Flat White

Liddell is just part of a bigger battle

22 May 2018

4:44 PM

22 May 2018

4:44 PM

Like a border skirmish that develops into a global conflagration, John Howard’s policy to require “two per cent additional energy” be met with renewables has escalated into a measure destroying the electricity market. Back in 1998, the idea sounded good: give renewables a leg-up while they march to their inevitable destination involving cost-competitively displacing fossil fuels in electricity supply.

In the interim, an immediate bonus would be that the subsidised renewables, being virtually all sunk and no variable cost, would automatically bid into electricity supply taking whatever price they could get. This would, so all the modelling demonstrated, bring lower market prices from the get-go.

There was a shadow of guilt by those who recognised that a subsidised product, in depressing the price of coal-generated electricity with its huge fixed sunk costs would be partially expropriating those investments. Moreover, in having “must-run” characteristics the renewables’ intermittent nature imposed unanticipated stop-start costs on the dinosaurs they were to replace.

But few gave much thought to these considerations – after all, it was said, the investments themselves were made many years ago and were overdue for the scrap heap.

Then it all went pear-shaped. Once existing power stations were confronted by new costs – either because things broke or Worksafe started demanding new spending – they closed down. The fabled permanent low priced transition to the renewable future unravelled. Prices doubled in 2016 to $80 per MWh and, no matter what Minister for the Environment and Energy Josh Frydenberg may claim, they cannot return to their previous levels. Compared to electricity from coal at $40-50 per MWh, wind costs $110per MWh and solar $150 per MWh. They could only begin to match the demonised coal-based system if they received subsidies tenfold the level of the present annual $5 billion plus.

The Liddell issue is only the latest flashpoint. Sold in 2014 for a nominal sum as an asset bundled with the larger Macquarie Generation, it now comprises about 17 per cent of AGL’s generation. AGL is, in turn, Australia’s largest coal and gas generator. In 2014 NSW, intent on getting the best price for privatising its assets, the Baird bundled generation assets together. This was unlike Victoria 15 years earlier and in the face of ACCC opposition.

It did not take AGL long to see how a doubling of wholesale prices brought a more than doubling of its profits. The effect is seen with the smaller Vales Point Power station also sold in 2014 for a nominal $1 million and now worth $730 million. Moreover, AGL, especially with its virtue-signalling renewables focussed marketing strategy, is ready to use its market power to squeeze higher prices from customers.

It is easy to demonstrate that a subtraction of the Liddell capacity from the market would mean higher prices than would otherwise prevail. If Liddell’s continuation meant an electricity price of $10 per MWh lower than would follow from its closure, AGL was likely to forego profits of around $300 million a year. So AGL resisted pressure by the government to remain open. It saw the trap in selling to a rival, Alinta, an asset it said was worth negative $950 million (due to the remediation costs on closure) for $250 million to a new owner who would also take over the remediation liability. Prior to the bid being lodged, most of the mainstream media thought the very idea of a new investor in Australian coal generation was preposterous.

In response to the AGL rejection of the Alinta bid, Tony Abbott called for the forced acquisition of Liddell and its resale. Frydenberg has said he has rejected this and according to the AFR, this ends “the Turnbull government’s bizarre experiment with state socialism and central planning”. The AFR thinks the government will pack up and accept the closure with all this means for higher prices (an outcome that a gullible, windphile AFR has always failed to recognise). The government’s passive acceptance of the closure of Liddell is one prediction that is certain to prove unfounded – there is now just too much awareness of the costs of displacing coal with wind/solar and, economic impacts aside, the political consequences of the higher cost, less reliable system this will entail.

The formerly low-cost Australian electricity system, once the cheapest supplier in the world, has been destroyed by regulatory requirements for high-cost renewable electricity. Electricity generators as beneficiaries of renewable subsidies and of the general increase in prices this has caused are complicit. And the complexity of the electricity market, the vast revenues that subsidies have created and a media ideologically disposed towards green fundamentalism has landed us in the present impasse. Patch-ups through jawboning, new forms of carbon tax, and the horrendously expensive Snowy 2.0 pumped storage cannot remedy this.

If, to extricate ourselves, we have to await the visible effects of a US economy with its success built on it having abandoned renewable energy interventions, we face several more years of income levels well below our potential. Especially difficult to retrieve will be the damage existing policies are causing in bringing about a severe contraction of those energy-intensive industries that have been the backbone of our economic strength.

Alan Moran of Regulation Economics is the author of Climate Change: Treaties and Policies in the Trump Era”.

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