What Kills the Australian Wind Industry: A $45 Billion Federal Power Tax

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The wind industry in Australia is doomed.

Australia’s commercial lending institutions know it (calling in their loans and refusing to lend for any new wind farms).

The wind industry knows it – hence the big players’ frantic efforts to ditch their wind farms, cut and run – although these fire sales are as much a product of their bankers’ refusal to extend credit (see our post here).

The big power retailers know it (see our post here).

From the panic exhibited in Canberra earlier this year, every Federal MP knows it too (see our post here).

And the wind industry’s parasites and spruikers know it – but just can’t seem to bring themselves to swallow an inevitable and bitter pill (see this lament from former Infigen spinner, Andrew George).

What’s got their attention is the fact that the completely unsustainable Large-Scale Renewable Energy target is about to implode; in spectacular fashion. The policy is a political suicide note, pure and simple.

As we detail below, the LRET is about to ‘go to penalty’; a result that means Australian power punters will be paying over $1.5 billion every year as Federal penalty tax on electricity consumption – with nothing to show for it, save crushed businesses and candle-lit households.

The Coalition (the combination of the Liberals and the Nationals) is purportedly made up of conservative, pro-business, small government types.

Their core constituency can only be incensed by the fact that earlier this year their Environment Minister, young Gregory Hunt and his (now back-benched) mate, Ian “Macca” Macfarlane set them up with a $46 billion electricity tax: half of which will be directed to wind power outfits – like Macca’s mates at near-bankrupt Infigen (aka Babcock and Brown); with the balance being recovered as a $65 per MWh fine (aka “the shortfall charge”) – and directed to general revenue (ie a ‘stealth tax’):

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

Back in May, in a rush of intemperate blood, Hunt, Macfarlane and the Clean Energy Regulator gave a “guarantee” to then PM, Tony Abbott that wind power outfits will easily build the capacity needed to generate the extra 17,000 GWh required to satisfy the (then proposed) ultimate annual 33,000 GWh target (thus avoiding the politically toxic penalty tax set up under the LRET).

However, that little “promise” was more like a new Miss World’s teary, claimed aim of achieving world peace during her year-long reign: something that everyone with a modicum of common sense takes as pure nonsense.

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One other politically fatal furphy that was pitched by Hunt, Macca and the CER was that – provided the shortfall charge is avoided – the LRET carries absolutely no cost to power consumers at all (see the post above).

But Hunt’s Vicki Pollard like ‘consistency’ had him denying any cost impacts from the LRET, but, at the same time, delighted to announce that Energy Intensive Industries will be exempt from “all RET costs”. Yeh, but, no but, yeh but.

So which is it? Is the LRET a family and small business ‘friendly’, that’s as cheap as chips and a guaranteed vote winner? Or is the effort to protect the Aluminium sector etc a dead-set giveaway, that – at $3 billion a year – the LRET is the largest, single electricity tax ever cooked up? And the largest single industry subsidy scheme in the history of the Commonwealth?

It’s going to Penalty

STT hears that the finance sector has absolutely no intention of providing any money to build new wind power capacity. The expectation is that RECs will, in the longer term, trade in the order of $30, at which price wind power outfits will not break even, placing lenders at enormous and perfectly avoidable RISK (see our post here).

STT hears that the major retailers are of the same view.

Back in May, Greg Hunt talked about “the phantom credit bank of what is currently 23 million [REC] certificates” – what’s called the “overhang”.

Retailers, such as Origin, hold the bulk of those certificates and will be able to use them to avoid the shortfall charge, until they run out. That means that there has been no need for them to enter long-term Power Purchase Agreements with wind power outfits to obtain RECs.

The REC market has taken a recent ‘kick’, as those holding them have been sitting back and watching the price rise; and they are likely to wait until the penalty set by the LRET kicks in, before they cash in their stockpiles at prices of over $90 (many were purchased at $20 or less). Trading at less than $30 last year, they’ve spiked to around $75 in recent weeks, and the forward market has them trading above $83.

Now, while wind power outfits might be rubbing their hands with glee, the present price has nothing to do with a sustainable business or investment environment. To the contrary, the REC price spike is like the light globe that burns brighter than the Sun for a nano-second, just before its filament turns to vapour and the globe fatally pops.

It’s to be remembered that the LRET was slashed from 41,000GWh to 33,000GWh for one reason, and one reason only: there was no way that the original target was going to be satisfied; and, working on the edict that discretion is the better part of valour, both Labor and the Coalition determined to save the LRET by retreating to the reserve trenches.

Armed with the knowledge that the major retailers have no interest in wind power at all (a product with no commercial value, save the RECs it attracts) and were steadfastly refusing to enter PPAs with wind power outfits, both sides of Federal politics were forced to cut the LRET target in an effort to buy a little more time.

What drove their rush for another redoubt to the rear, was fear: fear of how power consumers (read ‘voters’) would react to news that they were being hit with a $93 per MWh Federal electricity tax; on top of already escalating retail power bills; and without adding a single watt of wind power to the grid.

Commercial retailers have not entered PPAs with wind power outfits since November 2012; and have no intention of doing so now.

With more than $45 billion in REC Tax and fines to be collected from here, as the LRET starts to bite in the next two or three years, power prices are set to double: an outcome that is pure, political poison; and will ultimately result in the LRET being scrapped. Any policy which is both economically and politically unsustainable will fail.

