How the Public Are Deceived About the True Cost of the Mandatory RET

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After a late start, the AFR finally catches up.

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The Australian Financial Review – as one of the lefty Fairfax stable – “drank the Kool Aid” early and happily ran with the wind industry’s narrative that having Australia bristle with giant fans is a sure-fire way of cooling mother Earth; that wind power is free; and that the mandatory RET is public policy at its best.

In short, the AFR has been a faithful outlet for wind industry spin and propaganda. Regurgitating an endless stream of Clean Energy Council (CEC) press releases; and giving the likes of Infigen (aka Babcock & Brown) free rein to spruik about the “wonders” of wind – never questioning, let alone challenging, the wild and fantastic claims made about lowering retail power prices (all while “saving” the planet, of course) – it’s been a serious media outlet of choice for the wind industry and its parasites.

Until now.

In the last few weeks there’s been a seismic shift in the AFR’s approach to the imminent demise of the mandatory RET. Faced with an increasing barrage of hysterical claims about the world ending if the RET gets the axe (by the likes of the CEC and Infigen’s Miles George) the AFR’s journos and editor have finally opened their eyes to the greatest rort of all time. And, to the horror of the CEC and its taskmasters, they’ve stopped buying the myths and mis-information pitched up by Infigen & Co.

Phil Coorey’s piece on how Tony Abbott, Joe Hockey and Mathias Cormann have joined forces to bring an end to most ludicrous policy ever devised sent the wind industry into a state of panic (see our post here).

Since then, the AFR has followed up with a terrific piece from Alan Moran and an editorial calling the mandatory RET flawed and unsustainable (see our post here) – and a detailed analysis of the inherent flaws and failings of the RET by crack energy market economist Danny Price (see our post here).

With the AFR turning on it, the wind industry must know its days are numbered.

The AFR continues its recent trend with this fine piece of work by Ben Potter and another terrific editorial that strip away the myth that the mandatory RET is a benign piece of “climate change” policy which won’t cost power consumers a thing.

Renewable energy lobby’s shell game
Australian Financial Review
Ben Potter
25 August 2014

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The renewable energy lobby employs a neat trick to show that billions in subsidies for the costliest forms of electricity can lower power prices.

Wind and solar power costs between 1½ and 10 times as much to produce as power from coal and gas. But the vagaries of the National Electricity Market allow the renewables sector to claim that it lowers prices – even if it imposes costs on consumers elsewhere.

In a shell game, a conman quickly moves around three shells on a table or mat and his buddies pressure passers-by to bet which one contains a pea.

The pea under the shell is $37 billion of renewable energy certificates (RECs) that electricity retailers will buy from renewable energy generators or generate themselves between now and 2030 if the renewable energy target scheme isn’t changed.

“It’s misleading, because the subsidy is the REC, and the REC certificate is acquitted at the retail level and is included in the retail price of electricity,” Origin Energy chief executive Grant King says.

The renewable energy target has helped drive installations of 52 wind farms and 1.3 million solar roof-top systems – about one-eighth of total capacity – since 2001, Bloomberg New Energy Finance says.

The NSW Independent Pricing and Regulatory Tribunal estimated the cost of the renewable energy target to the average household in 2013-14 at $107 – about 5.3 per cent of a typical $2012 bill.

It is now under review by a panel headed by businessman Richard Warburton, who is sceptical that human activity is causing global warming.

Because the price of RECs is about the same as the electricity price per megawatt/hour, renewables generators are deriving as much revenue from selling RECs as they are from selling power to the National Electricity Market.

“All it is is a tax on existing producers which is passed onto existing consumers,” says Tony Wood, head of the energy program at the Grattan Institute.

“No one denies, when they are asked the right question, that renewable energy costs more than fossil energy.

“The only question is who pays for it? And right now it’s a combination of consumers and fossil generators who are paying for it, and you’ve got to question is that the right policy?”

The RET’s costs are buried in ACIL Allens’ modelling for the RET review and a report issued by the Climate Institute last week.

