Wind & Solar Subsidies Caused Australia’s Power Crisis: Salvation Means Slashing Them Now

The adults have just taken control of Australia’s renewable energy debacle: the ACCC’s investigation into RE subsidies and power market gaming spells the end for subsidised wind and solar.

As STT has pointed out on more than one occasion: when a policy is unsustainable it will either collapse under its own imponderable weight, or its creators will be forced to scrap it, in shame and ignominy. The demise of Australia’s renewable energy policies will probably be a result of a mix of both.

Ontario’s new Progressive Conservative government has just done what our political betters claim is impossible – slashing subsidies and cancelling 758 wind and solar projects that were in the pipeline: Ontario to Cancel Energy Contracts to Bring Hydro Bills Down: Keeping election promise will save $790 million to help lower electricity bills

There is nothing ‘inevitable’ about endless subsidies and mandated targets for wind and solar. Ontario’s voters/power consumers called the shots and got the result they were after.

There is no way that Australian households and businesses are going to suffer continual 20% year-on-year increases in retail power prices. And that’s precisely the path we’re on. The previous financial year, retail rates jumped between 13 and 20%.

Over the next couple of months, Australian power consumers will receive window faced envelopes, opened to a sense of dread, to reveal retail rate resets of anything between 20 and 28%; over and above the rates prevailing up to 30 June 2018.

At that point, the Energy Minister, Josh Frydenberg’s puffery about falling power prices will smack headlong into reality. Last week Josh picked up STT’s Pinocchio Award for his repeated claims that power prices are guaranteed to fall in the future and have already fallen.

The graphic above says otherwise; the retail power bills about to lob into letterboxes will confirm what power consumers already know. Australia is in the midst of a power pricing and supply calamity.

The significance of spiralling power prices is not lost on Liberal and National backbenchers, keenly aware of the political punishment that awaits.

Commentators have seized on the ACCC’s report and, if Coalition MPs know what’s good for them, they will too.

We’ll start the batting with a piece from the ever sensible Nick Cater.

Energy subsidies spark market strife
The Australian
Nick Cater
10 July 2018

In theory, Barnaby Joyce’s proposed royal commission into ­energy could be wrapped up by tea time. The causes of rising electricity prices are hardly a mystery. Subsidies dampen competition, erode market efficiency and ­reward rent-seekers.

Since the legal profession is prone to struggle with the bleeding obvious, however, a royal commission would be neither swift nor helpful. Lawyers being lawyers, they are inclined to look for legislative solutions when the free market should be left to do the trick. Worse, a royal commission would seem to address an issue that instead simply requires political nerve. After the best part of five years of Coalition government, consumers are over it. They simply want to get the problem fixed.

The solutions are long and painful, which is not what politicians like to hear, particularly when they are months out from a finely balanced election. At times like these, the temptation to dip a hand into the candy jar of populism is irresistible for some. Joyce is right to warn that a royal commission into energy is the kind of stunt Bill Shorten is likely to pull.

It suits Labor’s anti-business narrative to cast high energy prices as market failure. The large energy companies are making it easy for the Opposition Leader by gaming a distorted market in ways the socialist mind considers unconscionable. The claims that they are contributing to the common good by lowering carbon emissions is enough to make the most ardent coal-hater retch.

Yet it is hard to fault the bosses of AGL, Origin Energy and ­EnergyAustralia for seizing the opportunities offered by the renewable energy target to produce a return for shareholders. There is no suggestion they have broken any law. Turning energy CEOs into villains lets the architects of policy failure off the hook; the chaos in the sector is a classic case of non-market failure, in which subsidies given under the guise of taming the raw edge of capitalism become an exercise in handing out largesse to a favoured few.

Government-owned electricity corporations are little better than commercial players. State-controlled entities in Queensland and Tasmania are as adept as AGL at forcing the wholesale market.

That subsidies distort the market is as true in telecommunications as it is in energy. For AGL, read Telstra, which secured lucrative deals under the Rudd government as compensation for surrendering infrastructure to the National Broadband Network. Even today it remains on the drip of government subsidies, chiefly through the Universal Service Obligation, which makes it harder for its competitors to compete.

Labor’s stubborn refusal to learn from the failure of the two most damaging government interventions in recent memory makes the party a dangerous choice at the next election.

Upping the RET to 45 per cent would require more subsidies, craftily added to power bills, in a highly regressive form of tax. It would double down on the mistakes of the previous scheme, backing imperfect technological solutions and raising the barrier to new players and new ideas. Most scarily of all, it would give the major operators incentives to shut down coal power stations.

