The Renewal Energy Target (RET) scheme is a splendid example of a policy cancer that, if not checked, will continue to inflict substantial economic damage. The green vision of the perfect, Gaia-friendly electricity-distribution system was introduced during the Howard government with the modest target of a mere 2% contribution from renewables. Since then the target has grown tenfold at the federal level while the states have gone much further, with the talk now of seeing renewables contribute as much as 50% by 2030.
The consequences have been dire: the wholesale electricity market has been distorted by the emphasis on and subsidies for roof-top solar and wind, impairing the financial basis for operating traditional and reliable sources of baseload power.
What follows is an examination of the lack of logic informing the RET scheme and uses South Australia as the textbook example of what not to do when mixing renewable energy into electricity-supply systems.
The logic of RET subsidies
Generators of renewable energy, mainly wind farms and solar, are being paid a subsidy of $85 per megawatt hour (MWh) for wind and $40 per MWh for solar, as well as state subsidies in the order of $20 per MWh. These sources displace that generated by conventional power plants — the indirect equivalent of a carbon tax. If one MWh of electricity from black coal is displaced, that stops the emission of one tonne of CO2, meaning the carbon tax is $85 per tonne of CO2. For brown-coal electricity, with 1.5 tonnes of CO2 per MWh, the equivalent tax is $57. When we consider gas-powered turbines, things get seriously weird, with equivalent taxes of $170 to $213 even though gas is a lower emitter than black coal generation! The tax equivalents for these energy sources are shown in Table 1 for wind and solar PV.
The intention of having renewable sources in the electricity supply system was to drive out the highest emitters of CO2, but the cost structure of the wholesale electricity market is such that, while coal-burning power stations are the lowest-cost generators they have become more vulnerable and more ikely to be being stood down.
So the wholesale market is distorted by energy from roof-top solar that simply varies the demand to be met by the wholesale market. Meanwhile, wind farm energy goes into the market to take the going price and, in addition, the RET subsidy. This is the case for either non-dispatchable or semi-dispatchable wind power, as a suitable bid prices ensure the bid will be accepted. Finally, the RET scheme has a price structure that promotes the very opposite of the intention to drive the highest CO2 emitters from the market. Were that not the case, gas-powered generators would not be penalised more than those using both black coal and brown.
The example of South Australia
The latest Australian Energy Market Operator (AEMO) report on the performance of the electricity market in South Australia illustrates the major and inevitable problems associated with integrating intermittent energy generation into a state supply system.
South Australia has the highest installed renewable energy supply in Australia. This can be seen in Table 2, which shows where wind supplies 30.0% of demand and roof-top solar 6.5%.
The subsidies are paid to wind farms and solar suppliers, but these costs are passed on to all consumers. The average subsidy for the year was $72 per MWh for wind and $40 for solar PV. Spread over all consumers, this becomes $21.5 per MWh from wind and $2.6 per MWh from solar PV. This is the equivalent of a $24 carbon tax on CO2.
There are three problems that can be seen developing in South Australia, as shown in Table 2:
- The coal-fired baseload power stations have low utilisation, with a capacity factor of 39%. The high capital cost of a coal-fired power station should have a capacity factor of about 80% so that it can supply low cost baseload power. But this is not the case in South Australia, where the intermittency of wind power has all but eliminated steady baseload power.
- A consequence of the intermittent wind power has been the reliance on interconnectors to draw power from Victoria. This is also intermittent demand and can be as much as the interconnectors are capable of delivering. This stresses the Victorian power supply system.
- Worse still is that, on those occasions when there is plentiful wind power in South Australia, the surplus is exported to Victoria where it adds supply variations to a system with the much larger demand of some 6000 MW, with some 300 MW from wind farms. These events tend to occur in the early morning, between midnight and sunrise, and can be as much as 200 MW, which is a substantial disruption of the best time for baseload generation.
Intermittent wind power in South Australia is correlated with wind power variations in Victoria. So if the government of Victoria has a renewable energy target similar to South Australia then that may — almost certainly will — lead to the destruction of baseload operations in Victoria.
The conclusion from this analysis is that renewable energy policies have not been well thought out and, if continued without some thoughtful modifications, may have severe economic consequences.
Capping the RET scheme now might dissuade green-minded state governments from encouraging and adding wind farms to meet their 50% renewables aspirations. That would be the logical response, hence an unlikely one from a political class in the thrall of “sustainable” visions.
As the great American journalist H. L. Mencken put it, “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.” No one was talking about global warming when Mencken was in his prime but, were he casting his sceptic’s eye over the growing mess that is Australia’s power network, he would recognise such a condition and its consequences in an instant.
Tom Quirk trained as a nuclear physicist at the University of Melbourne. He has been a Fellow of three Oxford Colleges