Armageddon Beckons: National Energy Guarantee Crushes Australia’s Wind Industry

Renewables rent-seekers are nothing if not sore losers. A heartbeat ago it seemed as if the subsidies for renewables would last until kingdom come, and wind and solar power outfits could get away with the completely unpredictable and haphazardly occasional ‘delivery’ of power at ridiculous prices. Now, PM, Malcolm Turnbull’s National Energy Guarantee has turned their comfortable expectations to a mixture of dread and panic.

Here’s The Australian’s Nick Cater detailing the drama among the shiny-suited subsidy set.

Rent-seekers think Liberals wrong? Well that’s good
The Australian
Nick Cater
14 November 2017

Energy policy has been placed on a more level playing field to limit costly subsidies

“Any fool can criticise, condemn and complain,” wrote Dale Carnegie. “But it takes character and self-control to be understanding and forgiving.”

Carnegie’s advice should temper our loathing of the people responsible for wrecking a perfectly good energy market with their ill-judged policy intrusions.

They may claim to be well intentioned, but as Carnegie reminds us in How to Win Friends and Influence People, even gangsters imagine themselves blessed with hearts of gold.

“I have spent the best years of my life giving people the lighter pleasures, helping them have a good time,” Al Capone once lamented, “and all I get is abuse.”

Jay Weatherill was only trying to brighten our lives with his quirky plan to power his state with windmills and other imperfect methods of delivering alternating current at a constant 50 oscillations a second.

So far his little experiment — the South Australian Premier’s words, not ours — has delivered the highest electricity prices in the country, and possibly the world, and the first state-wide blackout for more than a half-century.

A more reflective premier might have thought twice before abandoning coal, preferably before a demolition squad blew up the state’s last thermal power plant, as it did late last week.

Instead, Weatherill is backing fledging technology called solar thermal. It would be a “game changer” that “signals the death knell for coal-fired power stations”, Weatherill told reporters in August, when he announced a solar-thermal plant would be built near Port Augusta.

The plant will have a capacity of 130MW, about 4 per cent of SA’s peak demand. Despite its modest size it will knock $90 million off our collective electricity bills, Weatherill said. “That’s about $50 per household … it could be much lower than that.”

One thing in solar thermal’s favour is that it can store energy. It won’t store it for long, however, since it suffers from the same impediment that stops us boiling the kettle tonight for tomorrow’s cup of tea.

But who are we to challenge Weatherill’s uncorroborated price assumptions about the potential of unproven technology? Especially when it has the cast-iron backing of concessional equity loan from the government.

The Premier reckons the project is a goer even without the $110 million it is borrowing from the feds, which makes you wonder why taxpayers get dragooned into carrying the liability for these kind of things.

Oliver Yates spent many hours trying to answer that question at Senate estimates committees before stepping down as chief of the Clean Energy Finance Corporation earlier this year. Here’s an extract from a particularly long session in February last year.

Greens senator Peter Whish-Wilson: “A point of clarification … Is there some kind of market failure in relation to financing these kinds of projects?”

Yates: “Market failure is, I think, an overused term. It could be a market failure, but a market failure could also represent the fact that there are not a lot of investors in certain asset classes … If you call that market failure then, yes, it is a market failure.”

Yates is an angry critic of the Turnbull government’s plans to fix the energy market. The Liberals “are knowingly stoking the fires of the destruction”, Yates told the online journal RenewEconomy earlier this month. “They are on the wrong side of history.”

Yates’s outspoken comments followed his unexpected intervention at a Liberal Party lunch in Melbourne earlier this month, when he stood up from the table so suddenly that his companions found their desserts on their laps.

He spoke for several minutes denouncing climate denial before he was ejected by security guards. Such incidents are rare at Liberal Party fundraisers, but there is an argument they should be encouraged. Properly promoted, they would surely draw a crowd.

Yates’s wrath was invoked by Jane Hume, a mild-mannered senator from Victoria, who tried to lighten proceedings by presenting Scott Morrison with a lump of brown coal as a souvenir from Victoria. For Yates it was further evidence of a Liberal Party in denial, as he told this column yesterday. “They’re walking around as if coal is a good idea,” he says. “Some of us find that offensive.”

