Finkel’s fine line through Australia’s testy power politics

It now seems certain that chief scientist Dr Alan Finkel will deliver a range of options for government policy makers when presenting his review to the COAG ministers and leaders this Friday.

There will be mention of the emissions intensity scheme, but because a carbon price of any form is not on the menu of this Coalition government, other more “palatable” alternatives will be on offer, including a low emissions target, an option on pairing new renewables with storage or back-up and, possibly, a pathway for regulation.

All have their merits. But as in any policy, the devil will be in the detail and the way these schemes are designed – for the future or the past. And it is going to be interesting to see how Finkel presents his case. Will it be his view of what should be done? Or will it be focused on what can be managed in the current political environment?

Certainly, there is a growing chorus among politicians and the mainstream media that something should be done. But there is not a lot of thought into what these policies can actually achieve, even though they should obviously seek to meet climate targets and manage the energy transition efficiently and at lowest cost.

And already we are running into problems. Two significant reports from three leading institutions were delivered to the Australian government last Friday that show that wind and solar is the cheapest avenue to a decarbonised grid.

The problem was that none of the institutions could bring themselves to actually say it: that wind and solar are by far cheaper than coal and gas and any “other low-carbon technologies”.

The Australian Energy Markets Commission and the Climate Change Authority reinforced their support for an emissions intensity scheme (EIS), and only saw a low emissions target (LET) as a second-best measure. Once again, those recommendations simply reinforce preconceived ideas, and lousy modelling.

Both institutions came out strongly in support of an EIS last year, but as we pointed out at the time, here and here, these positions were based on hopelessly pessimistic modelling inputs on the cost of solar and wind.

The AEMC said, then, that an EIS would be $15 billion cheaper for consumers than other options, but this was based on ridiculous assumptions, on the cost of solar energy in particular, as we highlighted in this story: Australia’s energy rule-maker hasn’t a clue about renewable energy.

Even a minor adjustment to their absurdly high forecast of solar costs showed that a high renewable energy target would deliver $15 billion in cost savings to consumers. But that conclusion, included in their own report, wasn’t highlighted.

If realistic costs of renewables and gas had been used, then it is safe to assume that the results would have shown that a high renewables policy would deliver significantly more savings than a gas-focused policy.

The tragedy is that the AEMC and CCA have now released data that confirms that those modelling assumptions were completely out of whack, but they have done nothing about it.

The independent assessment from the Centre of International Economics confirms RenewEconomy‘s observations that their modelling for both the AEMC and the CCA report used renewable energy prices (way too high) and gas prices (way too low) that were well out of the ball park.

But you had to go to the very last page of the addendum to the addendum to find this out. This table, which has no other commentary attached to it, shows that wind and solar are far cheaper than gas or coal.

Even the gas and coal estimates are generous because they assume a 40-year life of the assets, when it is clear that the world will have to decarbonise the electricity sector well before 2050.

But could either the CCA or the AEMC be bothered to put the more accurate low wind and solar costs into the modelling to see if it still came up with an EIS, or even an LET as the most effective solution?

No, they could not. And you can imagine that the reason they didn’t is because the answer would have shown that a high RET – aiming for 90 per cent renewables by 2050 – would be the cheapest option. Instead, they stood by their support for an EIS.

This is not energy economics. It is energy ideology, and energy consumers deserve better.

As the AEMC and CCA reveal, they want to remove barriers to the use of gas because it is “important for transitioning to a lower emissions electricity sector in a cost effective way while maintaining system security.”

They have even failed to understand that renewables and storage already beats gas on costs. The AEMC insists that having more wind and solar puts energy reliability at risk.

The CSIRO fell into a similar trap on costings. Last year, it produced an excellent report that showed Australia could decarbonise the grid with mostly wind and solar and storage well before 2050 and save $100 billion from business-as-usual. It provided a clear path on how to get there.

But when asked by the federal government to model various scenarios, it came up with something completely different. It found that the Coalition’s preferred scenario, of putting a cap on wind and solar (in this case 45 per cent) and relying on gas for the rest, would be the cheapest option.

But this is only because this gas scenario assumed ambitious energy efficiency and energy productivity targets, which meant that the high wind and solar (90 per cent) scenario, paired with battery and other storage, assumed that 386TWh of electricity would need to be delivered, compared to 236TWh in the high gas scenario.

As we wrote on Friday in our story, little wonder the gas option proved cheaper.

When the CSIRO modelled an “all-in” option, with efficiency and productivity gains taken into consideration, it somehow managed to jam significant amounts of gas and carbon capture and storage into its modelling, so of course it came out as more expensive.

This is the challenge that Finkel faces. Australia’s energy institutions now know that wind and solar are the cheapest option, but can’t bring themselves to say it, so compromised are they by their ideological preferences and their desire to protect incumbents.

The low emissions target, along with AGL’s proposed “pairing” of new renewables with new or existing dispatchable generation, has merit.

But this is only the case if the policy is designed to manage the transition in the most cost-effective way – not to protect various incumbent interests, which has sadly been the motivation behind much of Australia’s climate and energy policy making in the past decade.

An effective low emissions target ensures any scheme accelerates the transition away from coal and does not lock in support for fossil fuel generators, particularly gas. Will it only be set for new generators, or designed to protect existing generators, as South Australia’s proposed energy security target appears designed to do?

The suggested “high emissions” target of 0.7tC02e/MWh does not bode well, if correct. Former prime minister John Howard reportedly discussed a low intensity cap of O.2t/MWh way back in 2007. The current Australian average of 0.81 t/MWh is 66 per cent above the global average, and 91 per cent above the US.

This is a theme taken up with gusto by new Australian Energy Market Operator boss Audrey Zibelman, who rightly argues that it is ridiculous to encourage new high-cost peaking plants when low-cost demand management and energy efficiency can do the same job.

That relies, however, on people thinking about different business models, and different ways to manage the electricity system; and different policies – something that the AEMC has shown itself to be completely incapable of doing, hence the AEMO’s push for more rule-making powers of its own.

Every lobby group has their own preference for the future. The networks are attached to the idea that most of the generation by 2050 will come from homes and businesses. That gives networks the primacy over generation companies, as long as they can figure out a way to keep most consumers on the grid.

AGL predicts that gas will be bypassed as a transition fuel in the shift from coal-fired power to large-scale renewables, but it somehow imagines that it can go on burning coal at Loy Yang until 2028. The gas industry, of course, wants its commodity to be centre stage.

Others, like BHP, simply can’t see beyond the past. CEO Andrew McKenzie told ABC TV’s 7.30 that the system still had to be based around “baseload” and peak load. Even Glencore, ignoring the pathway forged by zinc refiner Sun Metals, and the soaring energy costs for Mt Isa caused by its choice of gas over renewables, refuses to look at solar because of the ‘need’ for baseload.

The future is going to be based around what Michael Liebrich calls “base cost” renewables, with other dispatchable generation and storage filling in the gaps at the cheapest cost possible. The CSIRO and the ENA have given an indication of what that might look like.

This should be the standard set for Finkel, which will likely shape the energy debate in the near future. One suspects that he understands where the industry is heading, and that it is futile to stand in the road of the technological change. Better to embrace it.