Yes, Let’s Triple The Cost Of Electric Power!

by David Archibald, author of Australia’s Defence (Connor Court) and Twilight of Abundance (Regnery)



23 June 2016



These pages previously reported on Origin Energy’s ($10.2 billion market capitalisation) plan to enrich itself at the expense of the Australian public. But the plan by Origin’s stablemate in the energy field, AGL Energy ($12.6 billion market capitalisation) is even more damaging for the Australian taxpayer.

In another sign that world that has gone topsy-turvy, the plan was presented at a meeting of an organization that is ostensibly promoting the economic development of Australia – the Committee for Economic Development of Australia. AGL’s plan would halt business investment in its tracks and send most of the industry we currently have offshore.

AGL’s complaint is that a lot of coal-fired power stations are lasting a lot longer than their projected working lives. And worse, the cost of power from these power stations is one third that of power from wind and solar sources. AGL’s solution is to require that working, useful coal-fired power stations be retired, so that the nation is forced to buy power that is at least three times as expensive. That is shown in slide 6 from AGL’s presentation:

AGL didn’t say in its presentation what gas price they are using for the price of gas-sourced power in their chart. The east coast of Australia is now in a permanent gas shortage due to the LNG plants built at Gladstone. Of those three LNG plants, only the Santos-operated one is short of gas for its operational life, by some 2 TCF. But the effect of all the plants will be to suck every spare molecule of methane out of eastern Australia. The price of domestic gas will be set by the price of exported LNG which in turn is linked to the oil price.

The effect of all that will be that the price that Australia will be paying for power will be as if it was generated from burning oil. This will be an idiotic situation for a country with a lot of black coal and a vast amount of brown coal.

AGL does not want to invest in renewables too much itself. It is seeding a $2 billion renewables fund with $200 million. Like Origin, its plan will be to make money out of its gas-powered peaking plants.

The solution to the problem of higher power prices from mandated renewables is a good dose of disestablishmentarianism. At the moment global warming is a state-sponsored religion with a priesthood in the CSIRO, Bureau of Meteorology, and the universities. The state should get out of the religion business.

From a correspondent:

In addition to the cost of generation, there will be increased costs of ensuring the NEM (National Energy Market) remains stable.

With the green plus black price currently in excess of the costs of solar and wind, their proponents are now crowing that they no longer need ARENA (Australian Renewable Energy Agency) subsidies and the like — but only as long as they have price certainty created by some form of government policy on carbon, so they can invest at a low rate of return.

The next challenge will be the NEM accommodating the fact that the 6 GWs of capacity to be built will be concentrated in the best solar locations (within NEM country) — which will be inland Queensland from Surat to the northern Bowen Basin, and northern NSW, the best wind locations. Both these tend to be where grid is skinny and, apart from coal fields, not much in the way of load.

As the percentage of renewables increases, the network will have to be able to handle the intermittency — which will involve substantial additional investment in voltage, frequency and fault-current control, particularly if the coal plants are to be removed. The gas plants will play a part in this, and will expect to be paid for the service on top of the provision of energy. They will love the volatility the intermittency will create.

The cost of the network integration will be a “network cost,” paid by users rather than allocated as a cost attributed to that fuel source. But don’t worry, the Barrier Reef will be saved.

Another correspondent contributes:

If you include the REC penalty then the “cost” of solar and wind is on par with, if not cheaper than, brown coal !

Currently all electric retailers must pay a penalty of around $80/MWh (current price of REC in the market) if they don’t have enough renewable energy (RE) in their sales portfolios. The volume of RE depends on the RET (RE Target) in the legislation (the Mandatory Renewable Energy Target or MRET, which is set every now and then by the Fed Govt). The latest target is 33,000 GWh Australia wide by 2020 as agreed between Abbott and Labor last year. The target is a lower level than the original target of 45,000 GWh by 2020 due to Abbott’s aversion to renewable energy schemes but as power demand has declined in the last 5-6 years this still represents a big proportion of total power consumption (23.5%, which is higher than the 20% envisaged a decade ago).

