Killing Off Australia’s Suicidal Renewable Energy Target Only Path to Economic Salvation

STT has been banging on about this since December 2012 and, for most of that time, pretty much alone.

Massive and endless subsidies to a chaotic power source, abandoned centuries ago for obvious reasons have cost this country very dearly.

Maintaining the Federal government’s Large-Scale Renewable Energy Target fixes Australia on a path to economic and social perdition.

While the likes of PM, Malcolm Turnbull and his gormless Energy Minister, Josh Frydenberg feign the pretence of caring and engage in the theatre of knowing, those in the know understand that the primary cause of Australia’s energy debacle is the LRET, pure and simple.

A market distorting, $3 billion a year tax on all Australian power consumers, it has all but destroyed Australia’s once reliable and cheap power supply.

With power prices rocketing at 20%, year-on-year and a grid on the brink of collapse (AEMO has just forecast inevitable blackouts this Summer, whenever wind power output collapses on a total and totally unpredictable basis), everybody is now interested in electricity. Funny about that…

Judith Sloan, however, has been on the right side of the equation for years now. At the moment she is pumping out articles for The Australian with furious regularity. Here she is again.

Speaking of power, we need a lightbulb moment
The Australian
Judith Sloan
5 September 2017

Bullying retailers and spruiking Snowy 2.0 isn’t a very bright idea, Malcolm and Josh

I’m beginning to sound like a broken record but, hey, vinyl is back in fashion. I’m surely not alone in being concerned about the crisis in our electricity industry and the implications of higher prices and lower reliability.
The fact that Malcolm Turnbull and Energy and Environment Minister Josh Frydenberg think that bullying the retailers as well as shouting about Snowy 2.0 will sort out the problems tells us everything we need to know.

Just think about retailers for a moment. The government is forcing additional costs on them, which will be recouped, to make sure that some customers get a better deal. But the flip side of this outcome is that other customers will get a worse deal.

When I investigated our options for signing up to a better contract — by the way, Josh, not everyone has a smartphone to link to the barcode: think older folk and those on low incomes — the answer was $30. That’s right, we could save $30 a year if we switched contracts. Quoting an annual saving as high as $1500 could seriously backfire on the political messaging.

There is no doubt the really big challenge in the system is to secure new investment in reliable baseload supply as soon as possible. Not more wind turbines, not more solar panels, not more solar thermal plants that may not work, but affordable, synchronous power in which supply can meet demand all day, every day.

The fact the Liddell coal-fired plant, all 2000 megawatts, is due to close down in 2022 means construction must start in the next year or two.

If we think about the history of the National Electricity Market, we should note that when it first came about in 1998, there was excess capacity of baseload power, mainly coal-fired plants. This was the result of years of over-investment by state governments that were always keen to ensure reliability, giving the engineers a free rein when it came to decision-making.

As a result of this overcapacity, when the rules and regulation of the NEM were devised, little attention was given to providing investment signals for the construction of new synchronous electricity plants. But the reality always was that the existing plants would reach the end of their physical lives at some stage.

To be sure, the NEM was very useful in providing incentives for the existing plants to become much more efficient — massive featherbedding had been a characteristic of many of them — but the intervention of the renewable energy target essentially threw a grenade into the workings of the market.

By subsidising intermittent energy, the RET has effectively driven the early retirement of a number of baseload plants and/or destroyed the incentives of the owners to maintain them in order to prolong their lives.

When Hazelwood was closed, it was in a very poor state of repair. Even though it had the advantage of a contiguous source of low-cost fuel — brown coal — the owners felt no imperative to keep the plant up to scratch or to extend the life of some of the turbines. With the subsidised, intermittent suppliers bidding in at effectively zero price, there was no future for the plant.

Of course, now that the wholesale price has risen so much — to more than $100 per megawatt hour — because high-priced gas is increasingly the price-setter, the owners of these legacy synchronous plants are actually cashing in big time. You only have to check out AGL’s financial results, share price and outlook to be convinced of this.

