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Why Abbott has got it all wrong on green energy

Tony Abbott is hinting he’ll wind back a program to support renewable energy because that energy is forcing up power prices. Read this, Tony; you’ve got your sums wrong.

In a press conference yesterday about improving prospects for manufacturing, Prime Minister Tony Abbott made a statement that appears ominous for the renewable energy industry:

And the RET [Renewable Energy Target], well look again, we support sensible use of renewable energy and as you know it was the former Howard government which initially gave us the RET, and at the time it was important because we made very little if any use of renewable energy. We’ve got to accept though, that in the changed circumstances of today, the renewable energy target is causing pretty significant price pressure in the system and we ought to be … an affordable energy superpower … Let’s make the most of the comparative advantages we’ve got and cheap energy — affordable energy — ought to be one of our comparable advantages.”

However, there’s a silver lining because the funny thing is the RET is actually reducing energy costs for energy-intensive manufacturers.

This is completely counter-intuitive and it’s understandable that those outside the electricity sector find it hard to understand, including the Prime Minister and probably many of those people he trusts and respects — like Maurice Newman, the man who will be advising the manufacturing taskforce Abbott is establishing.

In my conversation with Newman in July, he was convinced the RET and the carbon trading scheme were almost entirely to blame for the doubling of power prices since 2007, even though the Australian Energy Market Commission and every state government utility regulator had provided information that shows this is not accurate.

For this group, the logic is that renewables must require a price higher than what existing power generators charge, otherwise why would you need the subsidy from the RET?

Now, this is true for that portion of power we get from large-scale new renewables (currently about 7% of electricity and rising to around 16% in 2020). But by adding extra supply with near-zero operating costs to an already oversupplied power market, it also acts to depress the price received by the remaining, far larger portion of our power coming from fossil fuel generators. As Environment Minister Greg Hunt’s new adviser complained in a submission while he was an employee of the owner of some large coal and gas power generators:

It [the RET] imposes highly subsidised energy into the generation mix, the result of which will be a reduction in the wholesale energy price … Customers certainly potentially face lower wholesale energy costs as a result, at the expense of existing investors [in existing power generators].”

Now, on top of this reduction in the wholesale price, energy intensive manufacturers are granted an exemption from between 60-90% of the subsidy cost to support the extra renewables. So, for those manufacturers where electricity costs are significant to competitiveness, they get to capture savings off every unit of electricity they buy while only paying around 10-40% of the subsidy cost associated with the small proportion of electricity produced from renewables.

For example, imagine a smelter purchases 100 megawatt-hours of electricity. Of that, 16% is renewables receiving a subsidy of $60 per megawatt-hour (current market price is actually $35) which represents an extra cost of $960. But because the smelter is deemed to be energy intensive it is exempted from 60% of the cost and pays only $384 extra. At the same time the extra renewables supply pumped into the power market has reduced prices across the entire 100 megawatt-hours the smelter purchases by $5 (energy market analysts have estimated wholesale price reductions in this realm) representing a total saving of $500. Overall the smelter’s power bill is $116 lower ($500 minus $384).

Now, of course, this isn’t much fun for investors who own the other power generators that see power prices go down. As Industry Minister Ian Macfarlane observed in the press conference yesterday:

… in terms of the RET review; we’re facing an enormous challenge in terms of an excess generating capacity in electricity in Australia. To be adding large quantities of generation into that situation has to be questioned. The review process will go through those things but as the Prime Minister says, in terms of the cost of energy, the fact that a coal-fired power station is dispatching electricity at a lower price now than it was five years ago …”

Did you hear that? Coal power stations are suffering lower prices because of excess generating supply. And the RET will add to that excess supply.

And you know what? Many of these poor old companies that own these coal-fired power stations bought them after the government had announced the enlarged RET in 2007. So they can hardly complain they didn’t know this was coming. Heck, they may have even paid discounted prices for the power stations because of the RET.

Every large brown coal generator in Victoria and South Australia, bar Yallourn, has changed ownership since after the enlarged RET was announced (AGL bought Loy Yang A, GDF Suez bought Hazelwood and Loy Yang B as well as gas power stations in South Australia, while Alinta bought Northern and Playford B).

Also, a large chunk of New South Wales’ coal generation capacity was acquired by Origin Energy and Energy Australia in recent times. Plus, the rest of NSW’s coal generators should also change ownership shortly.

Why on earth the government would take pity on these guys for declining power prices is anyone’s guess.

