Wind Industry’s Deathknell: Wind Power Shortfall Means Power Consumers Will be Forced to Pay $20 Billion in Fines

Josh Frydenberg measure the time it will take to slash the LRET (again).

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While the short-term fortunes wind power outfits have never looked brighter, the fact that the price of RECs (aka LGCs) has recently gone through the roof is a signal that the game is all but up.

Before we detail why the wind industry is on its last legs, we’ll start with a couple of mainstream media pieces; the first from Adelaide’s Sunday Mail and the next from The Australian’s economics editor, Judith Sloan.

Wind farm subsidies rise, hitting consumers’ power bills
Sunday Mail
John Rolfe
23 August 2016

THE market price of the subsidy households end up paying to wind farms has surged by up to 270 per cent in just two years.

A grab-bag of green schemes is expected to add between $90 and $190 to power bills in 2016-17 depending on where consumers live, according to the Australian Energy Market Commission (AEMC). Within this, the price of providing a leg-up to large wind, solar and hydro setups was put at $29 to $44 — a charge that had and would rise by 23 per cent a year.

The accuracy of these predictions is in question though, because of a leap in the price of Large-scale Generation Certificates (LGCs) that deliver subsidies to wind farms and the other big renewable projects.
Electricity retailers have to buy a growing number of LGCs each year to comply with the Federal Government’s Renewable Energy Target (RET). They pass on these costs to customers.

The market price of LGCs has “gone through the roof”, said Matt Harris, head of climate change and renewables consulting at Frontier Economics, which the AEMC uses for its modelling.

A year ago an LGC certificate bought on the open market cost $54. It now costs $86, a jump of 60 per cent. In June 2014 the LGC price was barely more than $20. Today’s rate is a 270 per cent higher.

The AEMC’s estimate of Large-scale Renewable Energy Target (LRET) costs to residential consumers has at its heart an LGC price of just $46.52.

However, the AEMC said it had not underestimated LRET costs. It said its LGC price was a “long-term” figure. Both the AEMC and Frontier’s Mr Harris said that the spot market price contributed only a small percentage to overall LGC costs

A big chunk of retailers’ LGC needs are met via long-term contracts with wind and solar farms at fixed prices likely to be less than the current open market price.

Frontier Economics’ Mr Harris — who worked Malcolm Turnbull when the now-PM was Opposition Leader the first time, in 2009 — said the main reason for the LGC price surge was a supply crunch. This had been caused by a “long lag in investment” in new renewable generation capacity as a result of “policy uncertainty”. Mr Harris could not discuss the modelling done for the AEMC.

Wind’s subsidy windfall is not its only impact on consumers — it is also pushing up the price they pay for electricity.

In South Australia — which has the biggest number of turbines in the nation — the wholesale power price is currently 50 per cent higher than anywhere in the National Electricity Market.

When EnergyAustralia raised SA retail prices by an average of $260 a year from July 1, it said $210 of this was due to the cost of it buying power there.

News Corp Australia has previously reported futures markets indicate soaring wholesale prices could add $100 to $240 to annual bills in within two years.

The number of LGCs retailers have to buy this year rose by 14 per cent to 21.4 million and will increase by another 21 per cent next year to 26 million and then 10 per cent the year after.
Sunday Mail

Australia’s wind power debacle, Greg Hunt’s ‘finest achievement’.

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Now, here’s Judith Sloan from a couple of weeks back.

Renewable energy target: emissions down, not in a good way
The Australian
Judith Sloan
16 August 2016

Energy policy in Australia is a bit like pass the parcel, only in reverse. Instead of hoping for the parcel to land in your lap when the music stops, the last thing you want to happen when it comes to energy policy is to be holding the parcel when that eerie silence descends. So spare a thought for Josh Frydenberg, the new Environment and Energy Minister.

When we have states going off on frolics of their own — South Australia and Victoria have recently announced ridiculously ambitious renewable energy targets — and the distortions in the energy market are legion but difficult to unwind, he has his hands completely full.

Read my lips: Australia won’t meet its renewable energy target by 2020. In fact, it won’t get within cooee of the 33,000 gigawatt hours of electricity generated by defined renewable sources as negotiated by former environment minister Greg Hunt.

And to think that Labor considered a target of 45,000GWh was achievable by 2020 — what a joke.

Mind you, the 33,000GWh also was a joke, but Hunt wasn’t having a bar of the advice of the wise heads telling him to ditch the scheme or plump for a lower figure. It is astonishing that Hunt, who has vacated the environment portfolio for one that involves throwing taxpayers’ money at rent-seekers in other industries, regards the resetting of the RET as his finest achievement. He must be pulling our leg.

From where we are now, halfway through 2016, there is no way there can be sufficient investment in renewable electricity generation by 2020, given the need to firm up projects and get various approvals, to reach the target. We are only around the 16,000GW to 17,000GWh mark at the moment.

