Modelling from government advisor shows high RET may be cheapest option | RenewEconomy

Modelling from government advisor shows high RET may be cheapest option

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Modelling from government’s preferred advisor actually shows that a high renewables target could deliver lower costs to consumers than an EIS. That’s not what the public was told last week, but predictions that an EIS is cheaper were based on some ridiculous price assumptions.

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Renewables could benefit from more energy storage capacity in the electricity network. reupa/flickr, CC BY-NC
reupa/flickr, CC BY-NC

Modelling from the Coalition government’s preferred advisor on energy market economics reveals that a high renewable energy target offers the cheapest avenue for consumers to reach the country’s modest emissions reduction targets for 2030.

Now, that is not a headline you would have read late last week or over the weekend – which wanted you to believe that and emissions reduction scheme would save consumers up to $15 billion. 

But that estimate was based on some extraordinary assumptions about solar and gas prices, and according to the modelling commissioned by the Australian Energy Markets Commission would seek to lock in Australia to 80 per cent fossil fuel generation by 2030, with the share of renewables actually falling between 2020 and 2030.

aemc scenarios

The assumptions from Frontier Economics, a long-time critic of the RET, is based on a cost of large-scale solar plants that assumes them to be barely different in 2040 to what the industry says are attainable now.

It is also based on a benign view of gas prices. If a high gas price – predicted by most people in the sector – is dialled into the modelling, it shows that a high renewable energy target delivers bigger savings to consumers than the emissions intensity scheme.

This is not the first time that Frontier, headed by Danny Price, the man considered to be one of the key architects of Direct Action and its intended transition into a baseline and credit scheme, and the AEMC have joined forces.

As we wrote in 2014, in our story Modelling wars: Moulding data to kill renewables their modelling, then, assumed prices for wind and solar which were up to double prevailing prices, and assumed there would be little reduction over the following 20 years. The AEMC used that modelling to argue that the RET should be significantly reduced.

The latest modelling rakes over familiar territory. It is based on the assumption that large-scale solar will fall to around $80/MWh in 2040. Even in its low-cost scenario, it predicts 2040 costs of $72/MWh. Many in the industry say that those estimate are not far off what can be achieved now.

First Solar last week said unsubsidised solar projects in Australia were currently priced at around $80-$90/MWh.

Not only does the Frontier prediction use a high starting point, it assumes a cost reduction of just 1 per cent a year. Considering that large-scale solar costs have fallen around 40 per cent in the last year alone – mostly thanks to ARENA’s large-scale solar program, falling module prices and improving efficiencies – the assumption that prices will barely move in the next 25 years is absurd.

Not quite as ridiculous, though, as the assumption that under most of its scenarios, very little large-scale solar is built over the next 15 years. Even in the “high RET” scenario, it assumes virtually no added large-scale solar plants until the mid 2020s.

The modellers should get out more. It’s hard to find anyone in the industry that disagrees with the idea that more than half of all renewable energy generation built over the next few years and beyond will be large-scale solar.

aemo transmission report

The assumptions delivered to the government in this latest document by the AEMC also take a very benign view of future gas prices. Again, this is based more on hope than reality.

Even the Australian Energy Market Operator recently warned that renewables would likely strand gas assets because of the falling cost of wind and solar and the likely rising cost of gas. Its more realistic scenarios suggest 37 per cent renewables by 2030 (graph above)

In its high gas price scenario, favoured by most observers, the declaration by AEMC and Frontier that an EIS is by far the cheapest scheme to consumers is blown out of the water. This is the graph from the report that consumers and policy makers should be looking at.

frontier high gs revenue

It shows that wholesale prices over the next 10 years will be considerably lower under a high RET, and even the cost of the renewable energy subsidy does not take that revenue cost above the EIT. Frontier and the AEMC suggest, as they did in 2014, that this lower revenue is a “transfer of wealth” from the generators to the consumer.

Well, that would be a welcome change from the transfer of wealth that has been occurring in the opposite direction for the last decade or so. As the CSIRO modelling suggested, and the Finkel report flagged, consumers will be investing heavily in their own generation and storage so they don’t get ripped off by the utilities.

But the report from Frontier Economics appears to completely ignore the rooftop solar and battery storage market, and the impact that would have on the assumptions.

Given that the CSIRO and the networks lobby agree that the amount of rooftop solar will likely rise five-fold in the next decade, it seems implausible that the share of renewable energy will actually fall, as Frontier and the sponsors of its report, the AEMC, would wish us to believe.

