufacturing 92 89 11 Electricity--linked logistical support services 509 87 13 Construction (remainder) 1,832 87 13 Manufacturing (remainder) 1,956 79 21 Electricity, Gas, Waste and Water (remainder) 323 74 26 Electricity-linked technical support services 297 69 31 Agriculture (remainder) 592 64 36 Other services including gambling (remainder) 965 61 39 Retailing, wholesaling and transport (remainder) 5,224 45 55 Tourism related 1,775 38 62 Business services 1,372 36 64 Professional, Scientific and Technical (remainder) 590 36 64 Public and community services (remainder) 9,119 30 70 Total 28,631 Source: ABS Census 2006, customised tables. Note: Appendix B provides a description of synthetic industrial categories.

5.3 INCOME STRUCTURE

The structure of wage income in the Valley further highlights the importance of the electricity industry. Table 5.3 estimates of the proportion of total wage income that is derived from each industry in the Latrobe Valley.25 By this reckoning, the ‘electricity production’ industry provides approximately 11.9% of the Valley’s total wage income - almost twice its share of employment. Likewise, the ‘electricity dependent industries’ contribute 5.8% of total wage income, considerably more than its contribution to employment. Overall, although the electricity-related industries contribute only 10.9% of jobs, by this estimate they account for 18.7% of wage income. The Paper and Forestry industries’ contribution to income also greatly exceeds its contribution to employment. Conversely, tourism and retailing contribute less to wage income than to employment, reflecting the high proportions of part-time jobs in these sectors.

25 The values were calculated by multiplying the number of people employed in each of ten income groups in each sub-industry by the mid-point of the income bracket, then summing the categories. Incomes of ‘more than $2000 per week’ were assumed to average $2500 per week. 48

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Table 5.3 Sectoral Contributions to Income and Employment, 2006 Industry of employment Share of Share of Wage income Employment Electricity production 11.9 5.9 Electricity dependent industries* 5.8 4.4 Coal mining - and directly linked industries 1.0 0.6 Tourism-related 2.8 6.2 Paper and forestry 7.1 4.0 Agriculture (remainder) 1.5 2.1 Mining (remainder) 0.6 0.4 Manufacturing (remainder) 7.0 6.8 Construction (remainder) 7.0 6.4 Electricity, Gas, Waste and Water (remainder) 1.4 1.1 Professional, Scientific and Technical services 1.9 2.1 Logistics remaining 0.9 0.9 Business services 4.8 4.8 Retailing, wholesaling and transport (remainder) 11.3 18.2 Public and community services (remainder) 31.5 31.9 Other services including gambling (remainder) 2.4 3.4 Not stated or inadequately described 0.9 0.9 Total 100 100 Source: ABS Census 2006, customised tables.

Figure 5 displays this data graphically to reinforce the importance of the basic sector and emphasise the dominance of public and community services.

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Figure 5.1 Industry Shares of Income and Employment, Latrobe Valley, 2006 Note: Categories as defined in Table 5.1, see also Appendix B.

Electricity production has a higher share of income earned because it supplies a high proportion of well-paid jobs. Table 5.4 shows that electricity production and its related industries provide 22% of the moderately highly paid jobs ($1000-$1299 per week) and 43% of the higher paid jobs (more than $1600 per week) in the Latrobe Valley (SSD). The non-basic sector’s population-related jobs represent more that half of total employment (Table 5.1) but less than a quarter of well-paid jobs (24%).

Table 5.4 Industry Income Distribution, Latrobe Valley, 2006

$250- $600- $1000- > Industry of employment < $249 $599 $999 $1299 $1600 % % % % % Electricity production 0 0 2 12 31 Electricity-dependent (inc coal) 1 2 9 10 12 Paper and forestry 0 1 2 9 15 Other ANZSIC industries 33 31 33 25 20 Population dependent industries 64 64 55 44 24 Not stated or inadequately desc. 1 1 1 1 1 Source: ABS Census 2006, customised tables. Totals reflect rounding. Note: Categories as defined as in Table 5.1, see also Appendix B.

5.4 HOUSEHOLD STRUCTURE

Table 5.5 shows the relationship between sector of employment and household composition. It highlights the higher than average incidence of couple-with-children households among the male-dominated electricity production, heavy and civil engineering construction and paper and forestry industries. About 6 out of 10 households contain dependent children.

Table 5.5 Household Structure by Industry, 2006.

Total Dependent Not Industrial category Employed children Dependent (%) Children (%) Other heavy and civil eng. & const. 619 62 37 Paper and forestry 1,145 59 41 Electricity production 1,685 58 42 Coal mining & directly linked 170 58 42 Victorian average – all industries 58 42 Other ANSZIC categories 24117 57 43 Electricity-linked logistics 510 56 44 Electricity-linked manufacturing 92 53 47 Electricity--linked technical services 293 49 51 Source: ABS Census 2006, customised tables. 50

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Note: Couples with children includes families living with non-dependent children.

For social reasons, households with school-aged children, especially those with teenagers nearing the completion of secondary schooling, tend to be immobile. The data in Table 5.5 challenges the notion that households could adjust to restructuring of the local labour market by relocating to another region.

5.5 EMPLOYMENT MULTIPLIERS

The electricity sector contributes directly to employment in other parts of the Latrobe Valley economy through its transactions with other sectors and through its workforce’s contribution to local consumption expenditures. Remplan (2006) estimated that for every dollar of output from the electricity industry, an additional $0.30 is spent in the Valley, mostly on electricity suppliers, coal gas and oil, gas supply and mechanical repairs. These purchases injected about $352.6 million into the Valley’s economy each year. Similarly, for every dollar of output from the coal, oil and gas industries, $0.16 of inputs are purchased in the Valley, primarily from rail, pipeline and other transport industries, machinery and equipment suppliers, electricity suppliers, wholesalers and petroleum and coal products industries. These purchases, it estimated, injected $68.3 million into the Valley each year. Together, these industries’ first order expenditures in the Valley total around $420 million per annum. Remplan’s modelling concludes that the electricity sector generates 38.4% of total regional output and 28.0% of total regional employment and that the mining sector accounts for 11.7% of output and 6.6% of employment. When the total of direct, industrial (Type1) and consumption (Type 2) effects are included, Remplan’s regional modelling suggests that each job in the Valley’s energy sector generates an additional 4 to 5 local jobs (some of which will be part-time jobs, such as in the retail sector). Its estimates of regional multipliers are shown in Table 5.6. In Table 5.6, the magnitudes of the output multipliers are consistent with recent estimates by Stoeckl (2011) for energy in rural Queensland. The estimates of employment multipliers, which are in the range of 3.38-4.82 additional jobs generated from each job in the energy sector, are not verifiable (because regional input output data is not available).

Table 5.6 Regional Economic Multipliers, City of Latrobe

Regional Multipliers Coal, Oil & Gas Electricity Mining Output Type 1 1.22 1.39 1.24 Type 2 1.52 1.80 1.55 Employment Type 1 1.95 1.62 2.13 Type 2 4.82 3.38 4.63

Source: Remplan 2006, Table 3.1.

Remplan (2006) concludes that the Latrobe Valley continues to be dependent on the energy sector, which it views as the ‘propulsive industry’ that underpins local economic activity. This analysis supports that conclusion.

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5.6 CONCLUSION

The coal-fired electricity sector remains a cornerstone of the Latrobe Valley economy. About 15% of total employment is directly attributable to the coal-fired electricity industry. However, the importance of the sector to the local economy is greater, since the electricity and related sectors account for almost 26% of the Valley’s wage income and accounts for about a third of all high income jobs. The gender and skill characteristics of the employment profile suggest high barriers to worker mobility.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

CHAPTER 6: THE ELECTRICITY INDUSTRY WORKFORCE

This chapter narrows the lens to examine the characteristics of the energy sector workforce. It includes analysis of residential location, age, gender, household structure at the neighbourhood (postcode) scale. At this fine scale, ABS data is generally available only for the ANZSIC category for essential services: “Electricity, Gas, Waste and Water” (EGWW). Electricity workers dominate this industry category in the Latrobe Valley. The chapter’s purpose is to identify locations that are particularly vulnerable to energy sector restructuring.

6.1 RESIDENTIAL LOCATIONS OF EGWW WORKERS

Figure 6.1 shows the numbers of Electricity, Gas, Waste and Water (EGWW) workers that live in each of the Latrobe Valley’s postcode areas. This suggests that around 500- 600 direct EGWW workers live in the Traralgon postcode area, 400-500 live in each of Moe and Morwell, and about 200 live in Churchill.

Figure 6.1 Persons Employed in EGWW by Postcode, 2006. Source: ABS Census 2006. Note: The Traralgon postcode includes three separate areas, which are all darkly shaded

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Comparison of ABS ‘Place of Work’ and ‘Place of Residence’ data suggest that 95% of EGGW workers both live and work in the Valley. Those living outside the Valley are mainly managers, who either commute from Melbourne or who live in the Warragul area. The concentration of EGWW workers is highest the southern townships of Churchill, Yinnar and Boolarra. This is shown in Figure 6.2 as the percentage of EGWW workers in the working population displayed by postcode.

Figure 6.2 Percentage Employed in EGWW by Postcode, 2006. Source: ABS Census 2006.

6.2 EGWW WORKFORCE AGE CHARACTERISTICS

As described in the previous chapter, men dominate employment in the electricity and electricity related industries. Table 6.1 disaggregates employment for men in electricity and related industries by age groups. It shows that mature age men dominate this workforce: 61% were older than 45 years of age in 2006. The proportions of younger men (15-44 years) are lower in the electricity industry than in the rest of the local economy. This data is consistent with the history of the energy sector described in Chapter 3. In 2011, many electricity workers will be approaching retirement. Table 6.1 Age profile of men in the electricity workforce, 2006.

Industrial category 15-24 25-34 35-44 45-54 55-64 > 65 Total years years years years years years % % % % % % % Electricity production 4 7 28 43 18 1 100 Coal mining & assoc. 2 12 24 44 14 4 100 Electricity dependent 7 17 28 31 15 1 100 Rest of ANSZIC 19 19 22 22 14 3 100

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Source: ABS Census 2006, customised tables.

If older workers who began their careers with the SECV have been employed continuously, they are likely to have adequate superannuation balances and therefore will not be threatened by changes in the energy sector. However, if changes associated with the carbon price triggered an exodus of these skilled workers, the industry would face skill shortages and lose the knowledge and experience embodied in this generation of workers. A transition plan for the Latrobe Valley will require strategies for the retention of skilled workers for the life of the generators, and mechanisms to enable their skills and expertise to be passed to a new generation of workers.

6.3 EGWW OCCUPATIONAL PROFILE

The occupational structure of the energy industry reflects the way in which the SECV was ‘unbundled’ in the 1990s. In that process, the division of subcontracting businesses followed the trade occupations, so the generator firms were left with a predominantly managerial and operational staff profile. Table 6.2 lists the typical occupations of the Valley’s electricity production workforce.

Table 6.2 Occupations of Electricity Production Workers, Latrobe Valley, 2006.

ANZSCO Occupation Number % 3992 Plant Operators 306 24.3 71 Machine and Stationary Plant Operators 178 14.1 32 Automotive and Engineering Trades Workers 103 8.2 13 Specialist Managers 94 7.5 31 Engineering, ICT and Science Technicians 92 7.3 233 Engineering Professionals 73 5.8 3411 Electricians 67 5.3 22 Business, Human Resource and Marketing Profs. 45 3.6 26 ICT Professionals 24 1.9 51 Office Managers and Program Administrators 24 1.9 - Other occupations 254 20.2 Total 1260 100.00% Source: ABS Census 2006, customised tables. Total reflects rounding.

