Commentators and politicians who talk endlessly about the electricity grid’s inevitable transition to renewables seldom bother with the detail that private investors still have to fund the vast bulk of these supposedly cheap, green power projects.

The trouble is that those private investors are not much interested in ‘cheap’ power as that means low returns, and are instead putting their money elsewhere, including into fossil-fuel projects with potentially three times the rate of return.

The resulting collapse in investment in renewables in both Australia and overseas was noted in Australia in this publication early last year (‘Dark Ages Coming’, 18 February) and finally received belated notice in other media late last year and early this year.

However, having finally noticed the problem, politicians and commentators are largely ignoring the main reason for the investment collapse. When the Clean Energy Council issued its 2023 report in early February in which it confessed to an 80-per-cent slump in investment in renewables for the year – just $1.5 billion in 2023, as opposed to $6.5 billion in 2022 – the report pinned the blame on factors such as lack of transmission lines, slow planning and environmental approvals, higher costs and tight labour markets.

These are certainly all relevant but countries without Australia’s regulatory regime and spread-out, relatively sparse grid (as opposed to the dense networks of Europe and the US) have also experienced slumps in renewable investment. The UK consultancy Retfiniv, which tracks investment data in the sector for Europe and the US, also reports a sharp slump in investment for the March quarter to date, following a slowing in the December quarter of last year.

Also, as is widely admitted, investment in renewables in Australia was far from adequate to cover the loss of power from coal-fired power stations expected to go out of service in coming years, even before the investment slump.

The problem, as should be obvious to anyone with a passing knowledge of free enterprise, is that investors are not putting money into renewables because they can make more money elsewhere. One commentator who has explored this problem is Nick Butler, a visiting professor at King’s Policy Institute, King’s College in London. He has pointed out repeatedly that the big oil companies, to take an example, which invest in hydrocarbon projects such as oil fields, would typically look for an internal rate of return (IRR) of 15 to 20 per cent on such an investment (the return on the project to the company before considering issues such as tax).

In fact, this is a common rule among major companies and much smaller investors. Entrepreneurs putting their life savings into, say, a restaurant will want their money back in five to seven years. They are taking risks. In contrast, a return of 5 per cent might be acceptable for a investment in shares in a blue chip company, where the capital is expected to remain intact.

Professor Butler estimates that wind farms might have an IRR of just 5 per cent, or perhaps 10 per cent with better management (he does not specify how he estimates this), with some of the difference between a fossil-fuel project and an investment in renewables due to barriers to entry. Few companies can afford the immense, up-front cost of exploiting an oil field or building a coal mine, but the capital requirements for a new wind farm are much lower. As a result there are many more potential entrants and consequently much more competition in wind farms. In any case, more wind farms mean more oversupply at certain times, when power prices can go to zero or even become negative, and no supply at others.

Renewable energy enthusiasts have not helped matters by claiming that renewable power will be really cheap and that the problem of wind droughts (see ‘Transition Loses Traction’, 9 July 2022) can be overcome simply by building lots of uneconomic wind farms in all corners of eastern Australia, to offset the problem of wind suddenly dying over a part of it.

The volatility of renewables is also a part of the reason why private investors have proved enthusiastic about batteries. The Clean Energy Council report states that $4.9 billion worth of battery projects were approved last year, or more than double 2022’s level.

These projects are hoping to arbitrage power between times of wind glut when a battery can be recharged cheaply, and wind drought when prices skyrocket.

Another source of profit is in the provision of little-known ancillary services such as frequency management. Australian grids are run at 50 cycles (the current reverses direction 50 times a second). Wind generators and the like cannot provide power of a stable frequency on demand but batteries can and grids will pay extra for power at the right frequency. When the South Australian grid became a power island after the interconnector with Victoria went down at the end of January 2020, only a small number of providers in the state were offering frequency management services. As a result, as noted in a National Energy Market report on the issue, frequency management services were bid so high that for a week buying those services cost three-and-a-half times more than the supply of power itself for the state.

Activists hope that if enough batteries are built then the problem of intermittency and volatility will be overcome. That will require a lot of batteries. If and when the Snowy 2.0 pumped-hydro project is finished it will store 350 GWhs, and three such projects may get the grid past most wind droughts, assuming they can be refilled quickly after being drained. However, there are estimates that up to ten such projects would be necessary to cope with extreme weather events such as a series of hot, overcast, windless days. Counting Snowy 2.0 about two-and-a-bit are being built. In contrast the major battery projects typically store less than two GWhs each.

At least batteries may help absorb power from the 3.1 gigawatts worth of solar capacity added to rooftops around Australia last year, as consumers offset power prices and take advantage of various government schemes. But otherwise rooftop solar does little more than add to grid volatility.

The government is trying to boost investor interest in renewables through schemes such as the expanded capacity investment scheme, but the basic problem that such projects are simply not sufficiently profitable to interest investors remains.

The government could solve the problem by inflicting massive increases in power prices on consumers, spend billions perhaps trillions in taxpayer dollars in subsidies, or simply leave the problem for the next government.

Get 10 issues for just $10

Subscribe to The Spectator Australia today for the next 10 magazine issues, plus full online access, for just $10.

SUBSCRIBE 10 issues for $10 REGISTER 3 articles a month

Already a subscriber? Log in