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A Country carpeted with wind turbines with its rooftops glistening with solar panels is the product of one thing: endless and massive subsidies.

Cut the subsidies, and the greatest economic and environmental fraud of all time, would resolve itself in a heartbeat.

One myth that pervades political discourse in this Country at the moment, is the story that subsidies for wind and solar are now a thing of the past.

Federal Treasurer, Scott Morrison was leading with his chin when he announced a couple of weeks back that: “The days of subsidising energy are over whether it’s for coal, wind, solar, any of them.”

We all might wish. However, Scott’s bold claim is, of course, utter bunkum.

The nonsense seems to have taken hold as a result of talk about the National Energy Guarantee. We’ll hand over to The Australian’s, Nick Cater for some insight on the NEG, before dealing with the “subsidies are over” furphy.

Liddell closure: our energy farce won’t fix itself

The Australian

Nick Cater

10 April 2018

What was the AGL board thinking when it agreed to buy Macquarie Energy from the NSW government? Did no one tell them they would be stuck with two coal-fired power plants, accounting for almost a quarter of NSW’s generating capacity? Now AGL plans to shut one down to show how serious it is about our commitment to the Paris climate accord.

This virtue-signalling will leave an 850 megawatt shortfall in the National Electricity Market. It will mean higher prices, less efficiency and less reliability, the energy market regulator warned last month. But that is AGL’s problem as the rules now stand.

The farce over Liddell is proof, if any more were needed, that the energy market won’t fix itself. The biggest public policy failure since Federation has twisted incentives to the point where AGL is prepared to scrap, rather than sell, an asset it no longer wants. Chief executive Andy Vesey says the company has adopted “an anticipatory mindset”.

Indeed. It appears to be anticipating the election of a soft-headed Labor government that will revive subsidies for wind and solar hastening the end of coal. It falls to a Liberal government to fix this problem by 2022. But how?

A new HELE (high efficiency, low emissions) coal-fired power station on a brownfield site might do the trick for $2.2 billion if the government stumps up the money and starts today. We have learned to be wary, however, of kneejerk policy reactions. The first step, frequently skipped these days, is to establish the nature of the problem to be fixed.

It is a different problem than the one we faced 10 years ago, thanks in large part to expensive government subsidies that have increased capacity, albeit intermittently, at the mercy of the weather. Millions of solar panels in particular have made demand more “peaky”, reports the Australian Energy Market Operator.

The fall in daytime demand in the wholesale electricity market has been dramatic; the flip side is a sharp spike in consumption when the sun goes down. If there were enough storage in the system to cover that peak, the challenge would become somewhat easier.

In the short term we must retain all existing baseload capacity, and arguably increase it. Coal will provide the bulk of our energy for decades, but we should not close our minds to other options.

The business case for pumped hydro, for example, is strengthening. Its storage capacity makes the world’s biggest battery in South Australia look like an oversized phone charger. Megawatt for megawatt, Snowy 2.0 could release peak energy far more cheaply and in far larger quantities for a week at a time.

Providing it is backed with a transparent cost-benefit analysis and long-term costs can be carried by the private sector, Snowy 2.0 could be a better solution to the current shortfall than new coal.

That sort of big decision is better made by the market than governments. Which brings us to the case for the National Energy Guarantee, to which states and territories will be asked to sign up later this month.

The AEMO sees the NEG as a key part of the solution to spiky demand, along with changes to pricing mechanisms.

Under the NEG, generators of intermittent wind and solar would be obliged to make up the shortfall in supply when the weather lets them down.

AGL, for example, would be free to replace Liddell’s coal power with windmills, solar panels, hamster wheels or whatever it wants, so long at it carries the cost of filling in the gaps in supply.

Only a numbskull would reject the NEG, with its potential to restore sanity to the energy market. A return to subsidies, whether for conventional power generation or renewables, would be a damaging policy reversal.

Energy Minister Josh Frydenberg’s great achievement in the government’s response to the Finkel review was to phase out rent-seeking and insist generators pay their own way.

AEMO agrees that the market-driven approach enshrined in the NEG is the key to meeting the shortfall caused by the closure of Liddell.

“(The NEG provides) a market approach that 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,” AEMO says.

“These resources can include new supply, demand-based resources, efficiency gains and transmission investment that increases import capability and better util­ises resources in other regions.”

AEMO sees December as the deadline for agreeing to the NEG. Beyond that there will have to be what AEMO calls ominously “an alternative approach”, one that requires more expense and heavier government intervention to produce a less perfect solution.