Almost half (48%) of the workforce is classified as Plant Operators. Trade and technical jobs then account for a further 33% of the workforce. Employees categorised as professionals and managers — specialist managers, engineering professionals, business professionals, ICT professionals, officer managers — account for another 24%. Table 6.3 provides additional detail of the structure of the electricity and related industries workforce by cross-tabulating industry and occupation. Interview data suggests that workers with professional, scientific, technical and trade skills are concentrated in the electricity-dependent firms of the Valley, while the employees of the generator plants are more likely to be either management or plant operators. Because compensation proposed under the Clean Energy Future package will apply only to the 55

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley employees of generators that are contracted to close, workers in these electricity dependent industries are not currently eligible for support.

Table 6.3 Occupation by Industry, Electricity-related Sectors, Latrobe Valley, 2006.

Electricity dependent Elect- Other Paper Occupation Category ric- Manu- Tech- Logistic Eng &. & ity fact. nical Constr. forestry

% % % % % % Managers and Profs. 15 16 11 13 5 11 Eng., Sci. & Transport Profs. 7 3 31 0 3 7 Tech & Trade (general) 17 36 28 4 40 18 Tech & Trade (electrical) 7 13 2 0 15 5 Plant Operator 40 7 2 8 4 26 Labourer, general 2 4 4 5 7 21 Community service worker 0 3 0 0 0 1 Office worker 7 13 16 13 9 6 Sales & retail worker 0 2 0 5 1 0 Drivers & storepersons 0 3 1 52 4 4 Construct. & mining labour 2 0 2 0 10 0 Not stated & inad. desc. 2 0 3 0 2 1 Total 100 100 100 100 100 100 Total employees 1,260 159 294 676 512 1,141 Source: ABS Census 2006, customised tables. Note: Highlights plant operater occupations

6.4 EGWW EDUCATIONAL BACKGROUND

Table 6.4 details the educational achievements of the Valley’s electricity and electricity- related workforce. It shows that electricity sector workers are on average better educated than the remainder of the Latrobe Valley community, and that trade qualifications dominate their educational backgrounds. University (undergraduate or post-graduate) qualifications are under-represented in the electricity sector, but over- represented in its technical support services. This again reinforces the conclusion that the Valley’s core skills are found beyond the generator firms, in the network of supporting firms. Workers in coal mining and electricity dependent logistics industries (truck drivers) – in general have weak educational attainments. Many of them are also mature age workers who would be vulnerable in the labour market. The important observation from Table 6.4 is that the energy sector workforce includes high percentages of workers with practical skills at the diploma, trade and certificate levels. In the event that jobs in the electricity sector were lost as a result of

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley restructuring, employers in other sectors might be expected to find this workforce attractive to recruit for less skilled occupations in other sectors.

Table 6.4 Highest Level of Education, Latrobe Valley Workforce, 2006

Diploma Degree Trade & Not Industrial category & Grad. & Other Total Adv. Given Dip. Certif. Dip % % % % % % Electricity production 12 12 43 28 4 100 Coal mining & associated 5 8 36 48 4 100 Electricity-dependent manufacturing 10 3 62 17 8 100 Electricity-dependent tech. services 30 19 24 25 1 100 Electricity dependent logistics 1 3 25 61 10 100 Other heavy/civil eng & construct 5 5 57 26 6 100 Paper and forestry 12 6 38 39 5 100 Remainder of Valley residents 16 8 23 48 6 100 Non-metropolitan Victorian average 15 8 22 49 6 100 Source: ABS Census 2006, customised tables.

6.5 HOUSEHOLD STRUCTURE

Table 6.5 reveals that the majority of the electricity and electricity-related workforce are couple families with dependent children living at home. The structure of the ABS data set does not enable analysis of the occupations of the wives of energy sector workers. However, informants suggest that workers’ wives tend to either work part- time in the community services or retail sectors, or own and operate a small business.

Table 6.5 Household structure, Electricity and Electricity Related Workforce, 2006.

Couple Single Without Industrial category with with Other Total children Children Children

% % % % % Other heavy/civil eng & construct 57 5 33 4 100 Paper and forestry 57 2 34 7 100 Electricity production 55 3 36 6 100 Electricity dependent logistics 51 5 35 9 100 Victorian average 50 8 32 10 100 Coal mining & associated 49 9 36 6 100 Remainder of Valley residents 48 9 34 9 100

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Electricity-dependent manufacturing 46 7 40 8 100 Electricity-dependent tech services 41 8 36 16 100 Source: ABS Census 2006, customised tables. Note: Households with children includes families living with non-dependent children. Households ‘without children’ are couples or singles, ‘other’ is shared and other types of accommodation.

It is reasonable to expect that many electricity sector workers already work in other sectors or small businesses. The structure of rosters in both the energy and pulp and paper industries (rotating 12 hour shifts) makes it possible for workers to hold a second part-time job or to manage a small business (in particular, an agricultural business that has flexible demands).

Still, the Clean Energy Future proposals for structural adjustment assistance suggest that the existing Job Start network will assist any workers who are displaced in the planned closure of high emissions generators. Unless special provisions are implemented, a displaced electricity worker whose partner works part-time would not qualify for standard Job Start or Centrelink assistance.

6.6 CONCLUSION

Most of the Latrobe Valley’s energy sector workforce lives in the Latrobe Valley, either in the four main towns or in small townships to the south of the Valley. Many workers are of mature age. There is a large cohort of highly skilled workers in the 45-55 years of age group, who could either work for another 10-20 years or opt for early retirement. Many of those who work in energy-related jobs in the Latrobe Valley work in specialisations that are ‘in demand’ internationally. Multiple risks surround the future of this skilled workforce: they could opt for retirement and abandon the energy industry prematurely; they could leave the Valley, and take their skills to other locations, which would leave the energy firms and the Valley economy without crucial skills; or, in the event of involuntary displacement, they could take local jobs and displace other less skilled local workers.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

CHAPTER 7 THE MAGNITUDE OF THE ADJUSTMENT TASK

This chapter discusses the likely impact of a price on carbon on the Latrobe Valley’s trajectory of development. Its conclusions are tentative given continuing policy uncertainty, the imprecise nature of estimations about the direct and indirect effects of carbon prices, and the unknowable pace at which the economy will transform to low- emissions energy sources. In addressing the nature of the adjustment task, this chapter emphasises the identification of frameworks through which the region can better respond to emerging challenges. After reviewing existing interventions and new local governance arrangements, the chapter identifies four possible scenarios for the impact of the carbon price in the Latrobe Valley and provides a ‘bottom up’ picture of the impacts these changes may generate for businesses, individuals and the regional community. Before introducing the scenarios, it is useful to reiterate how the conclusions of the four descriptive chapters relate to the adjustment task:

 Chapter 2 argued that econometric modelling does not produce accurate estimations of the effects of policy changes at the regional scale. Its assumptions about long run labour market adjustments do not hold in a world where the decisions of people who provide labour are influenced by multiple family, household and community considerations and where the decisions of firms about their labour needs and business locations is governed by multiple non- price considerations. In reality, understanding how change will play out requires the simultaneous consideration of the trajectories of firms, labour markets, housing markets, and communities.

 Chapter 3 highlighted that the existing power industry comprises sets of firms with differently structured internal labour markets and distinctive patterns of interaction with each other, with the local labour market and with the Latrobe community. These institutional arrangements create barriers that may inhibit the transfer of workers among firms, condition firms’ interactions with local labour market institutions and perhaps discourage investment in new ventures. If the carbon price is calibrated to achieve a moderate rate of change, it is likely that the Latrobe Valley will remain a centre for energy production but switch its main energy source from coal to gas. In that case, the energy sector will face severe skill shortages in the near future.

 Chapter 4 demonstrated that the Gippsland and Latrobe Valley have lower rates of labour market participation and higher rates of unemployment than most other places in Victoria. It is evident that this labour market did not ‘clear’ following the structural adjustment associated with privatisation. On the contrary, the privatisation process compounded long-term disadvantages. On current trends, growth in the Latrobe Valley and Gippsland to 2026 will be based almost entirely on the in-migration of retirees, most of whom will have 59

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

fixed low incomes. Some observers view population growth as a solution to the region’s problems, but existing low labour utilisation suggests that — in the absence of new employment opportunities — the local labour market would have limited capacity to absorb additional workers. The persistently weak performance of the local labour market suggests that the existing suite of State and Federal government programs and initiatives have not adequately addressed the adjustment task.

 Chapter 5 focused on the Latrobe Valley labour market. It showed that although direct employment in the power stations of the Valley is about 6% of total employment, the wider energy sector employs about 11% of the workforce and over 20% of the male workforce. It accounts for about 40% of the Valley’s higher paid jobs. It therefore remains the cornerstone of the local economy.

 Chapter 6 showed that the energy sector workforce comprises a mix of professionals and managers, skilled workers and manual workers. It is dominated by mature aged men in traditional breadwinner household roles. The smaller townships to the south of the Latrobe Valley would be especially vulnerable if the carbon price led to a contraction of energy sector employment.

This chapter considers how these factors might combine to create the Valley’s future development trajectory. It first assesses the potential for revitalisation of the Valley’s energy sector and economy. It then develops four scenarios for the Valley’s future and identifies the medium term (up to 2026) and longer term impacts of the carbon price.

7.1 INNOVATIONS IN BROWN COAL AND ELECTRICITY PRODUCTION

The probable futures of the brown coal power stations would change dramatically with a commercially viable technological solution to reducing or eliminating their carbon emissions. Both the State and Federal Governments have made significant commitments to the development of “clean coal” technologies, to the identification of alternative uses of brown coal, and to the development of alternative fuel sources. The range of research and development projects aiming to reduce the emissions of the coal-based fuels include:  coal gasification with carbon capture and storage (CCS);  oxy-fuel combustion with carbon capture and storage;  post-combustion capture and storage, including retrofitting of existing stations;  coal to liquid fuels and power generation, with carbon capture and storage;  clean coal preparation technology;  other measures to reduce fugitive emissions from coal production; and  synergistic integration of renewable energy with coal-fuelled power generation.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Governments have to date focused on Carbon Capture and Storage (CCS) technologies, which appear the most likely short-term means of reducing the brown coal sector’s emissions. This technology involves capturing the CO2 produced when coal is burned, liquefying it and then transporting it to a suitable (underground or undersea) long-term storage site. The voids that exist in Bass Strait, adjacent to the gas fields, are the likely storage site for CO2 produced in the Latrobe Valley. (Undersea sites are preferred because underground sequestration may compromise the water table). A number of issues need to be resolved before CCS technologies can be implemented and commercially viable. These include:  Insufficient knowledge of the long term effects and risks of sequestration;  The possibility that demand for access to undersea voids will increase their value and consequently attract unforeseen costs;

 The possibility that pumping CO2 into undersea voids will increase the rate at which natural gas is expelled from the gas field, which would have effects for gas prices and gas fuel companies;  Problems with property rights and long-term responsibilities;  Questions about the implications for energy efficiency given the energy intensive nature of CSS;  Disquiet at the cost of the required infrastructure (upgrading pipelines from the Latrobe Valley to the gas fields);  Uncertainty about who should bear the infrastructure cost (the community through infrastructure funding or the firms as part of the normalization of the costs of polluting).

Even if CCS is proven at the commercial scale, it will take some time to bring the technology from experimental work, through demonstration stages, to commercially- viable incorporation in firms’ day-to-day operations. Testing and evaluation of CCS may take another 5 to 7 years (or perhaps, by some accounts, 10 to 15 years) and will require billions rather than millions of dollars of research and development funding. Even then it may not prove cost-effective, even at moderate to high carbon prices. Critics stress that emissions will still be high compared to renewable energy technologies. Reflecting these uncertainties, CCS initiatives are slow to emerge. In May 2010, BP Plc and Rio Tinto Group suspended a plan to build a carbon capture power plant. In 2011, the ZeroGen project in Queensland folded.

