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Australia’s self-inflicted energy crisis is an IQ test for anyone game to take the challenge. Published every day, the results provide a permanent record for future generations, enabling them to praise the scholars and punish the dunces.

Over the last few weeks, Australia’s Federal Treasurer, Scott Morrison entered the contest and earned a spectacular ‘FAIL’ when he claimed that “The days of subsidising energy are over whether it’s for coal, wind, solar, any of them.”

That this bloke is in charge of Australia’s purse strings, might concern that half of the population which grudgingly pays tax (on net) for the benefit of the other half, which merrily spends it.

Scott Morrison seems blissfully unaware that under his own Federal government’s Large-Scale Renewable Energy Target, wind and solar power outfits are siphoning $3 billion a year in renewable energy certificates (RECs) and will do so until 2031 – at a cost of more than $60 billion to power consumers, over the life of the scam: Australia’s Endless Renewable Energy Nightmare: Subsidies Worth $4bn a Year Run Until 2031

Contrary to Scott’s musings, the days of subsidising wind and solar, have only just begun.

Here’s Judith Sloan placing her mark on Morrison’s homework.

Coal-toting big gun Scott Morrison just keeps misfiring

The Australian

Judith Sloan

10 April 2018

Let’s not forget that this was the bloke who brought a lump of coal into the House of Representatives. But lately our Treasurer, Scott Morrison, has gone cold on the idea of new coal-fired power stations.

Alarmingly, he suddenly thinks he’s an expert on energy matters.

“There’s a difference between old coal and new coal,” he pompously told a business audience in Sydney. “Old coal bids into the energy grid at about $30 a megawatt hour, it could be $40.

“A new HELE (high efficiency, low emissions) plant five, six, seven years down the track is estimated to be bidding at around $70 or $80, so it is false to think that a new coal-fired power station will generate electricity at the same price as an old coal-fired power station.”

Why would the coal-toting Treasurer be saying this? (In any case, the HELE figures are too high.) The message of this intervention by Morrison is that energy policy has become a proxy for the weakness of Malcolm Turnbull’s leadership position.

He therefore is emitting all the expected lines — there’s no future in coal-fired electricity; the government can’t chip into fund or subsidise any coal-fired plants (but it’s OK to throw billions at Snowy 2.0); the closure of the Liddell coal-fired power station in the NSW Hunter Valley is regrettable but manageable — and (fill in the blank) statements to be advised by the Prime Minister’s office.

But here’s the bit I like about Morrison’s overt sycophancy: “The days of subsidising energy are over, whether it’s for coal, wind, solar, any of them. That’s how you get the best functioning energy market with the lowest possible price.”

Oh please, I thought. But was he foreshadowing some sensible initiatives? Was he telling us the government would seek to have the large and small renewable energy targets terminated as soon as possible and remove the run-off period until 2030 that sits in the legislation? Or that the Clean Energy Finance Corporation would be shut down along with the Australian Renewable Energy Agency? Perhaps he would financially penalise states and territories that subsidised renewable energy to the extent of those subsidies?

Sadly, the answer is no. Turnbull firmly would resist any of these initiatives and they simply are not on the Treasurer’s radar — or that of Energy Minister Josh Frydenberg, for that matter.

Indeed, Frydenberg had the chance to reduce the subsidies paid for small-scale solar installations earlier this year and refused.

So I say to Morrison: don’t mislead the public by telling us that the days of subsidising wind and solar (and let’s not forget batteries) are over. It’s not true.

And don’t forget that the emissions target that is driving the new love interest of Turnbull, Morrison and Frydenberg, the National Energy Guarantee, favours renewable electricity generation over other forms.

Of course, Morrison is no economist, as he frequently demonstrates. The idea we’ll have a “functioning energy market with the lowest possible price” tells us a lot.

The reality is that there are high levels of market concentration already and the players, understandably, are behaving like oligopolists.

Instead of bidding in when the price exceeds their marginal costs, these oligopolists manipulate the market to influence the price.

This is perfectly rational behaviour and what you would expect from the market structure, particularly the dominance of the large gentailers. It also applies to the Snowy operation, whose bidding practices, likewise, are trying to make the most of a distorted market.

And this is why the closure of Liddell is important because it will enable AGL (the largest gentailer) to further short the market and increase the scope to push up prices. At least former deputy prime minister Barnaby Joyce understands this point.

