Features Australia

The unacceptable cost of renewables

9 December 2017

9:00 AM

9 December 2017

9:00 AM

Parts of Europe may be tearing themselves apart politically over the vast costs of adopting renewable energy, but Australian voters are being asked to believe that doing the same thing down under won’t cost very much at all.

Modelling by Frontier Economics for the Energy Security Board has found that an influx of renewable energy will result in wholesale power prices falling over the next few years. In addition, an academic team led by Andrew Blakers, a professor of engineering at the ANU has devised a system for Australia to adopt renewables so that the country can cut emissions by 26 -28 per cent by 2030, effectively for free, or so the academics say.

These confident findings will come as a surprise to voters in Germany, the UK and Spain among other countries, who have all become weary of paying subsidies to renewable energy projects.

As this is being written, Germany is still without a government after elections held in September. Among the problems faced by Chancellor Angela Merkel in her struggles to stitch together a coalition is her previous support for refugees, and energy prices. The right-wing Alternative für Deutschland has gained support and seats in the Reichstag over those issues, and one set of coalition negotiations has failed, in part, over energy. The Greens demanded a major reduction in coal-fired electricity production, but the pro-business Free Democratic Party feared the job losses that would result.

The FDP is, in turn, reacting to frequent reports of the vast costs of German’s transition to alternative energy, known as Energiewend or energy revolution/transformation. In October the American Forbes magazine estimated that Germany had spent $US800 billion on green subsidies to date but was still likely to miss by a large margin its own target of cutting emissions by 40 per cent from their 1990 levels by 2020.

Power prices are also a sore point with voters in the UK, which is further along the renewables path than Australia. The Financial Times has estimated that existing contracts with low-carbon generators will be worth an estimated £10 billion a year in subsidies by 2020. According to an estimate on the website of Centrica, one of the UK’s biggest distributors, those subsidies added about 12 per cent to the average power bill in 2016, with the distributor declaring that costs from environmental policies have grown substantially since then.

Spanish enthusiasm for green energy, which resulted in the country becoming the fourth-largest wind farmer, has also pushed up end-user prices. According to a 2015 review by the International Energy Agency, those prices are ‘among the highest in IEA member countries’.

In fact it is difficult to find any country where the introduction of renewables on any scale has cut prices, or has not required massive subsidies to keep operating, despite confident modelling by Australian groups, and repeated declarations about how the cost of wind turbines and photovoltaic panels are falling. But that does not mean the Australian models are wrong, for Australian wholesale power prices are now historically high.

Data kept by the Australain Energy Market Operator shows that in 2007 when Kevin Rudd got into power and the networks were still largely regulated by the states, wholesale power prices averged $58.72 per megawatt hour for NSW, $52.14 for Queensland, and $54.80 for Victoria to take just the three eastern states as indicators. In 2017 to date the corresponding average figures are $81.22, $91.32 and $66.58.

However, it is widely acknowledged that wholesale prices were kept stable and relatively low for years by the influx of renewable energy – that was the problem. Renewable energy flooded onto the spot wholesale market when the wind was blowing, often pushing those prices well down and crimping the margins of the conventional operators. Generators have supply contracts with distributors but supplement their earnings on the spot market. The end result was to drive a number of the older brown coal plants out of busines. Those plants had long since paid back the money invested in them with interest, were aging, and were acknowledged as the least efficient, most polluting of the coal plants. In other words, the Rudd government’s Renewable Energy Target lifted the electricity industry’s carbon efficiency, not so much by substituting coal-fired power with wind energy but by driving older coal plants out of business. However, the result was also to end excess supply in the market that had been holding down wholesale power prices. When Rudd took office, power prices of the time were being pushed up by higher water charges. Water is used by power plants and the millenial drought at the time was restricting supply. After that, changes in network standards which required major investment in the poles and wires network, and regulatory changes permitted further investment which could be charged to consumers. Those changes caused the bulk of the price hikes prompting consumers to grumble.

Through most of those changes wholesale power prices were relatively subdued but now those prices have also increased. Frontier Economics modelling suggests that the present high wholesale prices will fall as major new renewable projects come on line. This may be true but, as occurred with previous surges in renewable supply, the end result may be a distortion of the market and further price hikes. In particular, those lower prices will not attract investment in the firm or conventional electricity supply required to keep the electricity network ticking over when the wind is not blowing.

The modelling work by Professor Blakers and colleagues, set out on the Conversation in late November, points to an energy future of renewables backed by a series of pumped-hydro projects. These are artificial lakes at high altitudes, rather than on-river dams, set up so that water is pumped up to the lakes when renewable energy is plentiful and allowed to run out and through turbines when the wind is not blowing. Although entertaining and about the only way a 100 per cent renewables future is possible, such a scheme would require substantial political will, many billions of dollars (the academics consider the costs acceptable), and a host of difficult-to-obtain environmental approvals.

The lesson from overseas attempts to decarbonise energy supply is that it is so expensive to do so on any scale that the result is often political turmoil.

Our policy makers should bear that outcome in mind.

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