Meridian Energy, the largest green energy generator in New Zealand, has challenged the opponents of Australia’s renewable energy target (LRET), saying building more wind farms and solar farms and opening the energy market up to more competition was essential to bringing down electricity bills for consumers.
Meridian Energy’s submission to the Climate Change Authority’s review of the LRET is a direct contrast to the position of the bulk of Australia’s conventional energy industry, which claims that the cost to consumers can be reduced by $25 billion over the next 18 years if the scope of the LRET is reduced to take into account falling demand.
But Meridian Energy says their math is misleading. It contends that the LRET mechanism, and the cost of the renewable energy certificates (LGCs), is no more expensive because of falling demand than it would otherwise be. And in any case, it will add just two per cent to residential prices by 2020. That’s because the LRET and the construction of wind farms, and at some point large scale solar and geothermal plants, would considerably offset the cost of the certificates.
It quotes figures from the AEMC which pointed to the “merit order effect” – or the downward pressure on wholesale prices – of energy sources such as wind and solar which have zero short term marginal costs, because the fuel is free. This could lead to falls of $10-$15 per MWh in the cost of wholesale energy – an event already witnessed im South Australia.
But if the hidden costs and benefits of the scheme were also calculated – adding the price of reserve plants and some network upgrades, and subtracting the avoided cost of new baseload gas plants, gas turbine running costs and avoided emissions – then the net benefit would be $4.77 per MWh, which could be passed on to customers, as this table shows.
And this leads to the second part of their submission – that these benefits would only be passed on with increased competition in the retail market, a situation that is only likely to occur through schemes such as the LRET,” Meridian says. Its point is borne out by recent experience – Australia’s retail electricity prices are surging to record highs, even as wholesale energy prices are at record lows.
“The LRET may in fact have a net benefit on the average household bill inclusive of network effects , and in any event imposes at most a negligible impost,” Meridian says. “This is insignificant in comparison to the retail margins available to retailers in what is a highly concentrated market. In relative terms, sustainable competition and consumer empowerment are far more effective in relieving pressure on household electricity prices when compared to the negligible impact of the RET.
Without the LRET, it says, opportunities for generation asset investment which can be accessed by new entrant participants would be lacking. The absence of such opportunities would inhibit the ability of new entrants to participate on a sustained basis in Australia’s retail market.”
It also says that changing the LRET would also increase the risk premium on all energy assets, causing increased costs that would be passed on to consumers. “The costs that would be incurred by consumers as a result of political uncertainty that would flow from changes to LRET – impacting not just renewable assets but the entire electricity generation and retail markets – would outstrip the net wholesale cost reductions associated with a reduction in the LRET target.”
Meridian Energy says it has committed $1 billion to building wind farms in Australia – it is a joint partner with AGL Energy in the construction of the 420MW Macarthur wind farm in Victoria, the largest in the southern hemisphere. And it has also flagged the possibility of launching its Powershop retail business – which has had dramatic success in New Zealand. But it says it would only do this if the LRET is untouched, and not mutated to a “floating” percentage target instead of a fixed target of 41,000GWh.
“Any change to this policy position that has the potential to retrospectively strip value from the investment that Meridian Energy was encouraged to make would gravely impact the appetite for (and ability of) investors like Meridian Energy to establish sustainable retail competition in Australia,” it says.
It notes that some new entrants have entered the retail energy market in Australia, but even after some initial success did not have the financial strength to succeed over the long term, or were bought out by bigger rivals anxious to maintain the status quo. Meridian said vertical integration – being a retailer as well as a generator – was essential to long term success, and asserted it wouldn’t take much market share to have an impact.
It said that even a market position of less than 5 per cent (just one fifth of the long term annual churn rate – customers changing providers - in Victoria) would enable a market participant such as itself to deliver savings to consumers “of a quantum that would outstrip the net impost associated with the LRET.“
Footnote: In my Greenchip column for The Australian today, I had a look at ACIL Tasman’s $25 billion estimate of the cost benefits to consumers if the LRET was changed. ACIL Tasman says this translates into savings of $840 for each household over 18 years. This translates into $46 a year, 90c a week, and 14c a day. Or 5c for each man, woman and child. Of course, those figures are hotly disputed, and the clean energy industry says the savings would be just a quarter of that sum, or just over 1c a day. In turn, the green energy industry would come to a halt, and Australia’s transition to a clean energy future arrested before its development. See the column here. Lucky last, as it turns out. The column has been dumped by News Ltd – for budgetary reasons.