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Australia’s power pricing and supply calamity has a single, proximate cause: massively subsidised, intermittent, unreliable wind and solar power.

The relationship is obvious to all but the deliberately obtuse and the rent-seekers that profit from it.

Another obvious relationship is how Australia’s enviable wealth and economic prosperity depended upon reliable and affordable power supplies.

Now that the consequences of a political obsession with renewables are being felt around the Country (most keenly in wind ‘powered’ South Australia and Victoria), Australia’s place as a working man’s Paradise is under direct and immediate threat.

Jobs depend upon viable businesses; viable businesses depend upon cheap and reliable electricity. Australia’s suicidal renewable energy policies have all but destroyed the latter; which leads to the inevitable destruction of the former.

Jobs in manufacturing and energy hungry industries are disappearing fast. With much, much worse to come. Here’s Alan Moran detailing the depth of an unfolding economic disaster.

Renewable subsidies and the destruction of Australian energy competitiveness

Catallaxy Files

Alan Moran

7 February 2018

Yesterday I was the token rationalist speaker at the Australasian Agricultural and Resources Economics Society’s “The Future of Australian Energy Symposium”.

Two other speakers were Tony Wood (from the ALP’s think tank Grattan Institute recently rewarded for the damage his advice has done with an AO) and Danny Price from Frontier Economics (also an ALP consultant).

In so far as their advice has been followed, these two prominent characters have been instrumental in forging the taxing policies on fossil fuel generators that have destroyed our energy market. They now acknowledge the market is broken, it being impossible to shrug off the line ball reliability and doubling soon-to-be trebling of prices that is illustrated here.

Not many attendees understood the importance of this graph demonstrating an international correlation (perhaps it is just chance!) between high wind penetration and high electricity prices.

But the politicians’ favoured consultants’ solution is one further attempt to get the interventionary policies right. Like the fans of socialism, they say its failure is because it has never been done properly!

The other speakers were operationally oriented – largely consultants – who proffered ways that the renewable target, now sanctified by the Paris Agreement few recognise as dead and buried, could be operationalised.

We have seen the wholesale price for electricity rise from under $40 per MWh with very little trend up until 2012, and was still $40 in 2015, to its present level of around $90 per MWh

​Wind has risen from nothing in the early part of the century to a share of over 10 per cent today. All of that wind is dependent on subsidies currently around $85 per MWh. In addition, there is the roof top solar (subsidised at $40 per MWh plus advantageous export tariffs). ​

Due to its abundant coal supplies, Australia had perhaps the cheapest electricity in the world ten years ago. As a result of the renewable subsidies it is now among the most expensive. Aside from increased direct costs to households, this has immense adverse consequences for the competitiveness of Australian industries and hence the nation’s living standards.

We can reverse direction and perhaps the demonstration effect of the US will provide the catalyst.

Catallaxy Files

Alan covers much the same ground in the piece below as above, but we think it worth repeating, not least because the message is one that needs to be heard, loud and clear.

Address to the Future of Energy Symposium

Alan Moran, Regulation Economics

Adelaide

6 February 2018

The future is less certain than the past but even with the past there are varying views about what has happened and what drove the developments.

We have seen the wholesale price for electricity rise from under $40 per MWh with very little trend up until 2012, and was still $40 in 2015, to its present level of around $90 per MWh

Wind has risen from nothing in the early part of the century to a share of over 10 per cent today. All of that wind is dependent on subsidies currently around $85 per MWh. In addition, there is the roof top solar (subsidised at $40 per MWh plus advantageous export tariffs). Rooftop solar is logged as a reduction in demand.

Here we have the breakout in electricity prices as the influence of government increased.

Subsidised renewables initially push the price down as they use their privileged position to out-compete commercially established supply (or in the case of rooftop solar, simply reduce demand). Previous, unsubsidised investments are, in effect, expropriated by government action (though like in the socialist countries, the people get little more than a whiff of the value of the seized assets).

The level of the subsidies is estimated here in terms of direct support, regulatory support, loans etc it amounts to some $5 billion a year.

This subsidy regime is, in turn, attracting new spending on facilities that are intrinsically high cost. The spending on new wind and solar this last year was $US9 billion:

This picture may be understating the increase in small scale renewables, the installations of which are not capped and which seem to be showing an explosive growth. In 2017 installations increased by 60 per cent due to higher grid prices, lower costs and increased ARENA subsidies. 2018 installations are projected to show more than a doubling on those of 2017.

While the surplus supply has an effect in initially pushing down prices, this can only continue (remembering that wind in Australia has a full cost of ~$100+ per MWh compared to new coal at maybe $50) until the sunk costs of the established plant cease to be sunk and require replacement.

In that event the owner, seeing masses of red ink into the future, will elect to close the plant. This incentive to close is amplified in the case of AGL which sees its foreshadowed closing of the Liddell power station as driving up the general price to the benefit of its other assets. With Hazelwood, the owner, Engie, also had a global policy of exiting coal and was confronted with considerable Worksafe requirements to spend money to get rid of asbestos.

