Origin’s Grant King Spells Out the Inevitable Demise of the LRET & the Wind Industry

turbine burns-Netherlands

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In last night’s post we took a look at China’s wind power debacle, where grid operators are refusing to hook up wind farms to the grid – due the uneconomic cost of doing so in remote locations – with the result that more than 20% of its wind power capacity sits idle – and the inescapable economics of the situation mean that hundreds of $millions directed at spearing turbines across the country have been, well, ‘thrown to the wind’.

In Australia, wind industry front men, Ian “Macca” Macfarlane and his youthful ward, Greg Hunt have been patting themselves on the backs for stitching up a “deal” with Labor for an ultimate 33,000 GWh annual target, under the Large-Scale Renewable Energy Target. The “deal” was done for no apparent purpose, other than saving their mates at near-bankrupt wind power outfit Infigen (aka Babcock & Brown).

Macca and Hunt – along with help from wind industry shills at the Clean Energy Regulator – have pitched the deal to Tony Abbott on entirely fictitious terms – arguing that it will avoid the imposition of the $65 per MWh shortfall charge – what young Greg calls “a massive $93 per tonne carbon tax”:

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

In fact, STT hears that this energy market “brains trust” has gone right out on a limb and given a guarantee to the PM that the wind industry will be able to build the capacity needed to make up the current 17,000 GWh shortfall in renewable energy available to meet their LRET target; and thus avoid the imposition of the penalty.

In a game of “smoke and mirrors”, what Macca, Hunt and the CER are deliberately concealing is the fact that the ultimate cost of the REC Tax under the LRET to power consumers is the same; irrespective of whether the target is satisfied or not.

To meet Macca and Hunt’s new target requires the issue and surrender of 495,600,000 RECs, which will hit $93 as the penalty tax begins to bite shortly. The full cost of the REC subsidy is added to retail power bills (it’s wrapped up in the Power Purchase Agreements between retailers and wind power outfits). Which means that the total cost added to power consumers’ bills will top $46 billion (495,600,000 x $93):

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

To that whopping cost to retail power consumers will be added the cost of spearing another 2,500 turbines far and wide across the country; the massive cost of building a duplicated grid to connect them and bring the power from the back-of-beyond to the cities where it might get used; and returns needed on all that capital ‘investment’.

Origin Energy is Australia’s largest power retailer; and its CEO, Grant King has been slamming the insane cost of the LRET for years. Grant King and other big retailers, like AGL and EnergyAustralia have been using the terms “unsustainable” and “unachievable” to describe the greatest corporate welfare scheme in the history of the Commonwealth, since 2013 (see our posts here and here).

Now, Grant King has weighed in again. This time he’s raining on Hunt, Macca and the CER’s parade, by pointing out the exponential increase in costs that would result from trying to get the extra 17,000GWh of wind power needed to meet their “revised” annual 33,000 GWh LRET target.

Construction costs to rise in RET deal, Origin CEO warns
The Australian
Matt Chambers
21 May 2015

Origin Energy managing director Grant King says construction costs are set to rise under the new renewable energy target deal as the industry scrambles to build $10 billion to $15bn of new capacity in about four years.

Speaking to The Australian after Monday’s deal between the Coalition and Labor to cut the target from 41,000GWh by 2020 to 33,000GWh, Mr King said the brunt of the costs would eventually be born by consumers for extra power capacity at a time of stagnant demand, meaning other power supplies would be forced out.

“If, at the end of the day, all the forces at work in the community say we want renewable energy and we’re willing for people to pay more for it, we’ll support that number,” he said on the sidelines of the Australian Petroleum Production and Exploration Association conference in Melbourne.

“But it’s important to remember there is no need for extra generation. If the extra 15,000GWh costs $10bn or $15bn, then that’s not a cost necessary to occur specifically to make sure people have enough power.”

When the scheme was conceived in 2010, demand growth was expected, and the renewable capacity was expected to feed new demand. But grid demand is now expected to fall because of increased efficiency, solar and slowing industrial use.

“The RET was never designed to force stuff out; it was designed to cause the future mix to be different,” Mr King said.

“With lower demand, what it’s trying to do is force stuff out and that’s a very different outcome than making the future choices different.”

Origin has a mix of coal, gas and renewable power after buying the Eraring black coal assets in 2013.

Mr King said there were still a lot of renewable energy certificates in the system from earlier rooftop solar subsidies, meaning new capacity was probably not needed until 2016 to meet the target. When it did, it would require a big jump in construction — mainly wind farms — to boost capacity from current levels of 16,000 or 17,000GWh.

“The industry somehow has to cause as much to be built in three or four years as has been built in the entire life of the scheme — and that’s at 33 (thousand GWh). Imagine it at 41,” he said.

“It’s an exponential increase in the deployment that is going to drive up costs.”

