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Apr 14, 2010

Energy prices will triple without a carbon price

Australians are being prepped for steep rises in energy costs. It's partly the result of the proposed ETS, but that's not quite the whole story, writes Giles Parkinson.

Australians are being prepped for steep rises in energy costs — partly the result of the proposed emissions trading scheme. But that is not quite the whole story, according to Grant King, the CEO of Origin Energy.

He thinks the price of energy to consumers might be three times the current tariff by 2020 — a situation not inflated because we might have a carbon price, but because of the real possibility that we won’t have one.

King is one of the most refreshing of speakers about Australia’s energy future because he has a broader vision of the energy challenge than most and can explain it in layman’s terms. Granted, he does have a strong interest in pushing the case for gas, and his company has got a lot of it to sell from the coal seam gas reserves in Queensland.

He also avoids some of the shrill claims and doomsday scenarios that have blighted so much of the energy debate in this country. And the most important myth he dispels is the idea we will somehow run out of power and the lights will go off.

It won’t happen, he says, because companies like his will invest in the sector and stand ready to do so. It’s just that those investment choices will be made at the greatest efficiency and the lowest risk of capital in light of the prevailing policies, and in the absence of certain policy drivers, most notably a carbon price, that will almost certainly result in higher costs to consumers.

The second myth he strives to dispel is that building out Australia’s energy requirement is somehow going to be too hard. It’s not, he says, because the task is no more daunting than what has been achieved in the past 40 years, both in terms of population growth (90 per cent) and energy consumption (about 600 per cent).

It’s merely a question of how we want the final mix, and that will be influenced not just by the nature of the policies, but their timing.

In a speech to CEDA in Sydney on Tuesday to mark the launch of the “Vision Series”, King made some interesting observations about the two policies that are in place — the 20 per cent renewable energy target by 2020, and the pledge to cut 5 per cent in emissions.

And his take was that we will have trouble meeting either target, but particularly that of emissions reductions, because of the absence of a third policy — a carbon price.

On the RET, King has some sobering views on the ability of other energy sources to help meet that target: large scale solar is a long way away from being cost competitive, and geothermal is unproven and unlikely to contribute much before 2020. That leaves pretty much wind, and wind only, to meet the RET, and King estimates that 7000-8000MW of wind turbines will be needed to meet the RET, and will need to be “balanced” by up to 6000MW of open cycle gas plants, which can be fired up quickly to meet peak demands.

“And that will have a profound impact on our entire generation system, both in terms of its operation and, ultimately, in terms of its cost,” he says. “And our contention would be that is largely yet uncosted into the price of renewable energy.”

As for other clean energy sources that could help Australia meet its 5 per cent emissions reduction target, King says carbon capture and storage will likely be “incredibly expensive” and unlikely to contribute much before 2030, and nuclear, not even on the political agenda, could not possibly be an option before 2020, or even 2030.

“You cannot build or permit many of the technologies that people are talking about in that timeframe, and you certainly wouldn’t take on the risks attached with many of the emerging technologies in that timeframe.”

Furthermore, he notes the absence of a carbon price will mean the economic case for most renewables is not sustainable over the longer term. Even in wind, he notes, there was a real risk that no carbon price beyond the end of the RET in 2020 could create stranded wind assets — something of an irony in the current debate over coal-fired power stations.

The other great hope for Australia to reach a 5 per cent emission reduction target is through energy efficiency, but King has serious doubts about that, despite the improved efficiency of many household appliances. King blames it on the hunger for large screen TVs, which he says are having an extraordinary impact on household consumption. And, he notes, air conditioning only has a relatively small market penetration but is growing quickly.

Even if we could achieve energy efficiency gains, the simplistic promise that this would save money may not hold true, King says, because it would not fundamentally change network costs, and may make them more expensive.

“To put in perspective what it might take to achieve that target of 5 per cent if the only levers we were willing to pull was energy efficiency — so how much energy people used in their homes — and the renewable energy target, we would need to see a 20 per cent reduction in household energy consumption by 2020 and we would need to double the amount of renewable energy installed by 2020 — so from, say, 7000 to 14,000 megawatts of wind. Clearly, we don’t need that much generation in terms of the growth that we’re facing, so we would actually need to force the retirement of thousands of megawatts of coal-fired generation in order to do that.”

Sadly, he says, there are few signs that politicians have the resolve to address the issues.

“My fear is that our policymakers and politicians are fatigued by the challenge that we face and will not revisit the issue in the current electoral cycle.

