Willing to be accused of stating the bleeding obvious, electricity retailers aren’t in the business of not selling power; they’re in the business of selling power, at a profitable margin, to as many customers as possible.
Power retailers in Australia have just come to the horrifying realisation that, with rocketing power prices and an increasingly unreliable supply, they are about to witness the complete destruction of their business model.
Major industrial users in South Australia are screaming about their escalating power bills and the increasing number of occasions when the so-called ‘wind power capital’ is unable to deliver power to them at all.
A couple of possibilities follow: first, large-scale users of electricity will start producing their own; second, they will simply drift into insolvency. In either case, retailers will lose their most substantial and profitable customers.
In South Australia, in response to BHP Billiton’s quite reasonable calls for an affordable and reliable power supply, it’s bully-boy Energy Minister, Tom Koutsantonis more or less told them to ‘get stuffed’, by asserting that BHP’s power supply to its huge Olympic Dam mine was a matter for it and not the South Australian government.
If BHP and other major industrial power users heed Kouter’s helpful ‘advice’, then retailers will lose their biggest customers, resulting in a massive reduction in the volumes they supply and the profits they make.
In ‘what if world?’, the fact that businesses like BHP Billiton will simply refrain from investing in new mines or expanding its existing mines (as it has spelt out in relation to its Olympic Dam operation); the fact that mineral processors, food processors, irrigators and other heavy power users will not invest in their businesses or create new ones, means that the demand for power can only decrease. Retailers are alive to the prospect of seeing a wholesale de-industrialisation of the Australian economy, as a result. It’s a well-justified fear.
Then there is the small matter of South Australian householders acting more like ‘doomsday preppers’; rewiring their solar systems to go completely off grid and installing high-capacity petrol or diesel powered generators in their homes. Again, rocketing prices and an unreliable supply conspiring to deprive retailers of that most important ingredient in any viable business: paying customers.
The only reason that retailers display an ‘interest’ in renewable power at all, is the need to obtain renewable energy certificates, in order to avoid a whopping $65 per MWh Federally mandated fine for every MWh the retailer falls short of the mandatory Large-Scale Renewable Energy Target (LRET).
While there will, no doubt, be little sympathy for the likes of Origin and AGL, their recent demand that the introduction of a Emissions Intensity Scheme (EIS) should be acknowledged for what it is: a desperate bid for survival.
Watching businesses fold, customers go it alone and householders chopped from the grid (unable to pay rocketing power bills or unwilling to pay for power delivered only when the wind blows) has caused these corporate cowboys to suddenly sober up. Here’s The Australian reporting on the inevitable demise of Australia’s Renewable Energy Target.
Renewable energy target set to push price of power even higher
8 March 2017
Electricity prices are set to continue to spiral upwards because of unintended consequences from the design of the renewable energy target, the nation’s energy tsar has warned.
In a submission to the review of the national electricity market by Chief Scientist Alan Finkel, the Australian Energy Market Commission also suggested that subsidies such as the RET and policy uncertainty could erode investor confidence — threatening the security of power supplies.
Yesterday, AEMC chairman John Pierce said the energy sector had “suffered from a long vacuum around national, co-ordinated policy decisions”.
“This has resulted in pervasive uncertainty which makes it difficult for business and consumers to invest — and undermines the reliability of power supply,” Mr Pierce said.
The commission also called for emissions reductions and energy policy to be properly integrated, pointing to Britain as a “cautionary tale” where customers were slugged with price hikes as climate change policy was at odds with energy policy.
“If environmental policy is not effectively integrated with energy policy the NEM might reach a point where participants do not have the confidence to make investment decisions in response to price signals,” the submission says.
“This is likely to result in a scenario where government intervention is always required, along with the consequent transfer of risks on to consumers and likelihood of higher costs.”
The warning comes as research to be released today finds that intermittent wind and solar technologies are imposing “hidden” costs on the power system, including the need to maintain back-up generation.
“These costs increase significantly as the share of intermittent generation capacity in a power system rises,” says the paper by BAEconomics, commissioned by the Minerals Council of Australia and sent to the Finkel review.