….
The Australian

Grant King

Grant King: estimates the chances of avoiding the LRET penalty tax.

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Let’s pick up on Grant King’s observation that: “It’s an exponential increase in the deployment that is going to drive up costs.”

By “deployment”, King is including the need to build the grid and network infrastructure to absorb an entirely intermittent power source, generated in locations remote from power markets.

It’s a point we’ve covered a few times, when we’ve looked at the additional costs of building the wind power capacity needed to avoid the shortfall penalty: starting with the $10-15 billion referred to by Grant King in relation to slinging up extra fans; and going on to consider 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 (see our post here). And it’s the reason that China has more than 20% of its turbines spinning uselessly in the breeze:

China’s Wind Power Ponzi Scheme Collapsing: Grid Operators Refusing to Connect Wind Farms

As we’ve pointed out, power grids cost serious money to build; and operators need to demonstrate juicy, on-going returns to entice investors to stump up the cash needed to build them. Those returns can only be recouped via retail power bills; and cash-strapped households and struggling businesses – already wild about increasing power bills – will only get wilder as escalating network costs get tacked on top – especially when they realise that cost is both pointless and unnecessary.

Retailers have been railing against the cost of adding to network capacity – simply because it adds to already spiralling retail power costs, making it harder to sell power to people and businesses that can barely afford it now: see this submission by Energy Australia to the Australian Energy Regulator.  And this submission from South Australia’s Business lobby.

The money piled into networks has a price: investors want a return; and banks lending for it want their pound of flesh too. But there’s a limit to what the Australian Energy Regulator will allow grid operators to pass on to retailers (and, therefore, to what retailers need to recover from their customers).

Here’s a story on how the AER has clipped the wings of grid operators in Australia.

New rules mitigate power prices
InDaily
7 May 2015

The Australian Energy Regulator’s draft decision on SA Power Networks (SAPN) pricing may herald a period of relatively stable electricity charges, giving businesses a more predictable platform for growth.

In the first determination of SAPN’s network charges using new national guidelines, the regulator estimated prices for small businesses in South Australia should drop by 9.8 per cent (or $381) in 2015-16, decline by a further 2.4 per cent in the following financial year and then remain virtually unchanged for the rest of the decade.

It was a result consistent with determinations for power transmission networks in NSW, the ACT and Queensland announced on the same day by the Australian Energy Regulator (AER).

The new pricing regime for transmission networks – which can constitute up to 50 per cent of overall power prices – is the culmination of reforms put in place over the past four years by successive governments in Canberra.

The Federal Minister for Industry and Science, Ian Macfarlane, said the AER’s decisions showed reforms undertaken by the COAG Energy Council were working.

“Under arrangements established by the COAG Energy Council, chaired by the Commonwealth, there are new rules for the Australian Energy Regulator so it has the power to ensure that network businesses are only charging customers for necessary and efficient costs,” Macfarlane said.

“The reforms have strengthened the AER’s ability to question network businesses’ proposals, including the introduction of expenditure benchmarking and setting a reasonable rate of return on investment,” he said.

The AER challenged a number of SAPN’s claims and would only allow the network to recoup $3.21 billion in revenues from customers over the next five years, 32 per cent less than the company had requested.

One of the big ticket items in that equation was SAPN’s claim for operating costs – like labour and maintenance costs – of $1.52 billion. The AER rejected this figure and has only agreed to allow $1.23 billion in operating costs to be recouped.

The regulator maintained that it was not satisfied that the level of operating expenditure reflected the costs that a prudent operator with efficient costs and a realistic expectation of demand and cost inputs would need to deliver the distribution services.

Similarly, the AER rejected SANP’s claims for capital expenditure of $2.4 billion over five years, instead agreeing only to $1.68 billion. Again, the AER said SAPN had not demonstrated a case for the higher amount.

In an aspect of the determination welcomed by Business SA, the AER rejected additional expenditure claims by SAPN relating to environmental and bushfire expenditures.

The AER said: “In respect of SA Power Networks’ proposed bushfire risk mitigation programs, it did not demonstrate that its proposals comply with its current or expected future safety obligations related to bushfire risk”.

“Nor did SA Power Networks demonstrate its proposed level of investment is prudent and efficient. SA Power Networks’ proposed road safety capital investment programs also were not justified by evidence that these are consistent with its obligations under the National Electricity Rules (NER).”

Business SA chief executive Nigel McBride said “our recent survey of member businesses found 87 per cent want reduced electricity prices as their highest priority over increased spending on measures to improve reliability, customer service, bushfire mitigation and road safety”.

Other elements of the AER’s decision included setting a rate of return (SAPN’s cost of capital) of 5.45 per cent in 2015-16, rejecting SAPN’s submission for 7.62 per cent.

The AER said the investment environment had improved since its previous decision and “this improvement translates to lower financing costs necessary to attract efficient investment”.

