Australia had a great electricity policy – let's get it back | RenewEconomy

Australia had a great electricity policy – let’s get it back

Australia has no federal policy other than what’s left of the RET. Zero, zip, nada. Perhaps Canberra could learn from the states?

Figure 2 Comparative share of renewable electricity. Source: NEM Review, EC.Europa, ERCOT, CPUC, ITKe

When the ALP lost government in 2013 Australia had a secure, but rising, cost of electricity. Network prices had risen substantially, causing bill shock mainly because the AEMC and COAG had failed to rein in the Australian Competition Tribunal; and because networks were – and are – entitled to earn a perpetual rate of return on sunk costs, even when those costs have been fully recovered and notwithstanding that capacity utilisation has fallen.

The carbon tax was adding around $30/MWh to electricity prices, but the increase in network costs and the community emphasis on energy efficiency driving lower consumption were the key factors. The wires and poles cost tripled between 2008 and 2013.

However, over the next five years it’s the generation cost that drives prices up from $274/MWh (before retail discounts) to maybe $324/MWh (and the federal government loses, say, $10 billion of tax revenue in the process).

Figure 1 Household electricity price stack. Source: Simshauser, Nelson & Doan, ITKe
Figure 1 Household electricity price stack. Source: Simshauser, Nelson & Doan, ITKe

More importantly Australia had a suite of policies that:

  1. Encouraged energy efficiency. Every large corporate had to explicitly report on its energy efficiency plans.
  2. A carbon tax. Although this was meant to transition to floating carbon price it was actually far more effective as a tax. The advantages were.
    1. It raised final prices encouraging efficiency.
    2. Simple to administer
    3. At $30/t raising more than A$10 bn a year. By contrast fuel excise which most people don’t really think about raises about $12 bn a year. For an average house in Australia that carbon tax added $180 per year to their costs. By contrast the fuel excise at $0.38 litre and assuming a motorist uses 9 litres/100 Km, and drives 15,000 km a year costs say $600 a person. In two car households the cost could easily be over $1000 a year. This to your author’s mind shows the difference between perception and reality.
    4. The known price enabled both generators and consumers to plan around the fixed cost. Space does not permit in this article but providing confidence around the cost of capital is the main way Govts can contribute to keeping electricity prices low.
    5. Most importantly it penalized high carbon emission raising the variable cost of brown to or above that of black coal and making gas cheaper, at the time, than coal

But what if the carbon tax forced old generation to close but no new generation was built? Wouldn’t that be a problem for energy security? So that’s where…

  1. Renewable energy incentives come in. That was done by the LRET. In addition, state governments decided to offer high feed-in tariffs for rooftop PV. This lead to a glut of RECs and so the LRET scheme was split in two, small and large. The surplus of large certificates has only recently been worked off. We’ve criticised the LRET policy several times as being a high cost and unreliable way to get new renewables into the system but it did at least a provide a carrot. Reverse auctions can do the same job in a cheaper and more targeted fashion.

The net impact of these policies was to raise final electricity prices to households by 10 per cent and to business by about 15 per cent. By and large the Australian system was regarded as one of the best in the world. Fig 1 shows that the explicit cost of the LRET and SREC scheme is small, even at today’s inflated REC prices.

The coalition eliminated the old policies, but didn’t replace them with anything new

Energy efficiency was completely de-emphasised.

The carbon tax was abolished. This worked in the short term to lower final prices but also made coal-fired electricity much more competitive against gas, and this partly explains why gas generators sold off their gas.

Because demand was low (consumption had fallen by a cumulative 9 per cent)  there were no peak price events and so gas peakers sat idle.

The Federal government also attempted to eliminate the RET, but in the end was able to do no more than reduce it. The main reason why the scheme wasn’t eliminated was because all the consultants said – surprise, surprise – that the new supply the scheme engendered helped to keep prices down. Technically there was a transfer of wealth from thermal owners to renewable owners.

