As the Liberal Party has been unkind enough to point out, Prime Minister Anthony Albanese promised ninety-seven times before he was elected that he would reduce household electricity bills by $275. He has subsequently attributed the substantial increases in electricity prices to Vladimir Putin’s invasion of Ukraine in February 2022 and its impact on global energy markets, including gas and coal. The more sceptical will note that the date of the invasion preceded the May election by some three months and, indeed, many of those ninety-seven promises of cheaper power came after Putin unleashed on Ukraine.
It is customary for causes to precede effects, and while Albanese appears to have borrowed Harry Potter’s spectacles, he seems to lack his magical powers. Indeed, rather than the invasion causing supply and price issues, there is a case that the supply and price issues helped encourage Putin to invade. Moreover, these supply and price issues resulted from the very energy policies supported by both the Albanese government and its predecessor—and the governments of Joe Biden and Western Europe.
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One of Joe Biden’s first acts was to cancel the Keystone XL pipeline, and he also adopted policies to restrict oil and gas exploration. Germany had continued to pursue its policy of energiewende which involved phasing out coal (and expensive historic coal subsidies), subsidising and increasing natural gas consumption as a transition fuel and “firming” energy source, while continuing restrictions on fracking to produce gas from tight shale formations. The United Kingdom similarly eschewed its fracking potential. France, with its extensive nuclear generation, increased its gas consumption, because of the substantial variability of its increasing fleet of renewables. Nuclear generators are unable to ramp up and down rapidly, so increased use was being made of gas turbines.
Electricity prices rose substantially as a result of these policies, for the reason that renewables have essentially zero short-run marginal cost and dispatchable (overwhelmingly thermal) plant simply cannot compete in the merit order. This erodes the economic viability of dispatchable generation upon which the system stability and reliability depend, and so renewables cannibalise the reliable generators.
This should not have come as a surprise to Albanese (nor to his predecessors), because the German energy economist Lion Hirth had shown some time ago that once the renewables share surpasses about 20 per cent of system generation, its value falls markedly as the economic competitiveness of reliable generation falls, plant is retired and not replaced, and is no longer available to make up for the limitations of renewables.
The relevant price then becomes, not the Levelised Cost of Energy which Minister Chris Bowen likes to cite, where renewables can be less than new coal generation, but the System Levelised Cost of Energy, which includes storage (pumped storage and batteries) and the additional costs of the transmission capacity required for a widely dispersed, low-density generation system. The Albanese plan, “Rewiring the Nation”, so far includes an additional $20 billion for transmission, and renewables plus storage is more expensive than dispatchable coal and gas.
Transmission is only part of the story, however, though it must be capable of carrying all the capacity it serves or generation must be off-loaded (as it often is in the UK). When solar generation coincides with peak wind generation, energy in excess of transmission capacity is either wasted or must be stored—in a battery, unless proximate to a pumped storage site. Because solar and wind typically exhibit capacity factors of only 25 to 30 per cent, transmission lines servicing them are also typically low in capacity factor and transmission losses are high.
These low capacity factors also mean that surplus capacity is required to both meet load and recharge storage—of the order of four times average load or more. (Efficiency into and out of storage is only around 85 per cent—reportedly less with Snowy Hydro 2.0.)
The flexibility of gas generation, especially single-pass gas turbines, has meant increases in demand for gas—just at a time when supply has been constrained. Certainly, Putin’s Ukraine adventure disrupted gas supply, especially to Western Europe, and also drove up coal prices, but the increases began before February 2022 when Russia invaded Ukraine.
Trading Economics data on the price of natural gas shows that it was only around US$3 per MMBTU in mid-2021 (1 MMBTU = 1.055056 GJ), but it hit US$6.31 on October 5, 2021, dropping by the beginning of 2022. Prices increased sharply with the invasion and were at US$8.17 on May 20, 2022, just before the federal election. But it is important to note that on February 20, 2023, it was US$2.26—the cheapest in two years. Perhaps Albo thinks his gas price cap has driven down the entire global market.
The Trading Economics record has been much the same with steaming coal. Coal had drifted down to around US$50/ton, but it soared to $228 on October 1, 2021, before really taking off after the invasion, reaching US$412 on May 20, 2022. It has held up better than gas, sitting at $214 on February 20, 2023.