Much of the nation’s CCS effort is focused on the high emissions power generators of the Latrobe Valley. In the May 2010 budget, the Federal Government established a $4.5 billion Clean Energy Initiative to support the research, development and demonstration of low emissions technology including $2 billion to support the Carbon Capture and Storage Flagships Program (funding was reduced to $1.68 billion after Queensland’s flood crisis in 2011).

In Victoria, the Flagship program has funded the CarbonNet hub, a project examining the feasibility of geo-sequestering carbon emissions produced by the Latrobe Valley’s energy sector. This new project builds on a $33.3 million contribution from the Victorian Government. The Victorian government has also worked to create a legal and 61

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley institutional framework in which carbon sequestration can be implemented. The Victorian Greenhouse Gas Geological Sequestration Act 2008 established the legal framework for geo-sequestration to proceed. Then, in October 2009, the State sought applications for exploration permits to explore formations suitable for geological carbon storage in two areas within Victoria’s Gippsland Basin. . The previous Victorian government also committed $12.2 million in 2010 to establish Clean Coal Victoria, a government organisation dedicated to maintaining the momentum of emission- reduction innovations in the use of brown coal. A number of additional projects have been proposed, but their future depends on the willingness of investors to commit capital, on State and Federal policy support, and technological advances. Among them are projects that seek new uses of brown coal, such as using technologies that convert coal to oil or coal to urea. Such projects will become more commercially attractive as the carbon price rises, especially if new gas discoveries do not keep pace with demand. In addition, novel combinations of renewable energy or gas combustion with coal-fired base load power may emerge; for example, the addition of gas turbines, the pre-combustion use of geothermal hot water in steam production, the commercial development of algae-based bio-sequestration, or solar powered steam production (Tester, 2008; Maguire, 2009).

Progress toward finding a technological solution to the high emissions of base load power stations is hampered by a lack of investment funds. The global financial crisis combined with uncertainty about future policy has significantly reduced the likelihood that new plants will be commissioned in the near future. Even if new funding was available, the ‘first mover’ disadvantages associated with breakthrough technologies create a strong disincentive to invest. The financing provisions of the federal government’s Clean Energy Future package aim to overcome these barriers, but some business commentators remain sceptical. Nonetheless, power plants have a long gestation period. Assuming state-of-art technology is available, it might take 2 years to plan a project and secure financial support for it, another 2 years to obtain the necessary approvals and permits, perhaps a year or two more to wait for the delivery of specialist parts and equipment from overseas, and then a five year building program. By the time the project is complete, the ‘state-of-art’ technology at the commencement of the planning phase might be 10 years out of date. This is always a problem for major projects. However, at a time of intense global research and development activity in search of ‘clean coal’ solutions, there is a high risk that available technologies will be superseded in the near future. It is agreed that the currently dominant forms of renewable energy (wind and solar) are unlikely to play a direct role in the future in the Latrobe Valley (LCC, 2010). Victoria’s climate does not provide enough sun or wind to generate sufficient amounts of electricity, and the intermittent nature of these energy sources means they cannot replace base power. In particular, it is argued that in places (like Denmark) where wind power supplies a significant proportion (30%) of electricity needs, renewable sources rely on hydro-electric or nuclear backup to deliver baseload power. Small scale renewable energy is used most effectively in places with a compact urban form, and where energy sources are located close to urban end users.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Restricting the frame of vision to existing renewable technologies produces too narrow a focus for thinking about the future of the Latrobe Valley. As discussed in Chapter 2, market analysts argue that the most likely outcome for the Valley in the short term is conversion of coal-based generators to gas-fired electricity production, a development that would increase the area’s articulation with the Gippsland Basin oil and gas production industries. Opportunities for wave or geothermal power – or some other yet to be identified source – may also be found in Gippsland or the Valley. The Latrobe City Council (LCC, n.d) seeks to consolidate the Valley’s position as the State’s premier site for heavy industrial development. It sees the Valley becoming a technology and manufacturing hub for the wider Gippsland region. The LCC supports efforts to identify less emissions intensive and more diverse uses of coal, so that the resource is not dedicated to a single end use (electricity production). With new uses, especially coal-to-oil or fertilizer (urea), brown coal becomes exportable to world markets, and would therefore bring new income sources to the Latrobe Valley. Latrobe City Council (LCC, 2010) also seeks to strengthen the region’s knowledge and research capacity. It proposes requiring that government-funded brown coal and energy research and development locate in the Latrobe region and advocates the establishment of a Gippsland Centre for Sustainable Technologies (GCST) to oversee research initiatives, support sustainability in the region’s resource economy. The GCST would “focus on regional innovation, diversification of skills, research and development capability and commercial enterprise” (LCC 2010:7). The GCST, which would be located at Monash University Gippsland Campus, would also provide specialist education and training to support the Valley’s transition.

7.2 THE IMPACT OF THE CARBON PRICE ON OTHER INDUSTRIES

The impacts of the carbon price on emissions-intensive trade-exposed industries in the Latrobe Valley will depend on how policies settings for these industries develop as the carbon price transforms into a carbon market. The Securing a Clean Energy Future package is kinder to EITE than the earlier CPRS proposals. However, there is a risk that the emissions of some local firms will fall below the thresholds that would qualify them for EITE assistance. In addition, the planned Productivity Commission review of EITE assistance may find that it is not warranted in the longer term.

The Maryvale Pulp and Paper Mill, which employs over 1000 workers directly and supports a large number of haulage and forestry jobs, will face continuing challenges. It plays a pivotal role in supporting local sawmill and plantation timber industries (which sell waste and thinned samplings to the paper mill). The State of Victoria’s forest management program also relies on the Mill (it raises funds by selling harvested timber to the mill). Many of its workers are less skilled mature age men who would face some difficulty finding new jobs if they were displaced.

The impact of the carbon price on the agricultural and forestry sectors may be positive. Whilst climate change implies an expanded role for Gippsland in food production, the carbon price may encourage the replacement of agricultural land with 63

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley plantation timber. Depending on the detail of funding and implementation, initiatives to store carbon in the soil may assist farms to remain viable. Much of the farming in Gippsland consists of dairy farms, which have already suffered negative impacts from the effect of the global financial crisis on exports.

As outlined in Chapter 6, the employment multipliers of the energy industry imply that all consumer oriented businesses in the Valley will be affected by the carbon tax if the energy and related industries decline. Small businesses in areas with high percentages of energy sector residents (i.e. Yinnah and Boolarra) would bear the brunt of this effect.

7.3 FOUR SCENARIOS FOR THE FUTURE OF THE LATROBE VALLEY

This section reworks a set of scenarios that were identified by Victoria’s energy regulator Vencorp in 2008 to identify the possible effects of the carbon pricing for transmission system planning (Vencorp, 2009). Their scenarios purposefully anticipate the extremes of probability so that planning can accommodate a range of less radical outcomes.26 In this exercise, the effects of carbon pricing are assumed to depend fundamentally on three parameters: the carbon price and its rate of increase, the underlying rate of economic growth, and the extent to which changes in the energy market—as a result of different rates of innovation among fuel sources and different levels of investment by firms and states—change interstate flows of electricity and the fuel source mix. These movements are uncertain. First, whilst the initial carbon price in 2012 will be set at $23.00 per tonne, the Clean Energy Future planning allows that future price increments will be determined in the light of a range of environmental, economic and political factors. In essence, therefore, the rate of increase in the carbon price will depend on the political will of future federal Parliaments. Second, and as discussed in Chapter 2, econometric modelling of the carbon price assumes a healthy rate of economic growth; that is, growth rates that create an expanding job market and therefore a relatively painless labour adjustment process. The modelling does not consider the outcomes when the economy is in recession or characterised by declining employment opportunities. Third, national scale modelling considers changes in fuel types, but does not take account of the spatial implications of those changes, for example, if Queensland’s gas resources expand more rapidly than Victoria’s as a result of the differing character of their mining and resource intensive industries. Taking these possibilities into account, Vencorp produced four scenarios for the Latrobe Valley: a ‘High Carbon Response, High Growth’ Scenario 1; a ‘High Carbon Response, Low Growth’ Scenario 2, a ‘High Energy Export’ Scenario 3, and finally a ‘business as usual’

26 Similar but more detailed scenarios have been developed by the Earth Resources Development Council (Victoria, 2010e) in consultation with energy sector and local stakeholders. The Vencorp scenarios are preferred because they incorporate overall growth projections.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

Scenario 4. These futures are stylised to provide an indication of the range of possible outcomes not a prediction of any actual outcome.

Scenario 1: High Carbon Response, Robust Economic Growth, High Energy Import A high carbon adjustment response is likely if Australia opts for a rapidly increasing carbon price or if the Commonwealth adopts stringent renewable energy targets. This scenario assumes that in addition to the carbon price, robust economic growth produces high energy demand. These buoyant economic conditions also supply adequate capital to finance energy innovation investments. Moreover, the price signals incorporated into the carbon price operate as was anticipated by its designers, and stimulates significant investments in low emissions technologies as well as facilitating a rapid transition to low carbon energy sources. New gas fields are discovered and gas prices remain within reasonable limits; this stimulates the construction of new gas-fired power plants to meet demand in the shorter term. However, the high-price scenario expects that, for the most part, these investments will not be made in the Latrobe Valley. Renewable energy investment will favour South Australia, where the bulk of solar, wind, geothermal (and possibly nuclear) project activity is likely to locate. South-west Victoria (Otway gas and wind) and north- west Victoria (solar and geothermal) also attract investment. Energy retailers establish small peaking generators near terminal stations, close to urban settlements, to supply an increasingly volatile demand profile. The federal government invests in infrastructure to facilitate this shift. This scenario assumes there will be no breakthrough in clean coal technologies. As a result, Victoria’s electricity total energy sources shift away from the Latrobe Valley. However, with continued robust demand for power, the transition in the Valley will be slow – since the new capacity coming on line will meet new demand rather than displacing the power produced in the Valley. The National Energy Market expands and the transmission system is expanded to enable bulk imports, with strong flow from South Australia to Victoria. This scenario assumes that in a buoyant economy consumers will bear higher electricity costs rather than alter their consumption behaviour. Here the generators in the Latrobe Valley maintain their output but have a falling share of total demand. The generators are protected in the short term by Federal government compensation. Hazelwood and Energy Brix power stations take up the Commonwealth’s ‘contract to close’ and retire by 2015. However, they are replaced by new gas-fired plants at the same sites. The remaining power stations upgrade using available lower emissions technologies. No new brown coal power stations are built, but the remaining coal-fired stations remain profitable because electricity demand and electricity prices are both increasing. Although in this scenario the Latrobe Valley gradually loses its role as Victoria’s energy production centre, there is no sharp adjustment since the closure of Hazelwood is managed to minimise labour displacement. In the longer term, as the energy- specialised support services that are currently based in the Valley are likely to drift

