Power costs spike short-circuits onshore abalone growth
Michael Owen & Verity Edwards
5 December 2016
The largest onshore abalone growing company in the southern hemisphere, whose power bill is set to rise by $650,000, has joined mining giant BHP Billiton in warning that unreliable and expensive energy costs in the southern states are killing investment and jobs.
Malcolm Turnbull said he shared those concerns: “How can you attract investment to your state if not only is your wholesale cost of energy the highest in Australia but it’s not even reliable?”
Yumbah Aquaculture at Port Lincoln, on South Australia’s west coast, received an electricity contract quote for $1.35 million, $650,000 more than its current $700,000 contract.
An amalgamation last month of the former Southseas Abalone operations at Port Lincoln, Kangaroo Island, Bicheno on Tasmania’s east coast and Narrawong near Portland in Victoria’s southwest has made Yumbah a major energy-intensive user as it supplies more than 500 tonnes of premium abalone each year.
Yumbah’s Port Lincoln manager, Tom Hyde, said skyrocketing electricity prices in South Australia, worsened by the close of the state’s last coal-fired power station in May, were crippling operations.
The company was now planning to invest in more of its own back-up power generators, with South Australia having suffered two major blackouts in little more than two months because the state, powered by a 45 per cent renewable energy mix, has an over-reliance on an interconnector with Victoria.
The Eyre Peninsula onshore abalone farmer knows without a reliable source of baseload electricity, he cannot pump water through the tanks where $10m worth of his molluscs grow.
“We always thought we had sufficient back-up power but we’re going to have to invest in more because of the situation in South Australia. We have to keep the pumps going,” he said.
“We’re land-based abalone farmers and power is a huge part of our industry. It’s not just affordability, it’s reliability, and if the power goes down our stock dies, and you can’t insure molluscs.”
Mr Hyde harvests about 600 tonnes of greenlip abalone annually, more than half of that from his Point Boston farm, 640km west of Adelaide.
Yumbah exports about 90 per cent of its stock, and his abalone is in high demand throughout Southeast Asia. A 93 per cent increase in Yumbah’s power bill for next year means future expansion plans have to be cancelled.
“We’ve just purchased the land next door at Point Boston with the hope of expanding but now that’s put on hold until the South Australian problem has been addressed,” he said.
BHP’s Olympic Dam mine in South Australia’s far north faces similar problems. Olympic Dam asset president Jacqui McGill said the September blackout and last week’s outage had cost the miner $100m.
Lack of power reliability and rising costs was of “deep concern” to BHP Billiton’s board as it considered any further investment in Olympic Dam, which employs 3000 people in South Australia.
“We operate and sell into a market where we compete with people around the globe, not just in Australia. Having competitive pricing of power and security of supply of power is paramount for any business,” Ms McGill said.
The Prime Minister “absolutely agrees” with BHP’s concerns, and warned the looming closure of Hazelwood coal-fired power plant in Victoria “will and has already added to the wholesale price of electricity”.
South Australian Premier Jay Weatherill promised to bring more competition into the state’s energy market to increase capacity, lower prices and improve reliability.
South Australia’s base-load plant at Port Augusta and GDF Suez’s Pelican Point CCGT plant both stopped operating as a direct consequence of the market perversion caused by the Federal Government’s Large-Scale RET. The same applies to Victoria’s Hazelwood plant.
Wind power is already heavily subsidised under the LRET, which, as we detail below, allows wind power outfits to flood the market when the wind is blowing, literally paying the grid manager to take it – which knocks conventional generators out of the market, leaving them burning coal or gas (and incurring constant expense), but with little revenue (or no revenue whatsoever) to offset that cost (let alone turn a profit).
The graph above shows the output from SA’s last remaining base-load plant, Torrens Island during July, which is the reverse mirror image of the occasional output from SA’s 18 wind farms (with a notional capacity of 1,576MW), shown below:
In short, wind power outfits collect the same amount of revenue, irrespective of the spot price. However, conventional generators receive the prevailing price – and, unlike wind power outfits, do not receive any form of subsidy for what they dispatch: the market perversion driven by the LRET and subsidies for wind power is what has caused SA’s conventional generators to become unprofitable; and it’s that lack of profitability that led to Alinta’s decision to close its Port Augusta plant; and led to GDF Suez mothballing half of its Pelican Point CCGT plant 2 years ago (until SA’s hapless Labor government went cap and subsidies in hand to get its owners to fire it up, its working half only enjoyed a return when wind power wasn’t being given away).