There are therefore three reasons why Albanese’s Ukraine excuse for electricity prices rising, not falling, doesn’t wash. First, he was still making the promise up until the election, three months after the invasion drove up global prices. Second, prices began to rise before the invasion, due to factors other than the invasion—although some of those factors do indeed have to do with Russia and Putin. Finally, most supply contracts for electricity generation are in long-term contracts unaffected by global spot prices (although the Gladstone power station ran into trouble in 2022 because it was buying about half its coal on the spot market).
The simple explanation for the price surge in later 2021 is that, as economic activity recovered from the Covid pandemic, energy demand surged, but supply could not keep pace because the ESG (“environment, social and governance”) enthusiasm in the finance sector had effectively starved the fossil-fuel sector of capital, so that there had been little investment in new capacity by private investors or multilateral development banks. (For example, in November 2021 Australia attempted unsuccessfully to prevent the Asian Development Bank adopting a ban on investment in new coal-fired generation.)
A March 2022 report by Goldman Sachs reported that capital expenditure on oil and gas declined by almost 60 per cent from a peak of US$780 billion in 2014 to US$328 billion in 2020—partly because of the fall in oil prices until 2016 and partly thanks to Covid in 2020, but also because of ESG and the associated divestment campaign by 350.org and others. Goldman Sachs estimated that these investment reductions would lead to a loss in production of 10 million barrels a day (the equivalent of a Saudi Arabia) and 3 million barrels per day of oil equivalent in liquefied natural gas (the equivalent of a Qatar) by 2024-25.
The chief enthusiast for ESG on both sides of the Atlantic has been Sir Christopher Hohn, who runs the hedge fund the Children’s Investment Fund. Hohn has been pushing for the Securities and Exchange Commission in the US to require ESG reporting, but he also is notorious for donating £200,000 to Extinction Rebellion, who picketed a new runway at Heathrow Airport one month, only for Hohn to invest in the firm owning Heathrow the next. There are other examples of hedge fund operators such as Michael Bloomberg, who has done well funding the Sierra Club’s “Beyond Coal” campaign while investing in gas, which he now eschews.
ESG has shown signs of decline, especially because it is not delivering for investors. Over the course of 2022, BlackRock’s ESG Screened S&P 500 exchange traded fund lost 22.2 per cent of its value, while the S&P 500 Energy Sector Index rose 54.0 per cent.
But the hedge fund operators are not the only ones who have sought to extract advantage by financing environment groups. Putin’s hand in the energy wars was strengthened because Western European nations (including the United Kingdom) have yielded to environmentalist pressure and refused to develop their substantial shale gas reserves. In 2014 the Secretary-General of NATO warned that Russia was providing support for the political movement against fracking to exploit shale gas resources that might have lessened Western European reliance on Russian gas.
The reliance on Russian gas had been cultivated a decade earlier with the development of the Nord Stream I gas pipeline across the Baltic, which allowed Russia to supply gas to Germany while avoiding transit through Ukraine (and the payment of transit fees). Scandalously, finance for Nord Stream was secured in 2005 by the provision of a loan guarantee by German Chancellor Gerhard Schröder, who had been voted out of office and who was appointed chair of Nord Stream AG’s shareholder committee within weeks. In 2016 he became manager of Nord Stream 2 and in 2017 was appointed to the board of Rosneft, Russia’s largest oil producer.
Putin’s taking advantage of Western climate policy began even earlier, however, when he positioned Russia as the key ratification for the Kyoto Protocol to enter into force. Russia (with 17.4 per cent of relevant emissions) then sent numerous contradictory signals as to its intentions. It eventually ratified, after extracting concessions including EU support for Russian accession to the WTO and indications of investment in the Russian oil and gas sector.
It was not just greenhouse gases that were significant in this situation (although the City of London was keen to be able to start trading credits related to those), but Western Europe’s reliance on Russia for about 25 per cent of its supplies of natural gas, a situation that would worsen if electricity generation switched from coal to Combined Cycle Gas Turbine generation. Russia had already initiated a dispute over transmission of gas via pipelines through Ukraine, an issue that continued, and it was keen to develop alternative routes, such as Nord Stream through the Baltic.
