Out to Save their Wind Industry Mates, Macfarlane & Hunt Lock-in $46 billion LRET Retail Power Tax

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Wind industry front men, Ian “Macca” Macfarlane and, his youthful ward, young Gregory Hunt are out to defy all-comers: the Liberal’s core constituency (of conservative voters); their colleagues, Joe Hockey and Mathias Cormann; boss, Tony Abbott; and political, economic and environmental common sense – as they pump up a deal with Labor to salvage the Large-Scale Renewable Energy Target, and their mates at Infigen, Vestas & Co.

Over the last week or so, Macca’s last-ditch deal to get Labor to sign up to cut the LRET from 41,000 GWh to 33,000 GWh was hailed by economics dullards like The Australian’s Sid Maher as a “Breakthrough”, in a series of articles that included this piece of pure fantasy:

Mr Macfarlane has expressed concerns about the ability of the renewables industry to meet its RET targets after a collapse in ­investment in the sector. Failure to meet the target risks invoking a penalty clause that would double the cost of the scheme.

Anyone that follows these pages should spot the fiction within the fallacy; given that STT has been repeatedly pounding that kind of nonsense for some time now. And, like a dog with his favourite, well-gnawed bone, we won’t be letting go any time soon.

True, it is, that the wind industry will never meet the current target – and, as we’ve said before, it won’t meet the ‘new’ 33,000 GWh target, either. However, the claim that hitting the “penalty” will “double the cost of the scheme” is pure political twaddle; Macca knows it – and any journo who has bothered to do their homework – by reading the legislation, say, would have picked it in a heartbeat.

In short, Australia’s electricity retailers have closed ranks on wind power outfits by steadfastly refusing to enter Power Purchase Agreements, without which wind power outfits will never obtain the finance needed to build any new wind farms. The consequence being that retailers will be hit with the shortfall penalty (the ‘penalty clause’ referred to above), the full cost of which will be recovered from power consumers (a “stealth tax” that will add more than $20 billion to power bills). In addition, the cost of Renewable Energy Certificates will add a further $25 billion, taking the combined total of the REC Tax/Shortfall Charge added to retail power bills to a figure in the order of $46 billion.

At the risk of repeating ourselves (and we concede the point if challenged), in the balance of this post we’ll update our figures; and spell out just why this latest ‘deal’ is simply an effort to postpone the inevitable implosion of the most costly, and utterly pointless, Federal Government industry subsidy scheme ever devised. So, with that aside, on with the show.

The LRET is a policy debacle; it’s completely unsustainable, on every level: economic, social and political. It is not – as the likes of Macca and Hunt cynically pretend – and a gullible press naively reports – a warm and fuzzy, family and business friendly policy that won’t cost anyone a cent.

What journos like Sid Maher have either failed to appreciate – or are simply choosing to ignore – is the fact that the demise of the LRET has nothing to do with numerical targets, the death of the wind industry is a consequence of Australia’s electricity retailers’ commercially driven desire to destroy the LRET, and the wind industry along with it.

In the absence of the mandated subsidies (“the carrot”) directed to wind power outfits, and the mandated penalties (“the stick”) whacked on retailers under the LRET, there would simply be no market whatsoever for wind power (see our post here). Kill or cut the LRET, and the wind industry is completely finished – it’s mortally wounded now.

Commercial power retailers have not entered any Power Purchase Agreements (PPAs) to purchase wind power (or, rather, to obtain RECs) since November 2012. The wind industry’s demise was laid out long before the RET Review panel got to work in April 2014 and the talk about ‘dreaded uncertainty’ is just that: wind farm construction in Australia has come to a grinding halt because it makes no commercial sense to purchase power from an intermittent and wholly weather dependent generation source, that costs 3-4 times the cost of conventional power.