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley towards a Melbourne location to reduce their transport and transaction costs. This would result in a falling energy share in the total gross regional product of Gippsland and the Valley. This scenario demands policies for the Valley that stimulate new uses of brown coal and new industries that do not rely on the energy sector. Scenario 2: High Carbon Response, Weak Economic Growth, High Energy Import This scenario assumes the same policy settings as in scenario 1, except that here the expectation is for weak global, national and local economic growth conditions. This dries up firms’ access to finance and investment capital and curtails local electricity demand. As consumers respond to higher electricity prices by turning off their appliances, retailers become stressed and coal-fired generators find themselves unable to pass on the costs of the carbon price. However, subdued growth of EITE industries within Australia softens the emissions price – once permits become tradable – and it remains low. As renewable energy sources enter the market, overcapacity depresses prices in the wholesale energy market. Moreover, the combination of renewable energy targets and a lack of investment capital favour small scale renewable energy and gas projects (peaking plants and wind farms rather than base load facilities). Government budgets are stressed, constraining infrastructure funding. Cost pressures impel firms investing in generation using new energy sources to locate adjacent to existing infrastructure. Since, in the absence of adequate venture capital, the financing of new ventures will depend on government support and investment, and the state will have some influence over the location of these investments. However, with increasing system-wide overcapacity and the added burden of the carbon price, the game will revert to zero-sum, and cheaper power from new energy sources will tend to replace rather than augment existing higher emissions power sources. Without access to finance, breakthrough coal-related technologies fail to emerge and multinational parent firms shun further investment in the Valley. As a result, the rate of change in the Valley is rapid. As other power supplies become available, three brown coal generators will begin to phase down their activities. Some plants will remain in operation only to meet the obligations of the federal government’s compensation and planned closure arrangements. Maintenance regimes may suffer. Progress of brown coal technology innovation by private sector firms would stall. In this scenario Victoria is likely to have to rely on imported energy, possibly in the long term. In this scenario the Valley faces a more rapid adjustment process, which will need to be managed with the support of the structural adjustment provisions of the Clean Energy Future. In the Latrobe Valley, this scenario demands policies that stimulate new uses of brown coal, new industries that do not rely on the energy sector and interventions to assist displaced workers. Scenario 3: High Carbon Response, High Growth, High Energy Export As in scenario 1, in this scenario policy settings encourage rapid restructuring through high carbon prices and strong renewable energy targets. A high growth rate means that EITE industries grow rapidly. In this case, however, significant breakthroughs in clean coal technologies are complemented by government investment in the infrastructure required for carbon sequestration. These innovations encourage significant investments

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley in new generation, including investments in modern coal fired base load plants in the Latrobe Valley. As renewable technologies are commercialised, gas generation will be replaced by other power sources as local gas prices increase toward world (export) prices. Changes in the National Energy Market and transmission infrastructure encourage synergistic projects that integrate Bass Strait gas and Latrobe power. In this scenario the Latrobe Valley’s growth is robust. Technologically advanced coal-based capacity, as well as the transformation of coal-fired stations to gas— possibly with the addition of other combinations of energy sources (geothermal coal)— enable the Valley to develop its capacity to export to the national energy market at competitive prices, even after the carbon price is taken into account. The more secure outlook for coal-fired generation stimulates investment in other coal-related industries in the Valley. It becomes the site for new gas storage facilities that provide greater capacity to meet peaking demand. Renewable energy sources expand in other parts of the State, but since the Valley is producing for the national market, their contribution does not impede production in the Valley. This scenario is contingent on advances in coal-related technologies and investments in promoting infrastructural synergies between coal and gas and other resources in the Valley; for example, by the creation of bio-sequestration hubs near carbon storage sites. This scenario also assumes (federal) investments in the national grid to facilitate energy exports. This scenario would produce significant growth in the Latrobe Valley’s energy sector, but it demands investments in re-skilling and training to meet anticipated skill shortages. Scenario 4 Business as Usual In this business-as-usual scenario, weak emission targets and moderate carbon policies combine with continued strong consumer demand for electricity. The incentives embodied in the carbon price are strong enough to alter firms’ strategies (i.e. firms think about and plan for emission reduction) but not powerful enough to induce them to switch from current activities to new forms of generation. Innovation in coal technologies continues at a modest scale with the support of government subsidies. Consequently, the Valley’s emissions record improves incrementally. Base load coal- fired power stations continue to operate profitably, although possibly with some ongoing forms of subsidisation. Growth in demand is met by new gas generation and renewable energy sources within Victoria as well as imports from other states to augment local supplies. There is no ‘adjustment task’ in the Latrobe Valley; that is, no task in addition to the existing need for regional economic revitalisation.

Table 7.2 summarises the short, medium and longer term impacts of these scenarios.

Table 7.2 Possible Futures for the Latrobe Valley Power Industry Scenario Short-Term Medium Term Long Term 2010-2015 2015-2020 2020-2050 Scenario1. Orderly contraction At least one closure Gradual devaluation Strong Targets, after 2013. at 2015. and dismantling of High Imports, Latrobe Valley High Growth energy assets. Gradual 67

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

transformation of the Latrobe Valley economic base. Scenario 2. LVE generators Two possibly three Rapid devaluation Strong Targets, remain operational, coal-fired of Latrobe Valley High Imports, but plan exit. generators close. energy sector Low Growth Shift to imported assets. Major shifts energy. in the Latrobe Valley economic base. Scenario 3. Breakthroughs in Coal-fired power Latrobe Valley Strong Targets, coal technologies are plant upgrades. becomes a centre Strong Innovation, rapidly diffused. New gas & gas for the export of Strong Export Latrobe Valley storage electricity, generators continue investments. electricity-related to operate. Integration of gas skills and new and electricity industries based on networks. coal.

Scenario 4. All LV generators New investments Gradual shift away Moderate Targets, operate with focus on gas and from coal as new Business as Usual government gas peaking layers of investment support. stations. Coal-fired gradually smother power stations the old structures. retain volume but decline in share. An important caveat to the above is the potential—and even the likelihood— that there will be a technological breakthrough that is not currently known but one that will transform the trajectory of the entire energy sector and economy. In 1980, the internet did not figure in anyone’s account of the future.

Much of the uncertainty in these scenarios concerns the likelihood of technological changes, the extent to which new gas generation capacity will utilise existing infrastructure (and therefore locate in the Valley), and whether firms or governments are willing to provide new infrastructure to deliver yet-to-be proven renewable technologies. The way that governments organise the relationship between electricity and gas transmission systems will be important to the future of the Valley. MMA (2008b:6-7) notes that the cost of new transmission investments may ‘overwhelm’ investments in renewable generation and foreshadows a need for state planning to shift the generation centres to new regions i.e. away from the Latrobe Valley:

Integrated gas and electricity system planning processes may need to be made more robust, particularly to accommodate a departure from traditional incremental growth assumptions towards new processes that can accommodate the large and coordinated infrastructure investments that could be needed to support shifts in generation centres to new regions having renewable generation resources and significant gas infrastructure.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

The future of the Latrobe Valley will depend on decisions that State and Federal governments make about the extent that they are willing to fund new transmission networks.

7.5 CONCLUSION: THE STRUCTURAL ADJUSTMENT TASK

This chapter has confirmed that there are currently no technological solutions to the difficulties that the carbon pricing will create for the Latrobe Valley economy. Our scenarios allow for the possibility that outcomes of carbon pricing for the Latrobe Valley might be positive but might be negative. Although all scenarios imply that the Latrobe Valley will experience considerable structural change in the next 20 years, the direction of that change is very much open to debate. In the next chapter, therefore, we examine the change trajectories of other places and consider the extent to which governments and communities can influence outcomes.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

CHAPTER 8 BEST PRACTICE IN AUSTRALIA AND OVERSEAS

There is a substantial international literature on strategies through which firms, communities, individuals and governments can reduce the adverse impacts of structural change. Although strategies have proved successful in some contexts, there is no panacea that removes all adverse impacts. The point of this chapter is to show that there are always choices.

The chapter’s first section examines the restructuring of the European coal industry and the different patterns of outcomes that are emerging in particular countries. The next two sections look in detail at the effects in two contrasting regions: North East England and the Ruhrgebiet in Germany. The fourth section reviews the implementation of ‘New Regionalism’ partnerships in South Australia to highlight some ideas for local level initiatives for economic regeneration. These examples crystallize the policy approaches available to address structural change processes, as outlined in the final section which also draws some general policy lessons

8.1 INDUSTRIAL RESTRUCTURING IN EUROPE

This section describes the broad parameters of restructuring of the European coal mining industry and the regions in which it is located as well as introducing some concepts that make sense of the diversity of its pattern of change. It is concerned with exploring the European experience of what happens to regions facing large-scale restructuring.

As is unfolding in the Australian case, the restructuring of the energy sector in the EU has been affected by the interplay of changes in technologies, the transformation of markets and changing relativities in the prices for fuels, as well as geopolitical and macroeconomic effects. As in Australia, change has been associated with the development of energy markets. The creation of an international market for energy in the European Coal and Steel Community was a precursor to the formation of the EU. The EU continues to play an important role in regulating energy markets and prices through its competition policy, restrictions on state subsidisation and more recently through its emissions trading scheme. Climate change concerns have been a relatively recent influence. In contrast to the Australian case, however, restructuring of the European energy sector has been a long-run affair, characterised by different phases of change over the past 50 years. In Europe, coal has competed with other energy sources and technologies since the 1960s, when the emergence of oil as a fuel for power generation led to the replacement of many coal fired generators. The growth of nuclear power became important in the 1970s, and in the 1980s and 1990s gas also became an important fuel source for electricity generation. The mix of power generation sources has varied significantly between countries. Questions about energy security as well as macroeconomic effects (such as currency shifts) have influenced the mix of fuels and

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley power systems. For instance, the EU’s growing dependence on gas from Russia, central Asia and North Africa has emerged as a recent concern. The first significant wave of coal mine closures in the United Kingdom occurred in the 1930s, while in most European countries there was significant restructuring of coal mining from the 1960s. The oil crises of the 1970s provided a reprieve for European coal, so it remained both a significant contributor to power generation (and other uses e.g. coking for steel plants) and a significant provider of jobs and output in some regions. Coal sector restructuring has taken place over an extended time period and in the context of abundant supplies of hydro and nuclear power that provide base load backup for expanding renewable forms of power (principally wind). The consequences of restructuring of former coalmining regions are simultaneously economic and social. Understanding the outcomes involves tracing the types of new industries that are emerging, the social changes that accompany these new arrangements (such as new forms of employment and unemployment) as well as the cultural changes inscribed in these transformations. Questions of identity loom large and have important material effects. The restructuring of coalmining regions has been much investigated in Europe as part of the study of what are known as “old industrial regions” (OIRs). These are regions containing high concentrations of “traditional” industries, especially heavy industries like coal, iron and steel, and shipbuilding. These regions were the heartlands of their respective countries’ industrialisation. This characterisation has strong parallels with the Latrobe Valley. The study of OIRs has been at the centre of alternative theories of regional economic change. Orthodox economic explanations of their transitions stress that as industries adjust to market signals in the pursuit of efficiency, the effects in host regions uncomplicatedly reflect changes in the local composition of industries. Changes in labour markets are subsequent to (and caused by) changes in industries. In contrast, heterodox explanations draw on institutional and evolutionary economics to stress the role of institutions (of which the market is but one) in shaping patterns of adaptation. In this latter view, regions do not respond simply to market signals; rather, their reactions are influenced by past trajectories of development, or path dependency, including the plethora of institutional “lock-ins” that limit their developmental options. In short, history matters and the region itself is an influence on the restructuring process rather than merely the expression of shifts in industrial composition. These understandings influence the sorts of policy responses that public authorities make when faced with structural change processes. In some countries, such as the United Kingdom in the 1980s, the coal industry’s restructuring was led by the sharp removal of regulatory protection for coal producers. Policies were designed to accelerate adjustment on the assumption that the quicker the transition the less painful it will be for all concerned. Here, it was assumed that the market would produce an optimal resource allocation and, therefore, public interventions should be restricted to correcting market failures and to introducing regulations that improve the design of effective market processes.

