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WA government says no to new renewable energy

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Western Australia has some of the best solar and wind resources in the world. But for the foreseeable future they are likely to go largely undeveloped because the state government has indicated that it will not support any new large scale renewable energy developments on its main grid. It will prefer instead to subsidise the construction of wind farms and solar farms in the eastern states.

The admission came in a series of speeches delivered recently by WA Energy Minister Mike Nahan which highlighted what a dog’s breakfast – and a very expensive dog’s breakfast at that – the state’s electricity grid had become.

A series of catastrophic decisions over recent decades has left WA with what must surely be one of the most inefficient and costliest electricity grids in the world – it is dependent on a few filthy, ageing and expensive coal-fired generators and a gas supply which is heavily subsidised by the government.  And it has much more capacity than is needed.

It costs the state about $380 million a year to make up the difference between the cost of delivering fossil fuel electricity to households and the price it charges. That amounts to a subsidy of $400 per household per year by a government that has just had its credit rating downgraded because the resource-rich state has too much debt.

And this is even after raising electricity prices by 78 per cent over the last four years. In 2008, according to Nahan, the WA government subsidised 72 per cent of the cost of delivering coal and gas fired generation to the household. And its state owned utilities were still headed for bankruptcy!

The situation is compounded by the fact that WA has built too much capacity – a consequence of its reliance on a so-called “capacity market”. In a warning to those energy market experts that want a similar market to be imposed in the eastern states to protect the interests of coal and gas fired generation in the face of rising rooftop solar and falling demand, WA has built several hundred megawatts of generation that will never be switched on.

They have been built because generous subsidies make it profitable for companies to build cheap plant, such as peaking power stations powered by diesel, even if they never generate any electrons. In fact, the developers would probably lose money if they did switch them on because of the high cost of fuel.

“A large number of small peaking facilities receive capacity credits with the expectation they will never be required to operate,” Nahan said in his speech last month to the 2013 Energy in Western Australia conference . “The current system is clearly flawed when such facilities are clearly handsomely remunerated yet not fully utilitised.”

Yet the biggest casualty of this largesse appears to be not the useless, and unused fossil fuel generators, but the renewable energy industry. It is difficult to imagine a region better suited to renewable energy development than WA – solar resources among the best in the world, excellent wind conditions along the coast and inland (the 207MW Collgar wind farm near Merredin operates at near 50 per cent capacity), opportunities for the nascent wave energy, tidal energy and geothermal energy, and one of the most costly electricity grids.

But Nahan, who just last week opened the latest wind farm, the 55MW Mumbida facility near Geraldton – says the government is not encouraging new large scale renewable energy projects. “Western Australia is clearly in a situation of having excess generating capacity,” he said in the conference speech. “To build additional capacity on top simply to satisfy the RET (the national renewable energy target) is a sub-optimal approach and expensive for taxpayers.  Western Australia can satisfy its RET requirement by purchasing certificates from projects on the Eastern States.”

In other words, Nahan is proposing to abandon local renewable energy projects that would generate investment and jobs – and instead subsidise wind farms and solar farms to be built in the eastern states – to protect the interests of plants that have been built but will probably never operate.

It’s a mind-boggling situation, but one where Nahan apparently he sees no choice: He says that any changes to the markets would be done “with due regard to sovereign risk, asset impairment and other investment concerns” of the incumbent generators.

Nahan said that WA was considering having its market managed by the National Electricity Market, even if the two were never connected. He says this would reduce costs and make the market more efficient.

The NEM is an “energy-only” market, meaning that prices are set by demand and supply, and overcapacity is solved by the survival of the fittest. Several large scale coal plants have already been forced out of the market. But because renewables and lower demand are forcing down the price of wholesale power, and rendering many coal-fired generators unfit, the fossil fuel industry is pushing for the type of capacity payments that have created a mess of the WA system.

Nahan said that in WA the capacity market system was encouraging old plant to stay open – one of the detrimental characteristics of a market that “pays facilities in part simply for existing rather than for supplying cheap and reliable power to end users.” As he notes, the decision on such capacity is made centrally, while the costs are socialised.

Nahan is not alone in thinking this. The International Energy Agency has warned against capacity markets – indirectly labeling them as an inefficient subsidy to protect fossil fuel generation in the face of rising renewables. It, and others, favour more complex arrangements – so called “capabilities markets” that reflect  capacity, use, cost, dispatchability and environmental credentials.

In the meantime, Nahan has to try and untangle the unholy mess caused by what he admits is an  “ill-considered” structure that has created inefficient monsters such as Verve and Synergy.

Despite the state having 900MW of excess capacity – the growth of PV has reduced both underlying and peak demand – the WA government recently announced it would invest another $50 million (on top of the $290 million already spent) to keep the ageing Muja AB generators open for another 15 years, apparently in the hope of finding a buyer. It even sought to claw this money back from owners of rooftop solar, before being howled down by consumers.

It seems, though, that if Nahan could start anew, he would embrace renewables in a manner which might have been unthinkable during his time as head of the arch-conservative, climate doubting, anti-everything-green-and-particularly-renewables Institute of Public Affairs.

He concluded a recent speech by saying that he hoped to see a day where every home and every business in WA had PV on its roof.  That, of course, would be a perfect solution, but it is hard to imagine how that will happen given that the state is so set upon protecting the interests of the incumbents.

