Nobel prize winner: Aust Govt increasing the cost of power

Physics Nobel Prize winner and former US Energy Secretary, Steven Chu, made an interesting remark during his visit to Australia this past week. In an interview on Radio National’s breakfast program he was forced to reluctantly comment on the approach of Australian governments to the issue of climate change:

GREGG BORSCHMANN: Are you saying that in Australia that we’re looking at a failure of political leadership on this issue [climate change]?

STEVEN CHU: Well let’s see, what I’m saying, you can say it simply, I think the leaders in Australia are right now opting to make the cost of electricity more expensive for its citizens. Is that a failure? Yes.

For many policymakers and politicians this would come as an incredibly puzzling remark. How on earth could it be that by ignoring or downplaying the issue of climate change we could be making electricity more expensive? Didn’t the carbon tax just go and power bills went down by 5.5%? Also, the Australian Energy Market Commission has been keen to suggest that while the extra costs of subsidising renewable energy have been offset by it creating an oversupply of power that is depressing prices in the overall wholesale electricity market, this is likely to be temporary.

So is this physics Nobel laureate nuts?

Well, the answer comes down to how he anticipates technology to evolve in the future; it is not based on what we get with our current infrastructure. Of course, when the vast proportion of our existing energy infrastructure in place is carbon-intensive and its construction costs sunk and irretrievable, when we try to reduce emissions it costs more.

But that wouldn’t be the case if were starting with a blank sheet of paper. Chu explained that in the United States if you’re constructing a new power station you wouldn’t build a plain vanilla coal power plant even if you ignored the risk of a carbon price, because it costs 20% more than wind.

He also said:

In Australia you’ve got stunning sun, solar. I would hazard a guess that solar’s going to become within five years, 10 years max and maybe even today, it’s the low cost option. It certainly will be within a decade.

He’s not the only one projecting such an outcome. The UK’s energy minister foresees something similar in bright, sunny England of all places.

Given this, you might think, well, actually, the best strategy is to in fact wait and not do anything to change. However energy systems and markets can’t change on a dime. And you’re going to have to invest in your power system in the meantime – do you invest in equipment compatible with optimising for the past or for the likely future?

In addition, thanks to carbon emission reduction policies like the Renewable Energy Target and the Victorian and NSW energy efficiency targets, we’ve already got businesses and people that have invested in developing capabilities to roll-out this new energy infrastructure. Should we let them go out of business and become unemployed so their capabilities rot on the vine over the next decade when we’ll need them en-masse?

The Energy Supply Association of Australia put out a troubling report this week – a survey of bankers by accounting firm PWC.

The report noted:

The combination of the carbon tax introduction and subsequent repeal and RET review that is currently underway has significantly increased the level of policy uncertainty in the market for banks that lend to generation assets.

Some banks cited these events as further entrenching of banks’ position of supporting only corporate energy companies and projects with long-term PPAs – thus minimising the bank’s exposure to future political uncertainty.

If they were trying to completely undermine investor confidence in low carbon emission assets and capabilities, the Abbott Government has done an exceedingly good job.

Australia’s problem right now is that policymakers, energy infrastructure planners and investors are caught in a complete no-man’s land, that is being forced to optimise the electricity system assuming our current asset base is the ideal for the future.

To illustrate how this could lead us to a higher cost system let’s look at what’s happening at present with the debate around solar PV.

The present structure for pricing power acts to heavily discourage anyone from installing a solar PV system of a size that will noticeably export power to the grid. Indeed some commercial businesses are even disallowed from exporting power or paid nothing for their exported power. Instead the best thing is to install a small solar system that only displaces your own power needs, not that of your neighbour's.

In addition the power network companies are suggesting that they should be allowed to impose new pricing structures that would most likely exaggerate this effect. In addition the energy rule maker, while progressing a move towards allowing networks to charge very high prices for consuming power during peak periods (a sensible thing to do, by the way), has done virtually nothing to also require power networks to pay very high prices for power exported during these same peak periods.

Now rooftop solar installations are characterised by significant economies of scale – according to the SolarChoice Price Index the average quote for a 1.5 kilowatt system is $1.99 per watt, while a 10kW system comes in 37% cheaper at an average of $1.26 per watt (by the way you can get quality systems far cheaper if you shop around). In addition, not every power consumer has suitable roof space for a solar system.

Now what if battery systems achieve the kind of cost predictions a number of market analysts project, including WA’s main power utility Synergy and SA Power Networks?

This could mean we probably want to maximise the amount of roofspace covered in solar PV. And every small solar system that has been installed with the aim of avoiding exports represents a squandered opportunity to achieve significant economies of scale. At an extreme we may end up with a situation where installers are sent around to the same houses they visited just a few years earlier to get up on the roof to add more solar panels and pull out inverters to replace them with bigger ones.

If Steven Chu is right we’re about to commit mistakes much like this, thanks to policymakers' failure to plan and regulate our energy markets in a way that takes the global push for decarbonisation seriously.