The Obscene Cost of Australia’s Renewable Energy Debacle

What a difference a 20% year-on-year hike in retail power bills can make. Add in the South Australian experience of routine load shedding and statewide blackouts. Top it off with the threat of widespread blackouts this Summer; and not just confined to SA, but likely to send Victorians back to the Victorian age and New South Welshmen scrambling for candles, too, and you have an entire Country now obsessed about power.

In the face of a self-inflicted renewable energy debacle, all of a sudden, people who couldn’t tell the difference between baseload and their elbow have become energy experts, overnight. Pundits and commentators all think they have the answer.

Unlike the Johnny-come-latelys, The Australian’s Adam Creighton has demonstrated a pretty fair grip on the greatest Commonwealth mandated rort from the very beginning. Here’s Adam.

Come together, power suppliers
The Australian
Adam Creighton
11 September 2017

Adam Smith, the great free-market economist, might have nationalised Australia’s solar and wind farms, or at least insisted the government build them. He was pretty clear in his 1776 Wealth of Nations that a crucial function of government, along with national defence, and law and order, was “erecting and maintaining those public institutions and works, which though they may be in the highest degree advantageous to a great society, are, such that the profit could never repay the expense to any individual, or small number of individuals”.

Solar and wind energy may well be the must-have accessory for any great society in the 21st century, but they are being built only because government is forcing people to buy it. If renewable energy were as cheap as its advocates say, it shouldn’t need government to force people to buy it via various state and federal renewable energy targets. If these farms aren’t viable without compulsion, then the state should be building them — and reaping whatever occasional, intermittent profits arise (when the sun shines and wind blows), at least according to Adam Smith.

It’s a bit late for that now, you might say. Indeed, last week The Australian revealed a Saudi firm was enjoying annual guaranteed returns up to 80 per cent a year on its Moree solar farm courtesy of Australian electricity users, having had to contribute less than 10 per cent of the cost itself. That’s just one of many boondoggles.

In June 2013, Australia’s Renewable Energy Agency, whose mandate appears to be throwing public money around with abandon, gave $167 million to AGL for solar projects at Broken Hill and Nyngan. The NSW government chipped in another $65m, implying a public contribution of more than half the project’s value. AGL sold the projects late last year, and appears to have made an $18m profit on the sale, with an unknown share (probably zero) going to state and federal treasuries.

Perhaps AGL could offer mates’ rates to the government, in recognition of such generosity, for any sale of its Liddell power station, which it seems intent on shutting down, sapping Australia’s baseload power further. Sister organisation the Clean Energy Finance Corporation isn’t to be outdone, by the way, providing $100m in finance each over 2014 and 2015 to Origin Energy and non-bank lending Balmain Finance Corporation to help with various green schemes.

Treasurer Scott Morrison astutely observed yesterday: “It doesn’t surprise me that a big energy company wants to see a big source of supply go out of the market. I mean, that drives prices up and that benefits energy companies”. You couldn’t blame AGL for wanting to reduce supply to drive up prices. The AGL CEO, who earned $7m last year, would naturally want to keep meeting personal bonus and shareholder return targets. Such targets might not include what’s best for the energy market, which has become a mess of private and public involvement, including the worst elements of both.

If the parliament refuses to dump its blindingly stupid ban on nuclear energy, which makes us a laughing stock internationally, the government, state or federal, should be prepared to contract and build new coal-fired power stations to ensure reliable baseload power supply into the future. Ensuring reliable energy supply is a core responsibility of government. Nuclear power would provide reliable emissions-free baseload power. Predicating energy policy on some massive improvement in battery technology to arrive just in time as a fleet of coal-fired power stations close would be irresponsible in the extreme.

Common sense in energy policy might even win the struggling government the next election. One doesn’t need a political science degree to realise Labor’s weak spot is energy. Its advocacy of a bonkers 50 per cent RET (more than double the current share of renewable energy) as the country faces blackouts and surging power bills won’t be a good look politically.

Electricity provision isn’t selling lemonade on the beach. We don’t contract out our defence to a mishmash of different private providers with different technologies. Almost none of the assumptions that are required for an efficient free market are met in electricity: consumers and producers don’t even remotely have equal knowledge or power, entry and exit is not easy. And Mr Morrison hinted yesterday, the interests of providers and the public might not be aligned.

Retail electricity prices in NSW are 34 per cent higher than the average for the European Union and South Australia’s electricity is an incredible 95 per cent higher than France’s, according to recent analysis by MarkIntell and the US Energy Information Administration. And these snapshots were taken before the latest round of 20 per cent retail price increases. Something is drastically wrong with Australia’s energy market. There’s no reason why our power shouldn’t be as cheap as in the US, given our natural endowments.