Since the name of Sir John Monash has recently been dragged into the policy discussion by those committed to building a coal-fired power station whatever the cost, we should ask what, if anything, we can learn from the example of a brilliant military ­tactician and imaginative civil ­engineer.

Monash was an early investor in the new technology of re­inforced concrete that became available in the late 19th century.

In 1904, Carlton Brewery in­vited tenders for 21 steel malt tanks at its Swanston Street brewery in Melbourne. Monash tendered a proposal to build them out of concrete instead, arguing it was more suited to the purpose.

Australia’s first concrete brewing tanks lasted more than a century, serving as a shining example of an innovative, technology-neutral approach to problem-solving — and demonstrating that there is more than one way to brew good beer.

The Australian

Up to date, Nick Cater has been one of the few journalists with some kind of grip on the cause of Australia’s self-inflicted power pricing and supply calamity. So, it’s not without disappointment that STT has to correct him for being sucked in by the nonsense being peddled by the Treasurer, Josh Frydenberg and others. Nick reckons that:

“Only a numbskull would reject the NEG, with its potential to restore sanity to the energy market. A return to subsidies, whether for conventional power generation or renewables, would be a damaging policy reversal.

Energy Minister Josh Frydenberg’s great achievement in the government’s response to the Finkel review was to phase out rent-seeking and insist generators pay their own way.”

No, Nick, Frydenberg’s great achievement was convincing people, like you and Scott Morrison, that the NEG signals the end of the LRET and the rent seekers it attracts. If only.

The subsidies for large-scale wind and solar under the Federal government’s Large-Scale RET will total more than $60 billion over the life of that scheme: the Renewable Energy Certificates issued under the LRET have already added more than $15 billion to power bills, so far.

And then there’s the billions in taxpayer’s money ladled out by the Clean Energy Finance Corporation in soft loans to wind and solar power outfits, as well as billion dollar gifts and grants from the ARENA fund, eagerly lapped up by renewables rent seekers.

Contrary to Nick Cater’s belief that rejecting the NEG means a “return to subsidies” for “renewables” and a damaging policy reversal”, the NEG does not remove subsidies to wind and solar; they remain perfectly intact under the LRET.

Scott Morrison’s claim – aided and abetted by Josh Frydenberg and the rent seekers that run with him – is that subsidies to wind and solar have already been cut. It’s utter bollocks, and a Federal Treasurer and Energy Minister must surely know it.

The subsidies doled to wind and solar out under the LRET DO NOT END in 2020. Far from it.

The LRET target is set by s40 of the Renewable Energy (Electricity) Act 2000 (here).

Under the LRET the greatest single industry subsidy scheme of all time really only hits its straps in 2020, as the target reaches 33,000 GWh of mandated renewable energy – it runs at that rate until 2031:

Year Target in MWh (millions) REC Subsidy @ $85 REC Subsidy @ $93 2018 28.637 $2,434,145,000 $2,663,241,000 2019 31.244 $2,655,740,000 $2,905,692,000 2020 33.85 $2,877,250,000 $3,148,050,000 2021 33 $2,805,000,000 $3,069,000,000 2022 33 $2,805,000,000 $3,069,000,000 2023 33 $2,805,000,000 $3,069,000,000 2024 33 $2,805,000,000 $3,069,000,000 2025 33 $2,805,000,000 $3,069,000,000 2026 33 $2,805,000,000 $3,069,000,000 2027 33 $2,805,000,000 $3,069,000,000 2028 33 $2,805,000,000 $3,069,000,000 2029 33 $2,805,000,000 $3,069,000,000 2030 33 $2,805,000,000 $3,069,000,000 Total 423.731 $36,017,135,000 $39,406,983,000

At the present time, RECs are trading at $85 each: one is issued to a wind or large-scale solar generator for every MWh dispatched to the grid.

Retailers are forced to purchase RECs, with their alternative being a fine (referred to as the “the shortfall charge” – a ‘stealth tax’ on power consumers directed to general revenue) set at $65 for every MWh the retailer falls short of the annual LRET target. The fine is not tax-deductible (where the REC as an expense is), meaning that the true cost of the shortfall penalty is $93, assuming a corporate tax rate of 30%.

It’s that relationship that led to forecast prices for RECs of $93: it would make sense for retailers to pay that amount to avoid the shortfall penalty, which would effectively cost them the same figure.