Indeed, it would be fascinating to see what the results of the modelling would be if Frontier dialled in high gas prices, lower utility-scale solar costs, and low demand (recognising the growth of rooftop solar and storage) into the same graph.

But the AEMC makes it clear what its preferred scenario is. As you can see, renewables make a small share of the total generation by 2030, coal remains at 60 per cent and gas is a healthy 18 per cent. (Curiously, open cycle gas plants rate barely a mention in any of the scenarios).

AEMC outputs

The AEMC says maintaining this high level of fossil fuels (80 per cent) more than a decade from now is good because it means more synchronous generation and inertia – again ignoring the technology alternatives identified in the Finkel report.

In the high RET scenario, gas is reduced to just 2 per cent – hence, perhaps, their push for the EIS scenario.

Mostly, it seems an exercise in wishful thinking and underlines, perhaps, why the AEMC is considered to be such a stick-in-the-mud.

It is responsible for the rules of the energy market, but has been dragging its feet for years arguing that rule changes that encourage smarter and more efficient technologies, such as battery storage, are not needed. Even COAG energy ministers have had to give it a boot up the backside to try to catch up with events.

The CSIRO report with the Energy Networks Australia, and the Finkel Review’s preliminary report on the National Electricity Market, both underlined how Australia’s policy and market rules were so far behind the technologies which are now available.

It seems that the AEMC is still imagining nothing much changing in the next 20 years (a similar picture to what AEMO chairman Andrew Marsden was imagining at his CEDA presentation on Monday).

Presumably, this is the modelling that the government wanted to use to justify its shift to an EIS, before the idea was blown out of the water by its climate science denying right-wing faction.

Which is not to say that we shouldn’t have a carbon price. We should. But we should be careful how we frame one, and we should not introduce one simply for the sake of supporting the gas industry.

A big problem with this modelling is that its calculations stop at 2030. This means that the ongoing fuel cost for gas, and the free cost of already built wind and solar, is not taken into account. This helps inflate the assumed emissions abatement cost and simply provides more ill-informed propaganda for the anti-renewables brigade.

And, it should be pointed out, it doesn’t factor in longer-term emissions reductions targets.

Another major problem with the Frontier report – and the AEMC recommendations – is that they analyse a carbon price and a renewable energy target in isolation. That has never been the intention of any sensible policy proponent, although thanks to the Coalition’s fatwa on carbon pricing, it is what we have ended up with.

Labor, for instance, proposes a combination of an emissions intensity scheme and a renewable energy target. The Greens favour a similar mixture of carbon pricing and specific incentives. This overcomes the market obstacles for renewables (the markets are framed to favour commodity-based generators rather than those with zero marginal costs) and to reduce the cost of abatement via a de-facto carbon price.

They are all designed to work together. But it seems we have learned nothing from all the years of the carbon pricing debate in Australia. We are back to square one, and we are still being asked to believe in fairy tales.

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  1. john 4 years ago

    Every one of these industry reports totally underestimate the falling cost of solar battery wind for instance.
    Is it just wishful thinking or deliberate pandering to the outcomes they wish?
    The IEA used to put out costs of RE and have the costs falling by 2 or 4% a year meanwhile the cost drops have been as expected 25% and north of that.
    International competitive price with low labour costs and low funding costs have resulted in Solar for instance in the $20-$30 mWh range.
    One would expect 3 or 4 times that figure in a high labour cost high finance cost country which is still less than the $80-$90 figure they are talking about when?
    $80/MWh in 2040 you are joking.
    I suppose these reports will be warmly welcomed by those who say ” solar will never pay for itself in a million years”
    Do not laugh he was a senator.
    No not Mr. empirical evidence god only knows what he thinks.

    • howardpatr 4 years ago

      Senator “empirical evidence” Malcolm Roberts seems to think similarly to the many RWRNJs in the LNP who control Cayman Turnbull.

      • john 4 years ago

        Really is he so delusional as well.
        I do not expect any rational forward looking decisions then in the next 3 years.
        Perhaps what will happen these people will be seen beside the road of progress waving their arms in annoyance as progress passes them by.

  2. Miles Harding 4 years ago

    So, cleary written by and for the coal trolls.

    I skimmed the Frontear Economics report – It’ll need the best part of a day to go through.
    One thing the stood out was the retirement schedule of the WA Muja generators. These things are terminal NOW and it’s difficult to see how they will be still operating in 2030.

