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The dangerous thinking behind Coalition renewable energy policy

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The Coalition’s admission this week that it had thrown the Australian Renewable Energy Agency into the basket of climate change and green energy programs to be cut if elected should not have taken people by surprise, because they have been hinting at it for a few months.

But it does raise questions about where the Coalition is heading with its energy policies, and why there appears to be such deliberate moves to wind back support mechanisms for wind energy and solar, and other emerging renewable technologies.

FirstDogOnTheMoon3

Source: First Dog On The Moon, Crikey

Part of the problem may be in the quality of the advice it is receiving. Many in the Coalition defer to the Institute of Public Affairs when asked about climate change and renewables policies. The IPA, of course, is a right-wing think tank that doesn’t accept the science of climate change, and argues against climate and clean energy policies.

More recently, Greg Hunt has been using the work of Bjorn Lomborg to justify Direct Action. Lomborg, as we discussed in last month’s piece, is known for downplaying the dangers of climate change, for arguing that renewable energy should not be deployed until costs are reduced in research labs, and for suggesting that wacky “geo-engineering” schemes such as cloud whitening should be priorities.

That may explain why the Coalition is now targeting ARENA, whose job it is to help take technologies out of the lab and actually deploy them. The Coalition also intends to shut down the Clean Energy Finance Corp, which plays a similar role, as well as the Climate Change Authority, which conducted last year’s review of the Renewable Energy Target. The Coalition wants the RET to be reviewed yet again, but not by the CCA. The uncertainty is already causing Australia to fall down the ranks of investment attractiveness.

Another document that may be influential in Coalition thinking was circulated in recent months by one of its so-called “star” candidates, Angus Taylor, the anti-wind campaigner who is seeking election in the seat of Hume in NSW.

The document was put together under the banner of Port Jackson Partners, the consultancy where Taylor used to work. The central theme of the report is that the Coalition could drop the renewable energy target entirely (and immediately), save up to $3.2 billion (or up to $300 a household) by 2020 and still meet emissions reduction targets. But it’s based around a whole series of false assumptions. It is more likely to push up costs by around $1 billion a year.

The first assumption is on the issue of costs. As is typical of such documents, it gives a bleak picture of renewable costs and a rosy picture of fossil fuels. It says that wind costs are virtually double that of gas. But the reality is that there is, and will be, very little difference between the two.

pJ costs taylorFirst of all on wind. As the above graph shows, Taylor reckoned the cost was around $120/MWh, but the wind industry will tell you it is around $100/MWh at most. Some agreements have been struck at around $90/MWh or even lower. (In Brazil, an auction of capacity announced this week will see 1,500MW of wind energy built at around $US46.57/MWh. In the US, prices are even lower. These lower costs are helped by the fact that they have local production – something Australia had until the previous Coalition government brought the then MRET to a crashing halt in 2005).

PJ gas costsBut the estimates that gas will be around $65 are contradicted by one of Port Jackson’s own documents, produced in November 2011, which suggested that the long run cost of gas will be pushed up to $90/MWh (see graph to the right) by a jump in gas prices caused by the LNG boom. That estimated is based on the prediction that gas will double to around $8/gigajoule. But, already, forward gas prices are being bid at $9-10/GJ in the Queensland market, so the cost of gas generation could be even higher.

The second major problem is a lack of understanding about how the National Electricity Market actually works. For a gas plant to operate, as Taylor’s document suggests, at 85 per cent capacity – and so achieve the emissions reductions claimed by Port Jackson – two things would need to happen in the NEM.

One would be that around one-third of Australia’s baseload coal-fired generation would need to be taken off line to allow a gas generator to bid into the market at its short run marginal cost. That 9GW of generation would likely require a very expensive contracts for closure scheme. But it would result in the price of all generation – including the remaining brown and black coal generators – rising to that $90 price.

In the RET scheme, only 20 per cent of the generation receives that price – via add-ons to the electricity bills – although the impact is offset because wind and other renewables reduce the spot price of electricity in the wholesale market, as their short run marginal cost (or cost of fuel), is next to zero.

That means all generation, not just the 20 per cent for renewables, would receive the higher price. That will likely push retail electricity prices up 5c/kWh (net of carbon costs) rather than just 1c/kWh under the renewables target, as Port Jackson’s own data reveals.

The next two graphs illustrate this. The first graph is from Taylor’s document. It is used in the context that retail electricity prices will rise sharply, and something must be done about it – namely by killing the RET.

PJ prices taylorBut here is that same graph as it appeared in the November, 2011 document. As it makes clear, the cost of the renewable energy target is relatively minor – less than 1c/kWh, or 3% of the total electricity bill. That is consistent with estimates by the Australian Energy Market Commission, IPART and the Queensland Competition Authority, as well as the CCA. As it notes, the bulk of the increase comes from network costs, and the sort of increase in wholesale costs that would be caused if baseload gas generation set the marginal cost of power on the NEM.