Most of the costs are REC costs. Deloitte Access Economics in a report for business groups estimates the net present value of REC transfers to the renewables industry over 2015-30 at $17 billion, compared with $8 billion to $9 billion if the RET is closed or the target is wound back to a true 20 per cent of energy supplied.

When REC costs are included, retail bills are higher until at least 2020, after which opinions diverge.

ACIL Allen and the Climate Institute find that continuing the RET on its current path lowers household power bills by as much as $80 a year from now to 2030, despite swelling bills between now and 2020. Deloitte, using different assumptions about capital costs, falling demand and market responses, finds retail bills higher after 2020 as well.

The Climate Institute report shows the high long-run marginal production costs of solar and wind power – which include capital costs – relative to coal and gas. Coal and gas power come in at about $60 to $80 a megawatt hour in the eastern states, wind at $88 to $544 a megawatt hour and solar at $128 to $1533 megawatt hour.

But when it comes to bidding in the National Electricity Market, wind and solar clean up because they have zero short-term marginal costs (in the short term, capital costs are less important). Wood argues they even have negative short-term marginal costs because they need to produce energy to sell RECs.

The rising RET target forces renewables into the NEM, even though electricity demand is shrinking and no more capacity is required. Those factors combine to suppress wholesale prices, which have dipped below $40 a megawatt hour.

That in turn squeezes profits and market share for coal and gas generators, which have to cover their fuel costs, at peak times when they used to make their profits. Retailers then have to buy or generate renewable energy certificates to cover the renewable energy target – currently about 10 per cent, rising to about 28 per cent by 2020. The REC cost goes into the retail price.

If that cost is less than the wholesale price suppression, the consumer wins. But it’s a fine call, says Wood.

The RECs subsidy costs about $29 billion in net present value economic activity, 5000 jobs and $1260 in average annual earnings. This comes from more costly investments in renewables, which Deloitte says raise power prices and suppress resources, jobs and demand in other sectors.

Erwin Jackson, deputy chief executive of the Climate Institute, says such losses are more than offset by the benefits of emissions reductions under the RET.

A Climate Institute report released last week puts a much lower $2.7 billion economic cost on the RET. It finds it lowers household power bills after 2020. It values the social benefits of emissions cuts at $19 billion, based on a $24 to $50 a tonne social cost of carbon. Mr Jackson said this was almost certainly an under-estimate but “you have to factor it in, otherwise it’s a one-sided model and you are assuming climate change doesn’t exist.”

He admitted it was only an estimate of the RET’s contribution to global climate change efforts – offset by emissions increases in large emerging economies such as China and India – rather than any quantifiable benefit to Australia.

But it was the “best tool we have” to “open up the conversation” to considering the benefits of reducing emissions.

“What they’ll talk about very carefully is the cost to consumers, and they’ll show the cost to consumers is either slightly favourable or not much different – therefore ‘isn’t this a reasonable price to pay for renewable energy?’” Wood says.

“What they are very careful not to say [is] ‘what’s the cost to the Australian economy?’ because the cost to the economy includes the negative cost to the existing generators.

“To say that the renewable energy target is a small impost to consumers is the right answer but it’s the wrong question. The right question is ‘what’s the economic impact of the RET?’ and the economic impact of the RET is negative.”

The RET is a costly way to cut greenhouse gas emissions. Its price of abatement is $54 to $186 a tonne, up to eight times the recently abolished carbon price, ACIL Allen modelling for the RET review finds.

A cheaper – but politically tricky – way to reduce emissions to would be to return to a technology neutral carbon price signal.

The difference between Deloitte’s estimate of the REC cost savings from winding back the RET to a true 20 per cent and closing it – $9 billion – is similar to the $10 billion “additional profit” for coal and gas generators – such as Origin and EnergyAustralia – claimed by the Climate Institute report.

“It’s not that they’re better off because the RET was removed. It’s that they’re worse off because the RET was introduced,” Wood says.

Tim Sonnreich, strategic policy manager at the Clean Energy Council, an industry body, accepts that there’s a substantial wealth transfer from incumbent generators to renewables generators.

