Lost In Translation: How a CO2 Abatement Scheme Became “Corporate Welfare on Steroids”

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Time to remember the original aim of the RET
Australian Financial Review
Danny Price
21 August 2014

The RET was intended to cut carbon. Opening it up to more forms of efficient generation would help get that result.

The debate over the renewable energy target has ended up exactly where you would expect a debate on subsidies to end up. The beneficiaries of the subsidy are taking the high moral ground while those adversely affected by the subsidy are crying foul.

We see similar debates in the agricultural sector. Australian farmers complain they face unfair market conditions because the international farmers they compete with have the protection of subsidies, while our government provides none.

In this case, the coal-fired generators claim they are finding it hard to recover their costs on existing investments while the renewable generators who earn a subsidised return, claim their future investments are threatened.

Both arguments are founded on the same concept – investment certainty.

What has been lost in all this debate is the original objective of the RET. The renewable industry has focused on the benefits it brings to customers by suppressing the price coal and gas generators can charge customers. But as PJ O’Rourke once observed about the US health system, “If you think healthcare is expensive now, wait until you see what it costs when it’s free.” The economic costs of lowering the wholesale price charged by thermal generators by subsidising renewable generators will be enormous.

The renewable energy sector has cleverly confused the concepts of economic costs, which are the costs of the resources used to produce renewable energy, with prices. They do this to disguise the real cost impact of the RET on the economy and to make themselves a smaller political target.

RET never about pricing

The goal of the RET was never about suppressing prices, but this is now the cause célèbre of the renewable industry because they know this will appeal to politicians looking to reduce electricity price pressure. The RET was aimed at encouraging a reduction in greenhouse gas emissions by actively promoting the, then-fledgling renewable industry.

The debate about the RET really should be re-focused on how we can achieve our environmental targets most economically. If we can minimise the costs of reducing emissions, then it follows that we are more likely to reduce emissions further, which Australia will inevitably be pressured to do at the Paris round of climate negotiations in late 2015.

More recently the renewable generators claim they are now cost-competitive with thermal generators. While these claims are probably overstating the relative economics of the thermal versus renewable generation, there is certainly less need to continue to subsidise investors in renewable generators as the RET has done its job in developing a local renewable industry. It is now time for the renewable industry to face competition and this competition should lead to lower economic costs and lower consumer prices.

This could be achieved by progressively levelling the playing field between all potential sources of electricity supply and demand so that all technologies can compete to supply emissions reductions.

Recent analysis of the opportunity to reduce the economic costs and price impacts of the RET by making it more technologically neutral, for example by allowing gas generators to compete with renewable generators and create partial credits under the scheme to reflect emissions abated, has shown that this approach can simultaneously reduce the economic cost of the RET by more than $1 billion and reduce prices for customers by more than $50 a year. This cost could fall further if other forms of cleaner generation could also compete vigorously with gas and renewable generators.

Part of the reason that this cost and price reduction occurs is that it makes use of existing gas capacity that mostly sits idle that could compete with coal under a more technologically neutral RET. This approach of broadening the RET to allow a wider range of technologies to compete to supply emissions reductions, is one of those rare no-regrets policies.

Competitive pressure

If no technology is able to compete with the renewable technologies (for example due to the risk of rising gas prices) then the worst thing that would happen is that wind generators would continue to be built. The only complaint that the renewable industry could have against such a proposal is that they would be subject to more competitive pressure.

With lower costs and prices from such a transformation of the RET, the government could afford to leave the target where it is and rely on the transformed RET to do more work to contribute towards the achievement of Australia’s emissions reduction.

Unfortunately, the only beneficiaries from such a transformation of the RET are customers and the economy and, sadly, there is nobody to advocate for these stakeholders in the current RET debate.

Danny Price is managing director of Frontier Economics.
Australian Financial Review

When Danny Price says: “The economic costs of lowering the wholesale price charged by thermal generators by subsidising renewable generators will be enormous” he’s playing as the master of understatement.

As Liberal Member for Hume, Angus “the Enforcer” Taylor has repeatedly pointed out, the mandatory RET is nothing short of “corporate welfare on steroids” (see our posts here and here and here).

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), the cost of Renewable Energy Certificates and their bedmate – the mandated shortfall charge will add a minimum of $39 billion, and – if the price of RECs reaches $100 (as is forecast under the current RET of 41,000 GWh) – up to $60 billion, to power consumer’s bills over the next 17 years (see our post here).

As Danny Price points out, the original purpose of (and justification for) the mandatory RET was the cost-effective abatement of CO2 emissions in the electricity sector. So Australian power punters – lumped with the task of propping up near-bankrupt outfits like Infigen (aka Babcock & Brown) via the redirection of $40-60 billion of their hard-earned cash over the next 17 years – might reasonably ask just how much CO2 abatement “bang” they’re getting for those very considerable bucks?

It’s the very question that Danny Price has been grappling with over the last few months.

STT followers will be pleased to know that Danny Price hates intermittent, unreliable and insanely expensive wind power with a passion – and that he’s been tasked by the Coalition with coming up with a workable method of achieving least-cost CO2 abatement.

