The renewable energy lobby employs a neat trick to show that billions in subsidies for the costliest forms of electricity can lower power prices.
Wind and solar power costs between 1½ and 10 times as much to produce as power from coal and gas. But the vagaries of the National Electricity Market allow the renewables sector to claim that it lowers prices – even if it imposes costs on consumers elsewhere.
In a shell game, a conman quickly moves around three shells on a table or mat and his buddies pressure passers-by to bet which one contains a pea.
The pea under the shell is $37 billion of renewable energy certificates (RECs) that electricity retailers will buy from renewable energy generators or generate themselves between now and 2030 if the renewable energy target scheme isn’t changed.
“It’s misleading, because the subsidy is the REC, and the REC certificate is acquitted at the retail level and is included in the retail price of electricity,” Origin Energy chief executive Grant King says.
The renewable energy target has helped drive installations of 52 wind farms and 1.3 million solar roof-top systems – about one-eighth of total capacity – since 2001, Bloomberg New Energy Finance says.
The NSW Independent Pricing and Regulatory Tribunal estimated the cost of the renewable energy target to the average household in 2013-14 at $107 – about 5.3 per cent of a typical $2012 bill.
It is now under review by a panel headed by businessman Richard Warburton, who is sceptical that human activity is causing global warming.
Because the price of RECs is about the same as the electricity price per megawatt/hour, renewables generators are deriving as much revenue from selling RECs as they are from selling power to the National Electricity Market.
“All it is is a tax on existing producers which is passed onto existing consumers,” says Tony Wood, head of the energy program at the Grattan Institute.
“No one denies, when they are asked the right question, that renewable energy costs more than fossil energy.
“The only question is who pays for it? And right now it’s a combination of consumers and fossil generators who are paying for it, and you’ve got to question is that the right policy?”
The RET’s costs are buried in ACIL Allens’ modelling for the RET review and a report issued by the Climate Institute last week.
Most of the costs are REC costs. Deloitte Access Economics in a report for business groups estimates the net present value of REC transfers to the renewables industry over 2015-30 at $17 billion, compared with $8 billion to $9 billion if the RET is closed or the target is wound back to a true 20 per cent of energy supplied.
When REC costs are included, retail bills are higher until at least 2020, after which opinions diverge.
ACIL Allen and the Climate Institute find that continuing the RET on its current path lowers household power bills by as much as $80 a year from now to 2030, despite swelling bills between now and 2020. Deloitte, using different assumptions about capital costs, falling demand and market responses, finds retail bills higher after 2020 as well.
The Climate Institute report shows the high long-run marginal production costs of solar and wind power – which include capital costs – relative to coal and gas. Coal and gas power come in at about $60 to $80 a megawatt hour in the eastern states, wind at $88 to $544 a megawatt hour and solar at $128 to $1533 megawatt hour.
But when it comes to bidding in the National Electricity Market, wind and solar clean up because they have zero short-term marginal costs (in the short term, capital costs are less important). Wood argues they even have negative short-term marginal costs because they need to produce energy to sell RECs.
The rising RET target forces renewables into the NEM, even though electricity demand is shrinking and no more capacity is required. Those factors combine to suppress wholesale prices, which have dipped below $40 a megawatt hour.
That in turn squeezes profits and market share for coal and gas generators, which have to cover their fuel costs, at peak times when they used to make their profits. Retailers then have to buy or generate renewable energy certificates to cover the renewable energy target – currently about 10 per cent, rising to about 28 per cent by 2020. The REC cost goes into the retail price.
If that cost is less than the wholesale price suppression, the consumer wins. But it’s a fine call, says Wood.
The RECs subsidy costs about $29 billion in net present value economic activity, 5000 jobs and $1260 in average annual earnings. This comes from more costly investments in renewables, which Deloitte says raise power prices and suppress resources, jobs and demand in other sectors .
Erwin Jackson, deputy chief executive of the Climate Institute, says such losses are more than offset by the benefits of emissions reductions under the RET.
A Climate Institute report released last week puts a much lower $2.7 billion economic cost on the RET. It finds it lowers household power bills after 2020. It values the social benefits of emissions cuts at $19 billion, based on a $24 to $50 a tonne social cost of carbon. Mr Jackson said this was almost certainly an under-estimate but “you have to factor it in, otherwise it’s a one-sided model and you are assuming climate change doesn’t exist.”
He admitted it was only an estimate of the RET’s contribution to global climate change efforts – offset by emissions increases in large emerging economies such as China and India – rather than any quantifiable benefit to Australia.
But it was the “best tool we have” to “open up the conversation” to considering the benefits of reducing emissions.
“What they’ll talk about very carefully is the cost to consumers, and they’ll show the cost to consumers is either slightly favourable or not much different – therefore ‘isn’t this a reasonable price to pay for renewable energy?’ ” Wood says.
“What they are very careful not to say [s] ‘what’s the cost to the Australian economy?’ because the cost to the economy includes the negative cost to the existing generators.
“To say that the renewable energy target is a small impost to consumers is the right answer but it’s the wrong question. The right question is ‘what’s the economic impact of the RET?’ and the economic impact of the RET is negative.”
The RET is a costly way to cut greenhouse gas emissions. Its price of abatement is $54 to $186 a tonne, up to eight times the recently abolished carbon price, ACIL Allen modelling for the RET review finds.
A cheaper – but politically tricky – way to reduce emissions to would be to return to a technology neutral carbon price signal.
The difference between Deloitte’s estimate of the REC cost savings from winding back the RET to a true 20 per cent and closing it – $9 billion – is similar to the $10 billion “additional profit” for coal and gas generators – such as Origin and EnergyAustralia – claimed by the Climate Institute report .
“It’s not that they’re better off because the RET was removed. It’s that they’re worse off because the RET was introduced,” Wood says.
Tim Sonnreich, strategic policy manager at the Clean Energy Council, an industry body, accepts that there’s a substantial wealth transfer from incumbent generators to renewables generators.
“We are not denying that,” Sonnreich says. “But it’s a wealth transfer that’s in favour of consumers so we would have thought in a political sense that’s a pretty popular one.”
The Climate Institute report also says as much as $19 billion of future renewables investment is at risk if the RET is closed and about $10 billion if it is scaled back to a true 20 per cent target. Promoters of a $1.5 billion wind farm at Ceres, in Victoria, and a 100MW solar plant said they would reconsider their plans if this happened.
But Mr King said this is “nonsense” because the Australian Energy Market Operator had found that thanks to falling overall demand, “there is no investment required” in new generating capacity for at-least ten years.
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