Some 17,000 megawatts of coal-fired power would be taken out of the National Electricity Market to achieve Labor’s fantastical aim. The Climate Change Authority estimates that 10 coal-fired power stations of equivalent size to Hazelwood would go, to be replaced with who knows what. Energy bills would hit the roof, home insulation notwithstanding.

The robust defence of coal by the Nationals and others is timely. Coal will remain a substantial export commodity for Australia for the next quarter-century at least, whatever energy foolishness prevails at home.

The commitment of government money some seek to build new coal-fired stations should be tempered with prudence, however. As Liberal senator James Paterson observed last week, the notion that government intervention can be fixed by further intervention is less than convincing.

A government-built generator fired by coal, pumped hydro or even fairy dust cannot reduce power prices in the short term.

Commissioning a new coal power station would take at least five years — probably longer, given the track record of government infrastructure and the ­infinite capacity of environmentalists to find hitherto undiscovered invertebrates in the path of the bulldozers.

Government investment cannot be avoided, given the chronic failure of the market. Investment skewed towards winning votes, however, always ends in tears. The immediate and prudent task for a party that seeks to govern in the Menzies tradition, driven by practical action rather than politics, is to find a market solution to fix the problem of intermittency. The national energy guarantee, which obliges retailers to find their own backup power for the subprime renewable energy generators, is a major step towards turning the tide.

The NEG must be calibrated to reduce its natural tendency to reinforce existing market dominance. Crucially, there must be an end to the insidious subsidies that push up share prices for the few while delivering pain for the many.

Seldom has Robert Menzies’ dictum about not putting ­perceived political gain before the national interest seemed so ­relevant. “The true function of a Member of Parliament,” he wrote in 1942, “is to serve his electors not only with his vote but with his ­intelligence.”
The Australian

Massive subsidies under the Federal government’s LRET ($20bn so far, with a further $40bn to come) led to the rapid expansion of wind and solar capacity, starting around 2009 (the green line in Dr Michael Crawford’s eloquent graphic).

Following which, retail power prices went on a rapid and practically perpetual ascent, with the exception of what occurred after Tony Abbott cut Julia Gillard’s ‘carbon’ tax (the red line in Dr Crawford’s graph).

So far, so simple.

What Nick Cater gets absolutely right is pinning the blame on those subsidies for Australia’s energy debacle. However, Nick’s push for the National Energy Guarantee is not only wrongheaded, it’s become completely academic.

The NEG that was originally presented to the Coalition party room had the capacity to “turn the tide”, as Nick puts it.

The original NEG was based on forcing retailers to contract to secure reliable electricity to satisfy all of their customer’s demands, on a worst-case scenario. Namely, a breathless 42°C day in February, when demand rockets and wind power output, hits the floor. Retailers would be penalised for failing to have enough power (secured by contracts in advance) to meet the demands of households, businesses and industry.

What was originally proposed was analysed by STT here: PM’s Reliable Power Play Spells Disaster for Unreliable & Intermittent Wind Power

That’s not the NEG that Josh Frydenberg has been peddling. His (or rather the renewables rent seeker’s) version removed any obligation on retailers to satisfy demands on the worst-case scenario; introduced the concept of ‘demand management’ (cutting power supplies to users when wind and solar output inevitably collapse) and ‘demand resources’ (aka the victims of Soviet-era rationing); and excluded the opportunity for retailers to satisfy their emissions obligation using cheap and cheerful international and Australian Carbon Credit Units, instead forcing retailers to purchase intermittent wind and solar to satisfy that obligation. By reason of that change, the NEG proposed by Frydenberg amounted to the LRET on steroids.

With all due respect to Nick Cater, his comments and observations would make sense if he were talking about the NEG as originally proposed. However, what’s on offer dramatically expands the scale of Federal renewable energy target and extends its operation over the horizon.

But arguments about the merits of the NEG are now entirely academic.

On the sensible side of politics, the Nationals are demanding that the Federal government underwrites the construction and refurbishment of reliable, coal-fired baseload generators, which has incensed the lunatic left. On that side of the divide, the Green/Labor Alliance would rather die in a ditch than support a policy which so much mentioned the idea of coal-fired power.

On the NEG, never the twain shall meet.

The ACCC report dictates the need for cheap and affordable power (setting a target price of $45 to $50 per MWh) which means coal-fired power plant, as no other source can deliver power at those rates 24 x 365, whatever the weather. Accordingly, the NEG is a dead duck.

The PM, Malcolm Turnbull and Josh Frydenberg might be morally suspect, but they’re not complete idiots.

