There has been a major debate raging in Australian energy circles these past few years about which energy source will deliver the cheapest prices for electricity and the lowest-cost abatement, as we commence the task of decarbonising the grid.
Essentially, for home owners and businesses, it comes down to a choice between two: solar PV on rooftops, or gas – notwithstanding the fact that the renewable energy target will deliver a lot of wind energy. Most utilities, heavily invested in the gas industry, want you to believe that gas is the most efficient option – and appear to have the support of some of statutory bodies. This has helped define the political posturing around solar PV incentives, and some of the surprising decisions made in policy formulation.
Instinctively, however, homeowners are leaning towards solar, and they are probably right. But they won’t get much help from the statutory bodies that are employed to analyse the issue and provide advice to federal and state governments.
In matters of electricity, particularly with the dramatic technological advances and declining cost curves, Australia has been poorly served by bodies such as independent pricing regulators, and the Productivity Commission. They are simply unable or unwilling to keep up with developments, continually are out of the ball park on technology costs, and like to present rosy scenarios of conventional fuels. Utilities are using these ill-conceived conclusions to protect their own interests, and politicians are simply being hoodwinked.
A submission from the Melbourne Energy Institute to the Productivity Commissions’s recent report on electricity prices highlight how – contrary to the “institutionalised” belief that dominates policy formulation – solar PV can deliver the most cost-effective solutions to distributed generation, and its cost of abatement is probably little different to the carbon price.
That’s not what the Productivity Commission found, but the Melbourne Energy Institute accuses it of working with out-of-date cost assumptions, and says it took the worst-case scenario on solar PV and the best-case scenario with gas.
Let’s take the Productivity Commission’s conclusion on solar PV’s ability to meet peak demand. It suggested it would come at a cost of $1.5 million per MW, but the institute says this was based on a levellised cost of energy at $350/MWh. But the recent tender for the ACT solar auction was at a price of half that, and proponents of utility-scale solar PV farms in Queensland and Western Australia suggest they can be built cheaper again.
The IEA suggests utility-scale solar PV is around $150/MWh, and in many areas it is below that. The Institute says that even allowing for the supposed ability of PV to be able to supply 30 per cent of its capacity in peak demand, this cost to supply peak power falls to $0.8 million.
The Institute also notes that the Productivity Commission’s estimate of the cost of installed capacity of rooftop solar PV is based on a costs of between $5,030 to $5,845 per kW. Again, the institute suggests that the price of rooftop PV for rooftops in the Australian market is already less than half that estimate.
It is not surprising that the Productivity Commission struggles to keep up with developments. It even forgot its own revisions to its cost of abatement estimates of solar PV, which had originally put at $432 and $1,042 per tonne, before revising these down to $177/t/CO2 and $497/t/CO2 late last year. Now it’s returned to its original formula, but the Institute suggests these are way out of kilter.
Apart from relying on out of date technology costs, they also calculate the total cost of subsidy rather than the marginal cost. The institute suggests that the drop in subsidies implies a current cost of abatement of as low as $25/tonne (over a 25-year period). It could be argued that the vast majority of Australia’s rooftop PV capacity will be installed at a zero cost of abatement.
Gas also gets an inside run with the Productivity Commission. Its cost of meeting peak demand is put at $0.3 Million/MW peak, but the Institute points out that there does not appear to be any consideration for either the cost of gas distribution (more networks), or even the cost of the gas itself.
The gas industry itself expects domestic gas prices to at least double from recent levels within two years, and perhaps even quadruple, as prices rise to match the international price of gas. This will happen because most of the gas on the east coast will go to meeting export contracts from the large LNG facilities now being built. That means that the levellised cost of electricity from gas will also jump, from the $100/MWh that the productivity Commission uses for its calculations, to at least the $150/MWh level suggested by the recent assessment of the Bureau of Resources and Energy Economics. That puts the cost of gas in the same ballpark as solar. That’s where things get very interesting for both industries.
The Institute makes two other salient points about renewable energy subsidies. One is that they should not be judged on abatement costs alone, because they also serve to bring down the cost of those technologies and to provide energy security. Indeed Australia, which once had no issues with energy security due to its reliance on coal, may find that position changed by an increased focus on gas – a situation that has driven many of the progressive renewables policies in Europe. “Increasing penetration of renewable energy in our market has the potential to de-couple electricity prices from gas prices, increasing energy price security,” the Institute notes.
And there is the cost of coal subsidies, and the fact that the cost of carbon is not yet being properly reflected in the electricity market. The brown coal generators, for instance, are receiving $5.5 billion in cash and free carbon units from the “Energy Security Fund”, while the NSW government’s proposed Cobbora coal mine could deliver $3 billion a year in savings to generators by shielding them from the export price. It is not clear what the status of those contracts are now, given that the NSW government is now proposing to sell the mine, and the contracted price was less than what private operators could deliver, and amounted to a subsidy of around $4 billion over the lifetime of the project.
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