Adding Intermittent Wind & Solar Guarantees Spiralling Power Prices: Just Ask South Australians

Australia’s Energy Minister, Josh Frydenberg reckons adding more wind and solar will cut power prices, like South Australia never happened.

In his efforts to sell his National Energy Guarantee, Frydenberg and his coterie of ‘expert’ advisors have not only ignored reality, they’ve attempted to substitute it with their very own.

Over the last decade, there have been dozens of reports said to predict the path of power prices in the future.

Based on heroic assumptions (although they’re rarely disclosed) every one of them has predicted that power generation costs would plummet, with the addition of heavily subsidised and chaotically intermittent wind and solar.

With annual retail power price increases of between 13 and 28% – year-on-year – over the last three years, you’d think that these economic forecasters would give it up and join a travelling circus to hide their shame.

Of course, everyone’s an expert with the benefit of hindsight, but with that track record it would be a brave soul who backed the wisdom of these modern-day soothsayers.

Well, Josh Frydenberg is nothing, if not courageous.

He keeps talking about falling power prices as if it’s a real, here and now thing. Josh, the simple graphic above is not that difficult to follow.

Adding intermittent wind and solar is a guarantee of spiralling power prices.

South Australia sits at the top of the list above because it has more capacity in wind and solar (relative to other generation sources), than any other State, indeed any other country, in the world (Denmark and Germany are next on the list above because they run neck and neck on the same score).

With that shining example, you’d think that statisticians and economic modellers would look no further than Australia’s RE capital?

But, oh no, instead they ignore SA and attempt to reinvent the wheel.

Good economic analysis provides a basis for sound policy decisions. However, what’s being advanced at the minute is little more than third-rate propaganda. Here’s Alan Moran running the ruler over the latest effort by RE zealots to bamboozle and mislead.

Modelling, Schmodelling! How to rationalise policies that would destroy the economy
Catallaxy Files
Alan Moran
25 July 2018

In a reprise of the feeding of the 5000 with five loaves and two fish, the Energy Security Board has offered salvation for the Australian economy with the National Energy Guarantee (NEG).

A cunning scheme has been developed by the alphabet soup of acronymic agencies charged by the government to prepare a plan to regulate the electricity market. The objectives are to gradually remove the lowest cost (coal) generators, thereby reducing emissions, while lowering prices and raising reliability.  All at the same time!

The NEG proposal remains confidential, (as does Minister Frydenberg’s subsequent offer to the state energy ministers) in spite of it being leaked to all major news outlets.  Under the scheme, the existing generators are predicated to stay on line as long as needed – even though their economics is undermined by rival wind/solar generators.  These are currently favoured by the $80 per MWh subsidy under the Renewable Energy Target (RET) ($40 for rooftop solar). To place this in perspective, the total price before the policy madness started to bite was $40 per MWh.  Under the NEG, renewables – apparently, in a tax boost to government, including hydro – will benefit from an energy intensity scheme (aka a carbon tax).

The level of the carbon tax under the NEG is carefully disguised and is likely to fall both on generators and retailers, the former because the coal generators will have to accept a price discount on their contracts as a result of the increasing level of low emission electricity the retailers must source.  Of course, like any other cost the new carbon tax will be passed on to customers.  The fossil fuel generators also face a forced reduction in output as the “must run” renewable generators get priority.

As a result of these pliable coal generators being assumed to remain on-line, notwithstanding their losses, in a triumph of hope over experience, prices plummet from the stratospheric levels created by earlier versions of those same regulations.  Here is the proof!

Unfortunately modelled forecasts of regulatory outcomes in this industry have been disastrously wrong.  This is largely because, using pretentious econo-jargon, modellers focus on marginal costs and assume that these will drive firms to continue operating and renewing plant even after decades of losses.  Hence, no modeller picked the fact that exiting firms would cause prices to double in 2017 from their 2015 levels of $40 per MWh and stay at those levels.

It is easy to demonstrate how incorrect and, to the degree that they have driven policy, damaging previous modelled forecasts have been.

  • Jacobs for Climate Change Authority Nov 2016 envisaged the baseline (no regulation) price rising from $50 per MWh in 2020 to $80 per MWh by 2040. The RET subsidy comes to the rescue of this bleak scenario by reducing prices in 2020 to $30 per MWh, before they rise to around $67 per MWh in 2030 and hold at that level.