“If it’s not revisited over the next few months and our parties don’t find an agreed way forward…for another four years, that means we will make the least risky decisions we can make and we will end up with a mix of generation and an electricity system that will not be what we want for the long term but will nonetheless be what we get as a result of the current policy environment.”

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17 comments

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17 thoughts on “Energy prices will triple without a carbon price

  1. Mike Seabrook

    then there is the gordon-below-franklin hydro scheme which if built would mean tasmania would no longer have to import victorian latrobe valley brown coal generated power to sell to the rio owned comalco aliminium smelter at heavy losses to the tasmanian treasury.

    a decision for mr abbott and mr rudd – if this is built , lake pedder could be unplugged and saved.

  2. Roger Clifton

    Did you notice how the language Origin’s CEO uses is similar to that used by the renewables fanatics? It may be that it is the other way around, that the renewables movement, that the gas industry supports, uses the language of its sponsor.

    You would have to do a doubletake when he speaks of a “great hope for Australia to reach a 5% commission reduction target…”. That is terribly false. We have to achieve elimination, not token reduction, of our carbon emissions. And that means that we must eliminate gas, along with other hydrocarbons.

    Unless the purveyors of solar and wind can solve the problem of storage, they rely on being able to offset high fuel costs of the main supplier. That is, renewables need gas.

    You’re sleeping with the enemy, guys.

  3. Michael R James

    I wonder how real is that statement that 7-8000MW of wind power needs to be “balanced” by up to 6000MW of open cycle gas plants” particularly remembering that King is in the business of gas. It is also something of a mis-statement to talk about wind forcing retirement of coal-fired plant when a significant fraction of that plant is having its expired licenses extended 20 years beyond what the authorities granted in the first place.
    Nevertheless there is plenty of unpleasant truth in this. No one ever suggests that alternative renewable power should be 100% wind. And yes a ten year horizon for both large scale solar and geothermal are no doubt realistic–but remember that is because of poor political support and head-in-the-sand future planning by 12 years of Howard government. Better though only marginally improved under Rudd. (Good to see another confirmation of the absurd waste of throwing billions at CCS, even if it will have little effect.)
    The main problem is that we may get the worst possible outcome–prolonged life of the dirtiest generators imaginable–and continuing price increases, without any clean alternatives.

  4. Jim Reiher

    Despite the legitimate concerns of others writing here, it is still refreshing to get an energy boss, talking sensibly about the need for a carbon price.

  5. Heliosphere

    The fact that wind power needs to be “balanced” by gas is one that I’ve seen talked about before, which makes sense as the wind doesn’t blow all the time (which can happen over very large areas, affecting even widespread wind power installations). And if you don’t want to have brownouts you have to have nearly all of the generating capacity available as short-notice backup, which seems to be mostly single cycle gas.

    I’ve seen some wind power critics say that the increased use of the single cycle gas plants necessary with large-scale wind power destroys a lot of the carbon emission savings. I would really like to know how wind/gas compares to modern combined cycle coal plants in that respect.

    I find it very frustrating that the debate on renewables doesn’t often get to that level of detail, and information that takes all factors into account is very hard to come by.

  6. vajras2000

    @ #Roger Clifton – “Unless the purveyors of solar and wind can solve the problem of storage..” we already have, and these solutions are called BATTERIES

    we have a 3.5kW grid system with battery storage for use during the evening (non-sun time to you) and live in a major urban coastal area. we export all surplus daily power to countless others and get paid quite substantially for so doing. Before the batteries we eliminated the entire power bill… after the batteries we make more money!

    Regarding the “gas” part – see this unique Australian manufacturer has more info
    http://www.cfcl.com.au/

    They recently installed a demonstration unit in Australia’s only 6 Star energy-efficient community development, VicUrban’s Aurora project.

  7. Roger Clifton

    “Feed-in Tariff” is a nice Orwellian term.

    On the face of it, it would seem to be the rate that an erratic supplier would be paid for the electricity he supplies into the grid, after subtracting his share of the costs.

    That should include the rent for the grid, the wages of the man who reads the meter, all those engineers who keep the service on track, and for all the office workers. And for any “public services” that the politicians impose upon the main electricity supplier. In particular a minor supplier to the grid should contribute to the interest on the capital cost of all that main generating plant, whether it is lying idle or generating the electricity you cannot supply. If ever you are to make gas redundant, you must progressively pay all of these costs. Even in your imagined moment of triumph you would have to pay the “stranded costs” of the now-useless gas turbines. While still making a profit, of course.

    On the benefit side, you may be entitled to the cost of the fuel you save the main supplier. Are you going to break even? Not with coal in Australia. Certainly not with nuclear, anywhere else.

