Modelling wars: Moulding data to kill renewables

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The debate over the future of Australia’s renewable energy target should properly be fought out in the public arena, among politicians, and in the mainstream media.

Both seem disinterested, so the real fight is happening behind close doors, in the in-camera sessions of the RET Review panel and within the confines of Tony Abbott’s inner advisory group. The weapons of choice (apart from ideology) are economic models.

Welcome to the modelling wars. On one side there is a range of consultants such as ROAM, SKM, IES, Bloomberg New Energy Finance and Schneider, who say that the RET is a good thing and delivers benefits. Scrapping it, they say, and they illustrate this point through their models, will actually push customer bills higher, and achieve little but the ongoing protection of the incumbent industries.

Then there are those – whose reports are used by those incumbent fossil fuel generators – who argue the opposite, and who seek to say that it is the consumer, not them, that will be the biggest victim of this policy.

There is ACIL Allen, whose modelling has been used by EnergyAustralia to argue for a big reduction in the RET, and BAE Economics, whose modelling has been used by the oil and gas lobby to bring the RET to an end. Disconcertingly for the renewable energy industry, ACIL Allen has been hired by the RET Review panel, led by climate skeptic Dick Warburton to do its modelling, while BAE Economics is the firm owned by RET Review panel member Brian Fisher.

Enter, stage right, Frontier Economics, hired by the Australian Energy Market Commission, which sets the rules for the operation of the Australian electricity market, to conduct modelling for its submission into the RET.

Innocent bystanders might believe that the AEMC would be a neutral party in this, but is has been criticised for adopting an aggressively anti-renewable decision. It wants the RET diluted, and its views are likely to weigh heavily on the deliberations of the panel. On Thursday it released the modelling by Frontier Economics that formed the basis of its conclusions.

AEMC should be applauded for releasing the modelling. But it’s an extraordinary document, one that would appear to try to vilify renewables at every opportunity, and push the case for incumbents. Here’s why.

The first is its description on the capital cost of renewables. They use the following table.


Frontier’s modelling assumes the cost of wind energy is significantly more than it actually is. It bases its calculations on a capital cost of $2,658/kW – and then its says (see graph below) that it won’t fall much over the next 20 years. Most other analysis puts it at least 20 per cent below this. The about-t0-be-completed   270MW Snowtown 2 wind farm – built at a cost of $440 million – suggests a capital cost of $1,622/kW.

The modelling also assumes that the cost of solar PV is double the cost of what the solar industry says it is. It assumes that solar PV has a capital cost of $4,000kW, when in fact it is close to $2,000/kW. Even the AGL project at Nyngan and Broken Hill – considered expensive by most (though it is the first project of its scale in Australia) is sub $3,000/kW.

Frontier also assumes no solar cost reductions of any great significance over the next 20 years. So, while solar manufacturers are saying they are cutting module costs by 20 per cent annually, Frontier assumes that costs will not fall more than 35 per cent out to 2035. Bloomberg New Energy Finance, for instance, suggests capital cost of solar at $1,500/kW.

frontier future costs

Because of this, Frontier assumes that only wind energy will be built to meet the RET out to 2020, when other analysis suggests that solar will account for more than half of the installation in the latter years. In WA, it is expected that 2,000MW of solar would be installed to meet the current RET.

Having set a high bar for the cost of renewables, the Frontier modelling also appears to take a benevolent view of the price of fossil fuels – gas in particular. It predicts delivered gas prices  of $5-6/GJ and rising to $8-11/GJ in real 2013/14 dollar terms by 2030.

Analysts say these estimates on gas are at the low end, with most saying there is a big risk of a pricing breakout. Already, the surge in gas prices has been enough to sideline many gas fired generators, and cause write downs on others.

It also assumes that there will be no carbon price for the next 20 years. (This, presumably, assumes a Menzies-like career for Tony Abbott, but it also has the  outcome of raising the cost of the RET).

And then – in an assumption that further raises the costs of the RET, Frontier suggests that even a reduced target cannot be met, and that electricity retailers will choose not to build renewables and will instead pass on a “penalty price” to their consumers.

