Unreliable Subsidised Wind & Solar – Destroyers of Worlds – Have Become Economic Death

Market fails to cope with the rise of the unreliables
The Australian
David Uren
14 September 2017

Creeping nationalisation to fix policy blunders would make Lenin smile

In the former Soviet Union, electricity-generating plants were built with the architectural grandeur of cathedrals, some with stained glass windows. The leader of the Russian Revolution, Vladimir Lenin, saw the electricity grid as the perfect expression of socialism, distributing power to the people through the medium of central planning. “Communism is Soviet power plus the electrification of the whole country,” he said.

The supply of electricity has always had a heavy element of state control, mainly because the grid is a natural monopoly. Nobody wants multiple wires running down the street. In Australia, it was first nationalised in Tasmania in 1916 and in the rest of the country soon after. Since privatisations in Victoria and South Australia in the 1990s, it has been more intensely regulated than any other industry.

The National Electricity Market began its life 20 years ago to manage the interconnection of the grids of the eastern and southern states as the functions of electricity generation, distribution and retailing were separated into different corporate entities.

The NEM is a sophisticated piece of infrastructure enabling about 400 generators to bid to supply electricity to the grid in five-minute blocks, with the operator awarding rights to those offering the cheapest prices.

Government authorities run the show. A commission sets the rules for the market participants, a regulator enforces them and an operator manages the network, including planning its future needs. Last week’s Electricity Statement of Opportunities, issued by the Australian Energy Market Operator, is the key planning document, detailing the adequacy of the installed and projected capacity to meet projected power demand.

In the beginning, it worked well, delivering reliable power more cheaply while providing sufficient incentives for investment. A 2005 Productivity Commission report concluded that labour productivity had more than doubled in the decade to 2002 and trebled in Victoria, where the reforms had gone furthest while prices had dropped by about 20 per cent.

But superimposed on this closely regulated market came other policy imperatives. Retailers were required to fill a portion of their needs from renewable sources. Carbon emissions policy has been in flux for a decade. Gas supplies, a key input for 12 per cent of the market, have been buffeted by bans on fracking and, in the case of Victoria, conventional gas exploration.

These policies have resulted in the construction of about 2 gigawatts of new renewable power capacity in the past five years but no gas or coal investment whatsoever. In that period, about 2.5GW of coal-fired capacity has been withdrawn. Prices have soared as supply to the market gets tighter, but it has not been enough to encourage any new investment in reliable power, coal-fired or the more flexible gas-fired generation. No gas or coal investment is on the horizon.

The NEM worked well while it was dealing only with coal, gas and a bit of hydro power but it has struggled with the rise of unreliable solar and wind renewables. When they are working, they can always supply the cheapest power as there is no marginal cost for them to operate. Gas and particularly coal-fired power are most efficient when there is steady uninterrupted demand, so making way for intermittent renewables pushes up their average costs.

Other countries are wrestling with the same problems as climate change policies force greater adoption of intermittent renewable sources. As a new report from the Grattan Institute notes, Britain, France, Ireland and several US states are paying generating companies to guarantee a level of baseload capacity. Taxpayers foot the bill for generating electricity, whether needed or not. The Finkel review rejected this as too radical a step and recommended instead a new reliability obligation on new renewables plants, which would need to be able to supply power for four hours after the wind or sun stopped, whether through batteries, diesel or other power sources. If implemented rigorously, this could bring investment in renewables to a halt.

The generators told the Finkel review the biggest factor impeding investment was the policy malaise. With Labor promising a 50 per cent renewables target and the Coalition deeply divided over carbon emissions policy, there is little prospect of any bipartisan settlement. Instead, a creeping renationalisation appears likely.

There is a strong lobby within the Coalition for the North Australia Infrastructure Fund to finance a coal-fired power station in Queensland. Despite having done nothing to avert the closures of Hazelwood in Victoria or the last South Australian power stations, the government is considering buying out the Liddell power station in NSW from AGL in 2022 to avert its scheduled closure. It is little surprise to see Energy Australia lining up for federal help to keep its Mount Piper coal-fired power station running.

Both Malcolm Turnbull and Scott Morrison have shown their lack of faith in the electricity market, describing AGL essentially as price gougers. “AGL’s management want to look after their shareholders. For them, scarcity of energy is good because it enables them to raise prices,” the Prime Minister said on Monday. The Treasurer commented last weekend that he was not surprised that a major energy company wanted to see a big source of supply go out of the market. “I mean, that drives prices up and that benefits energy companies.”

The government’s loss of confidence in the ability of the market to provide incentives for companies to provide reliable supply provides its excuse for direct intervention. The failure of the federal parties to settle a bipartisan energy policy opens the field for ever more radical interventions from state governments, which already are conducting their own investigation of a clean energy mechanism should the federal government fail to act. The growing direct state involvement in the electricity industry will not produce the seamless grid of which Lenin dreamt but will lead to an ever deepening crisis.
The Australian

David Uren lays out a pretty comprehensive collection of what’s gone wrong in Australia’s power market, but hasn’t thrown up any meaningful solution.

The first thing that must happen is for the Coalition to scrap the Federal Large-Scale Renewable Energy Target.

The LRET is a $60 billion business and job killer, which has perverted the power market by forcing baseload generators to the back of the queue. Subsidies paid to wind and solar allow them to dispatch power to the grid at prices approaching (or even below) zero. The money is made in the subsidy, being the Renewable Energy Certificate, currently worth $85: a REC is issued for every MWh of wind and large-scale solar power delivered.