In the table above, we’ve tallied up the cost of the REC subsidy using both the current $85 and predicted $93 figures. Each year, from 2020 until 2031, 33 million RECs must be issued and surrendered to avoid the fines under the LRET.

While Malcolm Turnbull spruiks his Snowy 2.0 pumped hydro white elephant, and his hapless sidekick, Josh Frydenberg promises Nirvana under his National Energy Guarantee, the cost of the LRET (in terms of REC subsidy alone) will push $40 billion between now and the end of the greatest scam in Commonwealth history.

The full cost of the REC Subsidy to wind and solar generators is born by retail power consumers: one reason for rocketing power prices; the other being the market distortions created by intermittent and unreliable renewables (see our post here).

Since the NEG was floated in July last year, wind and solar power outfits have been literally camped out in Josh Frydenberg’s office, in the hope of avoiding the strictures of the reliability obligation attached to the NEG.

They’ve been attempting to ramp up the CO2 gas ‘emissions obligation’ attached to the NEG, and thereby keep their skin in the game.

What they haven’t reckoned on is the Monash Forum, a group of 30 Liberal and National MPs pushing for reliable and affordable electricity, and keen to restore common sense to Australia’s energy policy. They know that they are unlikely to get rid of the emissions obligation (although there are plenty among them keen to do away with both the LRET and the NEG). Of course, killing the LRET largely removes the need for the NEG. But, in the midst of an economic disaster, there are plenty of escape routes.

STT hears that the most likely shortcut involves allowing retailers to satisfy their emissions obligation under the NEG by purchasing and surrendering Carbon Credit Units (internationally trade-able and worth around $8). The kicker for the wind and large-scale solar industries is that retailers will be permitted to surrender CCUs instead of RECs, to satisfy their obligations under the LRET. The idea has been around for some time; here’s STT’s analysis from December 2016:

Frydenberg’s Carbon Credit Capers: Coalition Signals the End for Australia’s Renewable Energy Target & Wind Power

…

Now, at the risk of upsetting true free marketeers (and STT is proudly one of those), true to its name STT has sound reasons for supporting the proposed carbon credit plan (as we detail below). Of course, in a world not run by politicians terrified of the next trend on Twitter, there would be no such thing as “climate policy”, in general or “carbon” trading schemes, in particular. Also for the record, when they refer to “carbon” we take them to mean CO2 gas, an odourless, colourless, naturally occurring beneficial trace gas essential to life on earth. Anyway, this is the logic behind the scheme, which we last reported on in August 2014.

While there are still plenty in the Coalition camp who think that the shortest route home is to simply scrap or cap the LRET, there are plenty of other ways of skinning the subsidy cat.

From our Canberra sources, what Frydenberg was out to do involved leaving the LRET legislation in tact, but to gut it in such a way that the wind industry will be starved of subsidies by choking off the current and, more importantly, expected value of RECs.

The plan, we are told was meant to go like this.

The Coalition already has a policy aimed at achieving least-cost CO2 abatement, called “Direct Action” (a run down on the policy is available here). The policy has its critics on other scores, but it may well end up being the wind industry’s Armageddon.

Under the Direct Action policy, CO2 abatement is to be achieved at the lowest possible cost using “Australian Carbon Credit Units” (CCUs).

CCUs would be issued on audited proof of the abatement of 1 tonne of CO2. That could be by way of “carbon farming”: planting trees or restoring vegetation cover to over-grazed pastoral range-lands, say.

RECs, on the other hand, are issued on proof of renewable power dispatched to the grid: 1 REC for each and every MWh delivered. The deal has proceeded on the (wild) assumption that 1 MWh of wind power dispatched to the grid results in 1 tonne of CO2 emissions reduction in the electricity sector.

Under the plan being floated by Frydenberg last week, RECs would be made redundant and, instead, wind power generators would be entitled to apply for CCUs. RECs and CCUs would be consolidated, with the former being phased out, and eventually replaced by the latter.

Now, here’s the clever part.

A CCU would only be issued on audited proof that the applicant has, in fact, reduced or abated 1 tonne of CO2 emissions. That would see wind power outfits struggle to jump the first hurdle: despite some “smoke and mirrors” modelling, the wind industry has never produced a shred of evidence to back its CO2 abatement claims.

