South Australia has earned the unenviable title of Australia’s ‘Wind Power Capital’.
For its sins it has seen power prices rocket (the forward price, at $90 per MWh is more than double its neighbour Victoria’s) and unemployment with it: worse is yet to come, on both scores. Then there’s the grid instability and state-wide blackouts that come with routine, total and totally unpredictable wind power output collapses (see above).
It’s already an economic basket case, dependent on Federal Government subsidies to build submarines and other naval vessels. By reference to its ham-fisted economic management, the choice made by its Labor government to throw all to the wind probably seemed like a clever one, back in 2002.
But, economics has a mean way of reckoning with fools and those who otherwise seek to defy its edicts. For the sake of argument, let’s call them ‘consequences’.
In this piece, Alan Moran – a hard-hitting economist, if ever there was one – collects just some of them; and he doesn’t quarantine the pending disaster to South Australia.
Australian electricity policy: Armageddon or slow economic strangulation?
12 April 2016
Yesterday the ALP is reported to be examining how it can shut down “ageing coal-fired stations”. This is part of the policy to reach 50 per cent renewable energy by 2030 and the Greens claim Shorten is seeking an escape from the Party’s previous announcements.
Coalition government policy is for a Direct Action buy-out of emissions coupled with 33,000 gigawatt hours of electricity from “large scale renewable energy” (mainly wind) plus small scale units on rooftops.
At present, large scale renewables account for 12.75 per cent of electricity and the small scale units a little under 10 per cent. Large scale renewables are to increase by another one third by 2020. There is no limit to the small scale units.
Both large and small scale facilities are subsidised, which for wind is currently $79 per megawatt hour, a level that provides a price of around three times that which conventional power supplies receive. In the case of rooftop solar the Commonwealth subsidy is less but there are also state government subsidies. Roof top facilities’ subsidies are paid up-front which defrays the installation cost.
Essentially, at a time when real incomes are showing no growth, the “ageing coal-fired stations” are being replaced with windmills and solar panels that provide electricity at three to five times the cost of the plant they replace.
In itself that is a testimony to the idiocy and cupidity of politicians falling for snake-oil claims that renewable energy is free and basking in the funding these purveyors of poverty offer to election campaigns.
If we have half of electricity supplied by renewables (ALP policy) the wholesale electricity cost will be at least double current prices; if the Coalition government policy is for renewables to comprise only one quarter of electricity supply the additional cost is 50 per cent.
Australia has the cheapest coal in the world, which has been crucial to industry competitiveness and low prices to the household. Both major political parties are intent on preventing us taking advantage of this natural wealth and undermining our living standards.
But there’s more!
First, wind, being low cost operationally, bids into the system at between zero and its own operational cost of about $10 per megawatt hour. This depresses the spot price generally and adds to the travails of coal fired stations, already under pressure from hostile governments and banks fearful of activists.
With luck, we can get away with simply experiencing sub-potential living standards by seeing demand and supply matched with the closure of industries like smelting and steel that offer the highest labour productivity.
Secondly, renewable energy (other than hydro) is intrinsically unreliable. Supply can go from 100 per cent to zero in a few minutes and much renewable output is unavailable at night.
At existing shares of renewables this presents stability problems for the entire system and requires synchronous flexible generation (fast start gas) to fill the supply valleys when wind and solar are unavailable. These need a premium price which has to be reflected in customer bills and require a vastly more complex system management and one fraught with risks of breakdown.
South Australia has been in the forefront of renewable generation and this has forced the closure of coal and gas plant.
With wind and solar sometimes supplying 60 per cent of supply, the state’s instability problems are critical. They are papered over by politicians abandoning the national electricity market principles whereby the beneficiary pays for transmission.
Each new windfarm constrains earlier ones off the grid and, instead of new facilities paying for a stronger grid, the costs are smeared across inter-state users. And, at the same time, because there is a national market for electricity, the premium costs of wind in South Australia are largely shared across all states.
Australia’s problems are being observed elsewhere.
Germany has now decided that it cannot allow renewables to reach much more than 40 per cent of electricity by 2025 which means a halving of new wind build.
In California, where wind has entailed very high energy prices, the balance for wind’s peaks comes from gas storage but the most important source for southern California, has been leaking and is now under repair sparking forecasts of some 14 days of scheduled blackouts this summer.
Australia’s national energy market started life with relatively few political oversights but has evolved into one of political control. The contrast between it and the self-managing telecommunications system is stark. The rationale for energy intervention is largely politico-environmental with overlays of administered prices to prevent the effects being readily visible.
After ten years of this, the system is now in a precarious state as well as no longer providing the low cost supply that was ushered in with the deregulations and privatisations 20 years ago.
Alan – a master of understatement – points out that the ‘fast start’ (ie Open Cycle Gas Turbines) essential to covering routine, total and totally unpredictable wind power output collapse “need a premium price which has to be reflected in customer bills”.
With SA’s average spot price for 2015 of $72 per MWh in mind, consider the effect on ‘customer bills’ when wind power output collapses and the spot price approaches or hits the Market Price Cap.
That cap – currently $13,800 per MWh – sets the upper limit of what peaking power generators can extort from the system: for a rundown on how the National Energy Market is designed to work, see this paper: AEMO Fact Sheet National Electricity Market
And for a detailed rundown on just how often these price chiselling events occur: South Australia’s Unbridled Wind Power Insanity: Wind Power Collapses see Spot Prices Rocket from $70 to $13,800 per MWh
Consequences; sooner or later we all get to banquet on them.