As policy dithered under Abbott, investment in RE projects fell due to Abbott’s promise of cancelling the MRET. Price of REC (Renewable Energy Certificate = 1 MWh of RE) fell from the historical $40-50 band to $25-30 in early 2015. But then Abbott lost the fight to cancel the MRET, with the new target confirmed. Due to the lull in investment, when the new RET was confirmed, there wasn’t enough RE projects ready to go to produce the RECs. The price of REC shot up to $80-90, the level of penalty imposed on retailers if they don’t have enough RECs in their total sales. The price of REC can be punishing because the penalty is NOT tax deductible. The penalty is $65 so if a business has to pay this in after tax terms then the pre-tax penalty is 65/0.7 = $92 (based on 30% business tax).

Under current supply shortage conditions, if you build a wind farm you can receive up to $90/MWh paid by consumers who are forced to have a target RE in their consumption (retailers have no choice but to pass through REC cost to consumers). If the RE target is 23%, then this is the portion of RE you must have in your total supply. Which means up to $20-25/MWh additional cost to the price of power across the board. This amounts to 9% of the total household tariff A1 in Perth, or 17% of the generation cost component in the tariff (the other components being networks, retail and market management). For business, it amounts to 20-30% of generation cost as this cost is much lower than that for households due to business’s better load factor.

Under balanced supply-demand conditions for RE the REC price may fall to around $50-60/MWh, or $15/MWh across the board or 12% of generation cost for households or up to 20% for business.

But that’s half the story. These RECs refer to LGCs (large scale generator certificates).

When the MRET legislation was first brought down in 2000, REC consisted only of LGC. Then the solar lobby came in a number of years ago and forced Canberra to split the REC into LGC and STC (small technology certificates). This is to facilitate the entry of household rooftop solar PV systems. Since these systems are small (2-5 kW each) they are allowed to use estimated production over 15 years and then multiplied by 5 and then front-loaded as if they have produced those RE kWh. As a result, the capital cost of installing a PV system ends up being half the true cost as suppliers bank the STCs as soon as the PV system is installed. This is in contrast to solar farms or wind farms that can only bank the RECs that they actually produce each year.

Worse, state bureaucracies also devised the FIT (feed in tariff) whereby RE generated would be bought by state owned utilities for $400/MWh (40c/kWh compared to the A1 tariff of 25c/kWh). So every man and his dog went for PV systems a few years back, causing Synergy (in the case of WA) to lose $150m in 6 months. The WA govt quickly closed down the scheme. But in QLD for instance, they let it run for a year or more, leading to hundreds of $m of subsidies to high-income households that could afford PV systems early.

Worse, while LGCs are capped by the RET (volume target of 31,000GWh), STCs are UNLIMITED. Retailers MUST buy ALL STCs “produced” every quarter. The penalty for not buying STCs whenever and how-much-ever they are available is $40/STC. So we are lumped with this cost on top of LGC costs. In WA this cost would be around $80m pa or another $5/MWh – taking into account that the 5-times multiple to STC estimates doesn’t apply anymore, only the 15-year front-loading remains.

So in the best of conditions we have locked in $20/MWh impost on power supply cost to the Aust public. This works out around $380m pa to WA’s main grid, the south west interconnected system.

This cost can only go up year after year because of lower PV system costs and unchanged subsidies, leading to more competitively priced PV systems that will continue to eat away at grid supply, the bread and butter market for state owned utilities Western Power & Synergy. This death spiral has not been caused by disruptive technologies – solar PV has been around for decades, same as batteries – but by Fed and state govt subsidies that hit consumers and taxpayers and Fed and state budgets… for the benefit of German/Euro and Chinese manufacturers…

The real cost is not only the direct visible costs but the opportunity costs to Australia in being hollowed out manufacturing wise. The high cost of power nationally would be $4-5 billion pa and this would have an adverse multiplier effect on GDP and jobs… and to rub salt to wound we export most of our low emission natural gas while retaining coal at home, and then tax coal fired power through the carbon tax and any other form of emission reduction scheme…