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In other places, such as the German Ruhr region of the 1990s, more active forms of intervention have been developed to assist existing industries to adapt to the new market conditions created by changes in regulatory mechanisms (such as the introduction of emissions trading schemes). Here, policies aim to promote the development of production platforms that exploit the synergies of “related variety” (European Commission, 2006). Similarly, this approach is exemplified by the United States’ focus on identifying and promoting “phoenix industries” that emerge from the remnants of older manufacturing industries. In this vein, the US Department of Commerce’s Economic Development Administration (EDA) has aimed to create wealth and minimize poverty by promoting favourable business involvement, attracting private capital investment and fostering the growth of higher-skill, higher-wage jobs through a combination of regional capacity-building, planning, infrastructure projects, research grants and strategic initiatives. The EDA especially supports partnerships between local public and private sector organisations and universities to foster local economic development. Universities play a crucial role in these strategies: they are seen as catalysts and accelerators for economic growth, able to research, outreach and apply technological innovations to stimulate new economy ventures.27 There are important differences between the market approach and this new approach. In the market understanding, new industries are superimposed over the old structures, in the manner of a new layer of economic relations. For a time, the old and the new operate in tandem and the vestiges and remnants of the old structure persist in change-resistance pockets (see Massey, 1984). Plans to shift the Latrobe Valley from its heavy industrial history to a new economy based on services and tourism exemplify this type of approach. Often such rapid change processes are precipitated by crisis or turning points that publicly recognise the failure of the old way and old methods (Rip and Kemp, 1998). In the ‘related variety’ approach, on the other hand, the growth of the new industrial base is encouraged to emerge organically from the transformation of a region’s old industries. This incremental understanding envisages a regional system – of firms, labour markets and communities – that is constantly adapting and transforming itself in response to multiple economic, social and political signals. The trajectory and intensity of change processes depends on the way that governments manage policy changes.

Restructuring in the EU’s Hard Coal Sector

These are matters over which there is significant choice. This is demonstrated by the different patterns of outcomes in the EU hard coal sector in the last twenty years. Table 8.1 shows that between 1996 and 2004 coal production dropped sharply across the EU15, with especially strong declines in France, the United Kingdom and Germany.

27 See Cornell University’s Economic Development Administration University Center http://www.oed.cornell.edu/EDA/EDA.htm (last accessed November 2008).

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Table 8.1 Production of Hard Coal in the EU, 1996 to 2004.

Country: 1996 1998 2000 2002 2004 % change (000 (000 (000 (000 (000 1996- tonnes) tonnes) tonnes) tonnes) tonnes) 2004 EU – 15 126,695 108,328 86,089 73,702 66,279 - 47.7 EU - 25 341,689 291,181 253,057 239,280 228,146 - 33.2 Poland 137,048 115,145 102,291 102,723 100,517 - 26.7 Czech Repub. 76,243 66,879 66,709 62,855 61,350 - 19.5 Germany 53,157 47,208 37,376 29,209 29,151 - 45.2 UK 48,538 40,046 30,600 29,539 24,536 - 49.4 Spain 17,688 16,212 14,947 13,308 12,344 - 30.2 France 7,312 4,862 3,166 1,483 160 - 97.8 Italy 0 0 0 163 98 n/a Romania 1,323 1,406 281 13 53 - 96.0 Bulgaria 3,198 92 118 94 0 n/a Hungary 882 854 0 0 0 n/a Source: Eurostat

The accession of 10 new member states (EU25) in 2004 slowed the rate of decline in total coal production, primarily as a consequence of Poland’s contribution. Figure 8.1 shows that production in the EU fell faster than consumption in the period 1995–2004. This difference was made up by the growth in coal imports. This means, in short, that the EU remains an important market for coal, but is producing less coal of its own.

Figure 8.1 EU Coal Production and Consumption Source: Eurostat

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Looking in more detail at selected countries, Table 8.2 shows divergent patterns of restructuring in the relationship between production losses and job losses. In the period 1980–1995 coal production in Germany fell by 42 per cent, while employment fell by 50 per cent. By contrast, in Spain production rose slightly (4 per cent) while employment halved. In the UK production fell by almost 70 per cent, while employment fell by much more, almost 96 per cent.

Table 8.2 Coal Production and Employment, Selected Countries, 1980–1995

Germany Spain United Kingdom Prod- Employ- Prod- Employ- Prod- Employ

uction Ment uction ment uction Ment (000 tonne) (000) (000 tonne) (000) (000 tonne) (000) 1980 94.5 186.8 17.3 51.0 112.0 220.0 1990 76.5 130.3 19.5 43.0 91.0 40.0 1995 53.1 93.0 17.6 26.0 35.1 9.5 2005 24.7 38.5 11.9 8.2 9.6 4.4 % Change -43.8 -50.2 + 1.7 -49.0 -68.8 -95.7 1980–1995 % Change - 53.5 - 58.6 - 32.4 - 68.5 - 72.6 - 53.7 1995–2005 Pit closures 10 38 8 1995–2005 (19 – 9) (113 – 95) (31 – 23) Source: Eurostat

Between 1995 and 2005, the employment loss was of a similar magnitude to the production loss in Germany, more than twice the production loss in Spain, and about half the production loss in the United Kingdom. These outcomes are related to the number of pit closures at different times and in different places. As Massey and Meagan (1982) demonstrated, there are many forms of restructuring and many different types of outcomes. Job losses can be the outcome of the rationalisation of plants (plant closures), intensification of work to restore or improve profitability, or productivity improvements that are a result of technical change. In Germany, where production loss and employment loss were of a similar magnitude, significant production subsidies were provided to firms, reflecting its concerns about energy security, support for the local equipment industry and concern about the social consequences of mine closures. Tomaney (2008) argues that these different patterns of outcomes reflect different national approaches to restructuring. These are summarised in Table 8.3. In France and the Netherlands, state-led restructuring with large-scale government programmes has facilitated the replacement of coal-fired electricity and nuclear power and gas-fired power respectively. Mining in regions such as Nord-Pas de Calais (Lille) and Limburg (Maastricht) was eliminated. Germany’s approach, encapsulated by the notion of ‘requisite variety,’ promotes active restructuring around existing industries, while in the UK, especially during the 1980s and 1990s, policy sought to accelerate the effects of market forces. In Ukraine, a World Bank structural adjustment programme has reshaped the industry (and contributed to a political crisis) in the Donbass. By contrast, 74

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley the political priority in the USA and Australia has been modernising existing capacity to supply local and international markets. In many countries, mining regions are characterised by “lock-ins” as firms and public authorities struggle to adapt to new opportunities and break their dependence on old forms of economic activity but remain trapped in low growth trajectories.

Table 8.3 Varieties of Restructuring

Type Typical Nature Countries Adversely Impacted Regions State Led High France, Pas de Calais (Lille) interventionist Netherlands Limburg (Maastricht) Requisite Variety Innovation –led Germany Ruhr Valley

Modernisation Technology-led USA, Australia

Market Led Rapid Adjustment, United Kingdom Newcastle (NE UK) Market outcomes Ukraine Dombass Lock-In Trapped in old Belgium, Spain ways

Two regions with quite distinctive recent economic histories, North East England and the Ruhrgebiet, provide illuminating exemplars of these different approaches. Both are `regions’ in the European sense of the term: that is, they are large urbanised areas containing significant populations and multiple urban centres. They are not strictly comparable to the much smaller area of the Latrobe Valley, but there are parallels in so far as each has a particular industrialised identity that discursively constructs the place and distinguishes it from its surrounding areas.

Case 1: North East England

Coalmining in North East England can be traced back to Roman times, but the region became known as the Great Northern Coalfield in the 19th century and lay at the heart of a complex of steam age industries, including iron and steel, shipbuilding, railway and engineering.28 Employment in coalmining in the UK peaked in 1920, when 1.2 million were employed in the industry. As an export coalfield, the North East experienced its first production slump in the inter-war Depression. The coal industry was nationalised in 1947. Following a small wave of closures in the inter-war period, a major programme of coalmine closures occurred in the 1960s as oil and nuclear power emerged as competitor fuels. These closures occurred in the context of a long boom during which successive UK governments invested heavily in infrastructure and provided investment incentives to firms to locate in regions with declining coalmining sectors. Consequently,

28 This section draws upon and updates Tomaney (2003 and 2006).

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley the growth of new manufacturing industries and service activities offset the employment decline in coal (and other traditional industries). A second phase of restructuring in the North East coalmining regions occurred in the 1980s, with the privatisation of coal and deregulation of the energy sector following the defeat of the miners’ strike of 1984/5. The context in this period was quite different. The Thatcher government eschewed large scale state intervention, and allowed the restructuring that occurred in the aftermath of a deep recession to shake out uncompetitive manufacturing activities. This produced geographically uneven outcomes and resulted in the emergence of a North/South divide that separated the de- industrialising North from the new hi-tech and financial services industries in the South, in and around London (see Peck and Tickell, 1992). The new employment created during the restructuring was often relatively low paid and often part-time, in new economy sectors like retailing. The result was growing polarisation within local labour markets, as well as between places. The former coal mining regions – and especially their former mining communities – were marked by below average performance in relation to productivity, innovation, enterprise and educational attainment. Unemployment remained well above the UK average. As in Australia, reforms to the social security safety net make unemployment an increasingly unreliable measure of regional disadvantage as increasing numbers of “workless” workers are not registered as unemployed (Beatty and Fotheringill, 2005). The changes wrought in the coalmining regions were designed to have cultural as well as economic impacts. Coalmining regions were regarded as over-dependant on state support and lacking enterprise compared to the new industries like financial services (in London and the south east), in which the UK exhibited global comparative advantage. The perceived imperative was to renovate old industrial sites, typically turning them over to new activities such as leisure and retail. In part, these regeneration programmes involved a self-conscious effort to eliminate physical traces of the old industries. This approach was broadly continued by subsequent Labour governments, but with some notable new developments, including the creation of Regional Development Agencies (RDAs) to provide greater coordination of – and more capacity for – local public intervention in the economy.

Case 2: The Ruhr Region

The Ruhr region (Ruhrgebiet) provides a contrasting case where the emphasis has been on more active forms of restructuring aimed at developing existing industries as well as nurturing new ones. The process here has been informed by a heightened cultural awareness that emphasises the community’s role in creating its change trajectory. The Ruhr region is the major location for coal production in Germany29. It has about 5 million inhabitants and comprises several local authorities within the state (or Land) of Nordrhein Westfalen (NRW), which has a population of 17 million. Like North East

29 This section draws on work by Grabher (1993), Iking (2004) and Block (2008). See also GHCA (2007). 76

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England the region experienced restructuring in the 1960s. Changes in energy markets and technologies resulted in the closure of 146 pits between 1960 and 1980. Restructuring in the Ruhr has been marked by efforts to develop new activities out of the old. In addition, there has been a strong emphasis on developing new eco- leisure and cultural industries, including a major reforestation project and investments in recycling old industrial buildings. Perhaps the best example of this is the listing of the Zollverein mine complex (designed by Bauhaus) as a UNESCO world heritage site. The instrument for this programme was the International Building Exhibition (IBA) 1988- 2000, a programme that aimed to revalue and rebuild the Ruhr’s regional identity as part of broader regeneration strategies that would also serve to overcome local inter- city rivalries. Restructuring in the Ruhr has been governed by the principle of co- determination (Die Mitbestimmung) or cooperative planning between management and unions. In addition, the sector has been heavily supported by subsidies that have enabled federal and state governments to influence the direction of change.30 Industrial policy in NRW has actively supported existing suppliers of equipment to the mining, steel and power industries, encouraging them to develop new environmental technologies, notably renewable energy systems. Key to this development has been Federal government support for the development of renewable energy technologies, which has led to a rapid growth in the renewable energy sector and a related equipment industry. The State government has promoted the Ruhr as Europe’s “Energy Region” and has created a new development agency, Energie Agentur, to give focus to its efforts (Energie Agentur, 2007). The Gelsenkirchen Science Park provides a focus for these activities. It is the world’s first solar powered science park and home to the Ruhr Energy International Visitor Centre. Restructuring in the Ruhr, especially its development of new specialisms from the old industrial base, displays some of the features of a “related variety” developmental approach. Two of the world's leading producers of wind turbine parts, Voith Turbo BHS Getriebe GmbH and IBC Wälzlager GmbH, were originally producers of coal-mining machinery in the Ruhr. Siemens once produced conventional coal-fired power plants for the Ruhr area, but is now developing biomass generators. TERAMEX, a former supplier of mining equipment, is now providing drilling machinery for geothermal energy. A study commissioned by the German government found that in 2006 the renewable sector had generated 259,000 direct or indirect jobs. Recent government policies to encourage alternative energy aim to increase this ‘green’ employment to 400,000-500,000 jobs by 2020 and 710,000 jobs by 2030. Among the technologies being promoted are clean coal technologies – in which Germany has developed world leadership despite its decision to close its coal mines. Like North East England, the Ruhrgebiet still has an unemployment rate above the national average, but it was the fastest growing part of NRW in 2001―2005 (The Economist, 2008). One recurring concern for the future viability of the Ruhr economy is

30 A recent decision to phase out subsidies by 2012 was largely driven by economic concerns (principally, the cost of energy in Germany) (Deustche Welle, 2007; Speigel Online, 2007).