Because renewable energy investment is all about confidence (specifically 40 per cent of total costs are the cost of capital) and the federal government had made it very clear it was anti-wind and anti-renewable energy, it took a long while for investment to get restarted.

Low prices worked as well as high prices at causing adjustments

Coal and gas fired generators weren’t making much money, so their owners responded by merging and closing the least profitable generators. By far the worst and most disgraceful example of this was in Queensland, where the state government merged three generating companies into two and sat by while those two companies rorted their competitive advantage in the state.

But we also had the closure of Wallerawang which was 5 per cent of the NSW market, and AGL buying Macgen. The cumulative impact was shown when Hazelwood closed. Holding an ACCC inquiry today when the government had chances to intervene in the AGL/Macgen takeover is a clear case of shutting the stable door after the horse has bolted. And, it needs to be said, typical of policy in this area.

Announcements as a substitute for policy

To this day there is no federal  policy other than what’s left of the RET. Zero, zip, nada.  There is no policy because the federal government is opposed to the policies being adopted all over the world, which a majority of Australians want and which the electricity industry wants.

This is leading to a breakdown of the cooperative federalism of the past  decade and is another impediment to reform of the management of NEM. In fact, there is no management, just a committee (COAG energy committee) and government organisations with no KPIs (the AEMC for instance). There are announcements “Snowy 2”; and now, an after-the-horse-has-bolted ACCC review of retail prices.

I mean this is genuinely humorous. Everyone in the industry knows why prices are going up. It’s not greedy retailers. I mean retailers are greedy, but it doesn’t do them any good. Most small retailers struggle. Origin Energy, AGL and EnergyAustralia have had a terrible return on funds employed until very recently.

Prices have gone up, firstly because of constant returns to monopoly regulators on an ever increasing regulated asset base, but lower volumes and secondly because federal government policy has eliminated confidence in new investment, leading to a shortage of supply relative to demand. There is also a cost to consumers from the RET scheme, but that’s double what it should be due to federal government killing off investment.

SNAFU but still a great future awaits

So what have we got?

  1. An ageing thermal fleet.
  2. A globally low share of wind and PV. Across the NEM wind and PV were 9 per cent of output in 2016 compared to 18 per cent in Europe, 14 per cent in California and 15 per cent in gas and oil rich Texas.
  3. Prices which are now high by global standards
  4. A thermal supply oligopoly
  5. No gas to run the existing gas generators let alone new ones
  6. An electricity system where security is dependent on fewer and fewer thermal generators.

Some might see this as a hopeless situation, but because of Australia’s fantastic wind and PV resource, and because the cost of wind and PV has fallen, its actually a great opportunity to build a 21st century grid that will be the envy of the world.

Wind in the USA produces electricity at  US $42/MWh = A$63/MWh unsubsidised (the consumer pays $20/MWh and the tax credit is worth about $22/MWh). Capacity factors in the USA are getting up to 45-50 per cent – by comparison, a typical combined cycle gas plant is at 50-60 per cent. Australia’s newest wind farm is at 43 per cent in its first three months.

Australia’s 5GW of distributed solar and the low energy density of networks (electricity consumed per Km of wires) makes this a fantastic country to build a decentralised grid using solar PV and household storage. But again, where is the federal government vision? Where is the policy? Where is the modelling? The lack of initiative and policy cannot be excused on any level, 3 year election cycle or no. Australians have a right to, and do expect more.

Despite our advantages we are well behind what the rest of the world is up to.

Figure 2 Comparative share of renewable electricity. Source: NEM Review, EC.Europa, ERCOT, CPUC, ITKe
Figure 2 Comparative share of renewable electricity. Source: NEM Review, EC.Europa, ERCOT, CPUC, ITKe

In the USA a very recent survey of 600 utility companies confirmed they they plan to continue their decade old shift to wind, and PV and distributed energy despite the election of Donald Trump. And why wouldn’t they? Its good economics and sound policy with a decade of experience behind it.

