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March 18th 2009 print

Ray Evans & Tom Quirk

The High Price of PC Power

This is a Baptist-and-bootlegger story. The term “Baptist and bootlegger” comes from the prohibition era of America, when from 1920 to 1933, the manufacture and distribution of alcoholic beverages was prohibited. A large illegal industry grew rapidly, either making or importing and distributing illegal alcohol, and its participants were known as bootleggers, the term originating from concealing flasks of liquor in the legging of boots.

Many bootleggers made substantial fortunes, including the father of President Kennedy, Joseph P. Kennedy. So the bootleggers had a great interest in the continuation of Prohibition, and they would meet mediating politicians on a Sunday morning and make substantial cash contributions to their campaign funds. On a Sunday afternoon, after church, the Baptist leaders would also meet the same politicians and receive the same assurances from them that they had given their visitors that morning; that they were solid for Prohibition and under no circumstances would ever vote for repeal.

All successful conspiracies against the public require bipartisan political support, and they must contain these two elements: a commercial interest with serious financial incentives at stake, and an organisation which can provide moralising rhetoric which will camouflage the cash flows from the public to the beneficiaries of the swindle.

“Renewable energy” is the most recent Australian example of a Baptist-and-bootlegger coalition. The Greens, having demonised carbon dioxide, and having put the coal-based power stations on which we depend for our electricity at the top of their closure list, keep on telling us that renewable energy will provide for our energy needs; “wind and solar” they keep on chanting as if they were singing psalms.

During Prohibition, the Baptists were blissfully unaware of the bootleggers’ support for their high moral ground. In our current example, the Baptists and the bootleggers are in each other’s pockets and move from one side of the coalition to the other, with grace and dexterity.

Because the Greens have both sides of politics in thrall (through the hope of preferences and through disciples in both parties), there is general agreement on the virtues of “renewable energy”. The idea that “renewable energy” can usher in a new world of energy abundance, yet free us from the sin of emitting carbon dioxide, falls into a familiar pattern of eager salesmen with imminent doom as their product. Thomas Malthus is probably the best known, but he was followed by Stanley Jevons who in 1865, aged thirty, published his book The Coal Question, an alarmist treatise drawing attention to the imminent exhaustion of energy supplies, and its serious consequences for Britain as the major economic and naval power of its time. The book sold well and was widely discussed in government circles. It brought fame to the young Jevons.

In 1972, Donna and Dennis Meadows completed The Limits to Growth, which was published as the Club of Rome Report of 1972. The authors used computer models to predict the imminent exhaustion of every important mineral commodity essential to civilisation, particularly oil. The book was nonsense from beginning to end but it had a huge impact in financial and banking circles, generating the climate of opinion which led to the formation of OPEC and the rapid rise of oil prices which shook the economies of the West during the 1970s.

So imminent doom salesmen have done well in the past, and with the magic words “renewable energy” they are doing very well in the present. The Greens of course do not claim that we are running out of coal. Their claim is that by burning coal we are polluting the atmosphere to the extent that we will either experience runaway global warming, or as in Europe recently, we will bring upon ourselves a new ice age.

In Australia the renewable energy rent-seekers obtained their big breakthrough in 1997 when Prime Minister John Howard was persuaded to commit to requiring electricity suppliers to purchase electricity from renewable sources such as windmills, whenever the windmills happened to be delivering power. This was an extraordinary commitment from a prime minister whose party had championed the market and the forces of competitive enterprise ever since its founding in 1944. This was command and control with a vengeance, and since the Labor Party was always in favour of command and control, their only complaint was that the renewable energy targets were too small.

The justification for imposing this substantial burden on the electricity consumers of Australia was that it reduced the emissions of carbon dioxide from our coal-based power stations. This claim was very dubious then, and there is no evidence that it has done so since.

As a result of this commitment, and under pressure to deal with the Democrats to get the GST legislation through the Senate after the 1998 election, the Renew-able Energy (Electricity) Act 2000, the Renewable Energy (Electricity) Charge 2000, and Renewable Energy (Electricity) Regulations 2001 were passed, and the Office of the Renewable Energy Regulator was established to administer the transfers of wealth to the builders and operators of electricity-producing windmills.