The shortfall charge, set by the legislation at $65 per MWh, is not a deductible business expense (the shortfall charge is treated as a “fine”), the effective pre-tax penalty is, therefore, $92.86 ($65/(1-30%), assuming a 30% marginal tax rate. In the past, we’ve used $94 as the likely trading figure for RECs (as the shortfall charge starts to bite); but, as young Gregory Hunt uses the figure of $93 – when he refers to it as “a massive penalty carbon tax” – we’re happy to knock off the buck and run the numbers again.

Retailers, like Grant King from Origin Energy, have made it known that they have no intention of entering PPAs with wind power outfits – and, instead, will simply pay the shortfall charge, collect the full cost of it from their customers (ie $93 per MWh – compared with the average wholesale price of $35 per MWh) and declare the cost of the fines on their retail power bills as a “Federal Tax on Electricity Consumers”.

The cost of the shortfall charge at $65 per MWh compares with the average wholesale power price of between $35-40 per MWh. Therefore, at a minimum, retailers will be paying $100-105 per MWh for power, once the penalty hits (the average wholesale price plus the shortfall charge).

The Australian’s top economics writer, Judith Sloan has observed that the effect of the $65 per MWh shortfall charge “will be to triple the value of RECs and drive up electricity prices to a dramatic extent”; referring to the REC price in February this year – around $34 at that time – and the effect of the tax treatment of RECs versus the shortfall charge. As Judith notes, retailers will be looking to recover $93 in respect of every shortfall penalty charge they get hit with: ie, the $65 per MWh cost of the shortfall charge and the loss of the tax benefit that would otherwise be received were they to purchase RECs.

STT has likened the scenario to a “political time bomb”, where the government of the day will be belted at the ballot box for the utterly unjustified escalation in power prices, that will inevitably result from the LRET debacle.

And that brings us to Macca and Hunt’s latest efforts to salvage the wreckage of the LRET, their mates at near-bankrupt wind power outfit, Infigen (aka Babcock and Brown) and struggling Danish fan maker, Vestas, as well as their political skins.

Macca and Hunt are driving – with a lot of ‘help’ from the wind industry plants and stooges in their offices – a pitch whereby the ultimate annual LRET target gets pulled from 41,000 GWh to 33,000 GWh per year.

The LRET target is set by s40 of the Renewable Energy (Electricity) Act 2000 (here); and it’s the annual target set under that section that Macca and Hunt are hoping to pull in a deal with Labor, that, as we go to print, also appears to need help from 6 of the 8 Senate cross-benchers.

At the present time, the total annual contribution to the LRET from eligible renewable energy generation sources is 16,000 GWh; and, because retailers have not entered PPAs with wind power outfits for nearly 2½ years – and have no apparent intention of doing so from hereon – that’s where the figure will remain.

With no new wind power capacity being added – and none likely to be added – that leaves the shortfall at 17,000 GWh, or 17,000,000 MWh (1GWh = 1,000MWh); based on Macca and Hunt’s 33,000 GWh ultimate annual target.

So, as we’ve done before, we’ll put some numbers under what Macca and Hunt’s latest, last-ditch Infigen and Vestas salvage mission means – should they succeed – for Australian power punters and their retail power bills – assuming, of course, that they aren’t already among the tens of thousands that have been chopped from the grid, because they can’t pay their power bills now (see our posts here and here); or among those whose businesses are getting slammed against the wall, due to rocketing power prices (see our posts here and here).

In the table below, the “Shortfall in MWh (millions)” is based on the current, total contribution of 16,000,000 MWh, as against the 33,000 GWh target being pitched by Macca and Hunt, set out as the “Target in MWh (millions)”.

The target currently set for 2019 is 36.4 million MWhs, but we’ll assume that gets pulled to 33 million too, under Macca and Hunt’s ‘ingenious’ Infigen and Vestas rescue plan.

A REC is issued for every MWh of eligible renewable electricity dispatched to the grid; and a shortfall penalty applies to a retailer for every MWh that they fall short of the target – the target is meant to be met by retailers purchasing and surrendering RECs. As set out below, the shortfall charge kicks in this calendar year.

