A Looming Disaster in Energy Security

The constant headlines say it all: Australia’s energy system is in crisis. “High power costs floor business” says a lead story in the Australian Financial Review: “Shell-shocked businesses are re-assessing investments and jobs slugged by huge increases in electricity bills.” The Energy Users Association of Australia, which represents the country’s largest power users, believes major industries are on the verge of collapse because of the price of power. BlueScope Steel has warned that climate policies could produce an “energy catastrophe”. A country blessed with massive coal and gas reserves, economic resources that traditionally drive economic growth, has suffered a power blackout in South Australia and is suffering from extremely high power prices.

Let’s start with a brief overview of Australia’s energy system. Australia gets 73 per cent of its power from coal, 11 per cent from natural gas, and about 15 per cent from renewables (hydro 7 per cent, wind 4 per cent, rooftop solar 2 per cent and bio-energy 2 per cent). When the Hazelwood power station closed in March, Victoria lost 15 to 20 per cent of its base-load power, and the nation’s power capacity fell by 5 per cent. In Australia, coal is by far the cheapest way to produce energy and we’ve got plenty of it—hundreds of years’ worth in New South Wales and Queensland. Victoria has 200 billion tonnes of brown coal, enough for another 500 years. And it’s easily accessible—we’ve used less than 2 per cent of brown coal reserves since mining began in the early 1920s.

With coal comes greenhouse emissions, blamed by many scientists for “global warming”. Burning coal produces carbon dioxide, particularly Latrobe Valley brown coal, which is two-thirds water and has to be heated and dried before it can be burned. Gas, also a fossil fuel, produces fewer greenhouse emissions than coal, while renewables, hydro and nuclear produce none. So how does Australia go about trying to cut its greenhouse emissions? With no carbon price, the Renewable Energy Target (RET) rules. The current renewable targets are: the federal Coalition wants 23.5 per cent by 2023, with a 28 per cent target by 2030 under the Paris climate agreement; the federal Labor Party has a target of 50 per cent by 2020; South Australian Labor has a target of 50 per cent by 2025 (it’s now at 40 per cent); Queensland is similar; while the Andrews government in Victoria has a target of 25 per cent by 2020, 40 per cent by 2025. Logically, any curtailing of coal for other more expensive energy uses is going to flow through to higher electricity prices, although there are other factors at work, such as rising network charges.

Gas is more expensive than coal. It takes more capital to bring a gas well into operation than to open a coal mine. Gas power stations, though, are cheaper than coal stations to build. Renewables are inherently more expensive and cost at least three times as much as coal. This is mainly due to the materials they use, and the construction cost. The capital expense is borne mostly by the government; huge subsidies allow wind and solar to be considered economic, but is this so in reality? Money spent in capital construction must be recovered in energy, but renewables don’t produce much energy. The income they generate does not cover the capital cost. Renewables do have running costs; they have some operators. More importantly, they also have maintenance; for example, solar can’t afford to have solar panels covered in dust—it reduces their effectiveness. Figures showing the effectiveness of solar panels are determined in the laboratory; the real world is different. There is also the extra cost of building wind and solar connectors to the main grid. In addition there is the impact on the grid itself. With a mix of solar and thermal generators producing electricity, you challenge the stability of the system.

The intermittency of renewables creates pressure in the system. It has two damaging effects. First, the base-load plant has to shut down, but the plant is not built to shut down and come up to speed again. Normally it stays on line between major overhauls. Second, if you start bouncing the network around, you start to get failures of equipment on the network. In Victoria, there are gas turbines that can be brought on line and taken off quickly. These are mainly used for peak power, but with the Hazelwood closure, and the Andrews government planning to dramatically expand renewable power, some gas would effectively form base-load power, pushing up base power prices. Victoria may even end up importing black-coal power from New South Wales! Ironically, that’s why Victoria set up the State Electricity Commission in the first place—to mine brown coal instead of importing black coal from New South Wales.

