Australian fossil fuel subsidies undermine case for wind, solar

Tasmanians living on the Bass Strait islands of King Island and Flinders Island got good news last week – the cost of their electricity will fall in the coming year.

bass straitAccording to the state-owned electricity provider Hydro Tasmania, the bills will fall because of an increase in the diesel fuel rebate – a result of the carbon tax repeal put through by the Federal government.

That means that the islanders will be paying a new tariff of 26.15c/kWh. That is lower than what many households in the big cities in the mainland pay.

While that is happy news for the 1190 customers on King Island and 670 customers on Flinders Island, it highlights the massive distortions of fossil fuel subsidies – and how they are crowding out cheaper alternatives such as renewable energy.

According to Hydro Tasmania, the 26.15c/kWh represents less than one-third of the actual cost of providing mostly diesel-fueled electricity to the islanders.

currie dieselIn 2013/14, the state treasury provided a subsidy of $9.2 million to under a Community Service Obligation that requires it to subsidise the energy rate for Bass Strait island customers; and provide a safeguard from rising diesel fuel costs.

According to Hydro Tasmania, the total cost of providing electricity to the islanders is $13.2 million a year. Just $4 million comes from tariffs charged to the consumers.

As a result of the CSO, customers on the Bass Strait islands are effectively insulated from rising diesel costs. Indeed the Bass Strait Island energy tariff is now near parity with mainland Tasmanian prices (for near 100 per cent renewable electricity), but its daily charges are lower.

The International Energy Agency has railed against the provision of subsidies to fossil fuels, describing it as a massive distortion to the market. It estimates that more $550 billion are paid out in subsidies to lower the cost of fossil fuels across the world.

Australia has argued it does not have such subsidies. But, of course it does. The WA government recently admitted that it subsidises the cost of electricity to its consumers to the tune of $600 million a year. It fears that subsidy will rise as the cost of coal and gas-fired generation rises in coming years, and it no longer has the resources to support the subsidy.

Extraordinarily, a report it commissioned to examine the issue recommended importing coal from Indonesia. There was no consideration of renewable energy options, which would find it easier to compete if the fossil fuel subsidies were removed.

The Queensland government faces a similar bill of more than $600 million a year delivering its CSO to regional consumers connected through the Ergon network.

The Queensland government has railed against the more than $2 billion to be paid in “premium” solar feed in tariffs out to 2028. That figure was probably inflated, but over the same period, the subsidy for the deliver of fossil fuel electricity to remote consumers will reach $8 billion if nothing changes. That amounts to an average of nearly $900 a year per regional household, although that it worsened by the extreme cost of delivering electricity to very remote communities.

Without those subsidies, renewable energy options such as distributed generation and battery storage would be able to compete more readily.

king islandIronically, Hydro Tasmania is built a renewable and storage facility to King Island which it is refining and which it hopes will significantly reduce the amount and cost of diesel used. The first of its kind project is providing some amazing ground breaking work, and some times allowing diesel to be switched off altogether. The irony is that the scheme requires a subsidy – or at least a grant – so that it can compete with the subsidized cost of fossil fuels. The end result, everything costs more.

Solar developers in WA, which has some of the best solar resources in the world, say solar farms could easily compete with fossil fuels if the subsidy was removed. As it is, the cost to consumers is inevitably going to rise – to the extent that the WA grid operator thinks that 90 per cent of businesses could have rooftop solar within a decade, to try and defray costs.

The Warburton review recently made a big deal about the supposed $22 billion “cross subsidy” inherent in the renewable energy target, if it is left unchanged. But as The Climate Institute recently pointed out, this ignores comparative fossil fuel subsidies and the value of that investment in cleaning up our economy.

Based on International Monetary Fund analysis, subsidies to the coal, oil and gas industry in Australia, including their broader negative health and climate change effects, amounted to around $23 billion in 2011 alone.

The Climate Institute’s Erwin Jackson said that even taking the Warburton Review’s estimates at face value would see the renewable energy industry being subsidised over 15 years to the tune of what the coal, oil and gas industry get in one year.

And, Jackson notes, the Warburton Review avoids Australia’s energy decarbonisation challenge.

Based on independent modelling by Jacobs, the current RET would reduce the overall emission intensity of the electricity to 2030 by around 10 per cent,” the TCI says.

“The Warburton Review acknowledges that stopping the RET will increase emissions by almost 300 mega tonnes of carbon to 2030, effectively recarbonising our energy system.

“Yet ClimateWorks, ANU and CSIRO estimate that in order for Australia to meet credible pollution targets consistent with internationally agreed goals of avoiding dangerous climate warming of 2C, the emission intensity of electricity sector needs to be reduced by over 95 per cent by 2050.

“The head of the OECD and others have acknowledged the need for a decarbonised global economy to achieve this goal. No assessment was undertaken to examine the long-term costs and benefits of the RET in this context.”

And, of course, Warburton’s own modeling that changes to the RET benefits big polluters, not consumers, with big polluters getting a windfall of over $9 billion, while consumers will not enjoy a fall in bills.

 

Comments

11 responses to “Australian fossil fuel subsidies undermine case for wind, solar”

  1. Paul McArdle Avatar

    Thanks Giles

    Several instances of “socialised costs” included in your article, following on from this post here:

    http://www.wattclarity.com.au/2014/08/privatising-profits-whilst-socialising-costs-part-1/

    Paul

  2. Colin Nicholson Avatar
    Colin Nicholson

    This would seem ideal for a reverse auction for a thirty year supply

  3. John P Avatar
    John P

    This analysis suggests that the politicians who run these Liberal governments can’t do simple arithmetic.
    Either that, or something else is going on.

    1. Chris Marshalk Avatar
      Chris Marshalk

      You mean Joe Hockey’s budget is a perfect example.

      1. John P Avatar
        John P

        Not exacty. Hockey’s budget is not so much about arithmetic.
        It’s more about the ‘haves’ preying on the ‘have nots’ in the best traditions of the current parasitic version of capitalism.

  4. oliviasmith82 Avatar
    oliviasmith82

    Finally this angle is being looked into. Thanks Giles. For anyone engaged in either side of the current energy debate, this article is the most important piece to emerge so far in my opinion. More awareness must be brought to the fact the RET was analysed against criteria that bare no relationship to its original purpose.

  5. Graeme Harris Avatar

    You have missed the biggest subsidy of all to all miners. The depreciation for miners was changed as compensation for the mining tax. The mining tax has gone, the depreciation allowances stand, this is not cross subsidy it is a straight out subsidy.

    1. michael Avatar
      michael

      ?? mining tax and relevance to power generation…. however, depreciation is fairly common to assets purchased or constructed by all businesses no?

      1. Graeme Harris Avatar

        Mining companies including coal miners were given very generous depreciation regimens to compensate for the mining tax.
        Look at ASX miners last few years posting losses but large operating profits.

  6. michael Avatar
    michael

    $0.75/kWh to provide diesel power?? they are going about it the wrong way! I’ve never seen Diesel power quoted at $750/MWh, where does that cost come from?

  7. michael Avatar
    michael

    From a fact sheet on the Currie Power station for King Island;

    “The wind and solar renewable power generation is used on the island backed by diesel generators providing firm capacity and ancillary services. The target with this system is to use all the available solar and wind power to reduce diesel usage.
    The wind and solar renewable power generation is used on the island backed by diesel generators providing firm capacity and ancillary services. The target with this system is to use all the available solar and wind power to reduce diesel usage.”

    35% of the load is supplied by wind, so probably should imply within the article it is only a subsidy to diesel, when in fact it is subsidising the entire energy mix.

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