*This story was first published at Climate Spectator

9
  • 1
    tonyfunnywalker
    Posted Thursday, 19 December 2013 at 1:02 pm | Permalink

    An interesting review and recent experiences in the German energy market is an example where renewables are obsoleting conventional generation. Renewable energy beyond the capital cost is free and efficient, The SA and Vic brown coal fired turbines about 30% efficient boilers are relics of the early 20th Century and have depreciated away years ago. Even the Royal Navy converted to oil prior to WW1 to provide a game changer battle effectiveness V the Germans. These assets would have been written down in the due diligence at the period of takeover. The attractiveness in SA case was the Rate of Return guaranteed by the Olsen Government and maintained by Wran. Electricity prices are a function of gold plating of the distribution system and State Government bonuses. Power usage is declining generally - the PR education campaign for more efficient use of power worked was effective in the both the domestic and commercial environment.
    Consumers were made aware of their carbon footprint and did something practical about it. Businesses are increasingly carbon neutral so this simplistic view by Abbott and Newman is baseless.
    In Spain renewable cheap power is being used as an incubator for new industries and new businesses and in a country where manufacturing is also at an ebb. A cheap energy renewable generating capacity in Northern Adelaide could attract the very industries needed to employ the Holden Workforce.
    But this is all wishful thinking of course.

  • 2
    drmick
    Posted Thursday, 19 December 2013 at 2:02 pm | Permalink

    The nsw government is still ensuring that all the blame for the extra %10 on our power bills is sheeted home to the former federal government by stating that fact on our power bills; strategically avoiding to also notify the bill payer that the other %95 of the 200% rise in the cost of power is courtesy of he state LNP government.

    Imaging how much cheaper our bills would be if they were not so greedy, not so insistent that we use their dirty power and not be so beholding to the power companies that helped them get into power federally. They did this a few years ago with the water supply during the drought. People stopped using water as instructed and alarmed a t the drop in usage, and there fore profit, the government put up the price of water.

  • 3
    klewso
    Posted Thursday, 19 December 2013 at 3:14 pm | Permalink

    If Toady’s mates and sponsors in the power industries can’t make a buck from it, why would he support it?

  • 4
    Rubio Diego
    Posted Thursday, 19 December 2013 at 3:49 pm | Permalink

    When it comes to Abbott and his appointments it is much more accurate to believe the exact opposite to what they are saying !

  • 5
    Stephen
    Posted Thursday, 19 December 2013 at 4:55 pm | Permalink

    For a national leader, Abbott’s loony remark about the “forest” of turbines at Lake George was beyond belief.

    Even before he was elected, the Commonwealth and states had already done their bit to help the coal-fired power companies, steeply reducing home solar-power rebates.

  • 6
    Electric Lardyland
    Posted Thursday, 19 December 2013 at 5:25 pm | Permalink

    A quick translation of Super Tony’s comments about being “an affordable energy superpower”, this surely means: we’re gonna mine coal like there’s no tomorrow.

  • 7
    drmick
    Posted Thursday, 19 December 2013 at 6:18 pm | Permalink

    Gee it would be nice if there was balance in the reporting. The wing nut windmill witch rides into town to unsettle the unbalanced, with offers of cash, and an explanation for their failure as a human. Bingo. the diagnosis of “anti wind power payoutitis” or “windus compensatorus removum or elesus” replaces a lets suck it and see attitude with a, “this disease could set me up for life” attitude and the idea dies on the dollar.

  • 8
    Scott
    Posted Thursday, 19 December 2013 at 11:21 pm | Permalink

    I’m surprised Abbott is not using the RET to negotiate to get rid of the carbon tax. Why not say to Greens and Labor, I will set the Renewable power percentage (or RPP) to 0 unless you get rid of the carbon tax. The RPP is the amount of an entities power purchases that must be covered by the LG Certificates. Currently it is at 9.15% but can be changed at the environmental ministers discretion, so no legislation required.
    I wonder what the greens and co would say? And the figures you are quoting are for 2020…that will be when the wholesale prices have dropped by potentially $5 a MWH. Currently it is no where near that much..most modeling is pointing at cents rather than dollars for the savings to wholesale prices as of 2013.

  • 9
    MJPC
    Posted Friday, 20 December 2013 at 7:51 am | Permalink

    One only needs to look to the Rocky Mountains Institute website to see that the age of coal and oil is coming to an end despite loyal foot soldiers like Abbott and Hunt and their energy industry mates holding on.
    What will be said by future generations when they see comments by the now PM that Australia will be an affordable energy superpower by selling coal to damage the earths inhabitability by increasing C02 emmissions; it’s just plain criminal neglect if not gross stupidity; Revolution Now!

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