The brute fact is that wind and solar are more expensive. The panel headed by the industrialist Dick Warburton estimated in its 2013 report that there existed a cross-subsidy for renewables of $9.4 billion between 2001 and 2013, with a further $22 billion required for the remainder of the scheme until 2030. That’s an average subsidy of about $3 billion a year. The report was ignored because Warburton was said to be a “climate change denier”, but the study concentrated purely on the economics of renewables. A recent report by BAEconomics came up with a similar figure, revealing that the government renewables subsidies were $3 billion in 2015-16. On one estimate, this equated to 6 to 9 per cent for the average household and up to 20 per cent for the industrial customer. These subsidies are not transparent, the report said. Almost three quarters come from government mandates paid for by customers and collected by third parties. Higher prices are passed on by retailers and paid for by consumers. These subsidies do not appear in government accounts, and are thus approximate in the report. The report’s other features include:

• Customers paid more than $2.1 billion to subsidise large-scale power station developers and small customers with roof-top solar.

• New transmission lines to link Victoria’s proposed wind farms to the grid will cost $2.2 billion.

• Legacy feed-in tariff schemes of state and federal governments amount to more than $700 million in subsidies. The Victorian Essential Services Commission in early March doubled the feed-in tariff, going against the states’ trend to cut them back because they were costing governments too much money. This tariff subsidises people putting excess solar power back into the grid.

• The ACT, Queensland and Victoria renewable targets are similar to the RET, creating a big burden for many years.

• Federally, other renewable subsidies are direct grants and concessionary financing. Clean Energy Finance Corporation subsidies can’t be identified.

The federal Energy and Environment Minister, Josh Frydenberg, estimates federal Labor’s 50 per cent renewable target by 2030 will cost $50 billion. A federal Department of Environment study found a capital cost of $41 billion for Queensland and Victorian renewables—$14 billion in Victoria and $27 billion in Queensland. Melbourne consultant RepuTex has said state-based renewable schemes would effectively push the federal RET to 35 per cent by 2030. Renewables undermine the economics of the traditional base-load sources like coal and gas. Renewables have first call in the market (assuming the sun is shining and the wind is blowing!) with traditional base load coming into the market after that. These earnings and profit stresses have led to the closure of some coal-fired stations, such as Hazelwood. New South Wales electricity generator Delta Electricity claims more coal station closures will increase fluctuations in frequency in the electricity market, posing a risk to the security of the system. There have been increasing deviations in frequency in the past three years.

Power costs have been rising dramatically, and industry’s reaction is increasing despair:

• Alumina and Alcoa have written down their stake in the Portland aluminium smelter by US$126 million, implying a value hit of US$229 million for the whole smelter, because of higher power prices in a deal struck with AGL Energy. They believe a gas plant is out of the question at current gas prices.

• BHP Billiton knows that RET schemes raise costs and reduce power security while having no impact on emissions. Prices for its assets on the east coast rose by 42 per cent from 2015 to 2016, and are expected to increase by 78 per cent this year. It also warned long-term expansion of the Olympic Dam project might not go ahead if power security and costs were not addressed. The project took a US$105 million cost hit in the South Australian blackout. The company urges a carbon price based on energy intensity.

Similar warnings have come from Caltex and Glencore. Energy prices are the first priority for business, according to an Australian Industry Group forecast. Coca-Cola will shift its Adelaide production to Queensland and Western Australia. In 2019 it will close its Adelaide plant, which opened in 1951, with the loss of 180 jobs. Despite company denials, this is a clear reaction to the uncertainties of South Australia’s energy supply. Yet Victoria’s Energy Minister Lily D’Ambrosio claims that after the Hazelwood closure, prices will reduce in 2018-19 as more renewable energy comes on line, largely driven by the Victorian RET.