As set out above, given the impact of the shortfall charge, and the tax treatment of RECs versus the shortfall charge, the full cost of the shortfall charge to retailers is also $93. Using that figure applied to the 33,000 GWh ‘deal’, we’ll start with the cost of the shortfall penalty.

Year	Target in MWh (millions)	Shortfall in MWh (millions)	Penalty on Shortfall @ $65 per MWh	Minimum Retailers recover @ $93
2015	18	2	$130,000,000	$186,000,000
2016	22.6	6.6	$429,000,000	$613,800,000
2017	27.2	11.2	$728,000,000	$1,041,600,000
2018	31.8	15.8	$1,027,000,000	$1,469,400,000
2019	33	17	$1,105,000,000	$1,581,000,000
2020	33	17	$1,105,000,000	$1,581,000,000
2021	33	17	$1,105,000,000	$1,581,000,000
2022	33	17	$1,105,000,000	$1,581,000,000
2023	33	17	$1,105,000,000	$1,581,000,000
2024	33	17	$1,105,000,000	$1,581,000,000
2025	33	17	$1,105,000,000	$1,581,000,000
2026	33	17	$1,105,000,000	$1,581,000,000
2027	33	17	$1,105,000,000	$1,581,000,000
2028	33	17	$1,105,000,000	$1,581,000,000
2029	33	17	$1,105,000,000	$1,581,000,000
2030	33	17	$1,105,000,000	$1,581,000,000
Total	495.6	239.6	$15,574,000,000	$22,282,800,000

Between now and 2031, Macca and Hunt’s 33,000 GWh total target could be satisfied by the issue and surrender of 495,600,000 RECs. However, with only 16 million RECs available annually there will be a total shortfall of 239,600,000: only 256 million RECs will be available to satisfy the LRET’s remaining 495,600,000 MWh target, set under the ‘brilliant’ 33,000 GWh Infigen and Vestas rescue ‘plan’.

Under the latest ‘deal’, assuming that RECs hit $93, as the penalty begins to apply later this year, the total cost added to power consumers’ bills will top $46 billion (495,600,000 x $93), as set out in the table below.

Power consumers will end up paying for the shortfall penalty collected by the Federal government, and for the cost of the RECs issued to wind power outfits – in relation to collecting the cost of the REC Subsidy from power consumers, Origin Energy’s 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 paid to wind power outfits.

To give some idea of how ludicrously generous the REC Subsidy is, consider a single 3 MW turbine. If it operated 24 hours a day, 365 days a year – its owner would receive 26,280 RECs (24 x 365 x 3). Assuming, generously, a capacity factor of 35% (the cowboys from wind power outfits often wildly claim more than that) that single turbine will receive 9,198 RECs annually. At $93 per REC, that single turbine will, in 12 months, rake in $855,414 in REC Subsidy.

But wait, there’s more: that subsidy doesn’t last for a single year. Oh no. A turbine operating now will continue to receive the REC subsidy for 16 years, until 2031 – such that a single 3 MW turbine spinning today can pocket a total of $13,686,624 over the remaining life of the LRET. Not a bad little rort – considering the machine and its installation costs less than $3 million; and that being able to spear it into some dimwit’s back paddock under a landholder agreement costs a piddling $10-15,000 per year. State-sponsored theft never looked easier or more lucrative!

The REC Tax/Subsidy, including that associated with domestic solar under the original RET scheme, has already added $9 billion to Australian power bills, so far.

At the end of the day, retailers will have to recover the TOTAL cost of BOTH RECs AND the shortfall charge from Australian power consumers, via retail power bills.

And that’s the figure we’ve totted up in the right hand column in the table below – which combines the annual cost to retailers of 16 million RECs at $93 (ie $1,488,000,000) and the shortfall penalty, as it applies each year from now until 2031, at the same ultimate cost to power consumers of $93.