The AER reduced SAPN’s depreciation allowance by 43 per cent, to $402 million, the impact of which would be that the company “will recover its investment from customers more gradually”.

Interested parties have until 3 July 2015 to respond to the AER’s draft SAPN determination.
InDaily

With the AER substantially limiting the ability of grid operators to recoup the full costs of their investments, there will be little stomach left for adding any new capacity, any time soon: in the present circumstances, these boys would be simply throwing good money after bad.

STT hears that – in response to the AER rejecting its claim for a 7.62% rate of return on its network investment, SA Power Networks is looking to sack some 1,200 workers, in order to rein in costs and balance its books.

Hardly the sort of environment in which you’d expect it to pour the hundreds of $millions needed to connect the wind farms threatened in SA at Palmer, the Yorke Peninsula and elsewhere. The ludicrous CERES project threatened for YP requires two 74km cables, 60km of which would run undersea that would cost somewhere between $100-200 million to build – and bring with them the consistent failures seen with Germany’s offshore wind farms, where running HVDC cables under water from off-shore turbines has been little short of a disaster (see our post here).

Wind power outfits have never put their hands up to bear so much as penny of the costs of building the extra grid capacity needed to take their third-rate wares (see our post here): that tight-fisted approach isn’t about to change any time soon. And it’s pretty clear from the refusal of retailers (like Origin) to enter PPAs with wind power outfits, that retailers aren’t about to help, either.

In the result, there is no way the extra grid capacity needed to absorb an extra 17,000 GWh of wind power will ever get built. The wind power outfits desperate to wallow in the $46 billion REC Tax/Subsidy trough will have no grid to connect to; and power consumers will be belted with the $93 per MWh shortfall penalty tax as sure as night follows day.

While Macca, Hunt and the CER may have “guaranteed” Tony Abbott that the power market won’t end up going to penalty, STT thinks they speak with forked-tongue. Tony, you’ve been warned.

lone ranger and tonto

You know Hunt, Macca & CER
speak with forked tongue, Kemosabe.

About stopthesethings

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

Comments

  1. bulldog says:

    Too many economic illiterates – like the greens – are spruiking the false promises of renewable energy.

    Don’t expect the majority of the public to make up their own minds; and don’t even mention the ABC, Fairfax media and unions who influence flawed labor policy.

    Come on Tony, put the boot in to the corrupt wind industry.

  2. no free lunch says:

    Thanks for exposing the forkers.

    STT ‘continues to break stories and set the agenda, with more original journalism and investigations than ever before’.

    (The ABC’s description of Latteline in fact more aptly applies to this remarkable site)

    Bravo!

  3. Terry Conn says:

    On 21/6/2012 I received an e-mail from Greg Hunt (in response to an e-mail I sent him) in which he said, quoting something he believed the NSW price regulator stated, that the RET’s contribution to the increase in power prices was 0.3%.

    I have not attempted to correspond with Mr. Hunt since because he is clearly a ‘disconnected fool’. This RET policy is as poor a policy that has ever been implemented in this country and it comes about, in my opinion, because the current crop of ‘professional elites’ running this country are so far removed from ‘reality’ that they can’t discern a fallacy even when it stares them in the face.

    Hunt has a 1st class honours degree, many other elites are well educated as well. The problem is they gone from university to publicly paid positions and not ever had a ‘job’ where the crap they come up with actually impacts their income.

    Grant King has had to survive in the ‘free enterprise ‘ environment, he knows that ‘decisions’ effect him and his workforce, he can actually see what this ‘wind farm’ scam is doing to the country. If Abbott prefers to take advice from another ‘professional elite’ like Chloe Munro (CEO of the CER) than he will fail to deliver to his support base, pure and simple.

    Meanwhile, the costs of ‘connecting’ and ‘running’ the national grid to wind farms will continue to escalate regardless of what, yet another publicly funded body, the Australian Energy Regulator, says.

    Other ‘unseen’ costs are those not disclosed, such as deals struck between the CSIRO and the university of Newcastle to spend millions on ‘projects’ (that will never work) on how to develop aspects of the ‘smart grid’ to deal with ‘intermittency’ and so on.

    Just how many of these projects are all our soft brained, publicly funded, ‘scientists’ at the CSIRO and various universities actually working on to solve the ‘problems’ of intermittent ‘renewable energy’?

    Ultimately, the only way all these ‘professional elites’ will be able to keep working on all this garbage is if electricity generation and distribution is ‘government owned and nationalised’ (already supported by the ‘left’).

    One thing for sure, the current ‘free enterprise’ system of provision of electricity services is doomed under MacFarlane and Hunt’s scenario and Grant King knows it. Meanwhile, the publicly funded, disconnected ‘smart alec’s’ still get paid at everyone else’s expense, they will be the last to go, unless the likes of Grant King don’t get our support.

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