The various RETs have so distorted the electricity market government has little choice but to involve itself further. Intervention begets intervention.

Just as state governments charge royalties for the minerals they own, it’s our sun and wind, and any profits they generate should to some degree be taxed so other taxes on the economy can be lower. Solar and wind energy lead to wild swings in wholesale electricity prices that aren’t compatible with separate ownership of renewables and fossil fuel generators. The inherent intermittency of renewables means they must be owned together.
The Australian

Another very solid effort there from Adam. However, he heads off the reservation with his suggestion that Australia’s power pricing and supply calamity can be fixed by having the owners of wind turbines and solar panels also owning conventional generation plant.

The three big retailers in Australia, AGL, Origin and EnergyAustralia all have very substantial investments in wind and/or large-scale solar.

However, all of them have even more substantial assets in the form of coal-fired plant and gas-fired Open Cycle Gas Turbines.

All of them profit very handsomely from what Adam identifies as “wild swings in wholesale electricity prices”. Adam has a point when he says that this is not “compatible with separate ownership of renewables and fossil fuel generators”. However, the big boys are vertically integrated power generators and retailers, which all benefit from those wild swings in the spot market for electricity, by holding both reliable (coal/gas) and unreliable (wind or solar) generation assets.

A whole shadow industry has been developed around wind and large-scale solar power ‘outages’; and AGL, Origin and EnergyAustralia are in it up to their necks.

 

Open Cycle Gas Turbines (OCGTs) are literally jet engines, run on gas or fuel oil (diesel) or kerosene. Wind ‘powered’ South Australia is shipping in 276 MW worth of OCGTs built to run on diesel, just to avoid more summer blackouts.

The initial capital outlay is low, but their operating costs are exorbitant – depending on the fuel input costs (the gas dispatch price varies with demand, for example) operators need to recoup upwards of $300-400 per MWh before they will even contemplate firing them into action. For a wrap up on “fast-start-peakers” see this paper: Peaker-Case-Histories

As to their inefficiency and insane running cost (relative to coal-fired plant or Combined Cycle Gas Turbines), see this Frontier Economics paper: modelling_wholesale_electricity_costs_april_2013  Note the numbers are based on gas prices in 2012, which have skyrocketed in the last 5 years, making the cost per MWh from OCGTs more expensive, still.

For peaking power operators, the inevitable and total collapses in wind power output is where the greatest rort of all time begins.

You see, it’s not really about the costs of running OCGTs (or diesel engined generators) this is all about what the operator can get away with.

The pattern was set up by the energy market whizzkids from Enron – back in the days when it raped and pillaged the Californian power market, using much the same tactics. Wait for an “outage” – self-generated in Enron’s case – sit back and watch the grid manager panic about widespread blackouts; and then ‘offer’ to solve the problem by delivering power in the nick of time at rates 1000 times the average price: the Enron rort was detailed in the doco “The Smartest Guys in the Room”.

 

 

For the purchaser (grid manager), it’s not about how much the vendor ‘needs’ to cover its costs – it’s all about how much the grid manager has ‘got’: some might call it ‘chiselling’; others ‘naked theft’. Hence, the NEM rules that set the upper limit of what can be charged at $14,000 per MWh.

However, there has been serious talk about increasing the cap to …. be sure you’re seated for this … $80,000 per MWh. See this paper by Dr Jenny Riesz here: Energy-only markets with high renewables: Can they work?

The ‘alternative’ to increasing the mandatory price cap from its already whopping $14,000 per MWh to a phenomenal $80,000, is to pay baseload generators $millions upfront to hold additional spinning reserve – with plants permanently ready to come online to cover wind power collapses; and, therefore, burning coal and gas around the clock – with what are called “capacity payments”: Power Punters to Pay Double for Wind Power “FAILS” – REAL Power Generators Paid to Cover Wind Power Fraud

All of this power market insanity is the direct consequence of inevitable but unpredictable wind power output collapses; the criminal scenario detailed above will only get worse if the ultimate annual 33,000 LRET were ever met; and would become a complete social and economic disaster if Labor’s 50% renewable target fantasy were ever realised.

One way or another – whether it’s the daily spot price “bonanza” enjoyed by peaking-power-piranhas; or paying millions of dollars in capacity payments to baseload generators, just to keep the grid from collapsing when the wind stops blowing – it’s power punters that pay the ultimate price.

Enron set the standard when it gamed the Californian power market, 20 years ago. And, AGL, Origin and EnergyAustralia were all over it, long before Adam Creighton tumbled on the concept of owning both reliable and unreliable generation assets. Adam, they’ve been at this for a decade.

And that’s why Australians are now paying the highest power prices in the world. The boys who ran Enron would be proud to know it’s happening all over again.