  • Here are some prices forecast by Frontier in 2016, who argue:

The intuition behind the relative prices changes over time is as follows:

 The REG approach is essentially to withdraw high emissions capacity from the market, which should result in a price signal for new low emissions generation to replace it. This suggests that prices should rise in the short/medium term before reverting to long run equilibrium.

 The extended LRET approach is largely the opposite: this encourages entry of new low emissions generation via subsidies. This should lead to excess capacity, short-term (wholesale) price falls, which should encourage retirement of existing plant (crowding out). This suggests that wholesale prices should fall in the short/medium term before reverting to long run equilibrium.

 The EIT involves a mix of credits (encouraging low emissions entry) and penalties (encouraging high emission exit), which suggests that short term wholesale prices should be between the other policy options.

  • Here are the prices developed by Jacobs for Finkel. Note how the favoured Clean Energy Target brings dramatically lower prices over time, $40 per MWh by 2044, compared to $70 per MWh under the Emissions Intensity Scheme favoured by the ESB.

Summary 2020 and 2030 prices

Compared with the 2018/9 price of $82 per MWh (NSW), modellers offered the following forecasts.

Jacobs (2016)
reference emissions intensity (carbon tax) RET
2020 $50 $75 $30
2030 $62 $115 $67
Frontier (2017)
business as usual emissions intensity (carbon tax) LRET
2020 $46 $45 $40
2030 $50 $52 $30
Jacobs (2017)
business as usual emissions intensity (carbon tax) Clean Energy Target
2020 $75 $75 $75
2030 $84 $68 $55
ACIL 2018 (ESB, NSW)
price without Guarantee price with Guarantee emissions intensity (carbon tax)
2020 $50 $43
2030 $70 $48

 

Underlining the fragility of modelling, the “Guarantee” or emissions intensity carbon tax was estimated to result in a 2030 price of $115 per MWh by Jacobs in 2016, $52 by Frontier in 2017, $68 by Jacobs in 2017 and $48 by ACIL in 2018.

The rationale for the NEG is that it provides certainty on top of the supposed lower costs of wind/solar and as a result borrowing costs are lower and these get passed on in lower prices.  There are several problems with this

  • There is no way that the NEG will not be changed by a different government, even the same government if it sees a reason to do so
  • Minister Frydenberg, in yet another leaked document, has signalled that the 10 year guarantee can be five years, undercutting the NEG’s supposed certainty
  • The data underlying the ACIL forecasts is inconsistent with the certainty driven by the NEG: all the new generation is rooftop solar which, if the ACCC report is to be accepted, will see the subsidies removed from 2021; there is no new fossil fuel generation and AGL is assumed to maintain its price-boosting decision to withdraw the Liddell power station from the market rather than sell it to a rival.

The ostensible rationale behind this new intervention is the reduction of greenhouse gases, (the reliability provisions are unnecessary as retailers will pay insurance, “firming contracts”, without regulatory direction). Even as a greenhouse abatement , the NEG, on its own numbers fails.  The model shows only a trivial reduction in emissions without the NEG because the costs of wind/solar are assumed to be cheap but not so much so that they can survive without the RET/carbon tax subsidies.

The farce is that this plan has nothing to do with climate change, its ostensible justification.  There is no provision for emission obligations to be sold overseas to accredited (ahem!) sources and very limited, if any, possibility of firms acquitting their requirements by paying other sectors to do so more cheaply.  The plan is concocted to pursue a 30 year dream under which renewable energy, always on the cusp of commerciality, displaces all that archaic and politically incorrect energy derived from fossil fuels and uranium.
Catallaxy Files

About stopthesethings

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

Comments

  1. As Alan Moran clearly demonstrates, the standard of Australian electricity price modeling is every bit as good as the CIMP modeling that underpins the CAGW (catastrophic anthropogenic global warming) orthodoxy.  Maybe there's a message there?

  2. One of the major problems of renewables that is rarely mentioned on media is the fact that we have to run a ‘backup’ system of power for when the wind don’t blow and the sun don’t shine. This fact alone should inform the ignorant politicians of the absurdity of renewables.

  3. Thank god for universities, professors, modelers, statisticians and armchair experts where would Australia be without them. As electricity prices go through the roof and jobs disappear overseas every day and the Greens want to close down the only means to obtain foreign exchange the dreamers still produce graphs and tell the Australia’s population that it’s only time before they live in Nirvana. And all this is happening without even one opium den in the country.

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