Hostages to a renewable ruse
The Australian
Nick Cater
29 July 2014
The Abbott bashers are unwittingly siding with crafty merchant bankers.
THE power couple.
If there is a sound more pitiable than the whine of a pious environmental activist, it is the wail of a financier about to do his dough.
The mournful chorus now wafting from Greg Hunt’s waiting room is the sound of the two in unison, pleading with the Environment Minister to save the life of their misshapen bastard child, the renewable energy target.
You have to hand it to Hunt, who either has nerves of steel or is stone deaf, for he has retained both his cool and his fortitude.
The RET review by Dick Warburton on the government’s behalf has brought the rent-seekers out in force, for billions of dollars of corporate welfare is resting on its outcome.
As it stands, the RET will produce a bounteous return for a small group of investors shrewd enough to get into the windmill game while the rest of us are slapped with four-figure power bills.
Wind farms may be ugly but they are certainly not cheap, nor is the electricity that trickles from them. No one in their right minds would buy one if they had to sell power for $30 to $40 a megawatt hour, the going rate for conventional producers.
But since the retailers are forced to buy a proportion of renewable power, the windmill mafia can charge two to three times that price, a practice that in any other market would be known as price gouging.
As if a $60 premium were not reward enough, the transaction is further sweetened with a renewable energy certificate that they can sell to energy producers who insist on generating power in a more disreputable manner.
The going rate of $40 a megawatt hour means the total income per megawatt for wind farms is three to five times that of conventional power, and unless the government changes the scheme that return is only going to get better.
In an act of rent-seeking genius, the renewable lobby managed to persuade the Rudd government to set the 2020 target as a quantity — 41 terawatt hours — rather than 20 per cent of overall power as originally proposed.
Since the target was set, the energy generation forecast for 2020 has fallen substantially, meaning the locked-in renewable target is now more like 28 per cent.
That will send conventional producers scrambling for certificates, pushing up their price beyond $100. It’s a mouth-watering prospect for the merchant bankers and venture capitalists who were smart enough to jump on board, and brilliant news for Mercedes dealerships on the lower north shore, but of little or any benefit to the planet.
The cost of this speculative financial picnic will be about $17 billion by 2030 or thereabouts, according to Deloitte, which produced a report on the messy business last week.
Since the extra cost will be added to electricity bills, the RET is a carbon tax by another name, a regressive impost that will fall most heavily on those with limited incomes, such as pensioners.
The lowest income households already spend 7 per cent of their disposable incomes on energy, according to the Australian Council of Social Service. Energy takes just 2.6 per cent of the budget of those on high incomes.
Thus under the cover of responding to climate change — “the greatest moral, economic and social challenge of our time” — billions of dollars are taken from the poor and given to the rich investors in the unsightly industrial turbines that are blighting the lives of rural communities and stripping value from the properties of people who just wish to be left to live in peace.
If the anti-Abbott budget bashers who are squealing about a minor adjustment to pension indexation were serious, they would demand the end of the RET’s iniquitous transfer of wealth.
Yet ironically they find themselves on the side of crafty merchant bankers in the romantic expectation that this complex financial ruse is doing something to assist the planet.
To speak up in opposition to this social injustice is to find oneself condemned as a climate change denier, right-wing ideologue, apologist for the coal industry or, worse still, to be ignored altogether, as the ABC’s Four Corners managed to do in its renewable energy special last month.
The corporation flew reporter Stephen Long to California to tell us how wonderful the renewable energy bonanza is going to be and how foolish Tony Abbott’s government is to even question the proposition that too many windmills are barely enough.
“This government has an ideological agenda,” insisted John Grimes, chief executive of the Australian Solar Council.
“They want to carve out the impact of renewable energy on the network and they want to stop renewals in their tracks.”
Jeremy Rifkin, author of a book called The Third Industrial Revolution, told Long: “Australia’s the Saudi Arabia of renewable energy. There’s so much sun; there’s so much wind off the coast, and so it makes absolutely no sense when you have an abundance of renewable energy, why would you rely on a depleting supply of fossil fuels with all of the attendant consequences to society and the planet?”
Fatuous arguments of this kind are rarely challenged on the ABC, nor are the purveyors of renewable energy subjected to the degree of scepticism that others with corporate vested interests can expect. Instead they find themselves in the company of a cheer squad.
“The new developments with renewable energy and storage seem to have passed the Prime Minister by,” Long editorialised halfway through his dispiriting report.
Finally, however, as Long was about to run out of time and throw back to Kerry O’Brien, he let slip the awkward truth he had managed so far to avoid.
“Yes, it costs money to create the infrastructure for renewable energy,” he says. “A lot of money.”
Indeed it does, and if the arbitrary, inefficient and regressive mechanism of the RET is all that is left to overcome that hurdle, we may as well give up.
It is through this complicated method that the consumers are forced to pay a subsidy to wind farms without the need for a carbon tax.
The Australian
A fantastic piece of analysis from Nick Cater.