By looking at the price of renewable energy certificates that underpin the RET, we also know the market doesn’t think the target will be met. The (large-scale) certificates are trading around $86, which is close to the maximum allowable cap.

So what this means is the energy companies will end up simply buying RECs at the cap price and pass this through to wholesale electricity prices. In turn, retail prices also will rise even though there will be a huge shortfall in physical investment in renewable electricity generation. We will be paying for nothing.

To be sure, there will be some new investments — even more wind farms in South Australia (pause for laughter) and one or two in Victoria.

But the large energy companies are coming to the realisation that wind farms can be more trouble than they are worth. So a solar project in Queensland could eventuate, but don’t count on any significant wind farm investments in NSW or Queensland.

Can I put it out there? What really gets my goat is that there are lots of spivvy investors out there who have made hundreds of millions of dollars from the RET (most notably trading the RECs, not actually building renewable energy generation) but still boast about (hide behind?) the worthiness of the mission of doing something about climate change.

Can I also add that the RET will make virtually no contribution to Australia meeting its emissions reduction target of 5 per cent below 2000 in 2020? It will be easily met mainly because of the de-industrialisation that has occurred across that period — think the end of the automotive industry, aluminium smelting in Geelong and great swathes of other manufacturing.

Of course, if you were some sort of contrarian eccentric, you could argue that escalating electricity prices, at both the wholesale and retail level, have made manufacturing in Australia increasingly uncompetitive and so the RET has indirectly contributed to the meeting of the emissions reduction target — but not in a good way.

But here’s the real tragedy: the cost of abatement under the RET is vast compared with other alternatives. For the large-scale RET, it is well north of $100 per tonne of CO2-e. We could pay $10 for the equivalent for legitimate overseas abatement.

Even the government’s Direct Action program looks a bargain compared with the cost of the RET. We could have achieved more at less cost had we left the electricity grid alone.

As for the small-scale RET, the cost of abatement is just off the charts notwithstanding the warm and fuzzy feelings and (temporarily) low electricity bills enjoyed by those middle-class households with their solar photovoltaic rooftop panels.

In fact, it is the conflation between small and large-scale renewable energy that has driven relatively high levels of support from the public for renewable energy, particularly since most people don’t live close to large-scale wind or solar farms. But as the excessive feed-in tariffs are wound down by state governments, the degree of popularity may well fall away.

The irony is that the countries that have invested most in renewable energy — Denmark, Spain, Britain and Germany — are all pulling back.

There is a growing realisation in these countries that renewable energy is just too unreliable and expensive, particularly when account is taken of the need for continuous backup energy. Even the prospect of viable storage of renewable energy is insufficient to persuade them to stay the course.

Take the case of Denmark, for instance, the world leader in wind power. The government had set its own renewable energy target of 50 per cent by 2020.

However, five large offshore wind farms have recently been cancelled by the government, with the Energy Minister stating that “since 2012, the cost of our renewable policy has increased dramatically. We can’t accept this. The private sector and households are paying far too much.” (The implicit green tax in Danish electricity bills accounts for two-thirds of the total.)

The irony is that just as most of the rest of the world has hit peak renewables and is heading in other directions (new efficient coal-fired electricity plants are being built in Germany), we are still bound by the inefficient and inequitable RET.

And there is no doubt those spivvy investors have plans for other favourable government interventions to keep the money pouring in after 2020 — reverse auctions, anyone?

For Frydenberg, the challenge is simple: electricity must be reliable, affordable and sustainable — in that order. But it’s a herculean task and one that will keep him very busy in the months ahead.
The Australian

A very solid effort from Judith Sloan, as STT followers have come to expect.  However, Judith has got her wires crossed as to the basis upon which the price for RECs (LGCs) is set, given away by her line that: “(large-scale) certificates are trading around $86, which is close to the maximum allowable cap”.

In truth, there is no “maximum allowable cap” on the price of RECs. What there is an effective floor price, which determines the REC trading price.

The whole thing hinges upon the “shortfall penalty” which, as we explain below, is a fine that will be levied on all Australian electricity consumers and which will top a figure of $20 billion over the life of the Large-Scale Renewable Energy Target (as presently in force).

What matters in Judith’s analysis though, is her observation of the fact that:

“Australia won’t meet its renewable energy target by 2020. In fact, it won’t get within cooee of the 33,000 gigawatt hours of electricity generated by defined renewable sources”.

That means the power market is going to hit penalty and, because of the political fallout that inevitably follows, the end of the LRET and the wind industry that critically depends upon it.