We also should not forget the impact of the closure of the 1600 megawatt Hazelwood plant in Victoria’s Latrobe Valley. According to the Australian Energy Regulator, “the impact has been significant right across the National Electricity Market. In Victoria, average spot prices for 2017 were up 85 per cent and up 32 per cent in South Australia.” There also were large rises in NSW and Queensland.

There is no doubt Turnbull’s preference is to allow Liddell to shut. What is happening at the moment is really for show because of his weak position in the partyroom; it’s basically a charade.

AGL is telling us that, while the company is prepared to be reasonable, the plant is not for sale. There are plans — well, not firm plans because it wants to delay any decisions for as long as possible — to replace the capacity lost when Liddell closes.

The company even may entertain external bids for Liddell. But you can see the outcome from a mile away: the price won’t be right, there are complications of warranties and the company has forward sold the output until 2022.

There is no doubt that Turnbull and his supporters are pinning all their hopes on the NEG being supported by the relevant states and territories. Without this, they will be completely stranded. Mind you, there are serious doubts about whether it can work, in part because it is placing two objectives — emissions reductions and reliability — on a single instrument.

The advice the government is receiving from the bureaucrats on these matters is confusing. After the 1600MW Hazelwood plant closed, the Australian Energy Market Operator, run by US lawyer Audrey Zibelman, advised the government that “it will not compromise the security of the Victorian electricity system nor the broad National Electricity Market next summer”.

But six months later, AEMO desperately was seeking “a strategic reserve of around 1000MW to maintain supply reliability in South Australian and Victoria”. I guess a lot can happen in six months.

The government therefore may want to discount AEMO’s advice in relation to the closure of Liddell. Zibelman’s letter to the minister tells us: “AEMO’s view is that optimal approaches towards ensuring an efficient balanced system must target mechanisms that allow the greatest practical level of competition and innovation on both the supply and demand sides of the system.

“A market approach allows multiple other participants to compete to invest in a variety of resources that can address the reliability deficit to produce the best overall outcome for consumers.”

I’m not sure what that guff real­ly means — trust me? — but the real kicker in the letter is this: “Development of alternatives to meet the supply requirements in NSW will take time. Ideally, an agreed national energy guarantee will serve as a market mechanism to address this gap. If, however, the national energy guarantee is not agreed to by December 2018, AEMO recommends that an alternative process to acquire the 850MW of Liddell be pursued.”

I guess that’s called having a bob each way. And bear in mind that AEMO doesn’t assess any impact on electricity prices; it is concerned only with continuity of supply.

In the meantime, we should discount any utterances that the Treasurer makes in relation to energy policy (and a few other topics as well) because he knows nothing and simply is sucking up to the Prime Minister.

The Australian

Among the nonsense peddled by renewables rent seekers and dunces of the class identified in this post, is the claim that private investors will never build a coal-fired power plant in Australia.

With three exceptions, private investors have never built a coal-fired power plant in Australia, ever. The three exceptions are the (now mothballed) 150 MW plant at Anglesea in Victoria, built, owned and operated by Alcoa to provide power for its nearby aluminium smelter (now defunct); the 151 MW Redbank Power Station, located near Singleton, in the Hunter Region, NSW, built by Babcock & Brown (now mothballed, but up for sale); and the 416 MW Bluewaters Power Station near Collie in Western Australia, a high-efficiency unit built by Griffin Corp and now co-owned by Japan’s Sumitomo.

Every other coal-fired power plant built in Australia was built by state governments, underwritten by taxpayers and was flogged off to private investors, starting in the 1990s (with the notable exception of Queensland’s plants, which it still retains).

The reason is simple: the generation and distribution of electricity was always (and by many still is) considered by economists to be a ‘natural monopoly’. Indeed, for generations, economics textbooks used power generation and distribution as the example of a natural monopoly. They still do. Here’s the standard definition from Investopedia:

A natural monopoly is a type of monopoly that exists as a result of the high fixed costs or startup costs of operating a business in a specific industry. Additionally, natural monopolies can arise in industries that require unique raw materials, technology or other similar factors to operate. Since it is economically sensible to have some monopolies like these, governments allow them to exist but provide regulation, ensuring consumers get a fair deal.