STT Champion, SA Senator Nick Xenophon works closely with Danny Price; and is right behind Danny’s plan to chop the massive subsidies directed to the wind industry, in order to bring about a cost-effective policy of meeting Australia’s CO2 emissions target. The Coalition are keen to follow Nick’s lead; and, in order to get the changes through the Senate, are negotiating with Nick and the other cross-bench Senators, including Clive Palmer’s PUP Senators – as reported in The Australian today.

Coalition in direct RET talks
The Australian
Sid Maher
25 August 2014

THE Coalition is negotiating changes to its direct action policy in a bid to win crucial support from crossbench senators as new research shows the policy can meet Australia’s emissions reduction targets.

However, a key stumbling block remains the Palmer United Party, which The Australian understands is maintaining its position that support for direct action is contingent on the government agreeing to its plan for an emissions trading scheme.

Research by RepuTex shows that amendments to the scheme being proposed by independent senator Nick Xenophon could dramatically increase the amount of abatement that could be purchased by the government’s direct action scheme. The centrepiece of direct action, the $2.55 billion emissions reduction fund, is contained in amendments to the legislation that establishes the Carbon Farming Initiative.

It is expected to be voted on by the Senate in the spring sittings of parliament. Amendments proposed by Senator Xenophon include opening up the scheme to a limited purchase of international permits, changing the contracting and crediting periods for the emissions reduction fund and changes to the auction mechanism.
The Australian

STT hears that there is every chance a workable solution – along the lines developed by Danny Price and supported by Nick Xenophon – will be adopted by the PUP. In which event, the changes will cruise through the Senate.

Danny Price’s mission is to amalgamate the entirely unsustainable REC Tax – filched from unwitting power consumers and directed to wind power outfits – into the Direct Action policy, under which an Australian Carbon Credit Unit (CCU) will be issued to anyone stumping up audited proof that they’ve reduced or abated 1 tonne of CO2. The CCU will be tradeable on international markets and the equivalent of European carbon credits, which trade around A$8. Under Danny’s plan, RECs will be replaced with CCUs – and the subsidy per MWh of wind power will plummet from a projected $100 to less than $10. For a run-down on the mechanics of Danny’s plan – see our post here.

While seeing their subsidy gravy train slashed by 90% might sound a little like “bad news” for wind power outfits, earning CCUs comes with a BIG catch: CCUs will ONLY be issued where there is credible proof that the applicant has reduced or abated CO2. For wind power outfits this means coming up with actual proof (not smoke and mirrors “modelling”) that they have in fact reduced CO2 emissions in the electricity sector.

As youngsters sceptical of their peers’ more ambitious pronouncements say: “well, good luck with that”.

The need for 100% of wind power capacity to be backed up 100% of the time by fossil fuel generation sources means that wind power cannot and will never reduce CO2 emissions in the electricity sector (see our posts here and here and here and here and here and here and here).

E.ON operates numerous transmission grids in Germany and, therefore, has the unenviable task of being forced to integrate the wildly fluctuating and unpredictable output from wind power generators, while trying to keep the German grid from collapsing (E.ON sets out a number of the headaches caused by intermittent wind power in the Summary of this paper at page 4). Dealing with the fantasy that wind power is an alternative to conventional generation sources, E.ON says:

“Wind energy is only able to replace traditional power stations to a limited extent. Their dependence on the prevailing wind conditions means that wind power has a limited load factor even when technically available. It is not possible to guarantee its use for the continual cover of electricity consumption. Consequently, traditional power stations with capacities equal to 90% of the installed wind power capacity must be permanently online [and burning fuel] in order to guarantee power supply at all times.”

STT is happy to go all out and say that in Australia wind power requires 100% of its capacity to be backed up 100% of the time by conventional generation sources. As just one recent example, on 3 consecutive days (20, 21 and 22 July 2014) the total output from all of the wind farms connected to the Eastern Grid (total capacity of 2,952 MW – and spread over 4 states, SA, Victoria, Tasmania and NSW) was a derisory 20 MW (or 0.67% of installed capacity) for hours on end (see our post here). The 99.33% of wind power output that went AWOL for hours (at various times, 3 days straight) was, instead, all supplied by conventional generators; the vast bulk of which came from coal and gas generators, with the balance coming from hydro generators.

For wind power to reduce CO2 emissions in the electricity sector it has be a true “substitute” for conventional generation sources. Because it can’t be delivered “on-demand” (can’t be stored) and is only “available” at crazy, random intervals (if at all) wind power will never be a substitute for conventional generation sources (see our post here). Accordingly, wind power is simply incapable of reducing CO2 emissions in the electricity sector

The wind industry has never produced a shred of evidence to show that wind power has reduced CO2 emissions in Australia’s electricity sector. To the contrary of wind industry claims, the result of trying to incorporate wind power into a coal/gas fired grid is increased CO2 emissions (see this European paper here; this Irish paper here; this English paper here; this American article and this Dutch study here).

STT hears that Danny Price is well and truly alive to all that.

With Tony Abbott about to go on the offensive in his quest to wind up the mandatory RET (expect to hear more from the PM this week) the wind industry’s wild and unsubstantiated claims about CO2 abatement in the electricity sector provide the PM with just another reason to bring the greatest environmental and economic fraud of all time to a shuddering halt.