No easy choices, but a strong case for energy action

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A new report from the Grattan Institute highlights the need for increased government support for clean energy in Australia. It says a carbon price alone will not suffice, regulatory changes are needed and fossil fuel subsidies should be removed. But it hedges its bets on which technologies will provide the solution, and at what cost.

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A new report from the Grattan Institute has underlined the failure of current policies to push Australia quick enough down the path of a clean energy future, saying the government needs to do more to help unleash market forces, change the regulatory environment that protects incumbent systems from the advances of new technologies, and to reduce existing subsidies to fossil fuels. Or else face a much more expensive transformation.

The report also assesses the prospects of seven technologies that could, individually or in part, deliver on Australia’s target to of reducing emissions by 80 per cent below 1990 levels by 2050 – wind, solar PV, solar thermal, geothermal, carbon capture and storage, nuclear, biomass – as well as storage options and issues surrounding the grid. The latter is critically important to be able to link wind and solar resources to areas of energy consumption, but the report questions if Australia yet has the skills to achieve this. (A full analysis of the Grattan’s take on the smart grid and the 7 clean sources is here)

The report – No easy choices: which way to Australia’s energy future?, is a refreshingly frank approach that has a realistic assessment of the pretensions of each technology and the policies that are needed to get there. It seems the principal difference between this report and others is that Grattan has looked at the current long term policy targets and worked backwards to see how Australia might actually achieve these. As logical as this may seem, many other studies analyzing our energy future assume little or no change to the business as usual, and a blithe disregard for the stated policy decisions.

Grattan makes some crucial points: the carbon pricing scheme alone will not be enough by itself to enable low emission technologies to generate enough electricity at sufficiently low cost; gas will not deliver the emission reductions required and is at best a bridging technology; the current regulatory regime is designed to favour the incumbent gas and coal technologies; and these are supported by between $8 and $9 billion of annual subsidies (including the recent NSW government’s subsidized coal mining deal), and should be removed.

The report also uses provides a much more realistic assessment of technology costs and challenges of the various energy sources. Some of its assumptions and conclusions can, and no doubt will, be debated, but Grattan has gone to the trouble of seeking advice from the experts within each technology base, and it’s work provides a stark contrast to the outdated data included in the government’s draft energy white paper – particularly regarding the two most discussed and contentious technologies, solar and nuclear.

Solar is important because it is most likely to be the biggest single renewable source of the future, and a proper understanding of its near, medium and long term costs is essential if energy policy makers are to decide how to manage the impact on grids, generators and other competitors. The failure to do so has already resulted in some disastrous policy making (NSW feed in tariff, federal solar multiplier), which has effectively brought the rollout of large scale renewables in Australia to a grinding and costly halt.

The Grattan’s technology report puts the cost of solar PV at around $220/MWh in the best case scenario, which is consistent with industry estimates, and a high of $400/MWh. Finally, then, a bit of sanity, particularly when compared to the Energy White Paper’s best case forecast of $340MWh by 2030! It also makes some important notes about CCS and nuclear- particularly in the current debate around government incentives – saying neither technology would be able to be deployed in Australia without significant government support. “CCS and nuclear are unlikely to be demonstrated in Australia in the near future unless government takes on most of the material risks of the project,” it notes. “The demonstration of these technologies in Australia involves risks that only government is in a position to bear.” It also discusses the storage challenges (mostly in costs) facing intermittent sources such as wind, solar PV and solar thermal, the issues surrounding biofuels, and the question marks over geothermal.

There are several glaring omissions from the report: it does not adequately take into account energy efficiency and the impact that that will have on future energy demand, nor does it adequately address the prospects that large scale renewables and small scale distributed energy will have a dramatic change on the function of the grid– it assumes that it will continue to be defined by baseload and peaking sources, when studies in Europe and elsewhere suggest a more dynamic change. It’s right, though, that renewables will be limited to their scope without cost-effective storage, and the technologies for these are promising but uncertain. And it’s put off the highly contentious discussion about which policies and how to a later report.