But we take issue with Deloitte’s cost estimate for the mandatory RET of “$17 billion by 2030”, which is way off the mark.
Putting aside the hidden costs of providing fossil fuel back up to cover the occasions when wind power output plummets every day – and for days on end (see our post here); putting aside the need for a duplicated network to carry wind power from the back blocks to urban markets (see our post here); putting aside the cost of running highly inefficient Open Cycle Gas Turbines to cover wind power “outages” (see our post here), for the purpose of this argument let’s just focus on the cost of Renewable Energy Certificates and their bedmate – the mandated shortfall charge.
Under the mandatory RET – retailers are fined $65 per MWh for every MW they fall below the mandated annual target: what’s called the “shortfall charge” – follow the links here and here.
The alternative is to buy RECs and surrender them as proof that the retailer has purchased a MWh of renewable energy.
Wind power generators are issued 1 REC for every MWh of power dispatched to the grid – and this deal continues until 2031: the operator of a turbine erected in 2005 will receive RECs (1 per MWh dispatched) each and every year for 26 years.
Since the RET began in April 2001, over 195 million RECs have been created – worth more than $8 billion – the cost of which has all been added to our power bills.
The cost of the REC is ultimately borne by retail customers and, therefore, constitutes a Federal Tax on all Australian electricity consumers (see our post here).
Now to the numbers.
If no RECs were purchased, retailers would simply be hit with the $65 per MWh shortfall charge on the entire figure set by the mandatory RET legislation (see the link here).
That cost alone would add $2.665 billion to power bills annually from 2020 to 2031.
Alternatively, if sufficient RECs to satisfy the target were purchased at $100, say, the cost rises to $4.1 billion a year from 2020 to 2030.
| Year | RET in MWh (millions) | Shortfall Charge (or RECs) @ $65 |
RECs @ $100 |
| 2014 | 16.1 | $1,046,500,000 | $1,610,000,000 |
| 2015 | 18 | $1,117,000,000 | $1,800,000,000 |
| 2016 | 22.6 | $1,469,000,000 | $2,260,000,000 |
| 2017 | 27.2 | $1,768,000,000 | $2,720,000,000 |
| 2018 | 31.8 | $2,067,000,000 | $3,180,000,000 |
| 2019 | 36.4 | $2,366,000,000 | $3,640,000,000 |
| 2020 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2021 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2022 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2023 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2024 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2025 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2026 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2027 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2028 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2029 | 41 | $2,665,000,000 | $4,100,000,000 |
| 2030 | 41 | $2,665,000,000 | $4,100,000,000 |
| Total | 603.1 | $39,148,500,000 | $60,310,000,000 |
RECs are currently trading around $30, but, as the target starts to bite from 2017 the price is expected to exceed $90 and may well exceed the $100 figure mentioned by Nick Cater.
The shortfall charge (as a fine) is a cost that the retailer can’t claim as a legitimate tax deduction, whereas the REC is – this places an added value on the REC to the extent that its face value can reduce the retailer’s taxable income. At a minimum then, RECs can be expected to trade at a figure at least equal to the shortfall charge. But with the tax benefit attached, RECs would be worth at least $94 – based on a shortfall charge of $65.
At the bottom end, this means the value of the 603.1 million RECs that must be surrendered in order to meet the mandated target from 2014 to 2031 (and/or the shortfall charge applied) will add over $39 billion to power bills over the next 17 years. At the top end, the figure (assuming RECs hit $100 by 2017) will readily exceed $50 billion. These figures represent the greatest transfer of wealth in the history of the Commonwealth: a transfer that comes at the expense of the poorest and most vulnerable in society; struggling manufacturing businesses, real jobs and families. To call the mandatory RET obscene is pure understatement. No single policy has ever threatened to cost so much for nothing in return.
The mandatory RET must go now.
STOP THESE THINGS 
It’s appalling that these computer modelling accountants can’t get their modelling parameters even remotely aligned to reality. STT is much more accurate. The reality of cost impacts in Europe alone should give a clue to these people, but for some reason they like to soften the anticipated blow to the actual economy. Get your act together Deloittes! Next they’ll be telling us it’s all hunky dory in California.
Once again another article of significance from Nick Cater.
I have wondered why Malcom Turnball has been so keen to see an emission tradings scheme. One needs to consider that Turnball was a successful merchant banker, and what do people in the financial sector love more than anything?
They live off confidence and lack of confidence. The idea that something can be created to have a ‘paper’ worth, that can be traded and a profit made from, but in ‘real world’ is worthless. Think Dot.com, Freddie and Fanny, GFC, and…………….Global Warming/Climate Change. The abomination becomes apparent when one realizes that the market is totally corrupted by the market mechanisms that allow anyone to bet on the market failing or succeeding… i.e. short selling.
There is no moral/ethical compass from which our financial markets are guided. The only thing that matters is profit.
While this remains the situation, corporate charlatans, of which the wind industry is prominent, and the greater ‘renewables’ sector are guilty, not a lot will change.
It is surely a point of evident irony that the renewable/green sector is anything but.