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley the absence of any Ruhr-wide governance system. Currently the area is governed by a remote state government on the one hand and multiple local authorities on the other.

8.2 NEW REGIONALISM IN NORTHERN ADELAIDE

Our third case study is North Adelaide, in South Australia, where the transformation of an Old Industrial Region into a knowledge intensive manufacturing hub has drawn in high skill jobs and numerous innovative projects. The ‘New Regionalism’ approach adopted in South Australia involves elements of a market-led approach as well as elements of interventionist industry policies. The region’s policy aim is to promote exports, build local expertise and develop advanced technological capabilities. It seeks to position local businesses in local, national and international supply chains and to involve them in global systems of innovations.

This approach in many ways resembles the ‘related variety’ approach in Germany, since it builds on the region’s established history of manufacturing and directly promotes activities that build local technological capabilities within and between industry sectors and leading companies (Genoff, 2005:168). However, it differs from the European case because it emphasises the ‘soft infrastructure’ of local relationships that build on local knowledge and diffuse global learning knowledge (see Bathelt et al., 2004). In addition, the policy approach is not attempting to shift this region from its manufacturing base to a new strategy based on the ‘post-industrial’ sectors of hospitality, tourism and retailing. Rather, it is innovating by regenerating its capacity to produce elaborately transformed manufactures. This region is home to Australia’s Defence Science and Technology Organisation (DSTO), which (like Silicon Valley in the United States) provides reliable and abundant external funding that sustains its emerging local knowledge-intensive industry clusters. This local policy orientation in not in any way insular: rather, it encourages the local manufacturing sector to engage with the services sectors of Adelaide’s Central Business District and to demand sophisticated service inputs from them (e.g. legal and financial services). This creates a dual focus of strengthening internal inter-industry networks and synergies while at the same time building strong external networks that bring in skills and perspectives that are not available locally. New Regionalism contends that because each region has a unique mix of characteristics and needs, devolving policymaking to the local level is the best way of ensuring that local needs are addressed and that policy settings make the most of local advantages. Only local level policy development can nurture a region’s unique competitive advantages. An important component of this approach is its specific attention to matters of regional identity – to building a region’s confidence in its prospects and capacities – which not only improves the well-being of its communities, but also attracts investment and talent. This confidence is based on competitive performance and strong local and extra-local linkages, rather than the superficial accoutrements of city marketing and ‘creative class’ boosterism (see Peck, 2005). 78

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At the core of this approach to regional development, according to Genoff (2005), are new forms of local governance that bring together universities, research establishments, service and engineering firms as well as financial services businesses to form creative ‘knowledge infrastructure hubs’. The City of Playford’s ‘strategic industry development’ approach has played an important role in the region’s re-positioning to knowledge-intensive development. To promote local capacity, the City of Playford has created the Playford Partnership, a forum of local stakeholders that together tackle the difficult social and economic issues arising from structural change. The Partnership ‘is about developing ‘joined up’ or ‘whole-of-government’ strategies and programs in order to get policy traction’ (Genoff, 2005:169). It involves government and non-government agencies, operates non-hierarchically and celebrates the devolution of development policies to the local scale (see also OECD, 2001). It has three principal components: an Elected Members Forum of politicians whose electorates fall within the City, a Partnership Executive that concentrates on the City’s overall strategic vision for education, training, employment and so on, and Specialist Working Parties that implement inter-agency and integrated projects. These groups involve all the three tiers of government (Federal, State and Local) to maximise service integration and minimise duplication across funding sources and programs. New Regionalism recognises that path dependence and local embeddedness of regional economies and works in a holistic way, integrating economic, social, cultural and environmental concerns in ways that promote local industrial agglomeration. Although during the Howard administration these provided the Federal Government with a justification for washing its hands of the problems in regional areas (Rainnie and Grant, 2005), there are many elements of this approach that could be profitably applied in the Latrobe Valley.

8.3 THE LABOUR ADJUSTMENT EXPERIENCE

As the discussion of restructuring in Europe has demonstrated, industrial structures can change in a variety of ways with very different implications for the labour market. Different sorts of restructuring generate different patterns of job losses and have different implications for communities (Massey and Meagan, 1982, Morris, 1995, Harris et al. 1987). There is now a large literature examining the impacts of restructuring on worker displacement and re-employment. The retirement of Latrobe Valley’s power stations could produce a labour adjustment problem. Local and overseas experiences tell us that there are no immutable laws of plant closure and that the circumstances of each plant closure generate unique effects. However, the magnitude of the labour adjustment task will depend on:  The manner of firm closures or partial closures. When job losses occur, the outcomes for workers are in part determined by the size of the retrenchment event relative to the size of the local labour market (Sloan, 1986, Murtough and Waite, 2000). This implies ensuring that plants are wound down – with multiple partial closures or sectioning of activities, rather than closure outright. Adverse labour market impacts can be reduced by slowing the rate of job losses so that workers are released into the labour market in 79

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley smaller tranches. Unexpected mass redundancies flood the local labour market with excess labour, forcing workers to compete with each other for a finite number of jobs.  The extent to which existing firms are able to redeploy their valued workers. The successful redeployment of valued or loyal (long serving) workers reduces the labour adjustment task. It is likely that firms will redeploy higher skilled workers, especially given the skill shortages they have experienced lately. These same loyal and long-serving workers, who are perhaps nearing the end of their careers, are very difficult to place in the open employment market because their skills are highly firm-specific. It may be preferable to retain these workers, perhaps in a part-time capacity, and aim for resignations to be voluntary.  The extent to which firms implement strategies to minimise labour disruption. Firms can reduce their labour force through natural attrition and non-coercive voluntary redundancies (Buchanan and Campbell, 1992; Buchanan et al. 1992). Wooden and Sloan (1987) show that the attitudes of managers can play a crucial role in the quality of outcomes for retrenched workers. In recent years there has been increasing academic literature on the proportion, albeit small, of retrenched workers that suffer ongoing mental health problems triggered by redundancies (Price et al 2002). It seems that the trigger is not redundancy per se, but the perception of a procedural injustice associated with redundancy, for example unfair targeting and/or a humiliating termination event. These minority outcomes are extremely expensive for the community in the long term, and can be avoided by professional management of labour restructuring at the firm scale.  The extent to which new jobs can be created in other sectors in the Latrobe Valley. The outcomes of job loss depend on conditions in the macro-economy and the local labour market (Herzog and Schlottmann 1995; Massey and Meagan, 1982; Weller and Webber, 1999). When there are few vacancies in a local economy, competition for jobs increases. Employers may see a new pool of displaced labour as an opportunity to capture new skills at the expense of under-performing employees. On the other hand, it is not unusual for small communities to find ways to provide jobs for breadwinners with young families (often by displacing women). To limit these reverberations, new jobs need to be created, perhaps artificially through infrastructure programs, in smaller communities.  The extent to which workers are able to access jobs beyond their immediate neighbourhood. The size of the labour market in which workers seek work makes a difference to the range and quality of jobs that each individual is able to access (see Weller, 2008). For family and other reasons, some groups of workers, especially women, limit their horizons to a geographically immediate local labour market. More

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

skilled workers have wider labour market scope, but may need assistance to ‘see’ these opportunities.  The extent to which Latrobe Valley residents are able to migrate to places offering better job prospects. The decision whether or not to migrate in search of work involves complex decisions involving the different priorities of family members. These decisions are framed by the contradictory influences of housing and labour markets. Places with more abundant employment opportunities are also likely to be places with prohibitively high housing costs. In addition, housing values become depressed in places with fewer employment opportunities, making it even harder for homeowners to relocate (these issues are reviewed in Weller, 2009). The upshot is that out-migrants are likely to be young and single, without family ties that lock them into a community. Home owners, especially those with children in secondary school, are unlikely to relocate. However, skilled workers in the Valley are already involved in work that routinely takes them to other places for weeks or months. Unemployment and financial worries encourage people to stay close to their support networks, not to move away from them.  The capacity of households to endure unemployment or underemployment. A household’s capacity to cope with unemployment depends on household debt levels and on whether the household has more than one income earner. For displaced workers, there is a trade-off between finding a new job as quickly as possible and finding the best job possible, given each worker’s skills and attributes. In the case of Ansett airlines, for example, higher skilled workers who were in a strong financial position could hold out for a better job, often resulting in better long-term outcomes. Highly skilled workers who for financial reasons accepted low-skill jobs not only reduced their chances of returning to their career occupation, but also ‘bumped out’ less skilled neighbours. Good policy will not press displaced workers to accept the first job offer they encounter. A major unknown element of the Australian experience of labour adjustment is whether more restricted access to a social security safety net will change worker outcomes, compared, for example to the workers who lost their jobs in the restructuring associated with trade liberalisation in the 1990s. The aggregate outcomes for workers at that time are well documented (Peetz, 2005, Weller and Webber, 2004) and can be summed up simply as follows:  About one third of job losers will find a new job fairly quickly, although it is likely that the new job will initially pay less than their pre-retrenchment one. This group is younger, more skilled and more socially connected.  About a third of job losers will eventually find a job that is inferior to the pre- retrenchment job; for example, a low paid, insecure and part-time job in retail or services. The workers that find these jobs are less skilled and older, women with household responsibilities or people with physical impairments. Sometimes people in this group are highly skilled and experienced, but their own job search is restricted by their spouse’s employment. 81

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 About a third of job losers will never work again. They include older workers who opt for early retirement or become discouraged by repeated rebuffs. They also include many women who take this opportunity to start a family.  For about 1 in 20 of workers (5%), retrenchment will in retrospect be remembered as the best thing that ever happened – they will have gone to university, got married, or moved to a new state or suburb. Retrenchment will have been the catalyst for life-changing decisions.  For another 1 in 40 or 50, retrenchment will be the trigger for long term and irretrievable mental health problems that will not only limit their employability, but will impose large long-term costs on the community (Price and Vinokur, 2002). Recent work by Andrew Beer on the outcomes of retrenchment among former automotive workers in Adelaide suggests that these patterns of outcomes persist despite changes in Australia’s frameworks of labour market regulation.

8.4 CONCLUSION

What lessons are to be learned from this discussion? Although the European coal industry has been massively restructured, national and regional contexts have been important factors in the divergent patterns of change. The cases of North East England and the Ruhrgebiet exemplify the market-led and active restructuring models respectively. Both regions, however, also face enduring problems of relatively high unemployment and worklessness, lack of enterprise and innovation. Both face challenges as they seek durable forms of governance and robust regional identities. What this shows is that the outcomes of restructuring are amenable to policy intervention and that the range of possible trajectories is large.

