Renewables – they’re green and clean, but what’s the cost?

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It seems everyone is in agreement about the market impact of renewables and their effect on fossil fuels – they lower wholesale market prices and put coal and gas plants out of business. Where opinion differs is on whether this is a good thing for the industry and consumers, or a bad thing. As a cricketer would observe, it’s a spinner’s wicket.

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A day before the Climate Change Authority releases its discussion paper on the future of the Renewable Energy Target, the Clean Energy Council has released a detailed research paper that concludes that the policy measure has attracted billions of dollars of investment, is cutting emissions, and is essentially paying for itself.

The report by SKM was completed in August, but is released now as a riposte to the ACIL Tasman report cited by the majority of utilities and other companies who suggest that changing the Renewable Energy Target from a fixed target to a “floating” one that reflects 20 per cent of actual demand could reduce the rate of deployment of wind and solar energy and other renewables by up to half.

It says something about the state of the political and public debate in Australia that they think they can win a policy argument by making a virtue of putting the brakes on the transition to cleaner energy, but such is the obsession on costs that if you can produce a nice big number – in this case $25 billion over 18 years – in assumed savings, then bringing the wind and solar energy industries to a premature halt can be portrayed as sensible policy.

But the real concern for the generators and other utilities is the loss of income. Lower demand and the impact of renewables has already caused wholesale prices to fall to their lowest levels on record, at least before the introduction of the carbon tax. And the SKM report suggests that without the LRET, wholesale price would be $9/MWh higher. In a market that produces more than 200,000GWh of electricity a year, that is worth more than $2 billion.

There should be no doubt that this is the primary motivation of those who want the deployment of wind and solar to be curtailed. That much has been made clear by their submissions and underlined by the recent closure and mothballing of nearly 3,000MW of coal-fired electricity.

Indeed, there is not much difference between the reports produced by the pro-RET camp and the anti-RET camp. They both agree that more renewables will force wholesale prices down. They both agree that less renewables will mean more opportunities for gas-fired generation, and coal-fired generators producing energy for longer.

What they don’t agree on is the spin. As we pointed out earlier this month, you can break down ACIL Tasman’s numbers and arrive at a household bill of 14c a day, even if you accepted their worst case scenario.

But the pro-RET brigade has argued that this is nonsense, because the RET could actually pay for itself by delivering not just lower wholesale prices, but also lower prices at the retail level (over business as usual), and myriad other benefits. This has been pointed out in various ways by GE, Meridian Energy, and AGL.

SKM extends the analysis that dismisses the idea that scuttling the RET would not benefit consumers. It estimates that the fall in wholesale prices attributable to the LRET in South Australia, the state with the most wind capacity, has been between $4/MWh and 10/MWh.

Overall, this has resulted in retail prices being between $0.63/MWh and $4.41/MWh below where they would otherwise be. This is greater than the added cost of purchasing certificates, which have averaged around $0.06/MWh in 2001 to $3.13/MWh in 2012. The $9/MWh reduction in wholesale prices attributed to the LRET out to 2030 should translate into a $3/MWh reduction in retail prices.

It could be even more. SKM notes that more than 1,000MW of new roof-top systems have been installed since the beginning of 2011, and says the impact of this generation has not yet been felt in full on actual demand (and prices).

The report notes that since the Howard government first introduced a Renewable Energy Target in 2001, some 2,945MW in large-scale projects have been built (almost entirely wind), and 2,855MW of small-scale PV and solar hot water heaters. That’s a combined average installation rate of 480MW.

Still, the renewable energy industry is still dominated by hydro plants built years ago, as this graph below highlights.

 

In the next few years, SKM suggests that growth in rooftop solar will be solid anyway – the RET and state-based tariffs have simply brought forward the investment. The price at the socket – solar PV’s ability to deliver competitive prices in the household – guarantees its growth. “In the long term, uptake is driven by the continuing decline in system costs and rising retail prices as a result of carbon pricing and ongoing increases in network costs,” it says.

But the picture for large-scale generation is different. With the RET, about $13.7 billion of investment will be made in large-scale renewables. Without it, and relying only on the carbon price, that number would fall to just over $2 billion. (As the graph below shows).

By 2025, the carbon price is expected to fill the gap between the prevailing wholesale price and the long-term cost of energy for renewables. It predicts most of the large-scale build out will come in wind, with little large-scale solar.

Here’s how it might be divvied up among the states.

And it highlights other benefits:

The RET has delivered $18.5 billion of investment in renewable energy infrastructure and will deliver a similar amount again.

Generation from gas-fired power stations is expected to be 13 per cent less with the RET in place. It doesn’t expect new coal-fired power stations to be built anyway – presuming there is a carbon price, but says that the RET will reduce coal-fired generation by around 12 per cent.

The LRET has deferred the investment in about 500MW of inefficient open-cycle turbines and would mean that the amount of future gas-fired generation would be reduced by around 1,000MW.

It also notes that it has helped to reduce volatility in spot prices, which are at, or close to, record lows.

And it notes that the RET has helped reduce emissions and helped Australia meet its Kyoto target. It says it would have struggled to do so without it. Without the RET, the added cost of buying permits during the fixed carbon price period to 2015 would be $470 million, and the cost of purchasing international permits during the flexible-price period from 2015 in the absence of the RET is estimated at around $6.1 billion

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