In both these cases, and more so for the SA Northern Power Station (previously owned by Alinta, then closed and dynamited by the state government) the variable supply of wind energy and that energy’s grid priority stemming from its bidding advantages, forced a stop-start operational regime on the power stations which they were not designed to accommodate.

So, as long as the sunk costs can be waived, new supplies force down prices with the incumbents having to match bids. But once some considerable costs are required, the sunk costs are revealed as a long term form of operational costs that eventually need replacement and this will only be done if it is profitable.

Hence capacity is reduced, particularly the firm “dispatchable” power that comes from fossil or nuclear plant. Prices shoot up. This will remain the case, especially so if AGL is allowed to close its Liddell station thereby keeping reliable supplies tight.

In effect, the spending on subsidised generation capacity is as different from the notion of investment as is buying explosives to dynamite commercial businesses. Expenditure on subsidised renewables delivers negative value added. And it is inconceivable that the future costs of electricity will decline in response to the increase in renewables just as has proven to be the case in the previous periods when it was said we just have to give renewables a government leg-up to smooth the passage to their commerciality.

The claims that renewables are or soon will be cheaper than fossil supplies are no more credible now than those same claims were 30 years ago. We see estimates like these from the CRC showing wind is almost there:

Or this from Bloomberg New Energy Finance

What you never see is the lobbyists calling for the corollary of this new found competitiveness of wind and solar – the elimination of subsidies. Funny about that!

In fact, with regard to the costs of new fossil fuel plant, nothing much has changed since the construction of the most recent Australian coal power station at Kogan Creek. That generator’s owners in 2007 were offering long term contracts at under $40 per MWh. Since then coal has become cheaper to mine and steel fabrication has fallen in cost, offsetting somewhat the 50 per cent increased costs of labour.

Work by Jacobs for the Climate Council in 2014 suggested new coal in Queensland was under $60 LRMC while work commissioned by the Minerals Council put the cost of new coal in Queensland at under $50 per MWh.

The upshot of the subsidies in Australia has been a disastrous deterioration in our relative competitiveness in power prices from this in 1999:

To this in 2016, before some of the major price hikes took effect.

This interesting graphic is a global picture that shows some correlation between the penetration of subsidised wind – there is no other kind – and prices.

The high wind penetration countries – Germany, Spain, Denmark – have the highest prices; the countries with the lowest wind penetration– US, Hungary, Poland have the lowest prices.

Maybe it’s just a coincidence!

Reliability

Wind tends to be episodic in its supply and there is a high degree of correlation in its output, at least in each region. The South Australian blackout in 2016, was initiated by abrupt changes in wind supply which could not at the time be accommodated by some of the wind generators.

Whether or not such problems are overcome the fact is that wind is intrinsically less reliable than other technologies.

Minister Frydenberg recognised this when in June of last year he argued that wind should pay an extra $16 per MWh to firm up its intermittency costs. This, though it is hopelessly inadequate, is likely to be a provision in the National Energy Guarantee (NEG).

The extent of wind’s unreliability and need for back up is recognised by retailers’ risk management staff who usually require very high levels of firm support – and count wind as only about 5 per cent firm in some cases.

Ben Skinner now with the Australian Energy Council has drawn from his long experience with AEMO to offer the view that the reliability of coal (its Forced Outage Rate) – in this case the Latrobe generators – is 97 per cent. Only a 3 per cent chance of three going down at the same time. In the case of wind its equivalent reliability to coal’s 97 per cent would be 5-7 per cent.

Much was made of a sudden loss of a unit of Loy Yang B (528 MW) for two hours on 18 January this year as causing a price spike. Such outages are common but this is also the case wind, which fell 800 MW in a similar period.

The oscillations in the supply of wind very often run counter to demand as shown on this graphic for Victoria.

Much of the activity in energy policy now is concerned with accommodating the volatility and uncontrollability of wind and to a lesser degree solar. So we have batteries, the mooted Snowy 2 White Elephant, demand response, diesel back-up all to paper over the cracks of an electricity system that has been politically created so as to be both high in cost and low in reliability.

Australia’s 2020 progression to 23.5 per cent renewable energy represents an increase in electricity market share for wind/solar to 16 per cent from zero at the turn of the century. It is actually more than this because of small scale solar. Goals 20 year hence are upwards of 42 per cent renewable share.

No significant existing installations of wind and solar would have been developed without subsidies, the main one providing $85 per megawatt hour on top of the market price that was $38 per megawatt hour in 2015 and is $90 plus this year. This price increase has been brought about by subsidised renewable energy having a priority over coal based generation which is forced out of the market.

The increased renewable share also reduces the reliability of the system.

The Commonwealth’s policy, the NEG, will allegedly provide us reliable energy at $110-115 per MWh (a little over twice the price that would be available under the unsubsidised coal-based system now being destroyed). It will also provide a pathway to meeting Australia’s targets under the Paris Climate Change Agreement which specify emission reductions of 26%-28% by 2030.

