Judith Sloan: lays out a lesson on avoiding economic & social disaster.
In a week when the mainstream media have been (finally) laying out the catastrophic results of South Australia’s ludicrous attempt to power itself on sunshine and breezes, it would be rude not to include this cracking article penned by The Australian’s top-flight economics editor, Judith Sloan.
Judith’s work has graced the pages of STT once or twice before, as here: LRET “Stealth Tax” to Cost Australian Power Punters $30 BILLION
And, no doubt, with renewed interest in South Australia’s unfolding energy debacle, Judith will have plenty more to say on the issue. Here’s Judith.
Energy price reveals folly of renewables
19 July 2016
It is unusual for any story related to South Australia to appear on the front page of this newspaper. But when wholesale electricity prices in that state reached more than 30 times the prices recorded in the eastern states last week, the broader interest in the issue is obvious.
To give you a feel for the figures, last Thursday at 1.45pm, the wholesale power price in South Australia was recorded at $1001 per megawatt hour, compared with prices of between $30/MWh and $32/MWh for the eastern states. At one point, the maximum price in the state hit $14,000/MWh.
Unsurprisingly, several companies operating in South Australia, including BHP Billiton and beleaguered steelmaker Arrium, warned state Treasurer and Energy Minister Tom Koutsantonis that they might temporarily close their plants because of the high and erratic electricity prices.
But more worrying still are the medium-term prospects for the state: the chairman of the Energy Users Association warns that “large end-user customers are feeling the pain. As large customers roll off their energy contracts and need to renew those contracts, they are faced with significantly higher prices in South Australia”.
Electricity contracts for delivery next year and in 2018 are priced at between $90/MWh and $100/MWh in South Australia, compared with between $50/MWh and $63/MWh in Victoria, NSW and Queensland.
How could this happen? How could it go so wrong for South Australia? The short answer is, contrary to Roy and HG’s famous prognostication that too much is never enough, too much is too much when it comes to intermittent and unreliable renewable energy. South Australia is paying a heavy price for its misguided energy policy, potentially leading to the further deindustrialisation of the state while also reducing its citizens’ living standards. But the real tragedy is that this outcome was entirely foreseeable.
Let us not forget that South Australia continues to boast about its status as the wind power capital of the country and having the highest proportion of its electricity generated by renewable sources. Since 2003, the contribution of wind to South Australian electricity generation has grown to more than one-quarter of the total.
Late last year, the state government issued the Climate Change Strategy for South Australia, ignoring completely the problems that were already apparent in the system. The wholesale electricity price in the state has been consistently above the national average since early 2015.
The statement reads that “to realise the benefits, we need to be bold. That is why we have said that by 2050 our state will have net zero emissions. We want to send a clear signal to businesses around the world: if you want to innovate, if you want to perfect low carbon technologies necessary to halt global warming — come to South Australia.”
But last week the confidence of that statement had been forgotten. Koutsantonis hysterically blamed what he saw as failures in the national electricity market and inadequate electricity interconnection for his state’s high and volatile wholesale electricity prices.
He even pledged to “to smash the national electricity market into a thousand pieces and start again”. How he thought this suggestion would be helpful is anyone’s guess.
The main problem with electricity generated by renewable energy — in South Australia’s case, overwhelmingly by wind — is what is technically called the non-synchronous nature of this power source, because of its inability to match generation with demand.
When the power is needed, the wind isn’t necessarily blowing. Or if the wind is blowing too hard, the turbines must be switched off and again the demand has to be met from other sources — in South Australia’s case, mainly from electricity generated in Victoria from brown coal.
What is clear is that overdevelopment of variable generation using renewable resources is a recipe for higher prices and lower than expected reductions in emissions because of the increasing costs of ensuring system stability and reliability.
Feasible storage options are down the track and, in any case, likely to be expensive.
The system can cope with some renewable energy and, in the short term, wholesale prices may even fall. But across time expansion of renewable energy undermines the profitability of traditional base-load generators while increasing the need for more back-up supply (up to 90 per cent of the maximum generating capacity of the renewable energy sources).
