The Australian Energy Market Commission is the nominally independent body that sets the rules for the country’s energy markets. You’d expect, given the importance of its role, that it would have some basic understanding about the costs of the technologies that it is dealing with.
In the case of wind and solar, it is becoming increasingly obvious that it has no idea. Over the last few days, the AEMC has released important and influential reports that simply take the breath away for the depth of its ignorance.
This is important. The AEMC, because it sets the rules, is pivotal in the industry and has enormous influence at state and federal government levels, and holds the principal levers over the course of energy rules and outcomes.
As we reported on Tuesday, its report on the costs of the Emissions Intensity Scheme – which hit the headlines across most papers on Friday and the weekend – painted a favourable outcome for the EIS over an extended renewable energy target.
But, as we pointed out, it was based on an heroically benign forecast of gas prices from Frontier Economics, and included estimates for large-scale solar costs, in particular, that were off the planet. Without these distortions, the renewable energy target came out as the cheapest. Even their own modelling shows that, although they chose not to highlight it.
Now the AEMC has done it again, this time in its annual review of consumer electricity prices – which again hit the newspaper headlines, and, just like previous years, sought to paint renewable energy in a poor light.
It’s a report that relies on some absurd costings for large-scale renewables – again using modelling from Frontier Economics, the consultancy headed by Danny Price, the architect of Direct Action, and who teamed up with the AEMC two years ago to argue for the reduction of the RET (they won).
The basis for the cost estimate of large-scale solar stands out as an example of their ignorance.
“Our assumed capital cost of $2,305/kW and average capacity factor of 22% results in an LCOE for large-scale solar PV of approximately $135/MWh in 2016, reducing to $95/MWh by 2040,” the Frontier report says.
We’re not sure how it is they they assumed a capital cost above the ARENA costings that they quoted from. Other solar projects are already well below the ARENA costings – Sun Brilliance, for instance, has costed its 100MW solar project at around $1,600/kW.
But let’s just let that one slide because it is not really that huge in the scheme of things. The biggie is on the “capacity factor” – the amount a solar plant can produce.
Frontier assumes a capacity factor of 22 per cent. This is ancient history. Current solar projects will get at least 26 per cent, and most of the ARENA projects – because they are using single axis tracking – will get capacity factors of more than 30 per cent and up to 32 per cent.
That is probably the principal reason why Frontier – and through it, the AEMC – thinks that the cost of large-scale solar is around 50 per cent more than it actually is, and in 2040 (in their projections) will still not fall to actual current levels.
“Actually, I’m embarrassed for them,” said the head of one solar developer, who asked not to be named. “We really have to stop this nonsense.” We agree.
The AEMC, using modelling from Frontier, makes errors on wind energy too, assuming that it costs $90/MWh, when the reality is that costs for the wind farms that will be developed are way below that.
The AEMC and Frontier, however, still assume that solar is nearly 50 per cent more expensive than wind – when anyone in the renewables industry will tell you that they are pretty close to parity, if not already there.
The AEMC and Frontier, with their heads stuck firmly in their modelling, say “it is unlikely that further solar PV will be constructed to meet the LRET.”
I imagine that the 200 people or so who turned up at a solar function in Sydney last week, and the countless developers, bankers, lawyers, solar suppliers and even utilities working on such projects, would see that as a statement of such breathtaking stupidity that it is hard to figure out how it is that the AEMC wishes to put its name to it, and put it forward to ministers as a serious piece of analysis.
It’s also a surprise to Sun Brilliance, which plans to build its 100MW solar plant in WA early next year. “It’s remarkably out of touch,” says Sun Brilliance director Ray Wills. “We know some projects today are already below their 2040 predicted price!”
“It’s important for the industry to look at the projects that are being contracted today,” adds Jack Curtis, from First Solar. “The unsubsidised solar projects in Australia are currently priced at around $80-$90/MWh. Assumptions that large-scale solar will only fall to $72-$80/MWh in 2040 don’t add up.”
Wills suggests that with solar modules in 2016 already below 40c/W and with a current learning rate for solar at 26.3%, it’s likely solar modules will be below 20c/W in 2020. That could put the price of output of a new solar plant in 2020 below $A40/MWh.
But it is also the tone of the AEMC report into electricity prices that is a problem. It seeks, on all occasions, to paint renewables in as bad a light as possible: they say it is the cause of the coal-fired stations retiring, it is the cause of retail prices going up, it is the cause of instability in the grid.
Indeed, its gas price assumptions are seen by some as hopelessly optimistic, because they ignore supply constraints on the LNG gas projects in Queensland already struggling to source gas supplies, and the impact of a tight global LNG market, high net-back prices and the increasing costs of domestic production.
The two reports reports produced by AEMC and Frontier are in such huge contrast to the review handed out in the same period by the CSIRO and the Energy Networks Australia and the separate one by the chief scientist Alan Finkel, that you actually wonder if they are talking about the same industry, or the same century.
The CSIRO and ENA and the Finkel reports came to a similar conclusion: The world is changing, the technologies to deal with the variable output of wind and solar are available now, storage is here and will help change everything, and renewable focused grids are going to be a much cheaper option than business as usual or focusing on coal and gas.
(Interestingly, Frontier also did some modelling for investment bank CLSA, which claimed that – in direct contrast to what the network operators say can be done – local grids can only absorb 35-40 per cent renewables. The networks – and you’d think they would know – disagree: they laid out scenarios for near 100 per cent wind and solar.
(It also claims, hilariously, and also in direct contrast to the conclusions of the CSIRO, the networks, the chief scientist and just about everyone else, that “distributed energy” – solar and battery storage – is an expensive option, and twice the price of the grid. Recent analysis from Bruce Mountain shows solar and storage is already cheaper in some areas).
The main theme of the CSIRO, ENA and Finkel reviews – apart from the extraordinary technology changes that are and will take place – is that it’s high time Australia got on with making the rule changes and policy changes that could allow this “unstoppable transition,” as Finkel described it, to happen as efficiently as possible.
But that hasn’t happened because the AEMC has been part of the problem. It has refused to approve, or has delayed critical rule changes that smarter and more informed people have been advocating for years. At nearly every turn, it has sided with the incumbents, and buried its conclusions in fossil fuel thinking.
Little surprise, then, that at the recent COAG energy minister meetings, the focus has been on how to give the AEMC a kick up the backside and get it to move faster.
Perhaps COAG should just give it a kick up the backside and out through the door, along with its modellers, and find people with a finer grip on reality, and with a focus on the future, not the past.
Update: An ARENA spokesman later emailed RenewEconomy agreeing that the AEMC/Frontier estimates on large scale solar were out of the ball park.
“The average levalised lost of energy (LCOE) for the 12 projects earmarked for funding through ARENA’s large-scale solar competitive round was $113/MWh in September 2016,” he said. “Panel prices have fallen by another 10% since September, which could result in further reductions in LCOE.
“The most competitive Australian large-scale solar projects being built in 2017 are expected to be priced at around $95/MWh (LCOE), which is a significant drop from previously built projects such as Nyngan, Broken Hill, Moree and Barcaldine.
“ARENA expects that pricing in Australia will follow global trajectories, which are forecast (by BNEF) to experience a further 35% drop in capital costs by 2025. Assuming a 35% reduction in capital costs of the best in class current projects, we predict large-scale solar costs of $65 – $70/MWh (LCOE) by 2025.”
That would be 30 per cent cheaper, and 15 years earlier, than AEMC/Frontier modelling.