A natural monopoly, like the name implies, is a monopoly that does not arise due to collusion, consolidation or hostile takeovers. Instead, natural monopolies occur when a company takes advantage of an industry’s high barriers to entry to create a “moat” or protective wall around its operations.

The utilities industry is a good example of a natural monopoly. The costs of establishing a means to produce power and supply it to each household can be very large. This capital cost is a strong deterrent for possible competitors.

Once a large power generator or generators (with capacity sufficient to serve the market) is built, and once a network capable of delivering power to customers is built, there is no room in the power market for another generator of equal capacity, and there is no room either for a second grid to run in parallel with the first.

In powering their economies, governments had a choice: either allow private enterprise to build and own the generation and distribution system (a natural monopoly, allowing the owner to extort the market by reducing supply and raising prices) and regulate the market thereafter to ensure that power would be delivered at affordable prices to all consumers; or to build that generation and distribution system itself.

Australia chose the latter course, which was done through state-owned enterprises or commissions, such as SA’s Electricity Trust of SA (‘ETSA’) or Victoria’s State Electricity Commission (‘SEC’).

ETSA was the brainchild of a Liberal (ie conservative) Premier, Sir Tom Playford; and the SEC was built from the ground up by Engineer/Soldier, Sir John Monash, with the help of conservative politicians.

What occurred in the 1990s (with examples set by the likes of Enron in the USA) was that rent seekers beguiled government regulators with the promise that power prices would fall, if state-owned power monopolies were sold and broken up into three separate markets; with entities specialising in generation, entities building and managing the grid, and entities retailing power to customers.

The argument was that each would compete ferociously with the other in the respective markets and, therefore, drive down power prices.

After suffering major financial disasters involving their state-owned banks, cash-strapped state governments in SA and Victoria duly broke up and sold their grids and generation capacity to AGL, Origin, GDF Suez (aka Engie) and the like. None of those operators has ever built a coal-fired power plant themselves, but they are more than happy to run them.

Ageing coal-fired plant cost almost nothing to run (their entire capital costs were depreciated years ago) and, with wholesale prices rocketing thanks to intermittent and unreliable wind and solar, being able to deliver power on demand provides market and pricing power to those in charge of that capacity [Note to Ed: consider using the word ‘extortion’ here].

Over the span of nearly a century, state governments (including Liberal governments, run by conservatives) built, owned and operated coal-fired power plants. They did so not only because power generation and distribution is a natural monopoly, they did so because electricity (reliably delivered and affordably priced) is an essential service; essential, that is, to encourage investment by business; to maintain the profitability of those businesses, allowing them to employ people and pay decent wages; and to allow householders to enjoy electricity without suffering a heart attack every time they open their power bills.

Along with Scott Morrison, demonstrating an astonishing lack of insight into his own government’s energy policy, Josh Frydenberg, the Energy Minister continues to disappoint.

Lately he’s been extolling the virtues of the ‘power of the market’, and making nonsensical claims that if there were a market for coal-fired power, private investors would build the plant needed to keep the lights on. He’s even gone so far as to claim that building coal-fired power plant is against Liberal Party principle (Josh, try Googling ‘Sir Tom Playford ETSA’).

Notwithstanding their purportedly conservative DNA, Josh and Scott seem quite comfortable with their Nationally applicable LRET and the idea of its mandated 33,000 GWh annual target, which requires retailers to purchase that volume of wind and solar power (or rather the RECs they generate) or face the shortfall charge (a $65 per MWh fine for every MWh they fall short of the annual target, passed on to power consumers at a cost of $93); with the cost of the RECs purchased topping $3 billion a year, until 2031, and all tacked on top of rocketing retail power bills. That hardly sounds like the kind of government dictated, market distortion that irks true free market conservatives, now does it?

Like Morrison – ignoring the effect that $3 billion a year in subsidies to wind and solar has had on the power market and hence the profitability of conventional generators – Frydenberg occupies a strange netherworld, utterly divorced from reality.

Josh and Scott might start by dusting off their old economics textbooks, flicking through the pages to the section on ‘natural monopoly’ and then drilling down on the example of power generation and distribution, invariably used to explain the phenomenon.

Alternatively, these jokers might Google up the history of power generation in this Country. Who knows, they just might learn something?