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March 29th 2018 print

Alan Moran

Remedial Ed for Renewables Fans

Well-meaning folks will tell you green energy is cheap because wind and sun are free. The next time you hear such tripe, refer your interlocutor to this easy-to-grasp explanation why it isn't. So pithily laid out even a simpleton will understand, it remains beyond the ken of our federal government

green bulb IIThe fall from grace of the Australian electricity industry has been breathtaking. At the turn of the century, Australia had perhaps the world’s lowest-cost, most competitive electricity industry. This rested on cheap, low-sulphur coal, which was responsible for 85% of generation, ample supplies of gas, and modest but useful hydro-electricity generation capacity. 

Reform in the 1990s harnessed these assets to create a low cost, highly reliable system.  The reforms included:

  • a national electricity system that required competitive provision of generation and retailing through a spot market and power contracts,
  • privatisation of most of the industry, and
  • disciplined pricing of the monopoly networks.  

Seventeen years later the low-cost market-based system had collapsed.  Electricity price increases, having risen somewhat less than the Consumer Price Index, started to surge after 2008.

moran 1

This outcome was due to political intervention in different aspects of supply, including banning gas exploration and raising coal royalties. But above all else, to the adoption of carbon-abatement measures.  Those measures briefly included a carbon tax, but their fundamental drivers were increased obligations upon retailers for increasing levels of wind and solar energy under a Renewable Energy Target (RET) for “large scale” mainly wind facilities, and through direct subsidies.

Regulations require retailers to incorporate increasing amounts of designated renewable energy (almost exclusively wind and solar) into customer supplies; tradeable certificates are created and their price shows the RET subsidy is currently about $85 per MWh; there is also a rooftop installation subsidy set at $40 per MWh.  The subsidy for large scale facilities is currently capped to bring about a 16% market share by 2020.  The rooftop subsidy has no cap (installations are growing rapidly, having doubled in 2017, and now produce the equivalent of 3% of demand).  At a time when spot market electricity prices averaged around $35 per MWh, these were massive advantages to intermittent sources of generation.

Additional advantages were provided to these renewables through direct federal government subsidies and measures in place at the state level.  In total, the 2016 the value of the subsidies to renewable energy exceeded $4.5 billion.  This is considerable in the context of a generation market which had a turnover of less than $10 billion per year.

That $10 billion turnover level more than doubled once the effects of the subsidies started to bite. From under $40 per MWh as recently as 2015, the spot price is now around $90 per MWh.

This price increase is caused by the subsidised renewable electricity, being “must run”, squeezing out coal-based supplies, which need to bid at least their marginal cost.  This causes them to operate in uneconomic stop-start modes and forces closure once major capital expenditure becomes necessary.  The two most important closures were the Northern (South Australia) in 2016 and Hazelwood (Victoria) in 2017.

The chart below shows the relationship of wind’s market penetration and the spot price. moran 2

As a result of these developments, Australian prices — the white bar on the chart below — shifted from their very low levels in 1999 to present and ruinously expensive ones. Compared with other countries, as illustrated below, Australian prices are now among the world’s highest. moran 3

moran ad II

In addition to their high cost, wind generators are inherently unreliable and this caused a statewide blackout in South Australia in September 2016.  Wind and solar require additional ancillary services expenditures to fortify their reliability. Partly as a result of the realisation that renewables bring a deterioration in reliability, Australian governments have doubled-down in seeking to paper over the cracks that their policies have brought about in the market.

They have:

  • sought to suppress some effects of high energy prices by supporting subsidies to aluminium smelters, a policy that largely shifts the burden to other electricity customers;
  • provided subsidies to batteries, most notoriously the giant Tesla battery in South Australia;
  • set in place a process whereby regulators are optimistically seeking to devise a market that incorporates the energy price, its reliability and its emission levels;
  • led the federal government to buy out state government holdings in the 4500 GWh a year Snowy Hydro system; the price values the entity at $8 billion (a sharp rise from the $2 billion it was worth 5 years ago, prior to the rise in electricity prices); that purchase is to pave the way for an incremental pump storage at a cost between $4.5 and $10 billion to offset the unreliability of a renewable-dependent system.

Those supportive of renewables argue that energy subsidies are simply a bridge to an inevitable triumph of that technology.  Over the past 40 years there have been endless forecasts that wind/solar will soon be cheaper than fossil fuel generated electricity.  With good reason, those publicising such forecasts never argue for the corollary: an abandonment of subsidies.

For Australia, wind costs are at least $100 per MWh – contracts signed at less than this include the RET subsidy (the forward price of which is $50 per MWh).  Solar and batteries are even more expensive, though batteries will likely have a role in providing ancillary services in a renewable system.  Coal-based generation with existing plant can be profitable at well under $40 per MWh — although, as discussed, not once refurbishment becomes necessary.  Some studies estimate new coal based investment in Australia requires a price exceeding $75 per MWh though studies by The Minerals Council of Australia estimated that a High Efficiency Low Emission plant would be economic at under $50 per MWh and experimental work involving gasification put the costs even lower.

All this said, the ultimate test is that of the market and the way to explore this is to allow markets to operate without government subsidies and other interferences, just as they did in Australia 15 years ago.  This will provide the most efficient mix of generation.

Comments [17]

  1. Wayne says:

    Am I missing something Alan but that chart shows Australia as having one of the lowest costs.

  2. Macspee says:

    Wayne, yes you are: the chart is 1999.

  3. johanna says:

    Alan, the simplest explanation for simpletons is that coal and gas are ‘free’ as well. They are just sitting there in the ground, ready made.

    As with wind and solar, it is the cost of turning them into usable power that matters, and how much bang you get for your buck in doing so.