Once established, the windmill manufacturers (actually their Australian representatives) and then the solar power interests set up substantial PR operations. They enjoyed, of course, the clamorous and unceasing support of the Greens and their supporters in both parties. Greg Hunt, the opposition spokesman on the environment, vehemently attacked the Rudd government when it scaled down the subsidies granted to home owners who installed photo-voltaic solar panels so that it became a subsidy only to people on moderate incomes. This had been one of Martin Ferguson’s rare victories in cabinet, but since it was such an outrageous example of upper-class welfare, he won the argument. After Greg Hunt’s counter-attack, the government reversed its position and reinstated the subsidy. Since the cost of these panels is between $10,000 and $15,000 per kilowatt (kW) (compared with $1500 per kW for a coal-based power station), and only wealthy people could ever consider buying them, the reinstatement of this subsidy marks a high point in successful rent-seeking.

Electrical power is rated in kilowatts or megawatts. Electrical energy (what we pay for) is rated in kilowatt-hours (kWh), megawatt-hours (MWh), gigawatt-hours (GWh) or terawatt-hours (TWh); a thousand, a million, a billion or a thousand billion watt-hours respectively.

The economic structure of the electricity supply industry is complex, and few people outside the industry have any idea of the potential costs which can arise once politicians start meddling with it. To understand just how serious these consequences can be requires a rudimentary understanding of the economics of the industry. 

The basic building block of the industry is the Daily Load Curve. Since electricity has to be consumed the very instant it is produced, and since security and reliability of supply is the sine qua non of contemporary life, the capacity of the generators which supply this electricity to instantly follow up and down the changes in consumer demand which occur minute by minute, is central to the successful maintenance of voltage (240 volts) and frequency (50 Hz) of the supply. Reliability is of the utmost importance. Blackouts can cause not just economic dislocation but also accidents and death.

The Daily Load Curves for South Australia and New South Wales for Tuesday, December 9, 2008, a normal working day, are shown in Figure 1. The scales for New South Wales and South Australia are different; the maximum demand (MD) for South Australia is just over 1800 megawatts (MW) at about 4.30 p.m. EST, and for New South Wales the MD is 11,000 MW at about 4 p.m., six times that of South Australia.

The minimum demand for South Australia was 1150 MW between 3 a.m. and 6 a.m., 64 per cent of the MD. For New South Wales minimum demand was 6500 MW between 3 a.m. and 4 a.m., 59 per cent of MD.

The price curve is shown in Figure 2. The price curve follows the demand curve closely, reflecting the fact that our lowest cost generators provide base load power, twenty-four hours per day, and the most expensive plant, for example gas turbines, is used only for peak load power, usually three to four hours during the day. The variation in price during the day was between $14 and $42 per Mwh. Peak hour prices can become much, much higher, often over $100 per MWh.

Organising the supply of electricity to consumers in Eastern Australia is the responsibility of NEMMCO (National Electricity Market Managing Company). The National Electricity Market (NEM)—a wholesale market for electricity supply in the Australian Capital Territory and the states of Queensland, New South Wales, Victoria, Tasmania and South Australia—began operating on December 13, 1998. The NEM delivers electricity to market customers on an interconnected power system that stretches more than 4000 km from Port Douglas in Queensland to Port Lincoln in South Australia, and includes a sea-bed cable between Victoria and Tasmania. The NEM comprises five regions that are based on state boundaries, Tasmania becoming the fifth region in 2005.

Establishment of the NEM was the result of extensive consultation and collaboration between the states and the electricity supply industry. The NEM’s development was guided by a major 1990s Industry Comm-ission report that recommended a major restructure of the industry. The reforms led to the disaggregation of the vertically integrated government-owned electricity authorities into separate generation, transmission, distribution and retail sales sectors in each state. The goal of the reform process was to increase competition in the industry and provide greater choice for end-use electricity consumers.

Electricity is traded under the supervision of NEMMCO, which conducts the electricity market through a centrally co-ordinated despatch process that pools generation from producers and delivers required quantities of electricity from the pool to wholesale consumers. Specific activities in achieving this include managing the bidding, scheduling and despatch of generators, determining the spot price, measuring electricity use and financially settling the market.