The ACCC’s report offers them the easiest escape route from a political quagmire: kill the subsidies to wind and solar now; change the market dispatch rules to allow baseload generators to dispatch according to the market’s demands, rather than the vagaries of weather; and underwrite the immediate refurbishment of existing coal-fired plant and, over time, the construction of new High Efficiency Low Emissions plant.

Gobsmacked householders and business owners receiving their power bills over the next few months will expect Turnbull and Frydenberg to be doing something to arrest the situation and start ‘Restoring electricity affordability & Australia’s competitive advantage’ – the title of Rod Sim’s report. What the situation demands is something like what we’ve listed in the paragraph above.

The Australian’s Economics Editor, Judith Sloan weighs in with her own list.

Green light to fix our energy mess
The Australian
Judith Sloan
14 July 2018

The report by the Australian Competition & Consumer Commission on retail electricity pricing may well be a game changer in the energy wars bedevilling this country.

To be sure, the subsidised renewable energy sector will continue to put up a fight. Several of the report’s recommendations will not be to the liking of the key players and, let’s face it, wind and solar operators are accustomed to being indulged.

But by focusing on competition and the consumer, as the ACCC must, the implementation of the report’s key recommendations by the federal government could lead to lower prices for households and businesses and more dispatchable electricity in the system.

The title of the report is deliberate: Restoring Electricity Affordability and Australia’s Competi­tive Advantage.

Arguably, the ACCC report is at odds with some of the details of the proposed national energy guarantee, as outlined in the papers released recently by the Energy Security Board. However, this could be a good outcome for the Turnbull government.

The NEG requires the sign-off of five states and the ACT. Each jurisdiction has different points of view to push and different starting points. And note the ACT energy minister is a member of the Greens. While the ACT makes an infinitesimally small contribution to electricity generation, its government still can veto the adoption of the NEG. But making concessions to the ACT — a bigger emissions reduction target, say — will alienate some members of the Coalition partyroom. It’s the classic wicked problem for federal Environment and Energy Minister Josh Frydenberg.

So what are the main messages of the ACCC report? Here I’ll use clear expression rather than the bureaucratic obfuscation preferred by regulators in their written reports.

  • The subsidisation of renewable energy has pushed out dispatchable generation from the system and pushed up prices.
  • The subsidies attached to household solar installations have been excessive, are mainly paid for by other consumers and businesses and should be withdrawn.
  • The network companies, particularly in Queensland, NSW and Tasmania, have gamed the system, have added excessive costs and should be forced to take a writedown on their assets.
  • The retail companies, including the big three “gentailers” (AGL, Origin and Energy Australia) behave appallingly, deliberately confusing and fleecing consumers.
  • The market share of the gentailers should be capped where it is.
  • The government should underwrite new low fixed-priced generation projects for businesses.

The ACCC even puts a figure on the average achievable savings by 2020-21 for households and businesses of between 20 per cent and 25 per cent.

“The ACCC is confident that there is much that can be done to boost competition, lower costs and improve consumer experiences in the electricity market.”

From the point of view of the gentailers, the report could have been worse. The ACCC easily could have recommended these companies be broken up, with generation separated from retail.

Having said that, the suggestion retailers will be forced to offer a default product to consumers, at prices no higher than those determined by the Australian Energy Regulator, will not please them. Standing offers will be abolished.

But a reading of the report will convince most people the retailers simply cannot be trusted. They quote “discounts” from unspecified bases; they take advantage of loyal customers by putting them on worse deals; they supposedly reward on-time payment while imposing hefty penalties for late payment; and they offer inferior deals to customers from disadvantaged backgrounds who have difficulty paying their bills.

This part of the market clearly has failed. If the gentailers had any sense, they would have acted as exemplary providers. Their failure to do so was always going to induce a strong reaction from the ACCC.

The report also slams the cost impact and inequity of the small-scale solar subsidies taken up by many households. It is estimated solar customers pay about $538 a year less than non-solar customers. In most instances, the subsidies paid to these solar customers are paid for by other customers, including low-income earners, renters and those who live in apartments, and businesses.

The ACCC recommends the cost of solar feed-in schemes should be assumed by taxpayers rather than other energy customers. But just to highlight the degree of largesse in these schemes, during the next two years it will cost Queensland taxpayers $770 million to meet the costs of the excessively generous feed-in scheme in that state, a scheme that will continue until 2028.

In addition, the suggestion is that the Small-scale Renewable Energy Scheme be wound down and abolished by 2021. This would not affect existing solar customers but would alter financial incentives for new customers. The SRES now offers most customers an upfront discount of up to a third on an installation valued at $10,000.