PJ prices original

The incumbent generators would, of course, love the scenario painted by Taylor. It would mean they get a significantly higher return, possibly as much as $1 billion a year. They don’t like wind or solar, because those generators lower the spot prices on the wholesale market.

As we have seen in the past, the Coalition – and in particular its energy spokesman, Ian Macfarlane – needs little encouragement to argue against wind and solar. But such decisions should not be based on false premises.

As the November 2011 document suggested, the real focus should be on network costs, which the AEMC agrees is the biggest cause of rising electricity prices. That is where reform is needed, and where a properly advised Coalition government could drive the biggest savings for consumers, if it was to embrace some of the suggestions for distributed generation.

Another part of the Taylor document also questions the viability of the wind industry, based on the published returns of leading renewable energy companies. There’s no doubt that many are struggling, for a variety of reasons. But it’s a bit like suggesting that we shouldn’t have developed the internet because the early dot.com companies made losses, or that we should abandon cars because the big motor companies do the same. Port Jackson Partners knows better than that, and so should the Coalition, if they are as savvy about business and the economy as they say they are.

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  • No More Nuclear Waste

    “But it’s a bit like suggesting that we shouldn’t have developed the internet because the early dot.com companies made losses, or that we should abandon cars because the big motor companies do the same.”

    …or we shouldn’t support the mining industry, because most junior exploration companies never return a profit!

  • Name

    As we approach the election date it is crystal clear that an Abbott lead government (aided by Greg Hunt leading on climate change) will dismantle not only the carbon tax/emissions trading scheme, by providing a still undefined direct action in its place where tax payers pay polluters to possibly reduce their emissions, but also get rid of the RET. No details or costings are provided of their proposals and clearly climate change is not an issue they are serious about.

    Abbott’s recent reference to to an emissions trading scheme as “a so-called market in the non-delivery of an invisible substance to no-one” makes it absolutely clear that the thinking is still “climate change is crap”. Especially as Abbott’s phrase could be equally rewritten for his policy of direct action as “a so-called direct action plan in the non-delivery of an invisible substance to no-one paid for by tax payers”.
    I think the approach taken on this crucial matter – climate change – aligns perfectly with all their other policies – no details, no costings and no action.
    I recently attended a Climate Change Forum Q&A at which it was absolutely clear climate change is already happening (Prof Janette Lindesay ANU Climatology – 16 August 2013). How come an incoming Coalition will dismantle the existing measures on climate change? My only answer is the Coal-ition must be being funded well by coal.
    In which case no amount of erodite reports on costs of energy from renewable sources is going to stop what we are about to receive according to all the pollsters – a Coal-ition government.
    Nicholas stern made it quite clear several years ago that the cheapest way forward on climate change is to act now – is that why Abbott has now started saying he will not commit to a future budget surplus….

  • Christina Macpherson

    On 27 August the Coalition announced that it would use Australian Renewable Energy Agency to fund a solar energy project near Mildura d. http://www.abc.net.au/news/2013-08-27/coalition-open-to-supporting-north-west-victorian/4914666

    On 29 August it was announced that the Coalition would cut the funding for Australian Renewable Energy Agency http://www.energymatters.com.au/index.php?main_page=news_article&article_id=3913

    So which story is true?

    • Ketan Joshi

      That’s a very good question. Giles, any info on this? Mixed messages from all over the place.

      • Giles

        That’s because they are making it up as they go along.

  • biroses

    Thanks for good information Giles.

    The real push behind getting rid of the RET and opposing the carbon price is from mining and industry, which generally consume over 50% of the electricity on electricity grids exceeding 100 MW capacity (RECs are not incurred by consumers on smaller self gen grids).

    They are not interested in the residential tariffs issue. They pay much lower prices, usually negotiated directly at less than half the retail tariff.

    So the price of generation, (has been about 5c / kWh on the main grids due to cheap coal), RECs (3-4 c) and carbon price (1-2c) are their main costs; retail and distribution are minor. So the RET and carbon price together can add a lot to the electricity prices they are used to paying, which have been dirt cheap in the past. As some of these industries’ electricity costs are up to 22% of total costs, that is why they are fighting to keep the old model and do away with any additional price impacts to do with carbon or renewables.

    I think it’s time we need to ‘re-jig the debate’; let’s look closely at the operations of these companies, who are the main opponents to RET and carbon price. Let’s look at what they can do to improve efficiency; as an energy auditor I can say that is a lot! Let’s also look at how much truth there is in their claims they can simply move operations off shore to countries with cheap coal or hydro and be more profitable.
    (An article here Giles? I would be happy to help).

    The reality is that everyone, electricity retailer and industries, are going to have to get used to paying at least 13c / kWh for wholesale electricity by 2030. Yes that will add 7c or so to our tariffs bringing them up to the low 30′s c/ kWh. That won’t be the ‘end of the world as we know it’ as countries such as NZ with much lower incomes than ours are already paying that.