The minute-by-minute demand for electricity is measured in megawatts (MW). One MW is the power consumed by a thousand standard radiators. Fundamental to the economics of the electricity industry is the fact that although a typical home may have a possible demand of 50 kW (if every appliance were switched on simultaneously), most homes will operate at much lower levels of demand. For example, if a home had a fridge, a freezer, some air-conditioning, television, computer, lighting and a washing machine all going simultaneously, the demand would be approximately 10 kW. If these appliances kept going for one hour, 10 kWh of electricity would have been consumed and the consumer would have added to his electricity bill by $1.60 (at an average price of 16 cents per kWh). If an electric oven, a clothes drier, a dishwasher, and more air-conditioning were added to that list of appliances, then an extra 10 to 15 kW would be demanded from the grid, with a corresponding increase in the cost.

Within the industry the load is divided into three categories, domestic, commercial and industrial. In Victoria the off-peak hot water load for domestic consumers was developed from the war years on, and this became a useful way of smoothing the daily load curve.

Industrial and commercial loads are different in their characteristics from domestic loads. A large manufacturing plant such as an auto-assembly line will operate at close to the full capacity of the plant during its operating regime. So a plant on one shift will be on close to full demand for that shift, whereas a three-shift plant will be operating at close to maximum demand around the clock. Coal-fired power stations, brown coal stations in particular, love such loads since they operate best at constant output around the clock. Aluminium smelters, which maintain a constant demand around the clock, are particularly desirable consumers from a generating point of view, especially if they can be switched off at a moment’s notice, if only for a short duration. 

Commercial loads, shops and offices, also tend to operate at much closer to their rated demand but, of course, these buildings shut down at night and offices shut down at weekends, and so the Daily Load Curves reflect these patterns of work.

As the Daily Load Curves make clear, consumer demand changes every minute and the generating system has to cope with these changes. The Maximum Demand for the year in most states now occurs between 4 p.m. and 6 p.m. in February, when the air-conditioning load dominates the system. The installation of split-cycle air-conditioning into hundreds of thousands of Australian homes has had a dramatic impact on the Daily Load Curve, and on seasonal variations in demand for electricity.

From a supply point of view, the ideal Daily Load Curve would be a horizontal straight line. Bringing coal-fired power stations up to full output and then down again as demand changes from hour to hour, particularly if demand changes rapidly, is a difficult and costly business. This is particularly true of brown-coal-fired boilers. If the operators try to reduce the output of the boiler quickly, stability problems with the great ball of burning fuel within the boiler can become the frightening portent of a boiler explosion.

To assist in handling rapid changes in demand, the use of hydro-stations is invaluable. The output of a water-driven turbine can be changed very quickly, and so a mix of base-load coal-fired power stations which operate at 100 per cent capacity all the time and hydro-stations which change output very quickly, is ideal from the point of view of those responsible for maintaining the stability of the power system.

Unfortunately there isn’t enough hydro-power within the interconnected systems of Queensland, New South Wales, Victoria, Tasmania and South Australia to provide this supply of rapidly adjustable peak load capacity. Gas-fired turbines, essentially jet engines like those used in 747s, can respond rapidly to changes in demand, and since they can be bought off-the-shelf, and take little time to install, they are becoming increasingly popular with generating companies finding it difficult to keep up with demand. Unfortunately they are expensive to run.

The short run marginal cost (SRMC) of electricity at the power station terminals—the cost of generating an additional MWhr—depends upon the cost of the fuel consumed and the cost of extra manning at the power station. The brown coal power stations of the Latrobe Valley have an extraordinarily low SRMC of $2.60 per MWh. The SRMC for the black coal stations of New South Wales is $11.90. The difference is because of the very low cost of brown coal. The SRMC for gas turbine generators can be as high as $300, depending on the cost of gas.

Longer-term costs must include maintenance costs, amortisation costs and interest costs, and although these costs will vary from power station to power station, the longer-term cost for the brown coal stations is $25 to $30 per MWh, and $35 to $40 for the black coal stations of New South Wales and Queensland.

A crucial variable in the performance of a particular power station is the Load Factor. This is the percentage of the time for the year for which the generator is available to provide its full rated output. The Load Factor for the Latrobe Valley brown coal stations is 88 per cent. For New South Wales black coal stations it is 62 per cent. The difference between 62 and 88 per cent is of great economic consequence. Victoria used to be about 60 per cent, but after privatisation, and the dethronement of the trade unions, huge improvements have taken place. New South Wales lost more than even Michael Costa realised when his attempts to privatise the New South Wales electricity industry were vetoed by the state Liberal Opposition.