And that is one of the very strong factors, that’s turning the big retailers into ‘Sun-worshippers’. Back in September, Australia’s biggest retailer, Origin announced a ‘solar explosion’:

Let the Sun Shine In: Australia’s BIGGEST Power Retailer Determined to Kill Wind Power

That plan is designed at picking up RECs and, therefore, avoiding the penalty shortfall charge; and is running apace – Origin has been buying up land in southern Queensland and covering it with a sea of panels. Queensland was picked for its cheap land and relatively high day-time power spot prices.

However, STT hears that the planned roll-out of panels is designed as a temporary measure; given that retailers know full-well that the LRET is destined to implode.

By building their own (temporary) solar capacity, the big retailers, like Origin can get RECs without needing to lock-in to 10-15 year long PPAs, with outfits that are already on the brink of insolvency; thus avoiding a double-whammy of risk: the risk of signing up to obtain a decade (plus) long stream of millions of (soon to be worthless) RECs; and being caught up in the liquidations of operators like Infigen (which already has one colossal corporate collapse to its name).

When the LRET is inevitably scrapped in a few years time, the retailers plan to pack up the panels; and sell them to households, to be stuck on homes all over suburban Australia. The retailers’ collective confidence in the inevitable collapse of the LRET is based on the numbers: VERY, VERY BIG numbers. Here they are.

The LRET target is set by s40 of the Renewable Energy (Electricity) Act 2000 (here).

At the present time, the total annual contribution to the LRET from eligible renewable energy generation sources is around 16,000 GWh (depending on the weather, of course); and, because retailers will not enter PPAs, is stuck there now and forever.

In the table below, the “Shortfall in MWh (millions)” is based on a total contribution to the LRET from eligible renewable sources of 16,000,000 MWh (1GWh = 1,000MWh). The LRET target is, likewise, set out in MWh (millions).

As set out below, this means that the shortfall charge will kick in very soon; probably in the next month or so, depending on whether those currently holding RECs decide to sell or hold out for the market to hit penalty.

The REC price is, due to the impact of the shortfall charge, expected to hit $93, and, due to the taxation 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 current LRET target, 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	18.85	2.85	$185,250,000	$265,050,000
2016	21.431	5.431	$353,015,000	$505,083,000
2017	26.031	10.031	$652,015,000	$932,883,000
2018	28.637	12.637	$821,405,000	$1,175,241,000
2019	31.244	15.244	$990,860,000	$1,417,692,000
2020	33.85	17.85	$1,160,250,000	$1,660,050,000
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	490.043	234.043	$15,212,795,000	$21,765,999,000

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Between 2015 and 2031 the total target could be satisfied by the issue and surrender of 490 million RECs. However, with only 16 million RECs available annually there will be a total shortfall of 234 million. That means that only 256 million RECs will be available to satisfy the remaining 490 million MWh target over the life of the LRET.

Under the current LRET, with RECs hitting $93 as the penalty begins to apply, the total cost added to power consumers’ bills will nudge $46 billion (490,043,000 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 more than $10 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 tallied up in the right hand column – 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	18.85	2.85	$265,050,000	$1,753,050,000
2016	21.431	5.431	$505,083,000	$1,993,083,000
2017	26.031	10.031	$932,883,000	$2,420,883,000
2018	28.637	12.637	$1,175,241,000	$2,663,241,000
2019	31.244	15.244	$1,417,692,000	$2,905,692,000
2020	33.85	17.85	$1,660,050,000	$3,148,050,000
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	490.043	234.043	$21,765,999,000	$45,573,999,000

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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 young Gregory Hunt asserts, be “protected” from any of it under the current LRET debacle.

As our simple little exercise in arithmetic makes plain, close to $46 billion will be added to all Australian power consumers’ bills; irrespective of whether Hunt and the wind industry stooges in his office are able to satisfy the desires of their mates at Infigen, Vestas & Co to carpet the country in another 10-20,000 of these things.

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” – or, as young Gregory Hunt calls it, a: “massive $93 per tonne penalty carbon tax.”

But the economy crushing, $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?

In the post 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 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.

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 loud and panicked public squabbling in Canberra this year over the ‘magic’ LRET number, was simply a signal that the retailers’ had 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 threw 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 (and other mineral) prices, Australia’s economic dream run is over.

Despite the economic punishment that’s coming, Hunt and his side-kicks are still working over-time to ensure the survival of their mates at Infigen and Vestas. Their ‘survival’ can only come by way of 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 secure, reliable and affordable power:

Want Insane Power Prices & Mass Blackouts? Then Wind Power’s your ‘Answer’

With the Coalition still shackled to a $46 billion subsidy scheme, deliberately designed to be squandered on a wholly weather dependent power source – that’s 3-4 times the cost of the reliable and secure 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 the new Energy Minister, Josh Frydenberg are supposed to be on the conservative side of politics.

The Coalition’s continued (and inexplicable) support for the wind industry, stands in lamentable contrast with the approach taken by the Conservatives in the UK, where David Cameron won an election promising to end all subsidies to on-shore wind power (see our post here).

And, even with socialist Spain – where its government was forced to slash economy wrecking subsidies to wind power, resulting in a total collapse in wind power investment – only 27MW (yep, that’s right, just nine 3MW turbines) have been erected in the last 2 years:

Spain Puts its Economy Destroying Wind Industry to the Sword: ZERO MWs Installed in 2015

While Hunt and Frydenberg might consider themselves smarter than the energy 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 over 3 years 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 most recent LRET ‘deal’ simply guaranteed the demise of the former, by the certain imposition of the latter. Political punishment at the ballot box will follow, as night follows day. You can count on it.