    The Fuel mix pie chart looks completely off the planet. he extended LRET option is virtually all coal and renewables and will be unfit to respond to the variability of wind and solar. What are they thinking, apart from ” … must use coal … “?

    • Farmer Dave 4 years ago

      It is possible to see many recent events – including the production of this report – as examples of counter-attacks by the fossil fuel incumbents. Those incumbents face two simultaneous existential treats: the need to phase out fossil fuels as quickly as possible in response to the threat of climate change, and the economic threat of mass-produced renewables with their ever decreasing costs and free fuel. Jeremy Leggett calls this the “carbon war”, and I think he is right.

      • Giles 4 years ago

        I think you are right. the extraordinary thing is that this is coming from the AEMC, which is supposed to be independent, but has for a long time seen to be ideological.

        • Paul Wittwer 4 years ago

          From what I could discern, the AEMC is just a bunch of lawyers with a couple of commerce degrees and only one engineering degree amongst the lot of them. Sack half of the lawyers, replace them with technical specialists and they might have the makings of a team competent enough to manage the transition to renewables in the time required.

          • neroden 4 years ago

            I think it’ll take a Senate investigation by the Green Party to expose the fact that Frontier is spinning fairy tales to the AEMC. The AEMC need to start hiring real energy consultancies, and I think a Senate investigation into why Frontier is getting contracts despite being manifestly incompetent might be the way to do this.

      • David leitch 4 years ago

        I guess an energy efficiency scheme may not work the way in the way the model assumes if the assumptions are wrong. One thing to bear in mind is that you have to model revenue not just cost.

    • Matt S 4 years ago

      My skim didn’t include retirements, I went straight to price assumptions. State Gov have already announced closure in 2017 of capacity. Its either KwinanaC or Muja A/B that will go. You’re right, no way it’ll continue to operate.
      If Frontier stuff up so many assumptions.. can you get your money back?

  3. David Pethick 4 years ago

    I just don’t see gas prices averaging below $8/GJ over the medium term. A lot more risk to the upside than the downside.

    I can’t see on-shore gas E&P taking off again any time over the next decade – it’s political poison in NSW and VIC.

    Operators will run existing assets as hard as they can, so Cooper and Gippsland basin get sucked dry over the next decade and we’re left with only expensive tight gas and a long lead time to bring new fields on stream.

    Every bit of CSG goes up the pipe and out the door to SE Asia, particularly when oil prices climb back off the mat.

    The LNG facilities will get first use of every bit of gas they need. Everyone else can wait until they are done. They can pay a higher price than anyone else and that’s the way our economy works.

    First to be cut loose will be C&I customers. They built a business model around $3/GJ gas. Those days are over and they are never coming back. Next bit of gas taken out of the ground costs twice that. I don’t think too many upstream suppliers want to run at a loss and they certainly don’t owe the C&I segment any favours.

    I think the next cab off the rank is the OCGT and CCGT. Anything that doesn’t get shut down just runs as peaking plant. Burning gas to generate electricity in 2020 will be equivalent to fuel oil in 2000.

    Even with both of these large users curtailed (200 to 300 PJ pa), it’s only enough to cover the gas demand from a single LNG train.

    I ignore any analysis that doesn’t have realistic gas prices built in.


    Dave P.

    • disqus_gF5uXVTUbL 4 years ago

      Lot of acronyms in this post. You’re interested in people who share your education and professional background and not really into cross pollination from other fields or anyone else. It’s a shame. You won’t really achieve much with this approach of writing for people like you.

      • OnionMan77 4 years ago

        GJ : gigajoule
        E&P : exploration & production
        NSW : New South Wales
        VIC : Victoria
        CSG : coal seam gas
        SE : South East
        LNG : liquified natural gas
        C&I : commercial & industrial
        OCGT : open cycle gas turbine
        CCGT : combined cycle gas turbine
        PJ : petajoule
        pa : per annum
        P : Pethick

        • disqus_gF5uXVTUbL 4 years ago

          Thanks. For the purposes of this website and those of us who like being green, what is the difference between open cycle and combined cycle gas turbines?

          • Farmer Dave 4 years ago

            My understanding is that an open cycle gas turbine is a relatively simple unit – a gas turbine engine driving a generator. A lot of the heat from burning the gas goes up the chimney. In a closed cycle unit, that waste heat is used to raise steam, which then drives a steam turbine and another generator. Closed cycle units are therefore more efficient, but are more complex, and more expensive to build and operate.