Year	Target in MWh (millions)	Shortfall in MWh (millions)	Shortfall Charge Recovered by Retailers @ $93	Total Recovered by Retailers as RECs & Shortfall Charge @ $93
2015	18	2	$186,000,000	$1,674,000,000
2016	22.6	6.6	$613,800,000	$2,101,800,000
2017	27.2	11.2	$1,041,600,000	$2,529,600,000
2018	31.8	15.8	$1,469,400,000	$2,957,400,000
2019	33	17	$1,581,000,000	$3,069,000,000
2020	33	17	$1,581,000,000	$3,069,000,000
2021	33	17	$1,581,000,000	$3,069,000,000
2022	33	17	$1,581,000,000	$3,069,000,000
2023	33	17	$1,581,000,000	$3,069,000,000
2024	33	17	$1,581,000,000	$3,069,000,000
2025	33	17	$1,581,000,000	$3,069,000,000
2026	33	17	$1,581,000,000	$3,069,000,000
2027	33	17	$1,581,000,000	$3,069,000,000
2028	33	17	$1,581,000,000	$3,069,000,000
2029	33	17	$1,581,000,000	$3,069,000,000
2030	33	17	$1,581,000,000	$3,069,000,000
Total	495.6	239.6	$22,282,800,000	$46,090,800,000

Under the current ultimate LRET target of 41,000 GWh, the figure tops out at $3,854,000,000 a year; and $55,178,000,000 in total, so Macca and Hunt’s BIG compromise drops the REC Tax/Shortfall Penalty impact on retail power prices by a piddling $785 million a year, or $9,087,200,000 over the life of the LRET rort.

Whether it’s RECs being generated by current (or additional) wind power generation, or the shortfall charge being applied, retailers will be recovering the combined costs of BOTH – and power consumers will not “avoid” or, as Macca’s youthful ward, Greg Hunt asserts, be “protected” from any of it under Macca and Hunt’s Infigen and Vestas rescue plan.

As our simple little exercise in arithmetic makes plain, over $46 billion will be added to all Australian power consumers’ bills; irrespective of whether Macca and Hunt are able to satisfy the desires of their mates at Infigen, Vestas & Co to carpet the country in giant fans.

Not that it matters much to Australian power consumers footing the bill, but the ONLY difference is where that $46 billion gets funnelled. In the case of the REC Tax, that gets directed as a subsidy to wind power outfits (like Infigen and Pac Hydro); in the case of the shortfall charge, that gets directed to the Federal government, and goes straight into general revenue – as we call it, a “stealth tax” – as young Greg Hunt calls it, a: “massive $93 per tonne penalty carbon tax.”

Under Macca and Hunt’s piece of energy market ‘magic’, the $46 billion cost to power consumers of the REC Tax/Shortfall Penalty is just the tip of the iceberg.

The wind power capacity that Macca and Hunt’s mates at Infigen & Co are so desperate to build (in order to keep their Ponzi scheme from collapsing, as it has with Pacific Hydro) – and which Macca and Hunt hope will satisfy their ‘new’ target – will cost at least a further $80-100 billion, in terms of extra turbines and the duplicated network costs needed to hook them up to the grid: all requiring fat returns to investors; costs and returns that can only be recouped through escalating power bills:

Ian Macfarlane, Greg Hunt & Australia’s Wind Power Debacle: is it Dumb and Dumber 2, or Liar Liar?

LRET “Stealth Tax” to Cost Australian Power Punters $30 BILLION

In the first of the posts above we looked at the additional costs of building the wind power capacity needed to avoid the shortfall penalty – including the $30 billion or so needed to build a duplicated transmission grid. That is, a network largely, if not exclusively, devoted to sending wind power output from remote, rural locations to urban population centres (where the demand is) that will only ever carry meaningful output 30-35% of the time, at best. The balance of the time, networks devoted to carrying wind power will carry nothing – for lengthy periods there will be no return on the capital cost – the lines will simply lay idle until the wind picks up.