What to do? The gas industry argues that gas is a guarantor of energy and network security, and of lower emissions, as more intermittent renewables are put into the system. It says RET and other green subsidies should also include low-emissions fossil-fuel technologies. The Climate Change Authority estimates the output from gas-fired generation needs to double, probably triple, to produce about half of Australia’s power needs. Today, gas accounts for about 11 per cent of power. Gas prices are surging due to liquefied natural gas exports, which take up two-thirds of Australian production, and various state bans on gas exploration. Very effective campaigns by “Lock the Gate” extremists have inflamed farming areas, despite several scientific reports, which, while acknowledging legitimate fears for agriculture and water from fracking, say the practice is not dangerous if handled properly. Victoria has a ban on fracking, including onshore conventional gas, until 2020, although the Liberals are softening on the latter; a fracking moratorium is in place in New South Wales. Victoria’s policy was described as “reckless” by the Victorian Chamber of Commerce and Industry.

Gas supply is now tight, with shortfalls predicted as early as 2019. The industry says developing new reserves is vital in supplying existing demand, let alone new gas for gas-fired generation. Shell Australia says rising prices caused by Victoria’s gas bans could put some manufacturers out of business. New estimates from Geoscience Australia indicate Victoria’s gas exploration ban will shut off forty years of gas for the nation’s east coast, 27 trillion cubic feet of shale and tight gas reserves, more than double the identified total for Australia. In the US, fracking has produced cheaper oil and gas, transforming energy markets and giving the country a huge economic boost and making it an oil and gas exporter. In the US, 2016 emissions were at their lowest level since 1991, 13 per cent off the 2007 peak.

And what of coal, Australia’s great comparative advantage? Not one business or economic commentator talks about it; they all favour gas. The federal government, the Prime Minister, Malcolm Turnbull, Mr Frydenberg and Resources Minister Senator Matt Canavan have pushed “clean coal”—the use of HELE (high efficiency, low emissions) coal-fired power plants. There are hundreds of HELE plants operating around the world. HELE plants operate at higher temperatures and air pressure to convert water more rapidly to steam. This greatly improves the efficiency of boilers and turbines, which saves fuel and reduces carbon dioxide emissions by up to 50 per cent. A brown-coal power station using new generation technology would still cost a lost less to build and operate than solar or wind energy, says one new report. Such a power station could also quickly ramp up production to meet electricity demand as intermittent renewable energy fell away, says the report, New Generation Coal Technology, from the Minerals Council of Australia. The cost of building a 1000 megawatt ultra-supercritical power station today is equivalent to the annual $3 billion subsidy received by renewables in Australia in 2015-16. The numbers here are extraordinary:

• There are 1015 supercritical and ultra-supercritical power units in the world, with a further 1231 planned or under construction.

• Ultra-supercritical plants in China, Denmark, Germany and Japan are already achieving efficiencies of up to 47.8 per cent.

• Asia is building 88 per cent of the world’s new coal-fired power stations in the next five years, with 69 per cent of those supercritical or ultra-supercritical.

• Japan built the world’s first ultra-supercritical unit in 1993. It has ninety-five coal-fired stations and plans to build another forty-five with supercritical technology in the next ten to fifteen years.

• China has 579 HELE units, with another 575 planned or being built.

The report also talks about integrating HELE technology with carbon capture and storage—storing carbon dioxide emissions deep underground, which would cut emissions by up to 90 per cent. But this process, clean coal storage, is expensive.

The Victorian SEC was looking at this supercritical technology in the 1960s (there is nothing new about it), but there were no materials then that could withstand the higher temperatures and pressures. Those materials are now available worldwide. However, with these new-technology coal-fired stations the failure rates can increase; you’re dealing at the limits of performance. An athlete running flat out is more likely to get injured than one coasting at three-quarter pace. Even with a process of refinement, improvements are only at the margins. Still, the Australian business commentariat evidently believes that the responsible powers who make crucial decisions on energy in Japan, China, Germany and India are stupid. The journalists love talking about gas and the potential of batteries, but not coal. The truth is that Australia is shackled as we try to lower greenhouse emissions. Remember, we only contribute 1.3 per cent of humanity’s greenhouse gas emissions. We don’t have nuclear power, cheap gas or even much biomass (electricity from landfill garbage and forest residues). In Europe, biomass is a huge contributor to renewables, accounting for 20 per cent in much of Scandinavia. Native forest residues are allowed in biomass in Europe but not here, despite the Coalition approving it. The Greens and Labor do not allow it.