These patterns of changes created by restructuring do not simply alter a region’s industrial profile; they alter the region’s economic, social and cultural trajectories. This is also true for individual workers and their careers. When viewed over the trajectory of projected lifetime earnings, the cost of job loss for individual workers is high. The policy orientation of the adjustment in the Latrobe Valley should therefore be understood as an intersecting combination of community, firm and individual development trajectories. Good policy will synchronise these with a view to generate virtuous cycles of mutual advantage and support.

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley

CHAPTER 9 KEY POINTS AND POLICY OPTIONS

A just transition is a transition that does not allocate the costs of the transformation to a low carbon economy to any particular group or region. The research undertaken during this project confirms the continued dependence of the Latrobe Valley on the electricity industry, and hence the potential for severe economic and social costs if closures of major brown-coal generating plants are not replaced by new generation capacity or other new activities of a similar scale. This final chapter draws out the key points made in the foregoing analysis and draws out some policy implications.

9.1 THE PRINCIPLES OF STRUCTURAL ADJUSTMENT

Structural adjustment programs are good economic policy when they facilitate an orderly and conflict-free transition process (Productivity Commission, 2001) and work to reinforce the political and moral will to implement changes that secure the community’s longer term interests. Three principles of adjustment were outlined by Garnaut (2008). First, that assistance should be non-distorting; that is, it should reinforce incentives to reduce emissions. Second, that it should encourage activities that generate sustainable on-going employment and support the future economic viability of regional economies. Third, that it should facilitate rather than impede the policy objective, in this case the transition to a low-emissions future. A fourth consideration is that interventions be designed to limit second-order and third-order effects of the adjustment (such as adverse impacts on retail employment, housing prices, or school enrolments in smaller townships).

Most commentators agree that of all Australia’s regions, the Latrobe Valley is likely to face the greatest challenges as a result of the introduction of emissions reduction policies. Yet federal policymakers view the adjustment task created by these new policies in individual terms, as a matter of finding new jobs for workers that might be displaced or of compensating individual households and businesses from additional costs. Some expect that the transformation to a low emissions future will have a net job creation impact, and suggest that the labour market will adjust to a low carbon economy without too much pain (Hadfield-Dodds et al., 2008; AMWU, 2008). Others emphasise that the number of job changes induced by the adjustment are insignificant compared to the higher number of job changes that occur routinely in a vibrant economy (Chapman and Lounkaew, 2011). The problem is that the new jobs generated by the carbon pricing will not necessarily be located in the same places, or employ the same segments of the labour force as the jobs it causes to disappear. Our consideration of the Valley’s situation leads to the conclusion that the adjustment problem is primarily a regional problem. The policy responses proposed in this final chapter understand the effects of the carbon pricing as a shock that will tilt the Valley (its firms, communities and households) toward a new developmental trajectory. Related policy interventions need to ensure that the new trajectory builds from the Valley’s existing skills, specialisations and history to create a stronger, more vibrant and more resilient economy and community. 83

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9.2 VICTORIA’S POSITION ON REGIONAL ADJUSTMENT

The Garnaut Climate Change Review (2008:398) identified principles to guide the provision of regional adjustment assistance:

 Assistance should not distort or undermine incentives to reduce emissions;

 The benefits of assistance should accrue to households, communities and regions, in the form of employment growth and improved economic viability (that is, assistance should be designed to prevent its capture by rent-seeking interest groups or businesses);

 Assistance should be transitional (as opposed to continuing) and should aim to stimulate the transition to lower emissions activities.

In this framework, adjustment assistance is warranted only to redress the adverse impacts of policy change. The previous Victorian Government (Victoria, 2008) proposed that regional adjustment assistance be extended to include preventative measures. It also proposed that:

 Eligibility for assistance should be based on transparent criteria and established at the outset of the scheme;

 The Commonwealth should be responsible for funding adjustment schemes but that State Governments should be largely responsible for their design and implementation;

 The type and level of assistance to workers, regions or communities should be tailored to the impact on the affected group;

 Regional adjustment packages should incorporate climate change initiatives; and

 Preventative assistance, as required, should be made available before adverse consequences emerge.

In late 2010, consistent with this framework, the newly elected Victorian government and the local Governments of the Gippsland region began implementing preventative measures designed to improve the Latrobe region’s capacity to both withstand and adapt to changing conditions. Responding to a series of employment losses in early 2011, the Victorian Government announced a $10 million economic stimulus package to support enabling infrastructure development and employment creation in the Latrobe Valley. This and other funding has supported multiple initiatives in the Gippsland area that together provide the evidence from which the Victorian Government is preparing a local industry and employment ‘Roadmap’ for regional revitalisation. The initiative will

 build on existing local and regional economic plans and strategies;  improve coordination of local development initiatives

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 strengthen networks between State departments and the regions local governments and local institutions; and  identify new opportunities for new industry to leverage more investment locally.

The Roadmap is being developed in partnership with local and Federal governments, education and training institutions, business and community sectors across the Latrobe Valley. It sets out a State Government supported plan to diversify and expand the local economy that is intended to provide a framework for engaging with the Commonwealth on the parameters of structural adjustment assistance.

9.3 MANAGING AN EVOLUTIONARY TRANSITION

Our discussion of regional regeneration projects in Chapter 8 suggested that best outcomes for the Latrobe Valley could be achieved by initiating projects and programs that recognise its existing strengths and build on them to rejuvenate the economy. This general direction has been embraced by the Gippsland Regional Plan and planning by Latrobe City Council (LLC, no date). Consolidating this direction will require coordinated initiatives that build local business networks while at the same time creating external links that incorporate the Valley’s activities into global commerce, strengthen the Valley’s labour market and skill base, and reinforce its local governance structures. This is important because our overall analysis suggests that the re-employment of workers that might be displaced from coal-fired power stations is a less difficult problem than ensuring that their re-employment does not displace other, less employable Valley residents. The key problem in this respect is to ensure that the overall impacts of the carbon price are not permitted to increase the already above average rates of long-term welfare dependence in the Valley townships. Persistent labour under-utilisation and low wages in the Latrobe Valley suggest that its local labour markets have very little capacity to absorb displaced labour through shifts in real wages. There is also a risk that a decline in the energy sector might further depress local housing markets with the effect of trapping an already disadvantaged workforce in a place with few jobs. In addition, and in contrast to the structural adjustment process that accompanied trade liberalisation in the 1990s, the Latrobe Valley has already experienced productivity improving restructuring in manufacturing industries and a growth of service employment, especially in tourism and retailing. In this next transition, there will not be many opportunities to expand these service industries. On the contrary, energy sector jobs are now supporting otherwise non-viable tourism, retail, hospitality and farming jobs held by other family members. This in turn suggests that successful adjustment will require the creation of new jobs. Our overall analysis of the Latrobe Valley’s labour markets and housing markets has suggested that leaving the low carbon transition to market forces might produce adverse outcomes. This risk is too high: the market should not be allowed to creatively

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley destroy the Valley’s economic base and community viability. What is required is a policy approach that recognises that the regional economy is developing on a trajectory that can be reoriented by short-term strategic interventions that work toward long-term goals.

9.4 SHORT-TERM LABOUR ADJUSTMENT

The adjustment measures incorporated into the Clean Energy Future plan should ensure that any generator retirements occur in an orderly and planned way, so as to protect the State’s energy security, while at the same time minimising potentially adverse impacts for the directly employed plant workforces, other employment that indirectly relies on the generators, as well as the broader Latrobe region. Our scenarios assume that assistance to generators will be sufficient to ensure their continued operation and, in some cases, support their planned closure. To minimise disruption, the decommissioning of older brown coal plants should be staggered on a unit by unit basis, coordinating closures with the commissioning of new power sources or other initiatives that create jobs in the Valley. This would require the cooperation of energy companies as a condition of the compensation they receive as part of the Clean Energy Future package. It would also require that additional resources are dedicated to coordinating the activities of stakeholders, as far as is practicable. The least disruptive labour adjustment process would release workers from high emission plants and reallocate them to other plants that are already experiencing skill shortages. This process might be facilitated by direct transfers (without loss of seniority) or supported by wage subsidies. Such a process might have the following components: 1. For plants contracted to close, choose a plant retirement date that is near enough to induce workers and managers to consider their future options (i.e. 2015). Offer open-ended voluntary redundancy opportunities effective on plant retirement and call for expressions of interest in reallocation to other plants. 2. Maintain a register of employed workers who are willing to move to other employment. As vacancies arise in more viable plants, consider recruiting from the register, then backfill vacated jobs in the vulnerable plant with a contract, temporary or training positions. 3. Offer experienced mature age workers who are nearing retirement a range of transition options including part-time work. 4. Design opportunities to recruit experienced workers who are nearing retirement to acting as trainers or mentors for apprentices and recruits. 5. Introduce an attractive group apprenticeship package (i.e. a living wage) that includes training for the specific needs of the generators but also delivers skills for emerging industries in a ‘related variety’ of possible futures (see Chapter 8). Involve mature age workers to maximise the knowledge transfer to the new generation. 6. For skilled workers in existing plants, create scholarships to encourage them to move into specialised training for new industry research and development, 86

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again with a ‘related variety’ theme. Some of these scholarships could release workers for part-time university study (at post-graduate level) as a transition toward new employment (ideally, in new ventures proposed and financed by their current employer). 7. For unskilled workers that are not interested in retraining or redeployment, create jobs that will prevent them from displacing others – either in construction projects or in retrofitting housing for energy efficiency projects. 8. To overcome institutional barriers that might prevent workers obtaining jobs with other generators, create a transitional institution (which could already exist, e.g. in the form of Silcar) to break down firm-specific allegiances and broaden skill profiles. 9. Use funds to create opportunities for informal interaction among generators and their workforces, to enable the job re-allocation process to operate through informal social networks (e.g. internet information sites, job information billboards, even trivia nights at the local pub). Figure 9.1 depicts the flow of these ideas:

Figure 9.1 Orderly Adjustment In the Latrobe Valley, as elsewhere, there is a negative view of the sorts of short- term, low skill training that was offered in Labour Adjustment Programs in the 1980s. Such programs have little educational value and produce inefficient displacement effects in the labour market: see Hawke et al. (1997); Sloan and Wooden (1993). However accredited training for higher level jobs and to upgrade existing qualifications is effective for individual career development and lifts the region’s overall competency levels. Job-matching services, wage subsidies and relocation assistance also help labour markets to adjust, but may be of limited use in the Latrobe Valley context, given its size and narrow industrial profile. In a relatively small community such as the Valley, local word of mouth networks are likely to provide the best employment information – which means that employment outcomes can be promoted by encouraging social engagement activities such as festivals and sporting events. All displaced workers, including the highly skilled, need assistance in negotiating the rules of Centrelink and in organising their financial affairs. Many of the Valley’s power workers are nearing retirement age and have relatively large superannuation accounts. Provision of sound financial advice is essential to a successful retirement or transition to a new job or small business. Ideally, workers would receive 87

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley financial advice well in advance of their departure from a retiring generator plant, so that their assets and superannuation can be re-organised advantageously.