The Power Purchase Agreements (PPAs) struck between wind power outfits and retailers (which you’ll never see the likes of Infigen aka Babcock & Brown or Trustpower aka ‘Tilt’ talk about publicly) are built around the massive stream of subsidies established by the Large-Scale Renewable Energy Target (LRET) – which is directed to wind power generators in the form of Renewable Energy Certificates (RECs aka LGCs).
Under PPAs, the prices set guarantee a return to the generator of between $90 to $120 per MWh for every MWh delivered to the grid.
In a 2014 company report, AGL (in its capacity as a wind power retailer) complained about the fact that it is bound to pay $112 per MWh under PPAs with wind power generators: these PPAs run for at least 15 years and many run for 25 years.
Wind power generators can and do (happily) dispatch power to the grid at prices approaching zero – when the wind is blowing and wind power output is high; at night-time, when demand is low, wind power generators will even pay the grid manager to take their power (ie the dispatch price becomes negative)(see our post here). In recent times, wind power outfits in SA have been paying the grid operator up to $20 per MWh to take power with, quite obviously, no commercial value.
However, the retailer still pays the wind power generator the same guaranteed price under their PPA – irrespective of the dispatch price: in AGL’s case, $112 per MWh.
PPA prices are 3-4 times the cost that retailers pay to conventional generators; retailers can purchase coal-fired power from Victoria’s Latrobe Valley for around $25-35 per MWh, although with the pending closure of Hazelwood, the cost of that reliable, meaningful power can only rise.
Underlying the PPA is the value of the RECs that are issued to wind power generators and handed to retailers as part of the deal.
The issue and transfer of RECs under the LRET sets up the greatest government mandated wealth transfer seen in Australian history: the LRET is – without a shadow of a doubt – the largest industry subsidy scheme in the history of the Commonwealth. That transfer – which comes at the expense of the poorest and most vulnerable; struggling businesses; and cash-strapped families – is effected by the issue, sale and surrender of RECs. As Origin Energy chief executive 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. The REC Tax/Subsidy has already added $10 billion to Australian power bills, so far.
Between 2016 and 2031, the mandatory LRET requires power consumers to pay the cost of issuing 470 million RECs to wind power generators. With the REC price currently $86 – and tipped to trade around $93 as retailers get hit with the shortfall penalty set by the LRET – the wealth transfer from power consumers to the Federal Government (as retailer penalties) and/or to the wind industry (as REC Subsidy) will be somewhere between $40 billion and $50 billion, over the next 15 years:
With more wind power capacity per head than any other State, South Australians are going to be lumbered with a disproportionate share of the ludicrous cost of the REC Tax/Subsidy, set by the LRET.
The escalating cost of power (and its erratic supply) has rattled major employers like Nyrstar, placing its operation in jeopardy, threatening the loss of 750 jobs in economically depressed Port Pirie. And that has already led to more than 50,000 SA households suffering along without any power at all (see our post here).
South Australians have Premier Jay Weatherill and his merry band of Labor lunatics to thank for, what can only be described as, an ‘energy debacle’. Notwithstanding the scale and scope of SA’s brewing economic disaster, Labor still seems wedded to pushing the wind industry’s barrow.
Having directed planning panels all over the State to keep rubberstamping wind farm applications – and otherwise encouraging more of these things to be speared into the heart of thriving rural communities; like those situated in the Eastern Mount Lofty Ranges and on Yorke Peninsula – Labor seems simply incapable of retreating from the brink.
Albert Einstein’s definition of “insanity” springs to mind: “doing the same thing over and over again and expecting different results”.
Backing the likes of New Zealand’s Trustpower or the cowboys behind Senvion (aka REPower, aka Suzlon) in their bids to carpet South Australia’s most agriculturally productive regions with hundreds more of these whirling wonders beggars belief.
What South Australians need is reliable, secure and affordable power – of the kind to be delivered by Alinta’s (still in tact) Northern Plant at Port Augusta and GDF Suez’s Pelican Point CCGT plant, that – but for the power market perversion caused by the LRET’s massive REC Tax/Subsidy for wind power – would have been happily delivered without costing SA’s taxpayers a red cent.
The very last thing South Australians need is any more of the same.
The results of its wind power experiment are in: it’s been a costly and dismal failure. You have been warned.