If the NEG could be designed in such a way that retailers/generators internalise all their costs, the outcome would be wind selling at a severe discount to dispatchable plant. It would bring incentives for firm power and fast start capacity perhaps even the Snowy2 White Elephant. This would go some way to offsetting the damage that subsidies have imposed onto the market. But AEMO seems more disposed to pursuing a centralised approach. This extends the notion of ancillary services by collective provision of market support, thereby smearing the costs across all generator sources rather than incentivising those that have low reliability either to exit or to invest in insurance that irons this out.

But that is of secondary significance. Politics has converted our low cost energy potential into a high cost reality. Only politics can undo this.

Grafted onto the policy as developed is a rationalisation based on Australia’s accession to the Paris Climate Change Treaty and our ratification of this the day after Trump was elected President. The US economic success is now becoming evident. A key to this is low tax, low regulation and the abandonment of carbon taxes in their various forms.

Due to its abundant coal supplies, Australia had perhaps the cheapest electricity in the world ten years ago. As a result of the renewable subsidies it is now among the most expensive. Aside from increased direct costs to households, this has immense adverse consequences for the competitiveness of Australian industries and hence the nation’s living standards.

We can reverse direction and perhaps the demonstration effect of the US will provide the catalyst.

PDF version of Address

Alan, once again, does a superb job of detailing the true economic cost of unreliable, intermittent and heavily subsidised wind and solar power. However, his choice of graphics might be improved with reference to some of the following.

Alan uses this graphic in both of his articles:

It was put together by Eric Worrall, reproduced by The Australian and we carried it along with a Judith Sloan article in one of our posts, last year.

We were challenged at the time about the price point for Australia, which depicts that the average retail price is a shade over $0.25 per KWh.

Australian households and businesses would be over the Moon if that were the case.

Alan would be better served in using the following comparison between retail prices, based on the rates effective from 1 July 2017 in Australia:

Average retail prices in Australia are more like $0.40 per KWh, not $0.25.

South Australia, with the greatest wind power capacity per head in the country (1,698 MW for an ageing and shrinking population of 1.6 million) suffers the highest retail power prices in the world, and more than three times the price enjoyed in Trump’s USA.

Here’s another graphic Alan might deploy with considerable effect:

This graphic appeared in The Australian, a few weeks ago. It is poorly labelled, as one recent follower pointed out.

The word ‘spot’ in the line ‘Average wholesale spot price’ is a misnomer: the spot price relates to the spot market which, when wind power output collapses, often hits the regulated market cap of $14,000 per MWh; the wholesale price relates to the wholesale market, which is the price retailers pay, in aggregate.

The graphic originally failed to note the price is in $per MWh, which we’ve since added. But otherwise makes it crystal clear – by comparing the average wholesale price that prevailed in 2016 (in red) with the average wholesale price that prevailed in 2017 (in blue) among those five States which are connected to the Eastern Grid – that running on sunshine and breezes drives power prices through the roof. Western Australia isn’t considered, because it’s not connected to the Eastern Grid.

South Australia and Victoria together have 35 separate wind farms, with a notional capacity of 3,214 MW: SA has 1,698 MW of wind power capacity, Victoria has 1,516 MW.

In just on 12 months, the wholesale price has doubled in SA ($84.26 to $168.90) and more than doubled in Victoria ($62.04 to $139). Eco-zealots claiming ‘it’s coal what dunnit’ might take a closer look at coal-fired Queensland and New South Wales.

Remarkably, both states enjoy wholesale power prices within a bee’s whisker of each other at $75.65 (QLD) and $75.36 (NSW) – with those prices having fallen since 2016. Those prices compare rather favourably with wind powered SA, where the wholesale price is 2.25 times higher; and wind powered Victoria, where the wholesale price is more than 1.8 times higher.

Queensland has virtually no wind power generating capacity and NSW a piddling 826 MW, relative to its total generation capacity; the generation capacity of both states is dominated by coal-fired power plants (the stats for fossil fuel generators by state are available here).

The reason that Queensland’s wholesale price was running at $197 per MWh in 2016 was that its generators are owned by the State government which, looking to reduce its rising deficit and burgeoning debt, directed those generators to milk the power market for all it was worth. Facing an election last year, and rocketing retail power prices, the Labor government decided to pull the plug on what was a State-backed extortion racket.

Alan might improve on his choice of graphics, but his message his loud and clear.

The subsidies are colossal; in Australian history no single industry has ever received subsidies of the magnitude being directed to intermittent wind and solar.

The cost of those subsidies is born directly in retail power prices, which in the wind powered States of South Australia and Victoria are either the highest in the world, or fast heading in that direction (note the jump in the wholesale price in Victoria in just 12 months).

In addition, the effect of those subsidies has destroyed the normal functioning of Australia’s power market, favouring the occasional delivery of expensive and unreliable wind and solar power.

Victorians and South Australians are destined for more blackouts and load shedding, whenever wind power output collapses on a total and totally unpredictable basis (see below).

And the cost of power to households and businesses is guaranteed to rocket even further from here.

Welcome to your wind powered future!