9.5 LONGER TERM REGIONAL DEVELOPMENT

In the longer term, a coordinated regional development strategy could be based around the idea of ‘related variety’ but with an additional emphasis on strengthening regional governance and local skill development to compensate for current deficits. A successful adjustment from a local economy reliant on brown coal-fired electricity generation will require the creation of new jobs through a combination of stimuli that attract new investors and new industries and create jobs. These might include Clean Coal projects, infrastructure projects, as well as programs to improve the energy efficiency of housing. The following proposals are offered as the starting point for discussion among various levels of government, including local government and other local institutions. Commit to maintaining the Latrobe Valley as a centre of energy production and expertise, promote new industries that build from that expertise and develop a strategy for achieving that goal. The best future for the Latrobe Valley, the future that makes the greatest contribution to Victoria as a whole, is one in which the Valley remains a centre of energy production and expertise and builds from that core specialisation to regenerate its economic base. Investment in energy research and development, technologies, and plant and equipment will be one of the driving forces of growth over the next few decades, both globally and in Australia. In spite of the current limitations of brown coal, the region has a powerful base of expertise and experience on which to build. While the carbon price will impose costs on the Valley it might also bring new investment. A substantial body of adjustment funds will be available from the Federal Government to help shape a new future. It is important that the Victorian Government articulates further its strategy for preserving and developing the Valley as a centre for energy production and expertise, and frames its approach to adjustment issues within such a context. Elements of this strategy might include:  Technology spending and adjustment investment by the existing generators, supported by adjustment funds;  Investment in R&D and pilot plants in coal related energy technologies, such as CCS, coal-to-oil and coal bed methane;  Expanding initiatives that commercialise the use of brown coal in new industries;  Instigating new initiatives to build on the Valley’s expertise in electricity-related industries, including renewable technologies, energy storage, electric motors, energy efficient devices and so on;  Promoting increased gas-based electricity production in the Valley, drawing on new reserves of Bass Strait gas;

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 Examining the possibility of locating additional gas storage in the Valley to help manage future demand volatility;  Upgrading gas pipelines into the Latrobe Valley;  Examining ways to build synergies between the coal and gas industries, including but not restricted to sequestration. This might include directing research to exploring the creative friction between gas and coal socio-technical regimes;  Encouraging investments into renewable energy, especially biomass and geothermal energy, and especially in applications that complement and/or reduce the emissions of base load power suppliers. There are strong grounds for proposing that further detailed research be undertaken to assess the suitability of applying a ‘related variety’ regional development approach to the Latrobe Valley context. Develop facilities to support the use of energy-related expertise elsewhere in Australia, and globally. Experts in the region already provide electricity industry specialist services across Australia and internationally. With the globalisation of the engineering and consulting industries, and the high demand (especially in Asia) for such services, policy should facilitate the expansion of this local competitive strength and support the companies and individuals located in the region who export these advanced services. Support measures might include upgrading the Latrobe Valley airport, improved broadband services, tele-conferencing facilities, improvements in rail links and North-South road networks, and additional ICT and technical support services. It would be worthwhile to undertake a specific study of the methods by which public policy might facilitate increased activity in this area. Increase the concentration of energy-specific R&D, education and training activities within the Latrobe Valley region. Much of the R&D and training activity related to the energy industries and brown coal currently takes place in Melbourne rather than in the Valley. With the Valley’s skilled workforce ageing rapidly and skill shortages looming, there is room for significant expansion of energy related training activities. High priority needs to be given to building on-the-ground R&D, with complementary education and training activities, and ensuring the continuation of the Valley’s strong skill base after the current ‘baby boomer’ workforce retires. Western Australia, and specifically Perth, has had remarkable success in building R&D, education and training activities based on the State’s resource industries. This could be pursued on a smaller scale in the Latrobe Valley. Both the Gippsland Regional Plan and Monash University advocate this approach. The notion of regeneration suggests that the focus of the training effort should build and reinforce the region’s existing strengths in electricity and coal and their related industries. Monash University’s decision to relocate its engineering faculty from Churchill to Clayton and Gippsland Institute of TAFE’s relocation of its electricity- 89

Centre for Strategic Economic Studies: Adjustment Strategy for the Latrobe Valley related training to Clayton undermines the skill development of the Latrobe Valley labour force. Whilst there are many good reasons for these decisions, the fact remains that the Latrobe Valley – as a centre for heavy engineering and a place where there is likely to be significant research and development activity in the future – has no local university or TAFE presence in its key area of industrial specialisation. An additional problem for building local skills is that few Latrobe Valley secondary students obtain high enough Year 12 ENTER scores to gain admission to Monash University. This may well explain the difficulties the electricity sector faces in finding recruits for electrical engineering degree courses or finding apprentices with an interest and aptitude for electrical work. Support for transitional programs (and improving secondary school outcomes) might enable the young people of the Valley to access tertiary training and assist in reproducing the Latrobe Valley labour market for the next generation of work. To improve educational outcomes, interventions may have to commence at primary and even pre-primary school. Initiate Transitional Infrastructure Projects.

Infrastructure projects are a proven means of stimulating economies and creating jobs (albeit for physically able male workers). Large infrastructure projects could occupy the skilled Valley workforce through the transition to clean coal technologies. There are large numbers of projects already under way or in their pre-construction phases. Such projects should include a significant training component. Support Community Capacity Building.

A successful transition will demand that different levels of government work together. Latrobe City Council has proposed collaborative governance structures for the delivery of structural adjustment assistance, perhaps similar to those pioneered in the Geelong Innovation and Investment Fund. A partnership approach would enable the assistance to be integrated with the range of existing state and federal social programs and regional development initiatives that already deliver benefits to the Latrobe Valley’s communities. Local community capacity building can strengthen the region’s governance structures and helps attract ideas and investment. In Australia, the third tier of government, local government, is responsible for delivering a range of community services and managing land use planning. It has a crucial role to play in promoting the sorts of activities that nurture local innovation and development. The Latrobe City Council already works in partnership with other Gippsland Councils, through the Gippsland Local Government Network. It has also established a Transition committee that includes representatives of the energy sector and community organisations such as the Gippsland Climate Change Network. The Federal Government’s Gippsland committee of Regional Development Australia will be especially important to drive the implementation of the Gippsland Regional Plan in its alignment with the three levels of Government. Strengthening local governance structures and local decision making would support Gippsland’s communities and develop a positive and sustainable regional identity.

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9.6 CONCLUSION

The future of the Latrobe Valley’s community is inextricably bound up – for better or worse – with the future of the brown coal electricity sector. Because the strategies of generator firms will impact on the entire communities of the Valley – and not only on energy sector workers – the State of Victoria and the Commonwealth must ensure that any closure and restructuring of the region’s generators is supported by long-term coordinated programs to facilitate the adjustment in the electricity sector, to train a new generation of workers with expertise in electricity, and to avoid shocks to the Latrobe Valley community, labour market and economy.

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Wooden, M. and J. Sloan (1987). Plant Shutdown: A Case Study in Managed Change. Australian Bulletin of Labour, 14: 358–81.

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APPENDIX A1 COAL IN GIPPSLAND

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APPENDIX A2 POWER STATION UNITS

Unit Retire- Max. Ave. Avail- Fixed Fuel Variabl ment Capacit Heat ability Annual Cost e O & M Date y (MW) Rate % Capacit 2010 Costs (BAU) (Max) y Rate ($/GJ) ($/MWH) MBTU/MW ($/KW/YR H ) Morwell (EB) 1 2015 17 21.3 86 0 0.60 2.5 Morwell (EB)2 2015 17 21.3 86 0 0.60 2.5 Morwell (EB) 3 2016 17 21.3 86 0 0.60 2.5 Morwell (EB) 4 2016 30 21.3 86 0 0.60 2.5 Morwell (EB) 5 2017 55 21.3 86 0 0.60 2.5 Hazelwood 1 2030 184 13.3 89 127 0.60 2.5 Hazelwood 2 2030 184 13.3 89 127 0.60 2.5 Hazelwood 3 2032 184 13.3 89 127 0.60 2.5 Hazelwood 4 2032 184 13.3 89 127 0.60 2.5 Yallourn 1 2033 331 12.9 88 46 0.47 1.2 Hazelwood 5 2033 184 13.3 89 127 0.60 2.5 Hazelwood 6 2034 184 13.3 89 127 0.60 2.5 Yallourn 2 2035 331 12.9 88 46 0.47 1.2 Hazelwood 7 2035 184 13.3 89 127 0.60 2.5 Hazelwood 8 2036 184 13.3 89 127 0.60 2.5 Loy Yang A 1 2037 509 11.6 95 75 0.45 1.0 Yallourn 3 2038 356 12.9 88 43 0.47 1.2 Yallourn 4 2040 350 12.9 88 43 0.47 1.2 Loy Yang A 2 2042 473 11.6 93 80 0.45 1.0 Loy Yang A 3 2043 522 11.6 93 73 0.45 1.0 Loy Yang A 4 2044 468 11.6 95 81 0.45 1.0 Loy Yang B 1 2045 471 11.7 92 108 0.45 1.0 Loy Yang B 2 2048 478 11.7 92 106 0.45 1.0 Source: MMA (2008c).

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APPENDIX B SYNTHETIC INDUSTRIAL CLASSIFICATION

Synthetic categories used industry by age, sex, income and family composition tables :

Electricity production and associated industry

2431 Electric cable and wire manufacturing 2432 Electric lighting and equipment manufacturing 2439 Other electrical equipment manufacturing 2611 Fossil fuel electricity generation 2619 Other electricity generation 2620 Electricity transmission 2630 Electricity Distribution 2640 On selling electricity and electricity market operation

Coal mining

600 Coal Mining 1709 Other petroleum and coal manufacturing

Paper and forestry

301 Forestry 302 Logging 51 Forestry support services 1510 Pulp, paper and paperboard manufacturing 1521 Corrugated paperboard and paperboard container manufacturing 1522 Paper bag manufacturing 1523 Paper stationary manufacturing 1524 Sanitary paper product manufacturing 1529 Other converted paper product manufacturing

Other heavy and civil engineering construction

310 Heavy and civil engineering construction

Tourism related

44 Accomodation 45 Food and beverage services 501 Scenic and sightseeing transport 89 Heritage activities 90 Creative and performing arts activities 91 Sports and recreation services 92 Gambling activities

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Remainder of ANZSIC - remains in original category if not included above

A Agriculture and fishing B Mining C Manufacturing D Gas, Water , Waste Services E Construction'

Retailing, wholesaling and transport

F Wholesale trade G Retail trade I Transport, postal and warehousing

Business services

J Information Media and Telecommunications K Financial and Insurance Services L Rental, Hiring and Real Estate Services M Professional, Scientific and Technical Services

Public and community services

N Administrative and Support Services O Public Administration and Safety P Education and Training Q Health Care and Social Assistance S Other services

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Synthetic categories used in industry by occupation tables:

Electricity production and associated industry

2611 Fossil fuel electricity generation 2619 Other electricity generation 2620 Electricity transmission 2630 Electricity Distribution 2640 On selling electricity and electricity market operation

Coal mining

600 Coal Mining

Paper and forestry

301 Forestry 302 Logging 1510 Pulp, paper and paperboard manufacturing 1521 Corrugated paperboard and paperboard container manufacturing 1522 Paper bag manufacturing 1523 Paper stationary manufacturing 1524 Sanitary paper product manufacturing 1529 Other converted paper product manufacturing

Other heavy and civil engineering construction

310 Heavy and civil engineering construction

Tourism related

44 Accommodation 45 Food and beverage services 50 Other transport 89 Heritage activities 90 Creative and performing arts activities 91 Sports and recreation services 92 Gambling activities

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Remainder of ANZSIC - if not included in above synthetic

A Agriculture and fishing B Mining C Manufacturing D Gas, Water , Waste Services E Construction

Retailing, wholesaling and transport

F Wholesale trade G Retail trade I Transport, postal and warehousing

Business services

J Information Media and Telecommunications K Financial and Insurance Services L Rental, Hiring and Real Estate Services M Professional, Scientific and Technical Services

Public and community services

N Administrative and Support Services O Public Administration and Safety P Education and Training Q Health Care and Social Assistance S Other services

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