Victoria’s nonsensical renewable energy experiment
Summary: One of the benefits of a federation is that each state can learn from the mistakes of others. When it comes to electricity, the disastrous experiment of South Australia, with its uncontrolled promotion of renewable energy, should be a salutary lesson for all the others.....
South Australia has close to the highest electricity prices in the world and a system that is so fragile it is constantly being propped up — think coal-fired electricity from Victoria and specifically purchased diesel generators. It’s an example of what not to do. But this is not how the Victorian government sees the world as it embarks on an even riskier scheme of promoting subsidised renewable energy in that state. Virtue-signalling to attract wavering, inner-city voters trumps concern for keeping a lid on electricity prices and maintaining the stability of the grid.
Deeply unimpressive Victorian Energy Minister Lily D’Ambrosio has announced the results of a reverse auction for investments in large-scale renewable energy. The government’s legislated target is for at least 40 per cent of electricity to come from renewable energy by 2025. The auctions aimed to deliver 650 megawatts (nameplate capacity) of new projects. In the end, projects for 928MWs were accepted.
But let’s be clear: reverse auctions involve huge subsidies to the promoters of these projects, guaranteeing cashflow at high megawatt per hour prices. By contrast, the (federal) renewable energy target is a less secure source of subsidy, particularly as total investment is nearing the 2020 final target and the value of the underlying certificates, the large-scale generation certificates, will fall sharply in the early 2020s.
Now, the renewable energy sector will claim wind and solar deliver cheaper electricity than new fossil fuel power plants, although this claim doesn’t take into account the associated costs of firming intermittent renewable energy. This claim is worth interrogating because, notwithstanding a fall in the cost of the solar panels, there is not much in the physical construction of these projects that supports the assertion.
The real answer lies in the subsidised cost of capital that renewable energy projects underwritten by governments are able to secure. In effect, these projects can access debt finance at the long-run government bond rate. (Note that Victoria has a AAA credit rating.) Were new coal-fired plants able to access debt at this concessional rate, their cost per megawatt hour on a firmed basis would be much lower again. But because these plants need to accept direct merchant risk, their cost of capital could easily be 300 basis points above the government bond rate, assuming they can even secure debt finance in this country.
The fundamental problem of the renewable energy policy in Victoria is the refusal to learn from the problems of the South Australian experiment. These include:
• The failure to impose any firming obligations on the renewable energy projects to ensure 24/7 supply of electricity.
• The failure to take into account the extra expenses associated with investment in transmission and distribution needed to connect these often far-flung projects to the grid.
• The failure to take into account the destruction of the economics of existing generators — in Victoria’s case, the brown coal-fired generators in the Latrobe Valley — and the effects of the early retirement of these assets.
If any Victorian voter is foolish enough to think state taxpayers or electricity consumers are getting a good deal out of these reverse auctions, they need to think again. While these costs are not directly sheeted home to the renewable energy providers — they should be — they are real and will cause economic and social damage down the track.
Consider the firming costs that are necessarily part and parcel of renewable energy. Wind farms produce at most 30 per cent of their capacity, mainly in spring and autumn. Solar farms produce slightly less than 20 per cent, with peak output at 1pm — a time of relatively low demand.
When it comes to firming and using the figures from the current Snowy operation, the cost for solar is about $40 per megawatt hour. In the case of wind, however, a firming cost cannot even be nominated because of the inherent unreliability of wind patterns.
So when the Victorian government quotes figures of between $53/MWh and $57/MWh for the successful renewable energy projects in the recent reverse auction, we need to add a minimum of $40/MWh for firming. This makes these projects very expensive.
In terms of the poles and wires issue, there are considerable weaknesses in the way in which the regulation and pricing systems operate. Effectively, a renewable energy project can be located anywhere and, as long as the regulator agrees, the cost of connecting the project to the grid is borne by all customers without any cost imposition on the operator.
Note that regulated assets are priced at a fixed margin over the cost of capital, so the transmission/distribution companies do not really care who bears the cost.
Let’s also be clear about another thing: the abrupt closure of the Hazelwood power station in 2016 was a disaster for the state and the consequences still reverberate. At the time, Labor Premier Daniel Andrews made the ludicrous claim that retail prices would rise by less than 4 per cent in 2017. The actual rise was four times higher.
There are also some important short-term issues for Victoria, including the forecast shortfall of generating capacity of close to 400MW during the coming summer. The Australian Energy Market Operator says a combination of demand management — paying customers to power down — and extra diesel generation will be sufficient to see the state through those very warm days. But it will be a close call.
The Victorian case — and let’s not forget Queensland’s equally bizarre promotion of renewable energy projects, again many in far-flung places — should provide the backdrop to some much needed changes to the operation of the National Electricity Market. The rapid penetration of large and small-scale renewable energy demands some new rules to ensure the stability and reliability of the grid as well as deliver lower prices.
These changes must involve the imposition of more obligations on renewable energy providers who have been afforded too many favours. There are three main changes that are required: day ahead pricing; scheduled generation by requiring firmed capacity; and developer charges on generators for the cost of extra transmission and distribution.
There is no doubt these changes will be resisted by the renewable energy sector. But without them, the stability and reliability of the grid will be imperilled. It was one thing for a small state such as South Australia to lose its head and overinvest in renewable energy; it is another thing altogether for several states to do so.
The AEMO is clear we need to extend the lives of our thermal plants for as long as possible but the actions of foolhardy governments promoting renewable energy to secure inner-city votes threaten this outcome. At the very least, consumers in those states should bear the full costs of their governments’ foolish policies.
The hope is that federal Energy Minister Angus Taylor can deal with some of these issues before it is too late.