In the interests of disclosure, we should note that Yates has skin in the game. He co-founded the Clean Energy Derivatives Corporation, which bets on future National Electricity Market prices.

It is hard to see how sanity can be restored to the energy market without treading on the toes of the renewable energy lobby.

What angers them most about Josh Frydenberg’s reforms is the National Energy Guarantee, a mechanism that requires electricity retailers to find their own back-up power when wind and solar plants cannot operate.

They can no longer expect the east coast grid to cover for them; anybody selling electricity must provide it every day in regular 4,320,000 alternating cycles.

The NEG is bad news for renewable energy producers because it takes away an effective subsidy and goes some way to levelling the playing field. Regional electricity producers that rely heavily on intermittent renewable energy sources will have to fire up gas plants, install batteries, pump hydro, boil kettles or anything they think of to keep the lights on.

It is bad news for the SA government, which assumed those costs would be absorbed by consumers in other states. It is bad news for carpetbaggers generally.

It is, however, good news for everyone else since it will end a form of subsidy that was being added to our bills.

Investors in renewable energy will think twice before investing in new projects, and shift the focus to projects with back-up, such as solar thermal, if it proves to be viable.

It will reduce the risk of blackouts — even in South Australia — and empower consumers. It will help restore the energy market to what it used to be: a system where supply is dictated by customers’ needs rather than the caprice of the weather gods.

Nick Cater is executive director of the Menzies Research Centre.
The Australian

Nick Cater leaves open the question as to whether solar thermal might prove viable in SA.

It hasn’t proved viable anywhere else in the world.

The system upon which SA’s proposed shiny white elephant is based, is another shiny white elephant located in the Californian desert, Crescent Dunes. Despite the hoo-ha, the Crescent Dunes site claims to operate barely half the time and, on one reckoning, it has a capacity factor of a risible 16%.

This from our earlier post – South Australia: Sublime One Day, Ridiculous the Next – Premier Set to Squander $1.2bn on Solar-Thermal Boondoggle:

A company called SolarReserve is planning to build the new Aurora 150MW solar thermal plant at Port Augusta, which is apparently a copy of their Crescent Dunes plant in the US. But that project has been offline for most of the time since last October. The whole SA government is meant to be running 24/7 off “solar power”, which allegedly only has about 8 hours of energy stored up (as heat in the molten salt block).

So an 8 month break will be a bit of problem for the SA government (except of course, we all know that the real baseload backup here at 4 or 5am everyday, and most of the day in winter, is ultimately the very fossilized gas and coal.) Since the project only began working in Sept 2015 it managed to operate for all of one year and one month before it went offline for 8 months due to a leak. The SA State Energy Minister is not concerned saying it was a construction issue and SolarReserve “have learnt from that”.

The 150MW myth: most of the time it will be less, a lot less

Here’s an ominous number: Crescent Dunes has worked at an average capacity factor of only 16%. That would mean an average generation of just 24MW of power from the 150MW plant. Theoretically, they are aiming for a capacity factor of 51.9%. (Yes, according to Wikipedia, it is not 51.8%, or 52%, but 51.9%. Very specific spin then?) — Thanks to Graeme No 3 and AndrewWA  in comments for their help. And from TonyfromOz who says: “Everything about this SouthAus plant is the hyped to the max best case scenario that NO plant on Planet Earth has achieved yet…”

Should they close their Solar-Parliament each winter?

The South Australian government might want to switch their summer holidays to winter, because Crescent Dunes production in summer was three times as high as their best winter month. (30GWh in Sept 2016 compared to 9GWh in February 2016). SA may well be better off if Parliament has to shut down for winter, but how do you run hospitals and schools on one-third of the power?

As to the fallout from the NEG, if renewables-rent seekers are angry now – and STT has likened the process to working through the 5 stages of grief: denial, anger, bargaining, depression and acceptance – the worst kind of emotional turmoil is yet to come.

STT hears that there is a solid push within the Coalition ranks to completely destroy what remains of the wind industry’s ‘business’ model.

The plot goes like this.

Built into the Large-Scale Renewable Energy Target is a $65 per MWh fine, referred to as the ‘shortfall penalty’.

The LRET target is set by s40 of the Renewable Energy (Electricity) Act 2000 (here).