There are two problems here: One is the assumption that retailers can get away with the idea of charging consumers for something that they choose not to build. This is an arrogance that is shared by many big retailers, who treat their consumers as “ratepayers” rather than customers and assume they are an apathetic lot – this for an industry where one in four customers change supplier each year, and nearly one in four have rooftop solar, and who will, according to UBS and others, find it cheaper to add storage and disconnect (and tell their retailers to go stick it in someone else’s socket) as early as 2018.

The second is Frontier’s assumptions that even a reduced target cannot be met. Global energy suppliers like GE and Vestas, and most developers, say that the current target of 41,000GWh can be met. Frontier assumes that even a reduced target of just 23,000GWh (recommended by Origin Energy and others) cannot be met – and will result in a penalty price. Truly, it beggars belief.

Even after all this, what is the damage to the consumer? Well, it’s absolutely shocking! Frontier Economics, says it could be $25-$75 a year, or between 50c or $1.50 a week.

But wait! That is just the “resource cost”. It hasn’t yet factored in the benefits of the RET – which apart from environmental, emploment and investment – is the ability of renewable energy sources to reduce wholesale prices (because they have a marginal cost of generatio of basically zero).

This is called the “merit order” effect, and incumbents hate it because it means their revenues and profits are reduced.

As Frontier says: “This ‘merit order effect’ on retail electricity prices will offset the direct RET compliance effect to some extent and may overwhelm it.

In other words, the impact of renewables is to offset the cost of the incentives to build them in the first place. It may in fact reduce costs to consumers. This, it should be noted, is the conclusions of other modellers such as ROAM, SKM, Schneider and, of course, the Climte Change Authority.

But it is not what Frontier or AEMC chooses to highlight.

Frontier tries to demonise the merit order effect as a transfer of wealth from coal fired generators to consumers (actually many of these generators are retailers as well who hedge against such movements, but it is true to say that this is the nub of the RET issue – it is not about consumer prices, it is about protecting incumbent generators)

Then Frontier goes on to say that this merit order effect reflects increased supply of capacity and is not unique to renewables: a subsidy to new gas/coal capacity would have similar effects and would involve far less resource costs. Really? So why would you give further subsidies to coal? And how much of a subsidy would you need to give to gas so that its marginal cost of fuel is cheap enough to displace coal? It doesn’t say.

And as one observor noted –  The merit order effect is the entry of low, or lowest, bidding generation pushing higher priced generation out of the market.  This cannot be achieved by expensive gas fired generation with high fuel costs; surely Frontier knows this.

Then it comes to the crunch, highlighting the fact that most generators in the market now are playing a game of chicken – none of them want to be the first to leave the market, because that would mean profits would be restored to others. So everyone stays in the market and no one makes any money. It is a tale of mutual destruction.

And here is an interesting graph that was in the AEMC’s decision but does not appear to be in the Frontier Economics modelling report.

aemc ret

It shows the impact of slashing the RET in various scenarios. Apart from bringing it to an immediate halt, the scenarios of cutting the 41,000GWh target to 30,000GWh or 23,000GWH deliver savings of less than $10 a year to consumers.

That should be an interesting sell for the government: “We are completely stuffing up a $20 billion renewable energy industry, and protecting billions of dollars of revenue to coal and gas fired generators, just so we can save households 80c a month.”

Good grief.


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  • Hugh

    The Frontier costs are quoted in real 2014 dollars; BNEF’s are nominal. Frontier looks to be predicting solar costs of around $4.75/W in 2030, more than twice the current cost of utility-scale PV. BNEF predicts costs will fall to around $1.5/W by 2030, in nominal terms.

    • Matthew Wright

      They’re all to high. Solar is going in today at $1.60 a watt unsubsidised. You can have a system installed at this price point in 30-60days from ordering.

      • RobS

        Fairly sure you’ll find $1.60 is post RET/REC rebate, current pre rebate prices are running ~$2.10-2.30. Still less than half today then what these ridiculous models are showing in 2030. The models are likely to be off by a factor of ten, I expect PV prices in 2030 to be closer to $0.40/watt than $4.00/watt.

        • Matthew Wright

          True value, the biggest installer in the country at almost 100,000 installs charges $5000 for 5kW (after subsidy). Livesolar and others will beat their price by 5%.

          And solargain with a pretty good reputation will match written quotes from those guys.