    Now comes your friend and patron to the rescue. The cost of gas is going to go up threefold, and that’s even without a carbon tax. So that backyard shrine may well have a justification after all. It’s just as well you’ve been loyal to gas all these years. Now is the time for you to stand up and applaud your loyalty for years to come. Beyond 2020 and the end of the Mandatory Renewable Energy Target , in fact, according to the fine print in the article.

    Your loyalty to gas is important to them after 2020, because after MRET, no one is going to be forced be to pay for unprofitable supplies of electricity. Gas will stand alone, grotesquely expensive, an expense that we already know is going to go through the roof.

    A responsible government would have put in nuclear energy, years ago. There is still enough time to have the first nuclear plant generating by 2020, followed by a cascade of others in the few years beyond, making all those gas turbines “stranded capital”. That is, of course unless you reassert your pressure on your politicians to make sure that it is “not even on the political agenda”.

    Is that the loyalty of the renewables community? It is certainly not loyalty to the climate.

  8. Frank Campbell

    “7000-8000MW of wind turbines will be needed to meet the RET, and will need to be “balanced” by up to 6000MW of open cycle gas plants, which can be fired up quickly to meet peak demands.”

    and

    “that is largely yet uncosted into the price of renewable energy.””

    Precisely. Wind is a fraud on the environment and the consumer. And the harm done to thousands of rural residents – and the environment- is conveniently ignored by you all.

    I doubt if average backbenchers have a clue about the grid or power generation, but their masters surely do, in all political parties and the bureaucracy. They know wind is the largest fraud imposed on social democratic countries since 2000. Denmark’s nominal “20%” of wind has done nothing to reduce CO2 emissions for instance.

    The cruelty of the Thatcherite corporate state is something to marvel at. The shameless lying, the traducing of due process, the determination to crush the legitimate interests of its own citizens to pursue a bogus policy purely for (environmental) show.

  9. Flower

    “Denmark’s nominal “20%” of wind has done nothing to reduce CO2 emissions for instance.”

    Is that right Frank well that could be in keeping with the 20% of nuclear power in the US that has done nothing for CO2 emissions either. In fact the US, together with Australia and Canada, are the bad boys of climate change – really, really bad!

    Furthermore externalities of the nuclear fuel change pose a major risk to the environment and global economy and people are not fully aware of these risks, nor does the nuclear industry know how to deal with them.

    The long-term tailings’ leak at the uranium mine, Ranger, operating in the surrounds of Kakadu Park, is 5,000 times above the normal level and contains all the daughter products from the uranium decay series which amounts to about 15 different radionuclides according to the Supervising Scientist, Alan Hughes.

    The radionuclides include radium which has a half life of some 1602 years from memory and radon is the progeny of radium 226 which therefore makes radon (3.7 days half-life) emissions practically infinite.

    Meanwhile, still on the issue of externalities, the New Mexico Bureau of Geology & Mineral Resources recently reported that to date, two New Mexican uranium mills have been remediated.

    The Phillips Uranium Mill in Ambrosia Lakes cost $40 million to remediate 3.1 million tons of tailings, the Shiprock Mill cost $25 million to remediate 1.7 million tons of tailings, and Homestake Mill with its 22 million tons of tailings to remediate and the groundwater contamination will probably far exceed the $56 million suggested by the US NRC.

    There are many sites in New Mexico that require significant remediation. These include areas that may already have had some remediation such as Jackpile Mine and surrounding mines.

    “Many companies walked away from previous mining sites when the price of uranium dropped, leaving an environmental cleanup problem for the state and federal government. This will require a very large sum of money, possibly into the billions. Where will these funds come from?” asks the Bureau.

    Many billions of dollars of taxpayers’ money are required for environmental remediation around the planet because of nuclear. Nuclear power “too cheap to meter?” I don’t think so Frank.

  10. Roger Clifton

    Much of this squeaky-clean remediation of mine sites is done in full view of vast areas of farmland, where any suggestion of remediation back to forest would be met with religious fury. If you really are concerned for the face of the land, turn from the miners and confront the farmers.

    You can’t quote the fatality rate from uranium mining, because there isn’t one. Yet it could be replacing coal mining, which killed 2000 miners last year alone. Quoting a list of natural isotopes shouldn’t frighten us either.

    Overwhelmingly the worst human waste is carbon dioxide, for which there is no remediation. We’re just going to have to pay for the damage done to us by the injured atmosphere. That is, every year into the indefinite future, long after the generation that emitted it is dead and buried.

    Counting in millions of dollars will seem peevish when we start counting in deaths instead.