In 2008 the five interconnected states consumed 271 TWh of electrical energy. Eighty per cent came from coal and gas-fired thermal power stations, 12 per cent from gas turbines, and 6 per cent from hydro-power. Only 0.8 per cent came from wind, 2.17 TWh, giving a Load Factor for the wind farms of 25 per cent. The gas turbines and the hydro-power are used to meet the peak demands, but they are not sufficient on their own, and thermal power stations are often required to follow the changing demand up and down, while keeping the voltage and frequency steady.

Following the passage, in 2000, of the renewable energy legislation promised by John Howard in December 1997, and the guaranteed income which operators of windmills could consequently rely upon, “wind farms” have been spreading across south-eastern Australia like some monstrous cancer. South Australia has some 600 MW of wind farms and Victoria 400 MW, with much more planned for each state. These wind farms are a gross form of visual pollution and the property values of land owners near them, particularly when they despoil a view of the ocean, have suffered accordingly.

It is ironic that descendants of Joseph P. Kennedy are up in arms over plans to build a large wind farm near the coast at Cape Cod where they have a beach-front house. Not even the influence which the Kennedys still wield in Congress can protect them from the despoliation of their ocean view.

There are other sources of “renewable energy”, hydro-power being the most important. Tasmania still has potential hydro sites but after the Tasmanian Gray government was gazumped by the Hawke government and the Gordon-below-Franklin dam blocked by the High Court (in a four-three judgment), no Tasmanian government will, at least for now, contemplate building another hydro scheme. The major undeveloped hydro potential in Tasmania is on the Lower Gordon River. For a development to proceed in this World Heritage area, the Tasmanian and federal governments would have to agree that the scheme should be built. Given the influence which the electors of Wentworth and Flinders have over what Tasmanians do to secure their economic future, such agreement seems unlikely. A large hydro scheme on the Lower Gordon would, of course, add significantly to Kevin Rudd’s ambition for a 20 per cent renewables target for 2020, and would provide significant income for Tasmania by selling peak load power to the mainland.

So although hydro-power is renewable, it is definitely not “politically correct” power. Other technologies have sought to claim a place in the PC class of “renewables”: tidal power, wave power, geo-thermal and more recently deep underground hot rocks technology has been mooted, but no one is prepared to invest the very large sums required to even prove the viability of this dream.

Solar power is very PC, and it is always just around the corner as far as economic viability goes. Photo-voltaic solar panels cost between $10,000 and $15,000 per kW, and so they become the outward and visible sign of serious wealth coupled with deep concern for the environment, displayed prominently on the owner’s roof. Solar power stations based on collecting the sun’s radiation and focusing it on small steam generators have been tried and found wanting. The CSIRO’s experimental solar station at White Cliffs in outback New South Wales (an old opal mining town) was given much publicity when it was first commissioned, but it was an economic failure.

So it is wind power which has been making the running, and we now have some real data from Australia and from overseas to use as the basis for investigating Rudd’s policy of providing 20 per cent of our electricity from renewables by 2020.

The problem with wind is that it “bloweth where it listeth, and thou hearest the sound thereof, but canst not tell whence it cometh, and whither it goeth” (John 3:8). Promoters of wind power look for those sites where the wind is likely to blow more frequently and consistently than elsewhere. Thus coastlines seem to provide advantages, as do the ridges of mountain ranges. An early example (from the 1970s) of mountain ridge placement was the Altamont Pass Wind Farm, situated in the Diablo Mountains between the southern end of San Francisco Bay and California’s Central Valley. An advantage of this site is that under hot inland (California Central Valley) conditions a thermal low is developed that brings in cool coastal marine air through this pass, driving the turbines at a time of maximum need. Unfortunately this is not always reliable, and with inland high pressure the entire region can be both hot and windless.

The Altamont Pass Wind Farm comprises over 4900 wind turbines of various types and is still the largest concentration of wind turbines in the world, with a capacity of 576 megawatts (MW). Its annual output is given as 1.1 terawatt-hours (TWh) yielding a Load Factor of about 20 per cent. The turbines are dangerous to various raptors that hunt California ground squirrels in the area: 1300 raptors are killed annually, among them seventy golden eagles, which are federally protected. In total, 4700 birds are killed annually.