Unless and until the LRET it scrapped, baseload generators will never be able to operate in an efficient manner and make a reasonable return on their assets.

If there was anything that Lenin would be proud of, it would have to be the LRET: if you were setting out to destroy capitalism forever, then a subsidy system that rewards failure and punishes businesses for using electricity is just the trick.

Over the next couple of years, as the annual LRET target reaches its ultimate 33,000 GWh in 2020, power costs to businesses will easily double, putting an end to power hungry businesses and whole industries in this Country.

Mineral processors and manufacturers will be the first to go; with miners to follow. And it is not just the currently operating businesses that will be destroyed, there are the hundreds of businesses that will never get off the ground, simply because rocketing power costs act as a disincentive to enterprise and investment.

David Uren appears to gloss over the fact that Australia’s baseload generators were all built by state governments, using public funds. The likes of AGL simply snapped them up for a song. The Liddell power station, which the PM is begging AGL to keep up and running in order to avoid blackouts in Sydney, was purchased from the NSW government in 2014; and AGL placed zero value on it after its purchase. AGL has been thrashing it to death, ever since.

The concept of there being bipartisan energy policy is dead and buried. With looming summer blackouts guaranteed in wind powered South Australia and Victoria, and likely in New South Wales, holding hands and chanting Kumbaya will not help.

The solution requires an axe being taken to the LRET and the Federal government promptly purchasing ageing coal-fired power plants, refurbishing and expanding them. The long game requires construction of High Efficiency Low Emissions coal-fired power plant. That is only going to happen with the Commonwealth picking up the tab.

State governments built Australia’s once reliable power system, which delivered power at prices among the lowest in the world. Successive Federal and State governments have all but destroyed that system with policies designed to do just that. Get rid of the policies and start rebuilding the system from scratch.

Start with solid engineering and sound economics, and Australia can’t go wrong.

But, continue with the current ideological obsession over wind and solar and expect nothing but economic and social misery.

Malcolm, your time starts now.

Malcolm Turnbull: Nation builder, or destroyer of Worlds?

 

About stopthesethings

We are a group of citizens concerned about the rapid spread of industrial wind power generation installations across Australia.

Comments

  1. Jackie Rovensky says:

    Turning the rampaging Bull is not going to happen until the Government begins to govern and accept access at a reasonable cost to Electricity is ESSENTIAL in todays world. Supply of electricity is or should be classed as an ESSENTIAL service.
    Unless Turnbull and his Government accepts they are meant to be in charge of such things we will continue to see our Nation and its people’s future decline rapidly.
    You cannot stand around wiggling your thumbs Mr Turnbull you have to act now you have to ensure common sense prevails and not misplaced ideology. Get this country back on its feet and then look and see what can be done about reducing emissions – if it is necessary.
    Trying to do it when the country is in such a desperate state is madness and will only bring more harm.
    We need a reliable energy supply that is not a patchwork of redundant and ill-advised schemes that have shown no ability to reliably supply electricity when, where and at a rational cost to the people, businesses and industry of this Nation.
    If our PM does not want to make a decision against his personal ideological standing then he should stand down and let someone else do it. Until he does that he is our PM and as such should be working for us NOT his personal ideology which is aligned with his Governments Opposition party’s thinking. He should be working for us not for the Opposition or some misguided ideologues.
    Federal and State Liberals use your capabilities to bring this about to ensure we have a PM and Federal government that is working for OUR interests – and STOP SITTING ON YOUR HANDS – force him to act now.
    The first thing is to get the RET removed so a level playing field is provided and ensure this cannot be overturned by any incoming Government at a future date. This will create the certainty people are saying is needed to encourage investment in energy production.

  2. Colin Kenny says:

    “One might even think that for some reason he is aligned with the interests of the exploiters who are destroying this country for their own benefit.” – A quote from Michael Crawford’s comment above. Would this be a subtle reference to the fact that Turnbull’s son is invested in the renewables industry? Or simply a reference to his socialist/Green leanings? Either way he has the opportunity to win the next election at a canter if he was to disown the RET kill the subsidies.

  3. Michael Crawford says:

    If Turnbull was to grasp the nettle, declaim that providing reliable, affordable power was the essential responsibility of government in relation to electricity, and basically act as you outline, he would hold onto government at the next election and probably for several terms.

    Abolish at least the RECS component of the RET (the government can have a pious aspiration that CO2 emissions decline as long as it does nothing about it) and issue long term contracts for dispatchable electricity based on first and continuous use of the contracting facilities.

    If AGL doesn’t want to bid on that basis, there will be investors happy to fund new coal-fired generators with long-term take or pay contracts with government and the rapacious AGL will be left licking its wounds.

    The combination of abolition of RECs and the massive wholesale price reduction provided by coal-fired stations producing continuously and only slowing production during low demand periods in the daily cycle would give a huge reduction in real electricity prices.

    Wind farms would cease operating since they are incapable of providing dispatchable power and thus could not bid at such an auction.

    Most of the government bureaucracy created for the NEM would immediately be redundant and its costs would also be lifted off electricity consumers. In addition, that contracting arrangement would again offer low volatility electricity prices to customers so there would be no need for the financial hedging instruments which are an additional cost to electricity users and allow the financial sector to tax our power consumption.

    It would be a win for electricity users, a win for Australia and a win for Turnbull. Unfortunately he seems incapable of doing what is so obviously in the country’s interests and his own political interest. One might even think that for some reason he is aligned with the interests of the exploiters who are destroying this country for their own benefit.

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