          • RobS

            Would be interested to see the details on that deal, usually true values “5kw packages” are a 5kw inverter with 3-3.5kw of panels which can be “upgraded” later. Solarchoice conduct the largest monthly PV system price survey I know of and in their June 2014 survey the average price for 5kw systems Australia wide post rebate was $1.69/watt and they reported the lowest price in their survey set was $1.13/watt. The cheapest deal overall was $1.06/watt for a 10kw system with the average for 10kw systems currently $1.54/watt.
            Those numbers are substantially lower than 12 months ago when 5kw averaged $2.04 and 10kw averaged $1.82/watt.

          • Matthew Wright

            I’ve had that quoted before and have gone with it. Usually there price for stock standard flat rack is $5000- ~$5750 in the Victorian Market (out of pocket – ie after subsidy). Solargain says they will price match so my inclination these days is to get the Truevalue quote and get a solargain price match.

          • RobS

            Yes but the question is is it really 5kw of solar panels which are the major cost of the system or is it a “5Kw upgradeable system” which actually means a 3-3.5Kw system with an oversized inverter?

          • Matthew Wright

            It’s 5kW of panels which is the major component of the subsidy. If the subsidy is worth 60cents per watt based on the panels it is in their interest to supply 5000watts of panels in fact if they were smart they’d suppply 6500watts of panels and therefore the inverter cost would be static and other fixed costs would be static but they’d get more subsidy for the job making it appear cheaper to the customer per unit.

          • RobS

            As I say, I and the very large solar choice survey have never seen a documented 5kw PV system available for $1/watt after subsidy. I have seen many TVS systems that appear to be at that price point by the method I described. I think you need to rethink your maths. The logic you use only holds true if the subsidy is worth more per watt then their wholesale cost of panels, if the subsidy is $0.60 and the panels cost them $0.80/watt then more panels adds to the cost for the customer.

            If you have any evidence of this price point for a true 5kw system fully installed I would like to see it as I believe it would be an Australian and possibly a world record.

          • Matthew Wright

            The likes of Truevalue solar are not paying $0.80 for their panels. That’s the cost of a more premium panel like REC. They’re paying around $0.60 per watt

          • RobS

            All speculation and hearsay, as I said such a price would be an Australian and possibly a world first so please present your evidence it exists or I respectfully call you misinformed.

  • patrickg

    Thanks for reporting on this Giles, it’s a shame not a single other media outlet in the country – including the ABC – lacks the will, knowledge or capacity to understand, in order to report on this. Changes to the RET will have a huge impact on literally millions of Australians, and will shape Australia for decades to come. But not a whisper.

    I can’t help feeling this is also because of how debased and poor the notion of modelling – essentially latter-day push-polling – has become. The idea of anyone actually attempting to produce real data is the remarkable thing, not cooking the books.

  • Miles Harding

    On the positive side, it’s only the court of Sir Pository playing this game, so there will be plenty of opportunity to compare our crop of fools to the rest of the world.

    Piles of stinking BS are only possible to cover up for a limited amount of time.

  • Terry J Wall

    Thanks Giles. I guess we all know that it is just about fat cats getting fatter . So they made a few bucks out of shafting fellow citizens and the planet, For this skill they think that they must be smart because they have so much money. They can buy any remedy to fix any problem that life throws at them. It is like watching Rome self destruct.

    You would think that they have the skill to learn about the proven record of civilizations that take on this delusion. But oh no, they are totally seduced by greed. One is reminded of the old saying that ” power corrupts and total power corrupts totally”.

    We are fkd unless we as optional users of the products that fund these idiots, JUST STOP BUYING their goods and that includes the TPP.

  • Les Johnston

    From the report, there is no indication that the externality of coal fired generation, ie air emissions, has been considered in the analysis. If the public demands that air quality is important for the health of local residents, emission controls on power generation plant including coal handling activities, will cause the cost assumptions to fall apart. The implicit assumption that emission criteria will not be reduced must be challenged as being unrealistic, for example, like that in USA,
    Selling of the poles and wires provides the opportunity for the new owner to impose a charge on access by generators. The maintenance of poles and wires near large generation plant provides a rationale for imposing a new charge. Generator charges for access to the poles and wires throw the model assumptions up in the air.
    Watch what happens in reality!

  • Peter Campbell

    “…Both seem disinterested…” Argh. That pushes one of my pedantry buttons. From context I am sure you mean that both seem uninterested. At least one of them very much has a stake in the matter and so is not disinterested.