Australia’s efforts are put into perspective with some international comparisons. France, for example, gets just under 80 per cent of its power from nuclear, which is also widely used in many other European countries. France arguably underwrites Europe’s greenhouse abatement efforts through its nuclear industry. Europe’s emissions are calculated on a Europe-wide basis, so individual countries are not as isolated in their efforts as Australia. Europe also has extensive hydro-electricity in Scandinavia. Canada has a similar resource-based economy to Australia, but is even luckier: 60 per cent of its electricity comes from hydro, with huge input also from nuclear. They use their vast uranium resources; we don’t. Canada is second in the world after China for the amount of power produced by hydro, and sixth in nuclear. With hydro, renewables total 63 per cent of Canada’s electricity capacity, with the rest from wind, solar, biomass and tidal. Canada is also involved in shale oil and oil sands, and has four large-scale clean coal storage projects under way. Coal is a small contributor. Ontario two years ago closed the last of its coal stations; power there is now mainly nuclear and hydro, with some gas and wind. Yet despite Canada’s low-carbon energy mix, emissions from oil and gas rose by 14 per cent between 2005 and 2013. The former Prime Minister Stephen Harper withdrew from the Kyoto Protocol, saving Canada from theoretically paying billions of dollars in fines because their emissions were way over the Kyoto target in 2012.

However, the most interesting comparison for Australia, and Victoria in particular, comes with Germany. Germany is the biggest brown-coal producer in the world, and has been building new coal-fired power stations to keep the lights on. Coal still accounts for 42 per cent of Germany’s power supplies—brown coal (lignite) 24 per cent, and hard coal (comparable to black coal) 18 per cent—despite the country’s drive to expand renewable energy. Including gas and nuclear, non-renewables produce 64 per cent of Germany’s power. Germany’s Department of Energy says on its website that to provide a reliable energy supply, Germany will require ultra-modern and flexible coal-fired power plants. There is no specific policy to phase out coal and lignite generation, unlike its forced closure of nuclear plants in favour of renewables. Germany opened two new brown-coal plants in 2012, with one in Essen at 2200 megawatts capacity larger than the Latrobe Valley’s Loy Yang A. It has the ability to respond to the intermittency of renewables in fifteen minutes. Eight hard-coal plants are being built, along with two more brown-coal plants, respectively 1100 and 660 megawatts. The thirteen new coal plants total 14,208 megawatts—pretty well twice Victoria’s output. Many hard-coal plants, however, have been cancelled in recent years.

The Department of Energy in Germany says lignite, unlike hard coal, is unsubsidised and there are enough reserves “to last for a very long time”. Germany’s brown coal is more expensive to use than the Latrobe Valley’s, as Germany’s overburden is deeper and the brown coal seams are shallower. However, Germany’s lignite production has halved since 1980. About 90 per cent of Germany’s hard coal supply is imported. Of the rest of the country’s power supply, nuclear makes up 14 per cent, gas 7 per cent, renewables 35.8 per cent (wind 14.4 per cent, solar 8.1 per cent, biomass 8.7 per cent, and hydro 4.7 per cent), with a small contribution from oil. All nuclear power, however, is to be phased out by 2022. It’s unclear what Germany is going to replace it with.

Germany’s climate action plan for 2050, approved a couple of months ago, aims to cut back on greenhouse gas emissions but does not stipulate an end date for coal-fired power generation. While the plan envisages a step-by-step reduction in coal power, the Social Democrats in the federal coalition have opposed the setting of a coal exit date before job alternatives for those who work in brown coal have been determined. Sigmar Gabriel, until recently the Social Democrats leader and still Vice-Chancellor, expects brown coal to remain in use past 2040. Under the plan, Germany aims by 2050 to cut its greenhouse emissions by 80 to 95 per cent from its 1990 level, the year of German unification when old genuinely polluting plants in the communist east were still active. Under the interim target for 2030, emissions are to be reduced by 55 per cent compared to 1990. The action plan sets out sectoral targets for 2030, but emphasises the document is a work in progress and “cannot and does not want to be a detailed masterplan” for 2050. It adds that there will be “no rigid provisions”, with the plan technologically neutral and open to innovation. Great emphasis is placed on energy efficiency in power production and by consumers in property, transport, industry and agriculture. It stresses the government will simultaneously maintain German competitiveness. In reducing coal, “economic perspectives and jobs in the affected regions must be taken into account”. Above all, there must be “concrete future proposals for the affected regions, before concrete decisions for the step-by-step retreat from brown coal can go ahead”.