Now a Load Factor of 20 per cent is not in itself a problem. The problem with wind power is that it cannot be scheduled into the next day’s supply arrangements since its power output cannot be known in advance. If the windmills were connected to a pumped storage scheme, so that when the wind was blowing water could be pumped up into an elevated reservoir, and when demand was high the water could be used to drive a turbine at the bottom end of the pipeline, then the electricity produced would have real economic value. But to have to couple pumped storage schemes with every wind farm would make them transparently uneconomic.

During the heat wave of late January this year, the output from the South Australian wind farms was a maximum between 1 a.m. and 3 a.m., and negligible during the hours of maximum demand between noon and 6 p.m. This performance from an investment of some $800 million whose profitability is guaranteed by statute should lead to a public outcry and a royal commission.

In practice, every wind farm has to rely upon someone else providing back-up generating capacity. This means that the wind farm is entirely superfluous to the electrical system and that we are paying for electricity over which the system operators have no control, but which they are required by legislation to accept at the going spot price. The wind farms gazump all the other generators so that even at times of minimum demand, if the wind is blowing somewhere over a wind farm, a scheduled generator has to reduce its output (and thus reduce its revenue). Nonetheless, because the coal-fired stations have to maintain their output, albeit at reduced levels (and therefore at reduced efficiencies), the wind farm electricity has virtually no impact at all on emissions of carbon dioxide.

For the wind farm operators it is money for jam and as economic theory predicts, the rent-seekers will spend up to their anticipated profits in order to keep the rents flowing. So electricity consumers are paying over $600 million more for electricity as a consequence of John Howard’s MRET legislation. Most of this is pure profit, and so the wind farm operators will be prepared to spend hundreds of millions in lobbying for extension of the scheme, and Kevin Rudd has obliged them with his commitment to mandate 20 per cent of our electricity production from renewables by 2020. 

By 2020 annual electricity consumption in eastern Australia is estimated from NEMMCO data to be 347 Twh. If renewables are to provide 20 per cent, and no new hydro is to be permitted, electricity production from wind farms (or other renewable sources) must provide 53 TWh. Ignoring for the moment the insuperable problem of unpredictability, and assuming a Load Factor of 25 per cent, this will require a total of 27,000 MW of windmill capacity. Every bit of coastline, every mountain ridge, and much else that can be secured for windmills will have to be pressed into service to meet this target.

The capital cost of wind power is considered to be $2000 per kW, and so an extra 26,000 MW will cost $52 billion. And back-up will be required. So in addition to new coal plant required to provide an additional 60 TWh, back-up generation of at least 23,400 MW will be required. All of this will have to be paid for by the electricity consumer. These numbers could not appear in any Commonwealth budget; no government could justify that sort of expenditure.

On top of all this we have system stability problems created by widely dispersed power sources, spread over tens of thousands of square kilometres; whose output can vary dramatically as the wind gusts and dies down; that are connected to the main grid by long, weak transmission lines—a system operator’s nightmare. Such a transmission network, weak and unreliable as it will be, will cost at least $30 billion.

The costs of mandated wind power to date, and of the attack on carbon more generally, are not well known. In Australia, there has for some time been a need for large investments in new coal-fired power stations to meet expected shortages by 2013. No investment has been forthcoming, because the risk that the investment will be made worthless by government taxes on carbon dioxide emissions is too great for any non-government investor to accept. Alternative supplies such as gas turbines are cheap to buy and install but very expensive to run.

Alan Moran, the IPA’s expert on the electricity market, has calculated that the shortfall in new coal-based electricity supply has brought a 60 per cent increase in wholesale electricity prices over recent years. In his submission to the government’s Green Paper on the Carbon Pollution Reduction Scheme he wrote:

The Mandatory Renewable Energy Target (MRET), and state schemes together call for some 10 per cent of electricity to be supplied by sub-economic renewables at an annualised cost of $843 million (based on penalty levels) or $600 million (based on market prices). This has since been markedly increased by government announcements.

Thus the price of politically correct power has already begun to affect Australian industry and commerce as well as domestic consumers.

But this is only a foretaste of things to come. The bootleggers are making lots of money. The Baptists are in control of the language, the ABC, the broadsheet media and both government and opposition. Between them they have the game sewn up.

Ray Evans worked as a young engineer in the 1960s in the Production Planning Section of the State Electricity Commission of Victoria. Tom Quirk was deputy chairman of the Victorian Energy Networks Corporation.