Accompanying EU promises of support for WTO membership were promises of investment in Russia, with Richard Wright, head of the EU delegation in Moscow, stating in an interview with Ekho Moskvy radio station that Russia’s ratification of Kyoto “could mean substantial new gas-saving infrastructure investment and thus could open the way for significant European investment in Russia”.
In other words, Europe helped Russia increase European energy dependency on Russia. Western Europe’s reliance on Russian gas was certainly a factor in Putin’s judgment that invading Ukraine would provoke a constrained response from Europe. Writing last December, Rupert Darwall was in no doubt:
By restricting investment in production of oil and gas by Western producers, ESG increases the market power of non-Western producers, thereby enabling Putin’s weaponisation of energy supplies. Net zero—the holy grail of ESG—has turned out to be Russia’s most potent ally.
The pre-Ukraine energy crisis was also exacerbated by a seasonal wind drought in Europe, which reduced yields from wind generation in such a way that no amount of pumped storage or grid-scale batteries could assist—a salutary lesson for Australia.
The breathless reporting by the media of every extreme weather event as evidence of a “climate emergency” has helped drive all this, with the active support of those with a stake in there being a “climate crisis”. This is despite (as Roger Pielke Jr, perhaps the leading authority on such matters, points out) there having been if anything a slight decline in frequency and intensity of global hurricanes and cyclones. And as Bjorn Lomborg has shown, the risk of death from extreme weather events is 2 per cent of what it was a century ago.
The media’s natural tendency to promote bad news (“if it bleeds, it leads”) has also been assisted by what can only be described as the corruption of sources of news such as Associated Press, which received $8 million in 2022 alone to report on claims of global warming from five donors, including James Murdoch’s Quadrivium, the philanthropy of which certainly does nothing to harm the fortunes of his venture capital vehicle Lupa Systems, which invests in environmental start-ups. These donations are reported to support “more than two dozen journalists” to cover “climate issues”.
Brian Carovillano, Associated Press’s vice president for grants, has stated that “this is a mutually beneficial arrangement”. Carovillano had to “get used to the idea that funders weren’t just being generous; they had their own goals to achieve”. This “philanthropy” in support of climate groups whose actions favour the investments of their donors is quite widespread, as the examples of Bloomberg and Hohn (above) demonstrate. Associated Press argues that their donors do not influence their stories, but the reporters the donations support are inevitably going to find and give prominence to stories of climate problems, rather than reporting evidence that climate change is minor and natural.
Associated Press is not alone in this pumping-up of climate coverage, as other news wire services are also “partners” in Covering Climate Now, described as a journalism effort to increase news coverage of climate change that was co-founded by Columbia Journalism Review and the left-of-centre opinion magazine Nation. It is also partnered with the Guardian. Its partners, which also share material, include Agence France-Presse, Bloomberg and Reuters. There are few Australian partners, but many take these wire services, and the list includes The Conversation which is funded by universities and has an editorial policy of refusing to publish any climate “denial” pieces. Particularly worrying is that the list of partners includes the science journals Nature, once a paragon of commitment to objectivity, and Scientific American.
I have yet to see any serious analysis by journalists of Albanese’s attribution of rising electricity prices to the invasion of Ukraine, yet the data are readily available. This is not surprising, given the information they are likely to receive from the news services. The energy and climate policies of Australia have certainly been impacted by Russia, but this goes largely unreported. Moreover, the policies supported by both sides of politics have played a role in increasing Putin’s influence on Western Europe and certainly did nothing to discourage his ambition.
The economics literature is clear: Albanese’s (and Morrison’s) policies of increasing the proportion of renewables in the system were always going to result in increased prices as the plant that provided security came off-line. Attributing this to the Ukraine invasion is a furphy—but we are unlikely to learn about this, nor of climate policy’s role in Russian influence, from an incurious media.
Aynsley Kellow is Professor Emeritus of Government at the University of Tasmania. A former member of the ALP Minerals and Energy Committee in Tasmania and an Expert Reviewer for the IPCC Fourth Assessment Report, he is the author of Transforming Power: The Politics of Electricity Planning (Cambridge University Press) and Negotiating Climate Change: A Forensic Analysis (Edward Elgar).