But it also tells you why the solution to our electricity crisis does not rest in the hands of these big players, including AGL, but also Origin and Energy Australia. Their incentives are to milk their synchronous assets while walking on both sides of the street, declaring their commitment to renewable energy.

The problem is further exacerbated by virtue of the vertical integration of some of these firms — as both retailer and generator, which is fundamentally uncompetitive and should never have been sanctioned by the court. Sadly, there is unlikely to be any unscrambling of this egg and so we simply have to live with this undesirable arrangement.

As noted above, the solution to our electricity crisis must involve investment in new synchronous plants. Now we often mention high-efficiency, low-emissions coal-fired plants, and they are certainly an option. But we should be agnostic on this: gas-fired plants are quicker to build and probably cheaper.

Of course, there is the problem of sourcing the gas and that is where importing liquefied natural gas is a definite possibility. I’m not talking here about AGL investing in a receiving terminal, but new entrants entering the game.

Ideally, of course, we should be able to source the gas from eastern Australia but the actions of state governments are preventing this. And while it should be possible to bring gas into eastern Australia from the North-West Shelf in Western Australia, shipping costs could prove prohibitive.

Another option is to source LNG on the spot market from Indonesia or Qatar; the quantities are relatively small.

We are talking several hundred million dollars for a receiving terminal but the time lines are not too long. Ideally, the terminal would connect with existing pipeline infrastructure.

One possibility is that large users of electricity — such as smelters, steelworks, fertiliser factories — could form a consortium to invest in a receiving terminal and gas-fired plants in exchange for certain guarantees from the federal government. Capacity payments to synchronous power plants are commonplace in Britain and a number of European countries, and these would be necessary to create a workable business case for this kind of investment.

We already have various examples, such as the reverse auctions that are being offered to renewable energy suppliers by state governments and the contractual arrangements that apply to the various desalination plants dotted around Australia.

Don’t get me wrong, some of these ideas stick in my craw. By subsidising renewable energy we are being forced to subsidise new baseload. It would be preferable to withdraw the subsidies from renewable energy, but this doesn’t look like a realistic option at this stage.

I don’t want to seem a drama queen, but we are heading to a point of real disaster when it comes to electricity, notwithstanding our abundant supplies of coal, gas and uranium.

The clean energy target, which is just another name for the RET, will simply accelerate the unfolding fiasco, particularly as the requirement for renewable energy to provide back-up is unlikely to be implemented in any meaningful way.

My advice to all politicians: don’t just sit there, be prepared to think outside the box.
The Australian

STT, for one, certainly does not consider Judith Sloan to be a drama queen. Far from it. However, rather than encouraging politicians to think outside the box, Judith should be encouraging them to take an axe to the largest single industry subsidy scheme in the history of the Commonwealth.

As a Professor of Economics, Judith should recognise the merit in killing the LRET now under the rule that – when you are in a hole, for God’s sake, stop digging. This thing cannot be reformed – it is a $60 billion business and job killer that threatens every Australian household.

Australia once enjoyed an enormous competitive advantage, thanks to cheap and reliable energy. To have any hope of regaining that advantage this mess has to be sorted out – right now. A matter that has caught the attention of The Australian’s Editor.

Australia must regain its cheap energy advantage
The Australian
Editorial
5 September 2017

Malcolm Turnbull’s toughest challenge is electricity policy

Energy policy is Malcolm Turnbull’s most pressing national challenge. The Prime Minister needs to recalibrate climate and energy settings to reduce prices, boost supply and encourage investment. On this decision hinge our medium-term economic fortunes as well as the health of household budgets and the political prospects for the Coalition government. Mr Turnbull would like to satisfy business, markets, consumers, his partyroom, the states and voters while also bowing to global climate agreements. He will not be able to keep them all happy. His priority needs to be business and consumers, by ensuring plentiful, cheap power.

Affordable and reliable electricity has been a crucial building block of our modern cities, industries and lifestyles. Australia has been blessed with an abundance of resources and energy, giving us a competitive international advantage in cheap, secure power.