Germany, unlike Australia, does not have to cut emissions by itself; it’s part of Europe. Germany has interconnectors with ten neighbouring countries, with a total transfer capacity of more than 20,000 megawatts. It can buy nuclear power from France and coal-fired power from Poland, which still gets 90 per cent of its electricity from coal. Germany also exports a lot of energy.

What does all this cost and how effective has the policy been? A study from the University of Dusseldorf estimated that by 2025, Germany would have spent 520 billion euros on its Green Energy Transition. A family of four will pay more than 25,000 euros for the policy. It said the cost from 2000 to 2015 was 150 billion euros, with an additional 370 billion euros to be spent in the coming decade. Germany has the second-highest residential electricity prices in the OECD after Denmark, a big wind-power producer.

A recent study by a Cambridge physicist extrapolated on this. It’s from M.J. Kelly, the Professor of Solid State Electronics and Nanoscale Science, who is a Fellow of both the Royal Society and the Royal Academy of Engineering. Professor Kelly said actual data from 2014 showed the fruits of the $200 billion green investment in Germany. While there were isolated times of a few hours on one or two days where significant (more than 30 per cent) electricity came from renewables, the total contribution each of wind and solar was 8 per cent of average demand. Fossil fuels and nuclear provided the bulk of the remaining 84 per cent. “The problem is that for significant periods during winter when there is no solar or wind energy, the entire peak annual demand must be provided from the older generators,” he said. “Not a single generator can be turned off because it is needed to cover intermittency.” Professor Kelly said the older generators were providing 84 per cent, not 100 per cent, of the energy that they used to. They now had to charge a higher price to cover the same depreciation and finance costs. “In some cases it’s worse than this; many of the gas turbines were designed for base-load operation, and when used in load-balancing mode, the constant acceleration and deceleration of the shaft shortens its life to an unacceptable degree,” he said. “The owners are mothballing their assets for future base-load operation rather than misuse them.” A doubled penetration of wind and solar will double Germany’s electricity cost problems without any compensating relief.

The Kelly paper has a fascinating look at energy density. Today’s fossil fuels are the result of past photosynthesis and the densification of the resulting energy over millions of years. The actual energy density of fossil fuel is over a million times greater than the gravity energy density in hydro. Nuclear fuels are a million times more energy dense than fossil fuels. Professor Kelly estimates it would take 4000 square kilometres of land growing a biofuel crop to generate the same power as a 1500 megawatt nuclear plant that takes up one tenth of a square kilometre. The net average density per square metre for current biomass, solar and wind are all within a factor of twenty of each other—nothing compared with the factor of tens of thousands for fossil fuel and nuclear. “The first generation of renewables all suffer from the intrinsic diluteness of solar energy incident on the surface of the earth, coupled with the lower efficiency with which it is converted into a continuous useful energy supply,” Kelly says. Improvements in wind turbine blades, solar panels or better bio­fuels result in efficiency increases measured in tens of per cent: nothing compared with the millions of per cent for fossil fuels. These vast ratios are reflected in the size, costs and safety of the different sources of energy. Thus renewables will provide, optimistically, 10 to 20 per cent of global energy by 2035. “There is no prospect of seriously reducing fossil fuel emissions without an accompanying fall in global standards of living directly implied by large reductions in per capita energy use,” Kelly concludes.

Australia is now awaiting the final report by the Chief Scientist, Alan Finkel, on security of the national energy market. Submissions have just closed and the report is due by mid-year. Will it be a national reform blueprint?