          • David leitch 4 years ago

            That is correct. The waste heat is lower temperature not enough to drive a turbine (essentially a jet engine) efficiently but enough to make steam. Open cycle uses around 11.6 GJ gas per MWh and combine cycle about 7.5 GJ. However gas turbine efficiency degrades over time and gas is not that good at partial efficiency and is not really that good at fast ramping up and down. Certainly combined cycle is worse than open cycle in that regard.

          • OnionMan77 4 years ago

            Lame car analogy:
            – Open cycle is like a naturally aspirated engine. Think jet engine = hot gas exhausted to atmosphere.
            – Closed cycle is like a turbo boosted engine: the exhaust is used to do more useful work (shoddy analogy but hey)
            – Combined cycle is a turbo boosted engine plus using the exhaust heat with a Peltier device to run a heatpump for air conditioning (stretch here). Complex, expensive, but most efficient use of fuel energy.

        • David Pethick 4 years ago

          Hehehe – I’d never thought of my sign-off as an acronym. Cheers @onionman77:disqus.

      • Geoff James 4 years ago

        At least David is prepared to place his name beside his opinion.

        • disqus_gF5uXVTUbL 4 years ago

          For some us, an assessment isn’t based upon a name. If you wish to make a name for yourself go ahead.

  4. drescaped 4 years ago

    I will bet there is no costing of the failure to reduce CO2 emissions to slow down global warming. Insurance companies are starting to factor in climate change in their policies so numbers if you were to look are not hard to come by.

    • JohnOz 4 years ago

      The reinsurer MunichRE first place an insurance premium on global warming (then called ‘the greenhouse effect’) in 1977! In fact reinsurers have been on to global warming from very early on in the piece and have produced some excellent papers on it (including Lloyds of London / Chatham House in its Lloyds 360 degrees series).

  5. howardpatr 4 years ago

    “This is not the first time that Frontier, headed by Danny Price, the man considered to be one of the key architects of Direct Action and its intended transition into a baseline and credit scheme, and the AEMC have joined forces”.

    Why does not this surprise me – another ploy by the LNP and its fossil fuel backers.

  6. Steve Fuller 4 years ago

    It will be interesting to see how the Nick Xenophon Team digests all of this.

    Nick (I’m ashamed to be a South Australian) Xenophon is Danny Price’s number 1 fan, although the rest of his team not so much.

    Nick is holding NXT energy policy close to his chest but as we get closer to the next SA election and he seeks to gather candidates they won’t get away with Nick trying to appear populist pro-renewables while sticking closely to the Price world view.

    Prior to the federal election almost all of the NXT candidates believed that NXT actually cared about decarbonisation and climate change. Nick has little time to prove that he’s not just another bag of hot (fossil fueled) air.

  7. disqus_gF5uXVTUbL 4 years ago

    Has anyone looked at a structural analysis on who is on the AEMC, how they get there and what fields they are trained in? Are these chiefly political appointments, people who have worked in the field as mechanical or electrical engineers, economists or what? It’s hard to understand what is happening without making the subjective influences open, honest and transparent. People occupying public positions are not supposed to have conflicts of interest. If the prevailing orientation is counter field research then something seems amiss.

    • David leitch 4 years ago

      This actually was looked at recently. There is only one electrical engineer in a senior position at the AEMC. However I don’t personally see this as either a positive or negative.

      • disqus_gF5uXVTUbL 4 years ago

        There’s suggestions on this site the AEMC is not always grounded in real data and some of that data is in the field. Surely people with field experience have one perspective on technology and probably maintain relationships with other fieldwork officers even when they progress to managerial or board level positions. Otherwise, the issue arises of where people get their data from. e.g. the guy interviewed by ITK had negative links to wind hate sites. Without field data it becomes a battle of which model to accept, in other words, who is invested in the most conservative paradigm, professionally and personally.

    • Matt S 4 years ago

      I was interested in this myself. The Chairman is from Government (Treasury than Dept of Resources and Energy), the COO is from Networks. It’s seductive to simply say its classic regulatory capture..

      • disqus_gF5uXVTUbL 4 years ago

        I never followed a career in policy work, though there must be people who understand exactly what walks an ethical path and where that departure occurs. There must be both ethical obligations of the public position and perhaps also a professional code of ethics, if such a professional is also a member wishing to maintain that professional association.

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