The fact that there is no grid capacity available to take wind power from remote locations was pointed to by GE boss, Peter Cowling in this recent article, as one of the key reasons that there will be no new wind farms built in Australia:

GEreports: Can Australia now learn from any other country in how to encourage renewables?

Peter: Oh yeah, certainly. I mean, I think China’s perhaps an extreme example, but the point is that you put a firm policy in place, and you take it seriously, you unleash infrastructure bottlenecks to allow it to happen, and it will happen.

GEreports: What are Australia’s infrastructure bottlenecks?

Peter: Quite often there are concerns about grid stability if you have large numbers of renewable plants out there. You can fix all that if you really are honest about wanting to increase the level of renewables in the system. There are technical fixes to all of this.

GEreports: Can you give me an example?

Peter: Ultimately, what you might have to do is what they’ve done in Texas, which is get out there and build a new grid – big backbone powerlines – and then the wind turbines come. The problem in Australia is we look at a big windy area and say, “Oh, look, it hasn’t got any grid.” No individual developer can afford to build grid, so it doesn’t happen.

GEreports: The government should do that?

Peter: They could if they wanted to, or they could step up and put in place the mechanism to encourage someone else to do it.

Australia has stepped back from that sort of planning of the grid. The government used to own the grids, and we’re pulling back from that. And that’s fine. It’s not vital that you own it. But you do have to have a plan and send the right signals to investors that you’re serious about the plan for them to be able to risk investing. And that’s a critical question.

Let the private sector do it and I think you’d probably drive your best result, particularly in an economy like Australia. But, you do need the certainty, and the reason things have stalled in Australia is not because it’s too hard or because there’s planning issues or anything else.

It’s simply that people cannot be certain at the moment that the renewable energy target will still be binding on those liable under it, so people pull back from investing. Too risky.

Network owners have no incentive to build the whopping additional transmission capacity required to accommodate new wind power capacity; and nothing like the capacity needed to send a further 17,000 GWh into the grid to meet a 33,000 GWh target.

In many places, there are numerous wind farms planned, but the existing transmission lines are literally full to capacity. One example is the Hornsdale project north of Jamestown in South Australia, which Investec offloaded a year or so back (see our post here). The original plan was for 105, 3MW turbines (or 315MW of nameplate capacity), but the line they were targeting is only capable of taking a further 60-90MW when the wind is blowing (wind farms at Jamestown and Hallett all hook in to the same line). STT hears that the latest ‘plan’ involves 30 turbines, in recognition of the fact that the line has no room to take anything more.

Moreover, even if investors were prepared to – in a Field of Dreams, “build it and they will come” moment, of the kind suggested by GE – throw money at a duplicated grid, the returns demanded by those investors can only be recovered from retail power customers. Which is yet another reason why retailers are out to wreck the LRET and the wind industry with it.

This might sound obvious, if not a little silly: electricity retailers are NOT in the business of NOT selling power.

Adding a $46 billion electricity tax to retail power bills (the ‘modest’ figure under Macca and Hunt’s cunning Infigen and Vestas rescue plan) can only make power even less affordable to tens of thousands of households and struggling businesses, indeed whole industries, meaning fewer and fewer customers for retailers like Origin.

The strategy adopted by retailers of refusing to ‘play ball’ by signing up for PPAs will, ultimately, kill the LRET. It’s a strategy aimed at being able to sell more power, at affordable prices, to more households and businesses. It’s a strategy with a mercenary purpose; and has Hunt, Macca and their wind industry backers in a flat panic.

The continued public squabbling in Canberra over the ‘magic’ LRET number, is simply a signal that the retailers’ have already won. Once upon a time, the wind industry and its parasites used to cling to the idea that the RET “has bi-partisan support“, as a self-comforting mantra: but not anymore. And it’s the retailers that have thrown the spanner in the works.