“We are not denying that,” Sonnreich says. “But it’s a wealth transfer that’s in favour of consumers so we would have thought in a political sense that’s a pretty popular one.”
Australian Financial Review

A valiant effort there from the CEC, as its spin master plays the shell game and otherwise attempts to turn night into day.

The mandatory RET sets up the greatest wealth transfer in the history of the Commonwealth. However, it’s not – as the CEC asserts – one that power consumers are going to thank their political betters for. That transfer – which comes at the expense of the poorest and most vulnerable; struggling businesses; and cash-strapped families – is effected by the issue, sale and surrender of RECs. As Origin Energy chief executive Grant King correctly puts it:

“[T]he subsidy is the REC, and the REC certificate is acquitted at the retail level and is included in the retail price of electricity”.

It’s power consumers that get lumped with the “retail price of electricity” and, therefore, the cost of the REC subsidy to wind power outfits. Between 2014 and 2031, the mandatory RET requires power consumers to pay the cost of issuing 603.1 million RECs to wind power generators. With the REC price likely be at least $65 (by 2017) – and tipped to exceed $90 – the wealth transfer from power consumers to the wind industry will be somewhere between $40 billion and $60 billion, over the next 17 years (see our posts here and here).

Here’s the AFR’s editor in response to the wind industry’s latest efforts to spin its way out of trouble.

Models can’t hide true RET cost
Australian Financial Review
Editorial
25 August 2014

Studies relied on by the renewable energy lobby to justify the continuation of the Renewable Energy Target make a lot about noise about the RET’s effect on the wholesale price of energy. But as shown in this newspaper today, force feeding up to 30 per cent renewables such as wind and sun-generated electricity into the power grid may put downward pressure on wholesale prices amid weak demand by artificially boosting supply. But the effect of forcing more power into the system will then show up in other ways: by increasing retail prices through the cost of renewable energy certificates. Those increased prices will reduce gross domestic product, by depressing productivity and by pushing up prices and costs elsewhere in the economy. That is, it is a highly expensive way to reduce emissions.

As previously discussed in this newspaper, an ongoing review of the RET led by Dick Warburton to make recommendations about winding back or even ending the scheme has resulted in considerable argument over the scheme’s effect on the electricity markets. These arguments include contradictory findings by computer modelling groups, with the RET lobby relying on studies pointing to the effect of dumping a lot of additional capacity into the wholesale market at a time of stagnating demand. However, as the coverage in today’s Financial Review notes, retailers still have to buy the Renewable Energy Certificates required to meet their obligations under the RET from the renewable generators, and that is expected to cost $37 billion between now and 2030, or as much as the electricity itself. That is $37 billion that must be reflected in higher prices elsewhere.

The arguments over the Renewable Energy Target show just how deftly skilled lobbyists can distort the debate, but we should not lose sight of the fact that the RET in any form will cost many billions of dollars in return for an hypothetical social benefit of the carbon emissions being offset.
Australian Financial Review

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About stopthesethings

We are a group of citizens concerned about the rapid spread of industrial wind power generation installations across Australia.

Comments

  1. Stand against wind says:

    Finally, the Fairfax media has woken up to the wind industry scam – now let’s hope the Sydney Morning Herald the Melbourne Age follow the Fin Review in exposing the cost burden all Australians are carrying to keep the ‘wind farm’ fallacy going. It’s time city folk woke up to the fact that it’s not just regional Australians who are negatively affected by these monstrosities.

  2. Terry Conn says:

    I have said it over and over again and I say it again today, the cost reality of mandated renewable energy targets is clearly observed by looking at the actual costs consumers pay in those countries, states or territories that have adopted policies that force renewables into the market eg. Denmark, Ireland, Scotland, Germany and Spain. The rest is ‘academic’! ‘Reality’ will win, it is just a matter of time. In the meantime, will the ‘wind industry’ get away with ‘scamming’ the punters long enough for them to set themselves up for their lifetime – not, I believe, if we keep up exposing the ‘scam’ for what it is.

  3. Yep, it’s Robin Hood in reverse: take from the poor to give to the rich! It’s about time the media started to see sense on this issue, particularly as the wind industry cannot prove its thousands of turbines actually reduce carbon emissions at all.

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