Governments state and federal have conspired to forfeit that advantage with policies designed to make electricity supplies more expensive and less reliable in order to reduce carbon dioxide emissions. While worldwide greenhouse gas emissions have been rising substantially these policies have reduced our emissions by an amount that is minuscule and inconsequential in global terms. Yet we continue down this path. Costs continue to climb, placing strains on consumers, industry and business. The summer looms as a test of energy security, especially in South Australia and Victoria, with forecast shortfalls at peak demand.

Such is the dysfunction in policy that national renewable energy targets have been set with no regard for sensibly spreading the generation around the National Electricity Market. The states have set even higher targets, largely on the expectation they will be funded by the federally mandated scheme. Now, as Mr Turnbull considers whether or not to adopt the clean energy target recommended by the Finkel report, there are threats the Labor states could implement such a scheme regardless.

This lack of national co-ordination, the impact of the NEM (which links all electricity networks except Western Australia and the Northern Territory), the bipartisan RET legislation, privatisation of many state-owned power assets, national emissions reductions targets and the strident political intervention of Mr Turnbull have seen Canberra assume ownership of a policy and economic dilemma that was once the domain of the states. The Prime Minister needs to deliver a policy that can provide some immediate relief, as well as a path for future investment and co-ordination.

So dire is the situation that states are spending up on direct payments to low-income earners to help them cope with the increased electricity bills that their own policies help to generate. They are funding information campaigns to advise consumers how to reduce their costs by using less power. States run their own schemes to encourage or directly invest in small-scale and large-scale renewable projects. Mr Turnbull and the premiers also wag their fingers at retailers, demanding lower prices. As today’s Newspollmakes clear, voters increasingly are focused on cost.

But to put downward pressure on prices and secure supplies, what is needed is more baseload generation located in places already connected by the grid. Yet so pernicious has been the impact of the RET and so changeable has been policy between governments (from bipartisan support for emissions trading to Labor’s carbon price, and from the Coalition’s rejection of any pricing mechanism to the possibility of a clean energy target) that the delivery of investor certainty for anything other than subsidised renewables appears almost impossible. If all subsidies and emissions targets were scrapped, we still would not expect investment in coal-fired generation because of the uncertainty about future regulatory settings. Likewise, investment in back-up gas generation is hindered by this uncertainty, the market distortion of the RET and restrictions on domestic gas supplies.

Still, Labor’s national 50 per cent renewable target would exacerbate the situation. Mr Turnbull must deliver the antithesis of this economic recklessness driven by climate gestures. He must give consumers and industry a clear path to affordable and reliable power.
The Australian

If Australia’s politicians are meant to think outside the box, as Judith Sloan suggests, then the next move must necessarily involve the Commonwealth government immediately purchasing and refurbishing ageing coal-fired plants and building High Efficiency Low Emissions (HELE) coal-fired plant.

Commentators and pundits are right when they say that private money will not invest in new coal-fired power plant. However, what the commentators ignore is that every last baseload power plant built in Australia was built by state governments. No coal-fired power plant was ever built in Australia with private money, alone.

Conventional generators, irrespective of who owns them, can’t withstand the punishment being dished out by the LRET – the perverse market mechanics are dealt with here: Turnbull’s Reliable Power Play: Australian PM Pushes Coal-Fired Future

If Malcolm Turnbull wants reliable power to keep the lights and air conditioners on this Summer and next, then his choices are pretty limited.

True it is that building new HELE plant will take several years. But, as the Chinese proverb puts it: “The best time to plant a tree was 20 years ago. The second best time is now.”

Over the same timescale, Australia ought to be building latest generation nuclear power plant (that’s if CO2 emissions really are the mortal threat to the Planet’s very existence, as climate alarmists insist).

Power consumers (read voters) have worked out where their power comes from and are now painfully aware of what it costs.

The LRET is simply unsustainable: it has killed the power market, wrecked the grid and is all set to destroy Australia’s wealth and prosperity.

It’s time to not just think outside the box, it’s time to blow up the box and start all over again. This time, based on solid engineering and sound economics, not subsidies and the weather.