The federal government has criticised state policies but offers nothing in return

The Victorian and the Queensland governments have all gone through a process in putting together their policy. In Queensland, the government commissioned a report, lead by an ex-Macquarie Banker (“The Mugglestone Report”) that found there would be no impact on prices from a 50 per cent renewable target. That report might be right or wrong, but where is the federal government’s expert report that contradicts it? Guess what? There isn’t one.

In Victoria there has been a long process with workshops and industry consultation. Everyone has a say and the process is modelled on the demonstrably successful ACT process.

Contrast that with the Snowy 2.0 announcement (just announced out of the blue one morning, well in advance of the final Finkel Report), or the federal government’s attempts to get a new coal-fired station built in North Queensland. Make no mistake, it’s the coal industry that wants that power plant. CS Energy, one of the Queensland generators, Origin Energy, AGL and Energy Australia, the four largest generators in Australia have made it clear that the project can’t be justified without an explicit subsidy and is contrary to their policy direction.

How can this be the way to do policy development in Australia? Is it any wonder that people lose faith in government when it proceeds in such an obviously irrational fashion? Any large company listed on the ASX would be in deep trouble with its shareholders if it proceeded in the same way.

David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.

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  1. MaxG 4 years ago

    Like I said elsewhere, democracy is dead… non-existing debate is now replaced by propaganda; now provided by a firm (registered in AU)… Reading towards the end is quite interesting and revealing… they brought you BREXIT and Trump… and if AU lets them, will bring back the COALition and climate deniers…

    • Kevan Daly 4 years ago

      So democracy is dead because it produces results you don’t like. Shady political operators are converting sensible voters into “deplorables” and “climate sceptics”??

      • MaxG 4 years ago

        No… I understand short statements can be misleading… it makes only sense for those who read my words… so in this case it is about the four pillars of democracy; what is left of it, and in this context, how propaganda (in its truest sense) has taken over in the form of fake news, which is another word for lies.
        You will find reference to ABC’s Uhlmann and his outright misinformation, also the Murdoch an now Fairfax press about the the situation in SA and renewables…
        I have been long enough around to see how people are manipulated; and while you can argue any decision stemming from it, because the people made, has anything to do with democracy, well, then I flippantly say: you are not getting it. 🙂

  2. Kevan Daly 4 years ago

    David, you may have liked the Gillard govt’s energy policy but those pesky voters didn’t. They continued to support Abbott in the opinion polls until he had abolished the carbon tax and then deserted him. I think there’s a lesson there for any political party that seems a bit ambivalent about electricity prices.

    • JIm 4 years ago

      Abbott won because the ALP’s credibility was shot as a result of Rudd being replaced and the internal conflict that followed. Public support for a carbon price dipped because international agreement wasn’t reached, but the notion that there was a ‘referendum’ on a carbon tax is nonsense. Abbott repealed the tax early during a brief honeymoon period. That’s coincidental, rather than an indication of some cause and effect. The evidence is lacking that the election turned on the carbon tax. What is certain is that Abbott deposed Turnbull because he counted on and received internal support for hardline opposition to action on climate change. This reflected party faithful views that were (and are) not well aligned with the majority of the public’s view. With Rudd deposed, all the Coalition had to do was to show unity in order to win.

      • MaxG 4 years ago

        I agree, and which supports my stance that an uneducated public cannot make educated — and therefore the best decision — for it and the nation.

        • JIm 4 years ago

          Perhaps Tesla will make the class pay attention

  3. trackdaze 4 years ago

    it seems Abbott and turnbulls governments have inadvertently proved Ohms law

    the greater the resistance the faster the voltage drop.