The spot price for LGCs (see above) has already factored in the application of the shortfall penalty. STT hears that the Clean Energy Regulator is already collecting the penalty from a number of small retailers, who do not have long-term power purchase agreements with wind power outfits and, because those that are holding LGCs are waiting for the price to hit $94, can’t purchase a single certificate at all.

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

Where a retailer fails to purchase and surrender RECs sufficient to meet their LRET target obligations section 5 of the Renewable Energy (Electricity) (Large scale Generation Shortfall Charge) Act 2000 applies:

Imposition
The large scale generation shortfall charge that is payable under the Renewable Energy (Electricity) Act 2000 is imposed by this section.

At the rate set by section 6:

Rates of charge
(1) The rate of charge is $65 per MWh.

The terms of the Renewable Energy (Electricity) Act 2000 mean that the penalty is applied for every MWh that retailers fall short of the annual target, set by section 40 of that Act.

The shortfall charge is, as specified above, $65 per MWh. As the penalties paid are not deductible business expenses (they are treated as fines), the effective pre-tax penalty is therefore $92.86/REC ($65/(1-30%), assuming a 30% marginal tax rate).

The point Judith gets absolutely correct about the market going to penalty is because 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 commercial retailers will not enter long-term 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).

The forward price for RECs at $94 suggest that the shortfall charge will kick in very soon; the timing depending on whether those currently holding RECs decide to sell or hold out for the market to actually hit penalty. As noted above, the penalty is already being recovered from small retailers.

The penalty cost sets the floor price for RECs at $93; due to the taxation treatment of RECs versus the shortfall charge, the full cost of the shortfall charge to retailers is also $93. RECs are tax deductible as an expense; the penalty is a fine and, therefore, is not tax deductible. Retailers, including Origin, have indicated to STT’s sources that they will be recovering the full $93 cost of the shortfall charge. Using that figure applied to the current LRET target, we’ll start with the cost of the shortfall penalty.

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Between 2016 and 2031 the total target could be satisfied by the issue and surrender of 471 million RECs. However, with only 16 million RECs available annually there will be a total shortfall of 231 million; with only 240 million RECs available to satisfy the remaining 471 million MWh target over the life of the current 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 $44 billion (471,193,000 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 another 15 years, until 2031 – such that a single 3 MW turbine spinning today can pocket a total of $12,831,210 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 $12 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.

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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 from all Australian power consumers.

The fact that small retailers are already paying the shortfall penalty and – that in the not too distant future – the Clean Energy Regulator will be recovering the shortfall penalty from the major retailers, as well, means either that the cost of the shortfall penalty will have to be cut from its present level of $65 per MWh; or that the current annual LRET target will need to be slashed by around 17,000 GWh – or, perhaps, a combination of both.

After the LRET was slashed from 41,000 GWh to 33,000 GWh in 2015, the Clean Energy Regulator, Chloe Munro ran around trying to convince then PM, Tony Abbott and his hapless Environment Minister, Greg Hunt that the wind industry would have no trouble at all in meeting the reduced target, thereby avoiding the politically toxic shortfall penalty; in recent weeks Chloe has been asserting that it would be ‘inconceivable’ for Australia’s power retailers to allow the power market to go to penalty.

STT hears that the same line is being pitched to the Energy and Environment Minister, Josh Frydenberg by the CER and her plants in his office.

With the imposition of the shortfall penalty inevitable Josh Frydenberg must know that the LRET’s annual target has to be slashed again.  In circumstances where the life of the Coalition government is hanging by a thread, the last thing Turnbull & Co need is the revelation that their beloved renewable energy target carries the inevitable imposition of over $20 billion worth of fines to be tacked on top of the – already rocketing – retail power bills of all Australian power consumers.

With that backdrop, no financier in their right mind is going to invest so much as a penny in an industry that exists, and only exists, as a result of guaranteed subsidies under a policy scheme that can be scrubbed at the stroke of a pen. That means that the target can never be met, and that the LRET will simply implode, under its own politically self-destructive weight.

Josh and Chloe might have slept through 2015 and missed the fact that the once “rock solid”, “immutable”, “set in stone” 41,000 GWh target – which had die-in-a-ditch “bipartisan” support – was slashed for precisely the same reasons it will be slashed again.

The recent focus on South Australia has alerted millions of Australians to the pointless expense of subsidised wind power. Australian businesses, lucky enough to operate outside of its borders, have no inclination to follow South Australians down the road to social and economic disaster.

When people finally wake up to the fact that the subsidies being paid to wind power outfits under the LRET constitute the largest single industry subsidy scheme in the history of the Commonwealth, power consumers (read voters) will be angry enough.  When they find out that around half of the LRET’s annual $3 billion Federal tax on electricity is being collected as a “fine” and being returned to general revenue, they won’t be angry, they will be furious.

Josh Frydenberg and Chloe Munro can bank on it.

Time to surrender Chloe, the LRET is doomed.