  • Motorshack

    Back in the days when I was regularly doing software consulting, I would occasionally have a client who thought like this. They would not, or could not, wrap their heads around some new bit of technology that promised to make their business more profitable. Instead they clung to what they knew (or what their brother-in-law was selling them), even though what they preferred was becoming uncompetitive.

    My point is that lots of people have sincerely tried to show the conventional power industry that there was a better way available, but they insist on doing things that will surely wreck their companies. So, with a clear conscience, I would let them do that.

    There will, of course, be some short-term costs for the customers, and it will delay for a bit the day when the country gets completely serious about climate change, but over the longer term it is primarily the stockholders of these companies that will suffer, not the clients, because the clients will still be relatively free to make a switch to cheaper, cleaner energy sources anyway.

    After all, the real question here is not whether or not the power companies will survive in their present form. They clearly will not. The question is rather how badly they will crash when reality finally catches up with them once and for all.

    So, since they blatantly refuse good advice, sincerely offered, I would leave the managers of these companies to explain it to their stockholders entirely on their own.

  • Andrew Stock

    Great analysis Giles! It is a travesty that groups such as AMEC and Frontier Economics can use cost bases that are so far skewed relative to real world costs. Unfortunately, based on costs they have used in other recent studies, I suspect ACIL Allen will be also well wide of the mark in the work they are doing for the RET review. For other good summaries of costs the Climate Council report on Electricity this week provides a good summary.

  • Sqawkin

    Unfortunately it might not be so hard a sell for the government as many of the public are unenlightened. This week I have had an online comments battle in my local paper, the Ballarat Courier where people tell me renewables don’t work, they’re putting up the price of electricity, killing jobs etc. No amount of explanation, providing links to factual articles etc seemed to have effect.

    • wideEyedPupil

      I’ve been to Hepburn Shire meetings where the one-world-government brigade turn up to ask their questions about the two modest scale wind turbines at Sailor’s Hill (Hepburn Wind community power). There’s always a few and if you argue it out with them it’s not hard for half-rational observers to sort out who is fruit and nuts and who is talking sense.

  • Chris Fraser

    None of the portending ‘polarisation’ of energy consumption by clean or dirty source would matter if households chose to use clean energy. Hopefully no legislation could force the use dirty energy if we get specialised retailers who invest only in clean. Possibly a worse threat is the idea that when FiTs run dry we can’t share micro generated energy on the local grid for customers that prefer it, we’d have to store all of it.

  • CoreyAnder

    Now that there are approximately 1.3 million small generators (pv owners) competing with the big power companies and skin in the game we have an opportunity to have a rational electricity system evolve despite the efforts of Abbott and his clique of profiteers and climate change deniers.

    The 1.3 million and THEIR supporters should be able to overwhelm their opposition if they can find their voice.

    The main problem to deal with is putting together an easy to understand argument that explains the basics of the system and a vision for a new system that acknowledges the costs and benefits of each current system component and entity and the alternatives and also that satisfies the electricity needs of the nation. Issues including the costs and externalities of subsidising, mining and burning fossil fuels, the savings available from energy efficiency measures, the benefits of smart technologies, the inequitable individual access to sun and wind, the meaning of energy poverty and the risks to the network associated with cheap storage also need to be explained.

    It seems to me that the nation would be best served by having grids and a suite of supply systems that are controlled and operated ethically, equitably, efficiently and democratically.

    We cannot afford the old, centralised, polluting models of the past where ordinary people were happy to remain ignorant about how the system was financed, managed and operated so long as they could turn on the lights and the air con and complain loudly when their bill came or the lights went out.

    Now is the time for the 1.3 mill to be able to get their around a new clean, safe, democratic paradigm.

    It is up to those of us who want to fight against the moral and ethical poverty of Abbott and co to articulate this paradigm in form that anyone can grasp.

    Anyone up for it?

  • Matt S

    The terms of reference are too narrow. It’s interesting the only policy option which was focused on Renewables was the LRET which in isolation is resulting from much higher contract prices than through the ACT CFD model for instance. Not only is pricing ridiculous, but the policy suite itself is far too restrictive. This failure to imagine is symptomatic of the problems in reforming the market, and illustrative of the need to overhaul the AEMC.