  4. Mark Roest 4 years ago

    There is a lesson to be learned from Spain in the 30s here, which puts Abbott and Trump in perspective. That lesson also applies to violent suppression of unions until they were strong, and then systematic weakening of them to reach the point they are at today. The right wing is about feudalism, about Jim Crow, about debtors’ prisons, and generally about white male dominance, and the gradations of class that Charles Dickens wrote about, where people could feel ok as long as they could see someone else below them. Not a pretty picture; not what we hoped for as we came into this world.

    • neroden 4 years ago

      Yep. Neo-feudalism is what the right-wingers are trying to do. It is not acceptable and should be fought.

  5. Mark Roest 4 years ago

    Focusing on positive policy, here are a couple to consider:
    Community Choice Energy (legally Community Choice Aggregation) has become a surprise hit in California. Since the investor-owned utilities waged united political war on every effort to organize municipal utilties, resulting in very few being formed, and since the IOUs also dragged their feet every step of the way on decentralized generation from renewable energy, the Legislature crafted and passed a bill allowing local governments to form CCA authorities which take over the purchase of electricity for those who join them — and it’s opt-out, rather than opt-in. The IOUs continue to operate and maintain the lines, and provide billing services, with a separate sections for procurement costs and delivery costs. One flaw / loophole for IOUs in the bill is that they get an opaquely calculated payment for existing contracts for energy purchases, and they are gaming that furiously, with a legislator collaborating with them on bills to support them, to charge more than the retail price of electricity — in other words, to force the CCAs into bankruptcy or make them raise prices, rather than charging less than the IOUs for a higher percentage of renewable energy, which they have been doing. The IOUs, like the utilities and gas & coal generators in Australia, are committed to power and profits, not to the best interests of the public and nature.

  6. Mark Roest 4 years ago

    The second idea is to replace the old fossil-fuel-based, huge-factory vehicle manufacturing industry that Australia had, with new forms of manufacturing that can make a factory viable with only a small fraction of the volume required to support an engine plant, and a stamping press for steel body parts. You can, like Local Motors and Edison2, and the Rocky Mountain Institute, design ultra-light-weight, ultra-efficient cars and trucks tailored to specific market niches, or even your own personal preferences, and power them with electric motors that can last 400,000 to a million miles, and even, coming soon to a road near you, autonomous control, so you can share a car with others who have complementary schedules, or operate it like your own taxi fleet of one car or truck, maximizing the benefit of affording mobility, while minimizing the financial and environmental impact. You can make them with 3D printing, or press carbon panels into shape on a special machine that costs way less than a million dollars, and a few people can assemble a car in one to a few days.
    This means that there are extremely LOW barriers to entry, and when many people are doing it, creating a profusion of excellent designs on the road to choose from, they can coordinate politically to get the public to agree that it is in everyone’s interest to do away with the policies that support the dominance of the no-longer-existent (in Oz) large factories.
    All aspects of renewable energy and energy efficiency benefit from, and provide benefit to, a hyper-efficient battery-electric-powered transportation fleet which gets its go-power from them. They create a strong beginning for an equitable, nature-friendly, high-value, low-cost, climate-friendly, prosperous economy for all.

  7. james gibson 4 years ago

    Australia had the cheapest electricity prices in the world before ill thought out renewables mandates were implemented, starting with Howard’s RET, then to solar panel feed in subsidies, and now a greatly expended RET plus various state schemes.

  8. Paul Turnbull 4 years ago

    Great summary David. Your facts are clear, your anger professionally controlled. I got so cross that I put 6.5kw of solar panels on my roof!

  9. Ray Miller 4 years ago

    “Energy efficiency was completely de-emphasised.” Energy Efficiency is the key and long term game changer and ultimate weapon the end users have.

  10. Les Johnston 4 years ago

    I think this is a fair analysis of the policy position on energy in Australia. So many missed opportunities and so much ignorance and lack of political leadership. It serves as a great example of public policy and governance in a complex world. We need to ensure that the facts of the last 20 years are not hidden by those with vested interests to coverup incompetence.

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