A pivotal recommendation of the report is that the federal government should operate a program “under which it will enter into low fixed-price energy offtake agreements for the later years (say, six to 15 years) of appropriate new generation projects that meet certain criteria”.

These include: at least three commercial/industrial customers contracting to take energy for at least five years; current major energy providers in the retail or wholesale space will be excluded; the projects will be large enough to serve the needs of many customers; and “be capable of providing a firm product so that it can meet the needs of C&I customers”.

In effect, these anchor customers will set the requirements needed from these new sources of generation. They almost certainly will be thermal plants — not necessarily coal — but there is no reason projects with a mixture of energy sources could not bid to be part of the scheme. An indicative price point of $45 to $50 per megawatt hour is quoted in the report.

So what does the ACCC think about the NEG?

“The ACCC supports the development and imple­mentation of the NEG, incor­por­ating appropriate safeguards for competition in the contract market, as well as a way to achieve a settled policy framework under which new investment is encouraged in a way that reduces carbon emissions at low cost while promoting investment in a manner that ensures demand for energy is met.”

Again, some translation is required. The answer is: yes, but subject to some important quali­fications. The key is the last phase: “promoting investment in a manner that ensures demand for energy is met”. The point is also made that it is important the NEG doesn’t deliver advantages to the large incumbents.

There is plenty of water to flow under the bridge before any settlement on energy matters is reached. Inevitably, there will be pushback on some recommendations. It’s hard to see the Queensland government willingly break up its generators or impose a huge write­down on the value of poles and wires. And will the NSW government really want to rebate a minimum of $100 to each energy customer each year for the overvaluation of poles and wires that have shifted into private hands?

But at long last the ACCC is zeroing in on the issues that really matter: getting a good deal for consumers and ensuring reliable and competitively priced electricity for business.

Let’s hope the government responds quickly by seeking to implement the recommendations.
The Australian

Judith picks up the ACCC’s views on the NEG, noting its general support but only with the inclusion of a very important condition that the NEG must promote: “investment in a manner that ensures demand for energy is met”.

That condition necessarily involves meeting the worst-case scenario we outlined above, thereby guaranteeing that all power consumers receive electricity according to their demands, not the whimsical dictates of the weather.

The NEG being pushed by Josh Frydenberg does no such thing.

Among the Coalition, the Nationals, and a growing number of Liberals, have worked out that they have been duped with a policy that now looks nothing like what was originally presented to them in the party room last year. Josh, no one likes being played for a fool.

STT hears that the ACCC’s interest in restoring affordable power to all Australians is not just a passing one. Their top priority is the NEM market dispatch rules, which currently allow wind and solar generators to avoid any financial consequence from their routine failure to deliver electricity to the grid. Whereas, baseload generators (defined as “scheduled”) who fail to deliver according to preordained schedules, get whacked with very substantial financial penalties.

STT hears that the ACCC is going to reverse the dispatch rules and make the penalties faced by scheduled generators for a failure to deliver apply with equal force to intermittent wind and solar generators, as well. In the ACCC’s Rod Sims, renewables rent seekers have finally met their match. Let the games commence.

About stopthesethings

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

Comments

  1. I had to go on a hardship program last month. Most of my bills in the last 12 months are up around $1000-$1500 and I don’t know why.
    I put a spider in to stop the spin, they’re stealing from us so I’m reciprocating

  2. wal1957 says:

    And politicians wonder why they are loathed so much by the general populace!
    Our so called ‘leaders’ created this debacle. The NEG wil NOT fix the mess that we are in.

    Remove the subsidies.
    Any energy providers that provide electricity must guarantee that they can supply what they say they will. That means that when the wind don’t blow and the sun don’t shine on their unreliables they must have another source to supply…at their own cost!

    Imagine buying a new car that only works sometimes, randomly, and sometimes not at all! That is what we have been sold with renewable energy. Would we be in our rights to ask for a refund…you better believe we would!

    I want my money back you miserable rent seekers!

  3. Son of a goat says:

    Ah yes but on que like the Paul Revere of the renewables propaganda machine the AEMO’s Lovely Audrey has ridden into town.

    The horse looked buggered as she yelled out to all and sundry “the Nationals are coming, the Nationals are coming.”

    Whilst she agreed there should be more dispatchable generation, the cheapest way forward she stated was with more renewable generation with “firming.”

    Interesting word that “firming.”
    Maybe all rent seekers will be get a Botox treatment!
    I’m sure the Renewable Energy Messsiah will be up for that.
    Unfortunately for those zealots not even a facelift will save the wind industry.

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