The dangerous thinking behind Coalition renewable energy policy

The Coalition’s admission this week that it had thrown the Australian Renewable Energy Agency into the basket of climate change and green energy programs to be cut if elected should not have taken people by surprise, because they have been hinting at it for a few months.

But it does raise questions about where the Coalition is heading with its energy policies, and why there appears to be such deliberate moves to wind back support mechanisms for wind energy and solar, and other emerging renewable technologies.

Part of the problem may be in the quality of the advice it is receiving. Many in the Coalition defer to the Institute of Public Affairs when asked about climate change and renewables policies. The IPA, of course, is a right-wing think tank that doesn’t accept the science of climate change, and argues against climate and clean energy policies.

More recently, Greg Hunt has been using the work of Bjorn Lomborg to justify Direct Action. Lomborg, as we discussed in last month’s piece, is known for downplaying the dangers of climate change, for arguing that renewable energy should not be deployed until costs are reduced in research labs, and for suggesting that wacky “geo-engineering” schemes such as cloud whitening should be priorities.

That may explain why the Coalition is now targeting ARENA, whose job it is to help take technologies out of the lab and actually deploy them. The Coalition also intends to shut down the Clean Energy Finance Corp, which plays a similar role, as well as the Climate Change Authority, which conducted last year’s review of the Renewable Energy Target. The Coalition wants the RET to be reviewed yet again, but not by the CCA. The uncertainty is already causing Australia to fall down the ranks of investment attractiveness.

Another document that may be influential in Coalition thinking was circulated in recent months by one of its so-called “star” candidates, Angus Taylor, the anti-wind campaigner who is seeking election in the seat of Hume in NSW.

The document was put together under the banner of Port Jackson Partners, the consultancy where Taylor used to work. The central theme of the report is that the Coalition could drop the renewable energy target entirely (and immediately), save up to $3.2 billion (or up to $300 a household) by 2020 and still meet emissions reduction targets. But it’s based around a whole series of false assumptions. It is more likely to push up costs by around $1 billion a year.

The first assumption is on the issue of costs. As is typical of such documents, it gives a bleak picture of renewable costs and a rosy picture of fossil fuels. It says that wind costs are virtually double that of gas. But the reality is that there is, and will be, very little difference between the two.

First of all on wind. As the above graph shows, Taylor reckoned the cost was around $120/MWh, but the wind industry will tell you it is around $100/MWh at most. Some agreements have been struck at around $90/MWh or even lower. (In Brazil, an auction of capacity announced this week will see 1,500MW of wind energy built at around $US46.57/MWh. In the US, prices are even lower. These lower costs are helped by the fact that they have local production – something Australia had until the previous Coalition government brought the then MRET to a crashing halt in 2005).

But the estimates that gas will be around $65 are contradicted by one of Port Jackson’s own documents, produced in November 2011, which suggested that the long run cost of gas will be pushed up to $90/MWh (see graph to the right) by a jump in gas prices caused by the LNG boom. That estimated is based on the prediction that gas will double to around $8/gigajoule. But, already, forward gas prices are being bid at $9-10/GJ in the Queensland market, so the cost of gas generation could be even higher.

The second major problem is a lack of understanding about how the National Electricity Market actually works. For a gas plant to operate, as Taylor’s document suggests, at 85 per cent capacity – and so achieve the emissions reductions claimed by Port Jackson – two things would need to happen in the NEM.

One would be that around one-third of Australia’s baseload coal-fired generation would need to be taken off line to allow a gas generator to bid into the market at its short run marginal cost. That 9GW of generation would likely require a very expensive contracts for closure scheme. But it would result in the price of all generation – including the remaining brown and black coal generators – rising to that $90 price.

In the RET scheme, only 20 per cent of the generation receives that price – via add-ons to the electricity bills – although the impact is offset because wind and other renewables reduce the spot price of electricity in the wholesale market, as their short run marginal cost (or cost of fuel), is next to zero.

That means all generation, not just the 20 per cent for renewables, would receive the higher price. That will likely push retail electricity prices up 5c/kWh (net of carbon costs) rather than just 1c/kWh under the renewables target, as Port Jackson’s own data reveals.

The next two graphs illustrate this. The first graph is from Taylor’s document. It is used in the context that retail electricity prices will rise sharply, and something must be done about it – namely by killing the RET.

But here is that same graph as it appeared in the November, 2011 document. As it makes clear, the cost of the renewable energy target is relatively minor – less than 1c/kWh, or 3% of the total electricity bill. That is consistent with estimates by the Australian Energy Market Commission, IPART and the Queensland Competition Authority, as well as the CCA. As it notes, the bulk of the increase comes from network costs, and the sort of increase in wholesale costs that would be caused if baseload gas generation set the marginal cost of power on the NEM.

The incumbent generators would, of course, love the scenario painted by Taylor. It would mean they get a significantly higher return, possibly as much as $1 billion a year. They don’t like wind or solar, because those generators lower the spot prices on the wholesale market.

As we have seen in the past, the Coalition – and in particular its energy spokesman, Ian Macfarlane – needs little encouragement to argue against wind and solar. But such decisions should not be based on false premises.

As the November 2011 document suggested, the real focus should be on network costs, which the AEMC agrees is the biggest cause of rising electricity prices. That is where reform is needed, and where a properly advised Coalition government could drive the biggest savings for consumers, if it was to embrace some of the suggestions for distributed generation.

Another part of the Taylor document also questions the viability of the wind industry, based on the published returns of leading renewable energy companies. There’s no doubt that many are struggling, for a variety of reasons. But it’s a bit like suggesting that we shouldn’t have developed the internet because the early dot.com companies made losses, or that we should abandon cars because the big motor companies do the same. Port Jackson Partners knows better than that, and so should the Coalition, if they are as savvy about business and the economy as they say they are.