These costs come on top of the $1.8 billion that households and businesses paid in direct subsidies for the large-scale component of the RET last year alone, which will rise this year, the research finds. The subsidies “only represent a fraction of the costs” of the RET policy, the paper says.
The bosses of two of Australia’s biggest energy producers, Origin Energy and AGL Energy, yesterday also backed calls for an emissions intensity scheme, adding to pressure on the Turnbull government to overturn its stance against such a scheme.
Origin chief executive Frank Calabria said that it would have a relatively low impact on electricity prices and competitiveness. Mr Calabria said changes should be made to the national electricity market so it could cope with the “variability” from renewable energy while ensuring there was enough coal and gas power available in each state at all times.
AGL chief Andy Vesey tweeted his support for an emissions intensity scheme. Dr Finkel’s review is being conducted as renewables are increasing and coal-fired power plants are being closed.
The AEMC submission says the exit of existing generators has had unintended impacts, including increasing wholesale prices.
STT recently covered the BAeconomics study – Primer on renewable energy subsidies in Australia (available here) – which found that:
In aggregate, the subsidies paid to producers of renewable electricity amounted to almost $3 billion in 2015-16. Given that we have not attempted to provide a comprehensive inventory, the true number is likely to be higher.
Assuming an average LGC price of $85/MWh over 2016, and given that retailers would need to surrender 21.43 million LGCs to ensure that 21,431 GWh of electricity would be generated from large-scale renewable energy sources, the LRET obligation would imply direct subsidies to the large-scale renewable generation sector of more than $1.8 billion in 2016.
In the future, the expectation is that the amount of annual subsidies paid under the LRET is projected to increase. In part, this is a reflection of the increase in the annual target, from around 26,000 GWh in 2017 to 33,000 GWh in 2020.
The conclusion reached by Sabine Schnittger and Brian Fisher from BAeconomics is that the staggering cost of the LRET can only add to already crippling retail power costs. Power costs that are already causing commercial power users to howl; their fury has forced power retailers to completely rethink their approach to Australia’s LRET. Here’s more from The Australian.
Emissions trading scheme a fair call, Origin boss Frank Calabria says
8 March 2017
Origin Energy chief Frank Calabria has joined the growing call for an emissions trading scheme to provide more power affordability and security as the nation moves to lower carbon emissions, saying it is frustrating that the government took it off the table so quickly.
The call, made at a Committee for Economic Development of Australia lunch in Sydney yesterday, follows backing for a scheme from the nation’s peak farming group, a move that was yesterday endorsed by Origin’s major power generation and retail rival, AGL Energy.
“The best approach for the electricity sector is an emissions intensity scheme that would price carbon at the margin,” Mr Calabria said at the lunch.
He said a scheme would have a low impact on power prices, would provide an incentive for investment in low-carbon electricity and promote the winding down of high-emission coal generation.
“Unfortunately this mechanism has been ruled out by the government, despite widespread support from the energy industry and others,” Mr Calabria said.
The Origin boss, who took over from founding managing director Grant King in October, said it was frustrating that the government had shut the door so quickly on a trading scheme.
In December, two days after Energy Minister Josh Frydenberg left the door open for a carbon price, Malcolm Turnbull took emissions trading off the table after the idea was criticised by Liberal Party backbenchers, including senator Cory Bernardi, who has since quit the party.
“Industry had worked hard to see what the best alternative was to enable the signal to be provided, and (an EIS) has been called the least cost option by so many quarters … the frustration was it was just taken off the table so quickly rather than considered on its merits,” Mr Calabria said yesterday.
A call by the National Farmers Federation for the Turnbull government to reconsider its opposition to emissions trading, saying the sector was struggling with secure and affordable power, was backed by AGL chief Andy Vesey.
“The National Farmers Federation wants an emissions intensity scheme. So do we.” Mr Vesey tweeted yesterday.
The emissions intensity scheme proposed by Origin would apply only at the margin and only to the electricity sector, as opposed to the Gillard government’s emissions trading scheme that was more of a cap and trade system that applied to all sectors.
Because it is not technology specific, like the renewable energy target, it would incentivise gas power as well as solar and wind.
“The electricity sector represents only 30 per cent of emissions, but will have to do a lot of the heavy lifting to meet Paris targets, so we want that clarity and we think that (an EIS) was the lowest-cost mechanism,” Mr Calabria said.