Power retailers have no incentive to lock themselves into PPAs that run for 10-15 years (the time frame demanded by wind power outfits or, rather, the banks lending to build wind farms), at prices 3-4 times the wholesale price, where the demand for power has fallen, along with the wholesale price; and demand is unlikely to improve much from here.

Nor do they have any incentive to support a policy that will simply price their customers out of the market; leaving them sitting in their – soon to be, if not already, disconnected homes – freezing (or boiling) in the dark; or shutting the doors on power hungry enterprises, like mines and mineral processors, or manufacturing, for starters.

With the collapse in iron ore prices, Australia’s economic dream run is over.

Despite the economic punishment that’s coming, Macca and Hunt are working over-time to ensure the survival of their mates at Infigen and Vestas, via a $3 billion a year wind industry subsidy, that will simply result in further generating capacity (albeit of the kind that can only be delivered, if at all, at crazy, random intervals) – at a time when Australia has REAL power generating capacity coming out of its ears.

There is NO shortage of electricity in Australia: what there is, is a shortage of reliable and affordable power. With Macca and Hunt pulling out all-stops to throw $46 billion at a wholly weather dependent power source – that’s 3-4 times the cost of the reliable stuff – it simply begs the question: just who do these clowns pretend to represent?

It’s against that backdrop, that it’s necessary to be reminded that Hunt and Macfarlane are supposed to be on the conservative side of politics. Their fervent (and seemingly inexplicable) support for the wind industry stands in lamentable contrast with the approach being shown by the Conservatives in the UK, where David Cameron won an election promising to end all subsidies to on-shore wind power:

UK Elections: Brit’s Deliverance from its Wind Power Disaster

The US, where the ‘wind power’ states have cut their state based subsidies to wind power outfits (or are well on the path of doing so); and Republicans are out to prevent the extension of the Federal government’s PTC wind power subsidy:

2015: the Wind Industry’s ‘Annus Horribilis’; or Time to Sink the Boots In

US Republicans Line Up to Can Subsidies for Wind Power

Germany, where consumers and industry are fed up with escalating power prices:

German’s Top Daily – Bild – says Time to Chop Massive Subsidies for Wind Power

And Vesta’s home turf, Denmark, where the government’s brewing and massive legal liability to wind farm neighbours has resulted in a full-blown moratorium on planning permits for new wind farms:

Denmark Calls Halt to More Wind Farm Harm

While Hunt and Macfarlane might consider themselves smarter than the market, for power consumers – and the economy as a whole – salvation comes from the fact that power retailers do NOT have to follow the insane path set by the LRET. By refusing to sign PPAs with wind power outfits, retailers hopped off that commercially suicidal track nearly 2½ years ago; which has given them round one on points. Markets usually win in the end – ask Australian motor manufacturers, General Motors Holden and Ford.

The fact that power consumers (read ‘voters’) will be walloped with a $46 billion electricity tax under the LRET is not so much a problem for retailers, as a brewing political nightmare for the Federal government.

That the bulk of that tax will be collected as fines by retailers, provides them with the perfect piece of political leverage. Once power punters work out that they’re being slugged with a fine that’s around 3 times the cost of the power being supplied to them (ie an additional $93 per MWh, on top of the average wholesale price of $35 per MWh), they won’t just be a little miffed, they’ll be furious.

With wind power outfits in a state of grief stricken panic and their political saviours, like Macca, and Hunt powerless to make retailers enter PPAs, retailers need only keep their nerve, keep their pens in their top pockets, and watch the whole LRET debacle implode.

Far from ‘saving’ the LRET, or avoiding the shortfall penalty, the latest ‘deal’ has simply guaranteed the demise of the former, by the certain imposition of the latter. Political punishment will follow, as night follows day.