    • RobK says:

      Not just free Joanna, a royalty is paid to the state for the utilisation of a resource.

      • Tricone says:

        Rob, that is consistent with Johanna’s point.

        The royalties are an added cost by government and not intrinsic to oil, coal and gas. There are still many places in the world where oil and gas exude from the earth’s surface or the seabed without human intervention. (Somehow “the planet” survived.)

  4. Tezza says:

    Well done, Alan.

    The best elaboration of your last para belongs to Tony Abbott in his speech last October to the Global Warming Policy Foundation:

    “In the short term, to avoid blackouts, we have to get mothballed or under-utilised gas back into the system.

    In the medium term, there must be – first – no subsidies, none, for new intermittent power (and a freeze on the RET should be no problem if renewables are as economic as the boosters claim); second, given the nervousness of private investors, there must be a government-built coal-fired power station to overcome political risk; third, the gas bans must go; and fourth, the ban on nuclear power must go too in case a dry country ever needs base load power with zero emissions.”

  5. Rob Brighton says:

    Jump straight to Nuclear power. https://www.youtube.com/watch?time_continue=540&v=IzbI0UPwQHg worth a look.

  6. RobK says:

    There has been some slight of hand in the subsidy area.Large scale certificates are paid annually on a continuing basis at the relitively high rate of $85 (subject to variation). The small generators certificates (domestic) are only $40 but paid upfront as if they would produce for 15 years. On top come state subsidies for domestic roof-top in the form of feed-in-tariffs. These vary upto 40c/kWh ($400/MWh), some older deals even went to $600/MWh. No wonder domestic solar catches on.
    What is really evil about these schemes, other than driving the country broke, is it gives the perception that there is not an on going cumulative burden weighing on the electricity grid. The one-off domestic solar subsidies found by the RET are not indicative of the continuing Large scale certificates. All this when the energy RE produces is not fit for purpose because it requires so much more to be spent to make it reliable and to distribute it.

  7. gardner.peter.d says:

    The mineral resources tax is an interesting one. Minerals are a common resource for all of Australia, the argument goes, so the benefits should be shared round by federal taxation. Well, so is energy so basic to our needs as to require similar consideration. So why not nationalise it? The government is now so deeply involved in manipulating the energy market and the Australian economy so dependent on natural resources that it is in effect nationalising most of the Australian economy. Political risk, as the business schools call it, must now be one of the main cost drivers in the West. Add to this that it has now been admitted by leading EU politicians that the thrust of Green energy in international politics is wealth redistribution to poor countries and we have a very attractive to all on the Left of politics and all who despise the West. The Socialist international is still alive and kicking. Stalin is dead, long live Stalin.

    • ianl says:

      > ” Minerals are a common resource for all of Australia, the argument goes, so the benefits should be shared round by federal taxation”

      A common argument – and completely, utterly wrong. Onshore minerals, including hydrocarbons, belong to the State Govts, extending to the low tide marks. The Feds own them from the low tide mark to wherever the international marine boundaries happen to be, plus I must add the onshore minerals in the two Territories. The High Court has upheld this as legal fact quite a few times, to my knowledge the most recent being in the early 2000′s when hopeful activists for Native Title finally had a go. As an aside, the High Court as it was then populated from early 90′s to the early 2000′s did not cover itself with too much glory, as it dodged the question for nearly 10 years, allowing a disgraceful pileup of mining lease conflicts to occur.

      This legal fact of State ownership is what brought “King” Henry (then Mandarin of Mandarins), Wayne Springstein Goose and by default the hapless Rudderless down. The minerals tax (mining tax) had to be agreed to by the various State Govts since it impinged on their Royalty regimes with GST trade-offs being the only viable Fed negotiating lever. Henry and the Goose publicly told Rudd that this icky sticky had been negotiated when not only had it not been, it had never been fronted to COAG at all. Kabooom !!

      Gillard had no hope of disentangling that bowl of messy spaghetti.

      The legal fact of State ownership is also what allows Andrews from Vic and other State Govts to ban gas fracking, and even more conventional exploration, in apparent defiance of Waffle’s wishes. I use the word apparent, as the NT has also banned exploration and extraction of gaseous hydrocarbons, yet the Feds own that resource. Waffle yet again shows his awkward reluctance in the face of outraged ABC publicity.

  8. Tony Tea says:

    We need to refer to the Big Battery by its correct terminology: a network support device, not a source of supply.

  9. Jacob Jonker says:

    The propensity of nuclear power proponents to claim that it is carbon neutral diminishes their other arguments. I’m still reading Rupert Darwall’s Green Tyranny. The research for this book appears very well funded. Of course it is biased, but the accusations levelled against the Greens appear well-founded. As it happens, it ties in with my own views in that regard. Generally. so much debate or what goes for is obviously wrong in fact. Is it still worth repeating when obviously wrong? Are people persuaded if they hear a claim often enough? Do people make unfounded claims repeatedly to keep themselves convinced, lest they stop believing their own lies? Finally, for now, is the internet blogsite phenomenon, similar to much old-fashioned mainstream media, simply a means to waste people’s time and make them think they have some influence where they have none? China is still building coal-fired powerstations at the rate of one new one a week, last I heard. When they run out of coal from local sources, they will get it elsewhere. More and more, what the polities in the West argue about is increasingly irrelevant in the geopolitical scheme of things.

  10. AlanIO says:

    For $75/MW Australia could get a useful modern clean 1200 MW nuclear power station now. If we wait for a year or so we can do like Indonesia and have a Thorcon Liquid fuel reactor for less than $5/MW. Why do we listen to these anarchists/culture vandals who seem to be managed by someone with western culture destruction well within their grasp. Reason please people. AlanIO

  11. LBLoveday says:

    A good article by Vic Forbes