The decision by the South Australian government to sit on its hands when the coal-fired Northern Power station in Port Augusta closed in May was an act of wilful madness. The alternative would have been for the government to pay the owner, Alinta Energy, to keep the loss-making plant operating, certainly before an expansion of the interconnector capacity.
But Koutsantonis thought he knew better. “The truth is the reason it is closing is it couldn’t make money in this market,” he said. “The reason it can’t make money in this market is even though it does pour in relatively cheap power into the grid, renewable energy is cheaper.”
That would be cheaper only after taking into account the huge subsidies that are thrown at renewable energy courtesy of the renewable energy target and ignoring the need for back-up capacity.
Last week, the situation became so dire that Koutsantonis pleaded with the privately owned, mothballed gas-fired electricity generator located on the Port River in Adelaide to fire up to make up the electricity shortfall in the state.
In fact, gas should be the next cab off the rank when it comes to electricity generation. It is much less emissions-intensive than coal, particularly brown coal, but there is much less gas-generated electricity in South Australia because of the distortions in the market caused by the subsidies to renewable energy.
There are some important lessons in this disaster for the country as a whole; after all, there is no interconnector to another country as there is an interconnector between South Australia and the eastern states. And note that Victoria has a target of 50 per cent renewable energy by 2030.
Notwithstanding his exasperation, Koutsantonis did make one valid point last week: “This is coming to Victoria, this is coming to NSW … every jurisdiction is facing what we’re facing now.”
Bill Shorten should take note and immediately ditch his fanciful target of 50 per cent renewable energy lest the South Australian experience befall the rest of the country.
In and otherwise faultless analysis of South Australia’s energy calamity, Judith gives far too much credit to wind power when she says: “expansion of renewable energy undermines the profitability of traditional base-load generators while increasing the need for more back-up supply (up to 90 per cent of the maximum generating capacity of the renewable energy sources)”.
Given that the Sun still rises and sets every day, grid-scale solar power requires 100% of its capacity to be “backed up” by conventional generation sources; and, apart from off grid applications, residential solar is effectively backed up 100% of the time by conventional sources, in any event.
Wind power can only ever be delivered at crazy, random intervals and, likewise, 100% of all wind power capacity has to be backed up by conventional generation sources 100% of the time.
These posts tell the story:
The other, not so minor, quibble is with Judith’s statement that: “Bill Shorten should take note and immediately ditch his fanciful target of 50 per cent renewable energy lest the South Australian experience befall the rest of the country.”
Judith overlooks the fact that the current 33,000 GWh Large-Scale Renewable Energy Target will be more than sufficient to allow the “South Australian experience [to] befall the rest of the country”.
The “choice” between the current LRET target and Electricity Bill Shorten’s 50% LRET is like one of British sit-com, Extras side-kick, Maggie Jacob’s puzzling rhetoricals such as “would you rather be trampled by elephants or eaten by lions?”
A while back in a post dealing with the “choice” – Labor to Throw $200bn to the Wind: Electricity Bill Shorten’s Economic Suicide Pact Unpacked – we put the Maggie Jacob’s Poser as follows:
“would you rather have your economic future destroyed by a $45 billion electricity tax, designed to subsidise the construction of another 6,000 of these things; or a $90 billion electricity tax, designed to subsidise the construction of another 12,000 of them?”
As Judith well-knows, because she has written detailed analysis on the topic, the current LRET involves a $3 billion a year wealth transfer from power consumers to wind power outfits in the form of Renewable Energy Certificates: What Kills the Australian Wind Industry: A $45 Billion Federal Power Tax
So what Judith, and any other economist with half a brain, ought to be calling for is an immediate suspension of the operation of the legislation that gives rise to the LRET – the greatest single industry subsidy scheme in the history of the Commonwealth – and which is the Federal policy foundation for South Australia’s self-inflicted power supply and pricing disaster.