How to turn cheap power back on
Energy Minister Josh Frydenberg claims that renewable energy is a disruptive force in the energy market in the same way as the iPhone was to landlines and cameras. There is, however, a major difference: iPhones, like Uber, Kindle and eBay have disrupted previous commercial systems by force of technology. Renewables everywhere in the world have required government subsidies.
Electricity prices in Australia, having been perhaps the world’s lowest at the turn of the present century, are now among the highest.
This is a national catastrophe which has been forged solely by political interference. Subsidies to intermittent renewables, mainly wind and solar, have been the chief cause. Those subsidies are currently around $85 per MWh. And even if they fall to $50 per MWh, as forecast by Minister Frydenberg, this compares with the average total price of electricity, prevailing until 2015, of around $40 per MWh. That price has now doubled and reliability of supply has been impaired because the subsidies have caused the closure of coal power stations.
In the light of the meltdown of the South Australian market last year Malcolm Turnbull set up an inquiry headed by Dr Alan Finkel a former green entrepreneur, whose company, Better Place, being unable to command sufficient subsidies, went bankrupt.
Predictably, the Finkel report called for more of those same renewable subsidies that had forced the closure of low-cost coal power stations thereby undermining the previous cheap, reliable supply. Equally predictably, the report called for an increase in the electricity market’s “governance” – more of the political tinkering that has brought the industry’s demise – and yet another institution (the Energy Security Board) has been now been added to the dozen or more already in place.
Finkel commissioned dodgy economic modelling that showed future lower prices would result from the substitution of wind/solar for lower cost coal. It did so by using two mechanisms.
First it marries subsidised renewables to existing coal powered stations that are forbidden to close even if they are operating at a loss. This is an untenable solution, especially for power stations like Hazelwood, starved of capital by owners unwilling to pour money into loss making plant.
The second mechanism relied upon forecast cost reductions of wind and solar. This fabled onset of cheap renewables has been an ever-receding mirage imminent for the past 30 years. It is envisaged that renewables’ inherent unreliability will be shored up by batteries, a costly means of (expensively) smoothing out the troughs of renewables’ intermittency.
In June, Finkel released his findings, which forecasted a negligible price rise for households in 2017. Within days, electricity tariff increases of 20 per cent were announced.
Unenviably, in spite of having the world’s cheapest energy sources, Australia is now the world price leader. It is easy to estimate that household energy bills, even under an optimistic view of the Finkel proposals, would be between $600 and $800 per year more than would be the case under an outcome that returned the market to one where coal supplied ninety per cent of electricity.
Though the political edge of electricity prices is their immediate effect on households, more injurious is the effect the Finkel recommendations would cause in vastly increasing the costs of electricity to commercial users. By more than doubling electricity costs, the Finkel proposals would force the virtual cessation of production in energy intensive, trade-exposed industries; these account for one fifth of manufacturing and include some of the nation’s most productive activities including metals and smelting, pulp and paper, sugar and confectionery. Competitiveness and future growth would also be adversely impacted across most agricultural and mining sectors.
Coal power offers more reliability and is half the cost of wind. That said, recent contracts have been signed by AGL and Origin for substantial future wind supplies at prices excluding renewable subsidies of $60 per MWh. That is less than the Finkel report estimated coal to cost.
All this provides compelling reasons for the total rejection of the Finkel proposals.
However, the demonisation of coal and threats by a future government to destroy the value of any new coal power station means a return to an autonomous market-based new investment regime is impossible. It may be that the Commonwealth is preparing to commission new non-intermittent power stations –- inevitably coal based — to shore up reliability. While providing a patch-up, this would complete the dismantling of a national electricity market and place us on the path to the high-cost electricity regime that prevailed prior to the market reforms under Hawke, Kennett and Howard.
A preferable outcome would be for the Canberra to guarantee that a future federal government would not adopt policies that expropriate any new investment (as governments already do with roads, ports and other long-lived infrastructure) and:
- Abolish the commonwealth’s Renewable Energy Target (RET) and the subsidies, presently about $75 per MWh, it creates for wind and large-scale solar;
- Eliminate the Small-Scale Renewable Energy Scheme (SRES) under which electricity users in general are forced to provide a subsidy of $40 per MWh to roof-top photovoltaic installations.
- Cease all government subsidies through the budget including guarantees to bodies like the Clean Energy Regulator and the Clean Energy Finance Corporation (CEFC).
In addition, state government should remove subsidies like the Queensland Solar Bonus scheme and preferential feed-in-tariffs for PV generated electricity.
With such policies, Australia would once again benefit from the cheap electricity that government market interventions have caused.