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Gas gamble could cost 40% more than renewables in low-carbon shift

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Relying on gas-fired electricity generation “as a serious option” for reducing greenhouse emissions and cleaning up Australia’s power sector could cost up to 40 per cent more than a shift to renewables, and leave Australian households $500 a year worse off, a new report has found.

The UNSW report found that rising and uncertain gas prices were likely to create a market where investment in renewable energy generation would become the cheaper and lower risk option for Australia.

In modelling from the Centre for Energy and Environmental Markets (CEEM), researchers compared the risks and uncertainties in using gas-fired electricity or renewable technologies as part of a low-carbon transition.

The results found that, electricity costs would be lower and more certain with a diverse portfolio of renewables – including wind, solar photovoltaics, hydro, and others – while electricity portfolios with heavy reliance on baseload gas-fired generation could result in 40 per cent higher wholesale electricity costs.LNG-Natural-Gas-Exports-201206142

Lead researcher, Dr Jenny Riesz, said that the modelling had specifically incorporated uncertainty and risk – a factor she said was neglected in most studies – and that this had significantly affected the study’s results.

“No one really knows what international gas prices are going to do in the future, or how precisely our domestic prices will be linked. This means that relying on gas is a big gamble,” Riesz said – a gamble that the study found could cost a typical Australian family of four almost $500 more a year.

“By contrast,” she added, “renewables are a sure bet.”

Gas-fired electricity was also found to be much higher risk than renewable generation, being exposed to large uncertainty in future gas and carbon prices – unknown elements that could increase the cost risk by a factor of more than three.

Australia’s looming role as a major gas exporter adds a further dimension to price uncertainty.

“Domestic gas prices will be linked to international gas prices,” Riesz said.

Dr Riesz used the study’s results to urge decision makers to consider such an outcome in their deliberations on the current RET review.

“Gas electricity can provide useful backup supply, but we’re probably looking at higher costs if we use it for baseload energy,” Riesz said. “Renewables can provide bulk power more cheaply and at lower risk”.

But the report notes that the government would need to consider “other types of market intervention” to promote investment in renewable generation.

“Ongoing growth in renewable generation could be achieved via an expansion and strengthening of the existing Renewable Energy Target scheme, or via a suitably high carbon price,” the report recommends.

“Government intervention of this nature is likely to be required to achieve the levels of renewable energy indicated to be optimal in this analysis.

“If the Australian Government does not implement mechanisms to support the managed growth of renewable generation in Australia, this modelling suggests that consumers could be exposed to extended periods of higher than necessary electricity prices while the industry ‘catches up’ to the high gas and carbon prices that have eventuated. Gas-fired generators are likely to be able to pass these high costs through to consumers for an extended period.”

Screen Shot 2014-08-12 at 1.23.47 PMThe modelling also indicates that it is worth rethinking existing electricity infrastructure.

“We have a huge fleet of coal-fired generators in Australia. Analysis in the United States suggests that some coal-fired generators can be very flexible and shift to operating as peaking generators,” Riesz said.

“If we can use our existing coal-fired generators in a peaking role to back up renewables, we can reduce our greenhouse emissions at low cost, and low risk, without having to invest in gas-fired electricity. We need to better understand what those coal-fired generators are capable of.”

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