The costs of power

The Great Innovator or Terminator– the Federal Government?

Georges Pompidou when president of France counselled his prime minister, Giscard d’Estaing that the three great dangers for a politician were wine, women and technologists. It is a pity that our Governor General may not have advised our Prime Minister of the modern danger of technologists.

Yet parliament has just approved a target of 20 percent of our energy to come from expensive or developmental renewable energy sources by 2020. This is being put in place before an ETS with the argument that these changes should be made now as carbon taxing will be slow to shift energy prices. What are the consequences for electrical energy, the most pervasive energy source in society?

It is surprising that the government has not examined the costs and consequences of its legislation without reference to the Productivity Commission. So let us look at the costs of various forms of electricity generation presented in Table 1. The cost profile of power plants shows brown and black coal plants with a clear cost advantage over other available technologies. There is however a devil lurking in the detail and that is the price of natural gas. At the present time there is a difference in the price of natural gas used locally and the export price. As an example the clearing price for natural gas in the Victorian energy market is $3.50 per Gigajoule. However the export price is $7.00 per Gigajoule. Naturally the owners of the sources of natural gas are keen to get the maximum price for new supplies while local energy users such as aluminium smelters are not at all keen to pay the export price. The attempted resolution of this issue is through legislation such as the West Australian requirement of a fraction of reserves put aside for local use.

Table 1 Present Profile of Power Plant Costs*

Power Plant		Total Cost per Mwh	Marginal Cost per Mwh with natural gas at $3.50 per Gigajoule
Thermal	Brown Coal	$38	$2-6
Thermal	Black Coal	$38	$5-15
Gas Turbine	Combined cycle	$47	$30
Gas Turbine	Open cycle	$60	$45
Nuclear		$70
Thermal	Gas	$80	$60
Wind		$95

Sources Total costs A Moran, IPA. Marginal costs ACIL-Tasman

It is clear also from Table 1 that wind power is not a competitive technology without some incentive paid to the owners of the wind farms. This is of course exactly what the renewable energy programme sets out to fix by subsidizing each megawatt-hour of wind power by $65, an increase from the $42 of the old scheme. But it is of course the consumer who pays the higher price as retailers and distributors must buy this expensive power or face essentially a non-tax deductible fine of $65.

The Australian Energy Market Operator estimates the need for some 9,000 to 11,000 Mw of new gas turbine generators to satisfy electricity demand growth out to 2020. New gas supplies will be needed and this may bring about the change to export parity pricing. Now what might happen if gas prices were lifted to reflect export prices? The conclusion from Table 2 is that the pricing gap between coal and natural gas becomes very much larger. The other intriguing feature is the position of nuclear power in the pecking order.

Table 2 Profile of Power Plant Costs after doubling natural gas prices

Power Plant		Total Cost per Mwh	Marginal Cost per Mwh with natural gas at $7.00 per Gigajoule
Thermal	Brown Coal	$38	$2-6
Thermal	Black Coal	$38	$5-15
Nuclear		$70
Gas Turbine	Combined cycle	$72	$55
Wind		$95
Gas Turbine	Open cycle	$96	$81
Thermal	Gas	$116	$96

Finally you might ask what might be the result of a carbon cost being added through an ETS? Well take a price of $40 per tonne of emitted carbon dioxide as a longer term price rather than the proposed starting price of $10 per tonne. The result shows brown coal being more heavily hit than black coal, a closing of the coal-natural gas gap and the increased attractiveness of nuclear power.

Table 3 Profile of Power Plant Costs after doubling natural gas prices and a $40 per tonne of emitted carbon dioxide charge

Power Plant		Total Cost per Mwh	Marginal Cost per Mwh with natural gas at $7.00 per Gigajoule and $40 per tonne of emitted CO₂
Thermal	Black Coal	$68	$35-45
Nuclear		$70
Thermal	Brown Coal	$87	$52-56
Gas Turbine	Combined cycle	$87	$70
Wind		$95
Gas Turbine	Open cycle	$121	$106
Thermal	Gas	$141	$121

The renewable energy program is by far the most dangerous example of picking winners by a government. It proffers a subsidized and intermittent source of power, windfarms, while ignoring the possibility of competitively expensive nuclear power. At the same time it is laying the ground work for the loss of substantial income from export industries without being able to provide substantial alternative sources of export income.

The terrible conclusion to be drawn from all this is that while we are exporting expensive energy to Japan, China, India and our other customers we will set about destroying a competitive advantage of cheap power while literally tilting at windmills! All this is being set in motion with some bipartisan support but without an international agreement that would be the only hope that we might have to preserve some competitive advantage.

*Energy units are confusing as 1 Megawatt-hour of energy is 3.6 Gigajoules.

Doomed Planet

Tom Quirk

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