However, generators running efficient Combined Cycle Gas Turbines would be eligible for CCUs, on the basis that, by comparison with ageing coal-fired plant, CCGTs emit around 50% less CO2 per MWh dispatched to the grid. Accordingly, gas-fired CCGTs would receive an effective subsidy in the form of CCUs for the CO2 abatement attributable to a switch from coal to gas; thereby giving an incentive to invest in new and more efficient gas-fired plant.

The auditing of CCU applications would be done by way of certification and verification by a registered valuer. In the event that wind power outfits can satisfy the auditor and pocket a CCU, they then face the prospect of a far less generous subsidy stream.

(As an aside, one earlier variation of the plan was that the recipient of the CCU would not be able to cash it in, but would, rather, surrender the CCU to the Australian Tax Office and enjoy a reduction in their taxable income to the (pre-determined) value of the CCU: after auditing, the applicant would present their CCUs to a Certified Practicing Accountant to be submitted to the ATO with the applicant’s tax returns.)

The point of Direct Action and the CCU is to bring about the cheapest possible CO2 abatement, by whatever means. This means that the market for CCUs would be open to all comers and competitive in a way which the market for RECs isn’t.

The REC price is underpinned by the mandated shortfall charge of $65 per MWh: the effect of which has already come into play, with the spot price for RECs at $87 fast approaching the expected top of $93 – that figure equates to the full cost of the (non-tax-deductible) shortfall charge.

The CCU, however, is meant to be tradeable and interchangeable with carbon credits on international markets; such as those traded in Europe. Under Direct Action, certain CO2 emitters would be able to meet their obligations to surrender CCUs by purchasing European carbon credits at the going rate: the trading price of which has ranged between A$8-12.

The price for CCUs is, therefore, expected to top out at around $12.

For wind power outfits to survive, let alone build any new capacity, they need RECs to be trading at around $40, at a minimum. Anything less than $30, and wind power generators will never cover their operating costs, which run between $25-30 per MWh (see our post here).

Under Direct Action (assuming audited proof that 1 tonne of CO2 emissions has been abated) wind power generators would be issued with 1 CCU (instead of 1 REC).

By replacing RECs with CCUs likely to trade around $12, the wind industry would disappear in a heartbeat.

The plan to replace RECs with CCUs was put together by energy market economist, Danny Price back in 2014; in essence a plan to rework the LRET to bring it into line with the Direct Action policy; starting with the plan to replace the REC system with CCUs (see our post here).

And, in substance, it was the same plan that Josh Frydenberg was hinting at last week. The political logic of it, no doubt, has fairly solid attraction to a government terrified of being branded “soft” on so-called “climate policy” by the rabid ‘green’-left; and equally terrified of recreating another South Australian power disaster in any other of the Australian states.

On the high plains of moral posturing and virtue signalling, the Coalition would have been able to have left the current LRET target in tact (at least at face value): allowing retailers to obtain CCUs at a fraction of the cost of RECs and to surrender much cheaper CCUs to avoid the $93 cost of the shortfall charge. On that basis, the Coalition could rightly claim that its carbon credit trading scheme would lead to an effective decrease in power prices over the medium term. Moreover, because there would be no market for RECs, there would be no reason to add any more intermittent wind power capacity to the grid, thereby avoiding catastrophic blackouts of the kind that are dished up on a routine basis in South Australia.

STT hears that the Monash Forum are workshopping the idea of merging RECs and CCUs, simply because doing so will instantly smash the value of renewable energy subsidies and thereby destroy the ‘viability’ of wind and large-scale solar.

Wind power outfits cannot operate without a subsidy worth more than $50 per MWh delivered to the grid; solar operators need the same kind of mandated power consumer ‘largesse’.

As noted above, the present value of a REC is $85. Allowing retailers to simultaneously satisfy both their LRET obligation and the emissions obligation attached to the NEG, by surrendering a single CCU (worth no more than $10) destroys the market for wind and large-scale solar. Retailers would have no need to purchase RECs, being able to use far cheaper CCUs, instead.

Sure, for all intents and purposes, it’s a ‘carbon’ tax. But the total cost to power consumers will be a tiny fraction of what the LRET will otherwise cost them, between now and 2031. What’s being thrashed out by the Monash Forum has the prospect of putting an end to investment in grid wrecking, intermittent and chaotic wind and solar. And that can only be a good thing.

For as long as Malcolm Turnbull and Josh Frydenberg are running Australia’s energy policy, Australian businesses and households are on a one-way trip to economic oblivion.

The Monash Forum might just save their Country from a total train wreck.