But it probably highlights how he might approach his portfolio if he had the opportunity to rip up the network and start over again. “Sometimes when you go down a path in a certain direction and take a wrong turn, you need to retrace your steps and start again on the right track rather than continue toward a dead end,” he told the energy conference.

Damn right. And rooftop solar on ever household and business would  be a good place to start over. Alas, Nahan is tasked – in his own words – not of starting over but by “putting Humpty Dumpty together again.”

In the meantime, the opportunity to lead the world on large scale renewables will be lost because of the folly of decisions taken in the past, and in the present.

Instead, it will be householders and businesses who will lead the way, and take the state towards Nahan’s aspiration of a solar array on every rooftop.

West Australian households are installing rooftop solar systems at a rate of 2,800 a month – far beyond the rate anticipated by the government when state and federal tariffs were reduced. The rooftop solar capacity in the state is now more than 300MW.

Based on the average system size of 3kW, that represents an investment of $15 million a month by households alone. The solution seems obvious to the consumers, even if it isn’t to the incumbents and the policy makers.

 

 

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  • adam

    If anyone (like me) requires some pre-reading on capacity markets this looks like a useful primer:

    http://theenergycollective.com/adamjames/237496/energy-nerd-lunch-break-how-capacity-market-works-and-why-it-matters

  • Warwick

    Which companies are pushing for capacity payments in the NEM?

  • RobS

    Eh, this bores me. People will continue to install rooftop solar, renewable generation will continue to rise, new fossil fuel investement will become increasingly stranded resulting in financial strain for fossil fuel developers and cost of new renewables will continue to fall. When this government finally falls costs will have fallen to the point where twice as much renewables will be installed with the same level of funding and without government support fossil fuel stranded assets will result in well deserved bankruptcies.

  • Ian Garradd

    It seems that they don’t support mid size business… the kind that are involved in hte supply chain for wind farm development, and likely are not keen on energy efficiency, or any business related to implementation of that.
    Very sad government, lacking vision and responsibility.

  • Robert Johnston

    Nahan, see’s the day with rooftop solar on every roof in WA. That day is certainly after he has divested his coal assets to a sucker who will have to write them off when he allows all these rooftop generators!

    Nahan’s lack of understanding of the future LGC market is extraordinary. He must be living in a world where LGC’s are readily available (ie the past!). In order to finance projects with a commercial bank (which reduces the cost of a project as their debt is cheaper than asset owners require) a long term PPA is needed, this is for BOTH the energy and the LGC. Nahan wants to buy just the LGC’s so someone else must buy the energy – but there is a limited demand on the east coast too due to oversupply which drives down the energy component value. This pushes up the LGC value needed to allow a project to proceed (as a project needs a fixed value to be economic).

    The alternative is projects proceed without a PPA in which case a project can raise less debt and are hence more costly (never mind the project still needs to sell the energy in an oversupplied market), leading to even higher LGC prices this time.

    Solution simple: close loss making fossil’s (no not the WA govt, the fossil fuel power stations in WA) and build renewables in WA where the wind and solar resources are great. It will be cheaper for WA electricity users and tax payers in the long run.
    Unfortunately it wont pay down the govt debt in the short term though – herein the policy decisions currently being made. Dopey.

  • Brian Innes

    Capacity credits are designed to ensure we have enough capacity at peak on what is a very small and peaky grid. It has worked well in promoting alternate and cheaper forms of peak demand management with DSM a major benefactor.

    The simple solution is to only pay capacity credits for DSM and new plant (eg less than 25 years old), there by encouraging the required investment for grid stability in peak and helping developers get access to the debt required for new plant.

    Old plant should have retired all its debt by then and if it can not compete in the market on its operating costs then it should well and truly be shut down.

  • Chris Fraser

    This piece is happy and sad at the same time. Whereas Mr Nahan has been granted a window of lucidity but his time in politics and the real world has revealed to him decades of bad planning. We can only wonder how the Institute of Public Affairs provides a space where arch-conservatives can but dream of days of yore.
    Firstly, it’s time to spin those awful generators off and stop throwing money down the hole. Secondly, the next investment decision should be based on how the alternative generators will perform economically in the mid and long term.

  • Claire

    Not all of WA says no! Here’s a chance to say yes http://www.pozible.com/freowindfarm

  • Zvyozdochka

    Nahan is an AGW denier, so he’s not particularly concerned.

    WA’s Energy 2030 paper can be thrown out the door, like many of it’s critics at the time said it would be.

    Sustainable Energy Now (SEN) and The Greens prepared an alternate/response paper here; http://www.greenswa.net.au/energy2029

  • JohnRD

    The provision of a reliable power system requires that enough properly maintained power sources are available to meet peak demand. One of the logical approaches to achieving this is to use competitive tendering to set up medium term (few years) contracts for the supply of available hours and actual power produced. Given that the amount of capacity required is limited and the WA total available is well above need this approach should accelerate the shut down of unneeded capacity as well as producing some very competitive power prices.
    My guess is that this approach will yield much lower prices than the Eastern states market system that pays extraordinary prices for peaking power.

  • WA not Eastern States

    Boy ‘o Boy, is this a cobbled together, gamed article. The problem with fly in/fly out commentators. As for Mike Nahan, the man has his views, and for now that’s about it. The gulf between what the Premier says, and Mr Nahan’s inner IPA, is widening – and it isn’t a bad idea to remember the guy has only had the Energy portfolio for 7 months. He may have been Parliamentary Secretary to it for a period prior that, but I would be surprised if he were really as up to speed on the electricity sector as he would like people to think.