Turning to the power reliability problems being experienced in South Australia, Mr Calabria said there was an immediate need for short-term measures, including making sure more gas-fired capacity was available when needed.
“Sufficient synchronous (coal and gas) generation must be physically available in each state at all times and interconnector flows must be managed so the system is resilient to sudden changes in generation and demand,” he said.
He said Gladstone’s LNG plants, including Origin’s Australia Pacific LNG, could be used as “swing-producers” when more gas was needed.
“Right now, in South Australia, they want to make sure the lights are on, so we need to be focused on that there are things we can do today,” he said.
“There is certainly an opportunity for LNG projects to swing that gas back (to let power plants fire up during peak demand).’’
Mr Calabria said there was sufficient gas-fired power station supply in Victoria that could take up the slack from the closure of the Hazelwood brown coal power station this month. “But it does rely on plants in Victoria — Mortlake, Jeeralang, Newport and Laverton, all gas fired and available and with access to gas,” he said.
Mr Calabria said gas supply hubs and transport hubs would also be needed to supply the gas.
He reinforced comments made last month that Origin’s planned $1.8 billion float of its oil and gas production and exploration assets — outside of Queensland coal-seam gas — remained the main plan but that trade sales would be entertained.
Mr Calabria repeated that the company had fielded offers, but said that a trade process was not being run parallel to its IPO process.
For years, AGL and Origin have delighted in their ability to rape and pillage in the power market, running Open Cycle Gas Turbine and diesel peaking power plants on those routine occasions when wind power output collapses, on a total and totally unpredictable basis (see above – the total collapse on 8 February forced SA Power Networks to cut power to 90,000 homes in SA, the corresponding jump in the spot price to $13,000 per MWh appears on the left immediately above).
Where, until now, Origin and AGL (in their capacities as generators) have gleefully charged prices from $2,000-$4,000 per MWh and all the way to the regulated market cap of $14,000 per MWh (rather than the $35-50 per MWh that it costs to generate using coal or gas in gas-steam or combined cycle plant), greed and hubris has finally caught up with them (in their capacities as retailers).
Working on the adage that it’s better to have paying customers over the long run, than putting them out of business by extorting unnatural profits in the short run, their call for an EIS is a recognition that the rampant rorting permitted (indeed encouraged) by the LRET is both commercially and politically unsustainable.
For the record, STT is not in favour of an EIS: it is simply a tax on CO2 gas by another name.
However, provided current electricity marketing rules are completely overhauled (eg designating wind power as a ‘scheduled’ form of generation, rather than as ‘semi-scheduled’ – an oxymoron if there ever was one) and the LRET scheme is scrapped, then an EIS has the prospect of permitting reliable base-load power generation sources to deliver power according to customers’ demands (rather then the whims of the weather) and to, thereby, return to long-term profitability. The result would be lower power prices than would otherwise be the case; a return to grid stability and a more reliable power supply.
While Origin and AGL will not say so publicly, the EIS they propose is completely incompatible with the LRET; they are simply mutually exclusive policies.
In a perfect political environment (one driven by economics, engineering and common sense) every single market distorting policy attached to the generation and supply of electricity would be erased from the statute books; and no new ones would be added.
However, Australia has drifted into an ideological netherworld, where inner-city hipster fantasies dominate among the media and political class. Attempting to run economies on sunshine and breezes, is just one of them.
The example set by South Australia demonstrates how a cult-like mentality, wedded to wind power, has effectively set it on an irreversible path to economic oblivion. The inevitable de-industrialisation of a state with the highest unemployment in the nation by a mile is a wilful and deliberate economic and social crime.
The call for an EIS is a panicked and desperate recognition by retailers that the present policy of throwing $3 billion a year in REC subsidies at the wind industry under the LRET is an economic suicide pact; first for their customers and, ultimately, for them.
As former Labor Premier of NSW, Jack Lang pithily put it: ‘Always back the horse named self-interest, son. It’ll be the only one trying’.
In the battle that’s just begun between Australia’s power retailers and Australia’s Renewable Energy Target, STT is putting our money on an EIS.
Malcolm, the LRET has to go: Australia’s biggest power retailers just said so.