Thursday, 29 May 2014

The cost of losing renewable energy

Written by

What will happen to energy prices if the government is successful in it's attempt to wind back the renewable energy market?

With barely contained glee, the Abbott government have begun their long threatened plan to remove support for clean technology in Australia. Assuming the senate supports them, they will remove:

  • the carbon price, which supports renewable electricity by making polluting electricity pay for their pollution;
  • the renewable energy target (RET), which mandates that a proportion of the electricity sold to consumers be sourced from renewables; and
  • any grant or program associated with renewables or energy efficiency, including the Australian Renewable Energy Agency (ARENA) the Clean Energy Finance Corporation (CEFC) and the Energy Efficiency Opportunities program.

Their argument, or perhaps “words they say when asked”, is that this will reduce pressure on household bills, often with some conflation about how the carbon price is responsible for the large rises of the last few years. They are supported in public statements by all the likely suspects; industry groups complaining that the RET and carbon price make them uncompetitive; the ‘gentailers’ or electricity retailers who also own generators, who complain that supporting renewables hurts their business, and conservative media outlets who just hate renewables because clean electricity is obviously Of the Left.

It’s easy to dismiss the corporate interests. We can know with absolute certainty that they are complaining because they want to make more money and see removing the RET as a way of achieving that. Origin, Energy Australia and AGL all own fossil fuelled generators that become less competitive under a carbon priced regime. And so they should. Mining and shipping coal is killing the communities nearby and burning coal is damaging our atmosphere. For a spectacular example of both at once, remember the fire at Morwell mine near Hazelwood power station in the La Trobe Valley. This is a naked attempt to make money from destructive practices while they still can.


[Image from the ABC]

The argument about lowering bills is a subtle one, mostly wrong, and could have some interesting political consequences. What happens to a party that spends years campaigning to remove the carbon price because it makes electricity bills too high, and then removing it doesn’t impact bills at all?

To understand the impact these schemes have on electricity bills requires an understanding of electricity bills. Your basic household bill contains three charges; the amount of electricity you used, the cost of providing a network to supply electricity and the fees for running the market, billing and some green programs. These are split roughly 40:40:20.

The large increases of the last three years have been driven mostly by network costs, increasing in the order of 50%. Networks have spent upwards of $40b on network infrastructure over the last few years and are entitled, under current regulations, to claim a return on that investment. Consumers demanded more electricity, the networks spent money to ensure that happened and now we are paying for the upgrade. There is a good argument that some of this expenditure was unnecessary, but not all of it, and we were going to face this bill eventually.

Removing the carbon price and the RET will have no impact on the main driver of electricity bill rises in the last three years. Changing the regulations under which the networks work is the only lever available for government to address network costs, and even then it would be difficult as they are so closely entwined with the states.

There is even an opportunity to increase competition in the network and market through deregulating activities which would sit well with a Liberal government, but none of these measures are currently on the political agenda.

The RET and carbon price raise bills by adding to the cost of electricity. The carbon price acts at the point of generation, while the RET acts at the retailer. Under a carbon pricing regime every tonne of carbon dioxide emitted is liable for a cost per tonne, somewhere around $23. Imagine Bayswater power station makes a MWh of electricity at a cost of $40 and emits a tonne of CO2 at the same time. The cost of this to Bayswater is then $40 plus $23 for $63 cost of production. This doesn’t necessarily get passed straight on to the market, as the generators set their price and are under no obligation to recoup exactly the carbon price component. Some of the inefficient generators have chosen to only pass on two-thirds of the price as the full impact of the price would leave them completely uncompetitive.

If we remove the carbon price, that cost at production will disappear. However, unrelated to this transaction, but supported by the carbon price and RET, renewables lower the wholesale price of electricity through two separate but related mechanisms; lowering of demand and the merit order effect.

New renewables in Australia have a pretty clear dichotomy; solar panels on roof tops and wind farms connected to the grid. We have some of the highest penetration of residential solar in the world, but with few grid scale installations to speak of. So the vast bulk of solar power is not ‘seen’ by the grid as generation but as a reduction in demand. The sun comes up and household electricity use plummets. Electricity prices are typically higher during the day than at night and reduced demand acts against this. Households with solar benefit from reduced electricity use, at whatever their purchase rate is, but also the grid at large benefits from reduced peak power prices.

The impact of wind and the merit order effect is similar. Wind generation is what we call ‘semi-scheduled’ generation. The rules of the network require it to take whatever wind generation becomes available and they get paid whatever the market rate is at the time. The real-time pricing of electricity is complicated, with a ‘stack’ of demand filled by the next generation available based on price. Having wind come on means that new demand doesn’t climb the stack and the price remains stable. This lowers overall wholesale prices and in some situations by quite a significant amount.

Removing the carbon price will reduce the cost of fossil fuelled generation. Removing the RET will remove the cost of renewable energy certificates. But, not supporting renewables will also raise electricity prices as the impact of the merit order effect and lowered demand will be reduced. This might not be noticed immediately, but in later years. The cost of running a fossil fuel plant always increases; the coal gets harder to mine, the plant requires more maintenance and the fuel price rises (particularly for gas). For renewables the fuel is always free, but the cost of exploiting it keeps getting cheaper.

It is hard to see now, but there is a point in the future where these two relationships add together to make us pay a lot more for power.

Noting that I am an unashamed renewables advocate, I think removing these carefully constructed policies is bad politics. They have made a very big deal about how the carbon price is raising prices, and so residents are going to want to see a reduction in their bills. I predict no one will notice as the moderate saving is wiped out by network increases in the next twelve-months and then by gas price increases after that. Removing the RET (which I don’t actually think they will do, more likely is a ‘true target’ adjustment) will have a similarly modest impact and could cost them votes. It is the appeasement of a noisy minority who don’t like the sound of rushing air, couched against the literally millions of families who have embraced solar.

I think the Abbott government has greatly underestimated how much Australians like renewables, but I expect we’ll let them know in the coming years.


Evan Beaver

Evan Beaver is an ex-public servant, now a consulting engineer.

Evan provides pro bono advice to SolarShare, a community solar energy project in the ACT.

Follow him on twitter: @evcricket