Controversially, the report does suggest that once emissions are capped through an emissions trading scheme, there is no case to support technologies beyond addressing the market and system failures identified in the report, including through a renewable energy target or low emission energy quotas. This would bring howls of protests from the pro-renewable lobby, but it does include one crucial caveat – that the emission caps are set with environmental integrity.

The irony is that given the science on climate change – the prime environmental consideration – such caps would likely trigger a transformation more rapid and disruptive than the scenarios painted in this report, as the IEA made clear when it canvassed the 450ppm scenario in its most recent World Energy Outlook. The Grattan Institute plans a further report to canvass what sort of mechanisms the government should be looking at – on the assumption, no doubt, that the government won’t be setting any emissions caps with environmental integrity anytime soon. Given the important decisions to be made this year regarding the RET, the creation of the Clean Energy Finance Corp and the mechanisms that it would likely deploy, the sooner the better.

And the Grattan Institute’s energy program director Tony Wood, also seems un-necessarily pessimistic about costs. The report recognizes that the costs of incumbent technologies will rise to $100-$150/MWh – up from around $40-$60/MWh – which it uses as its benchmark. Wood, says, however, that if CCS fails to deliver and nuclear is not deployed, then the price of energy could go “through the roof.”

That’s not the view, however, of the EU, which believes that the transition to renewables will cost no more than continuing with fossil fuels, or the IEA, which notes in its “high renewable scenario” that the increased use of renewables – up to 75 per cent – in the event that nuclear is not deployed as widely as some may hope and CCS fails to deliver – may be less than 10 per cent more than otherwise.

 

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6 Comments
  1. Tom Swann 8 years ago

    Must read the report, and seems the next part will be crucial.

    ‘Cap and trade’ will guarentee the emissions cut outcome, but seems plain to me that doing it with minimal disruption requires some complementary measures, even if that means it costs more on the obvious (though not necessarily the best) ways of measuring it. Messy question then which measures, to determine which complementary measures.

    Those in status quo energy often say all of the different approaches in different jurisdictions undermine each other and cost us loads more. But as you say, that may well be better than the politically feasible alternatives. Be very interesting to see how Grattan deals with this in the next report.

  2. Jim Wright 8 years ago

    A key item in the calculation of power costs is the losses incurred in the grid (as is implied in a couple of remarks in this paper). I have proposed a catch-phrase “follow the power” to highlight an approach which might reduce costs. The combination of sustainable population and maximising food production suggests a return to country living in many small distributed communities with very localised renewable power sources. Rail transport would be supported by a mix of on-board solar panels and power rails close to communities to recharge batteries. Nuclear power would be limited to the service of industries with high power demands (after all, even renewable energy equipment has quite a high power demand during manufacture) located in adjacent industrial precincts. In general, what I am saying is that power economies are as much a matter of how things are done as what is done.

  3. Tim Buckley 8 years ago

    The Grattan Institute’s work is excellent, but it would be enhanced by taking into account a few key issues. The cost of solar is materially overestimated, ignoring the 60% decline in solar module costs in 2011 alone. Deflation is constantly reducing the cost of renewable energy. Grattan also makes no distinction between distributed solar competing with retail electricity prices at the household level, not the wholesale price. Solar should also get a time-of-use premium and a further merit order effect premium, generally being available when demand is highest. Both would materially lower the cost of electricity to the Australian consumer, much to the displeasure of the existing electricity oligopoly of genretailers.

  4. Martin Nicholson 8 years ago

    Jim, I agree that industry will need a power source like nuclear. And with small modular reactors they could be located close to an industrial centre or a mine (once we get over the NIMBY paranoia). I suspect if we revert to regional local power generation for domestic and other services we will still need connection to a reliable grid that can cover for local failures. 50 or 60 years ago, when there were many island networks in regional areas (there still are in the far north and west), power failures were relatively common and it was taken for granted. I’m not sure that consumers who have got used to the reliability of the NEM would tolerate a significant lowering of reliability standards.

    • Jake 8 years ago

      Martin what’s your opinion of Thorium?

      • Martin Nicholson 8 years ago

        Jake, I am a supporter of nuclear fission and thorium is a fissionable product in the right reactors.

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