Where a retailer fails to purchase and surrender RECs sufficient to meet their LRET target obligations section 5 of the Renewable Energy (Electricity) (Large scale Generation Shortfall Charge) Act 2000 applies:

Imposition
The large scale generation shortfall charge that is payable under the Renewable Energy (Electricity) Act 2000 is imposed by this section.

At the rate set by section 6:

Rates of charge
(1) The rate of charge is $65 per MWh.

The terms of the Renewable Energy (Electricity) Act 2000 mean that the penalty is applied for every MWh that retailers fall short of the annual target, set by section 40 of that Act.

The shortfall charge is, as specified above, $65 per MWh. As the penalties paid are not deductible business expenses (they are treated as fines), the effective pre-tax penalty is therefore $92.86/REC ($65/(1-30%), assuming a 30% marginal tax rate).

A penalty unit is levied by the Clean Energy Regulator for every MWh that a power retailer falls short of the LRET’s annual target (this year 26 million MWhs – rising to 33 million in 2020 and remaining at that level until 2031).

The fine – which because there will be a very substantial shortfall in renewable energy delivered to the grid – is likely to add almost $1 billion to Australian retail power bills each year until the end of the LRET. Because it is not tax-deductible for retailers, the shortfall penalty is a $93 per tonne hidden CO2 tax paid for by retail power consumers.

STT’s Canberra operatives inform us that a solid group of Liberal and National backbenchers are determined to scrap the hidden CO2 tax.

Which is good news for Australian power consumers, but a calamity for wind and solar power outfits.

Retailers have a ‘choice’ between purchasing Renewable Energy Certificates (to satisfy their LRET obligation) or being hit with the shortfall penalty.

The price fixed for the shortfall penalty sets a floor price for RECs. As noted above, the after-tax treatment of the shortfall penalty means that its $65 face value ends up costing a retailer (and their retail customer) $93.

If the cost of the shortfall penalty is reduced, the value of RECs falls with it.

STT hears that an amendment to the Renewable Energy (Electricity) (Large scale Generation Shortfall Charge) Act 2000 is on foot, whereby the penalty price will be slashed to around $10. That move would result in a complete collapse in the market for RECs, by effectively slashing the legislated floor price for those certificates.

Another twist in the proposal is to allow power retailers to purchase International and/or Australian carbon credits (ACCUs) and to use them to satisfy their obligations under the LRET, by either acquitting those certificates in lieu of shortfall penalty units, or using them instead of RECs to avoid the shortfall penalty, altogether. CCUs are trading at around, funnily enough, $8-10.

As STT followers are well aware, the wind and solar industries have been mounting off about competing with conventional generators, for years now.

The plan being hatched by Coalition backbenchers will give them the chance of finally competing, head-to-head, with the big boys.

As they say, be careful what you wish for.

About stopthesethings

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

Comments

  1. John McKerral says:

    You state “Because it is not tax-deductible for retailers, the shortfall penalty is a $93 per tonne hidden CO2 tax paid for by retail power consumers.”. Shouldn’t that be $93 per MWh shortfall in renewables electricity paid for by retail power consumers. Was the switch to tonnes of emissions a mistake, possibly? How many tonnes of CO2 is emitted to produce one MWH of electricity? Doesn’t it depend on the type of generator?
    For instance a coal fired plant will put out much more CO2 per MWh of electricity produced than a CCGT powered plant.

    • John, no mistake at all. The assumption built into the RET from the outset is that dispatching 1MWh of wind power displaces 1MWh of coal fired power, and therefore 1 tonne of CO2. That assumption was based on the average CO2 itensity for coal plants in Australia. The assumption is false for a number of reasons, but it was used as the original basis for awarding RECs. It appeared in the Regulations and policy documents, but all reference has been expunged to avoid scrutiny.

  2. Nick Cater's comments about Oliver Yates recent hissy-fit must bring some amusement to the long suffering rural "receptors" (victims) of the noise created by non-compliant wind farms.  They will no doubt remember Yates smarmy obfuscation, when hand in glove with then Clean Energy Regulator Chair Cloe Munro, he attempted to justify the handing out millions in taxpayers' dollars to the shonks of the wind industry. 

    Senator John Madigan had Yates dead to rights back in 2015 now a little poetic justice, just "suck it up" Oliver!

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