The truth about soaring power prices: wind and solar not to blame.
By ABC business editor Ian Verrender
Between them, however, competition kahuna Rod Sims and Prime Minister Malcolm Turnbull last week demolished an old chestnut about renewable energy: it is not the cause for the recent spike in electricity prices.
In fact, according to both, it has had very little impact.
For the past decade or more, we’ve been bombarded with the message from a vocal but powerful minority within Parliament and the broader community that the switch to renewable energy has made Australia uncompetitive, crippled our industry and driven power prices higher.
The real issue is that, fundamentally, they don’t believe climate change is real or that humans have adversely affected the planet.
Having spent so long denying science and rejecting the overwhelming body of evidence, they’re now being forced to ignore economics; that renewables have become a cheaper longer term power source.
Coal is the future, they argue.
Coal-fired generators have no future here
That’s simply not a view shared by the power generators, whose primary motivation is to turn a profit and stay in business, or the banks who must finance them.
Nor is it a view shared by BHP, the nation’s biggest company that built a large part of its wealth on coal exports.
Last week, it confirmed it was reviewing its membership of the Minerals Council of Australia because of “materially different positions” on issues such as a Clean Energy Target and climate change.
Technical innovation around renewable energy generation has seen costs plummet.
So much so that US investment bank Goldman Sachs — hardly a standard bearer for radical ideology — now argues that, rather than pushing power costs higher, renewable energy is the cheapest form of power generation.
More on that later.
The truth about the power price spike
As the theatre over keeping open the creaking Liddell coal-fired power station in NSW’s Hunter Valley played an encore last week, the ACCC boss and the PM delivered a few sobering nuggets.
First, there was Rod Sims at the National Press Club in Canberra on Wednesday: “Forty-one per cent of the increase in electricity prices over the last 10 years has been in network costs and we keep forgetting that.”
He went on: “Those poles and wires that run down your street are the main reason you are paying too much for your electricity.”
Video: Rod Sims addressed the National Press Club on “Australia’s Gas and Electricity Affordability Problem” (National Press Club)
According to Mr Sims, extra retail charges account for 24 per cent of the higher prices while higher generation costs as a result of a failure to invest make up 19 per cent of the price hikes.
Green energy initiatives contribute just 16 per cent to the recent price hikes.
On Thursday in Brisbane, responding to questions, the PM concurred, explaining that “particularly for retail customers, the largest single part of your bill is the network costs.”
“That’s the poles and wires basically,” he said.
Gas, not coal, will fix prices
The short-term fix to Australia’s soaring electricity prices is to fix the gas crisis, but long-term fix it’s greater investment in renewables and energy storage, writes Ian Verrender.
But then he elaborated on the more immediate issues, particularly around generation and the changes that have been foisted upon consumers.
“In terms of the green schemes, they do have a cost but it is a relatively small cost,” he said.
“Gas is the biggest single fact at this point in time.”
What does gas have to do with it? As the PM explained, the electricity price is set by the last generator to come into the stack.
It’s what economists call the marginal cost of production. You might be to meet half the demand at low price. But it is the expensive bit at the end that determines how much a producer will charge everyone.
When it comes to electricity, gas is that last final element.
“It is peaking power,” the PM said. “The increase in the gas price has increased the cost of electricity.”
The gas debacle
Gas prices haven’t just increased. They have quadrupled.
And the tragedy is that Australia, with one of the greatest reserves of gas on the planet, now charges its households and businesses far more to use that energy than the countries to which we export.
Gas forgotten in energy debate
As politicians continue trading barbs over the merits of renewable energy versus coal-fired power generation, missing from the debate these days has been the role of gas.
With the continued reversal of policy on carbon pricing and climate change, the unofficial industry consensus was to build solar and wind generation with gas-fired back-up to shore up reliability; a decision affirmed by the chief scientist Alan Finkel in his report on how to cope with future challenges.
But three major export terminals were built at Curtis Island just off Gladstone in Queensland, with Santos building a plant that required far more gas than to which it had access.
To fulfil its export contracts, it began sourcing gas previously destined for the domestic market.
That forced the price of domestic gas sky high just as a global glut sent international prices crashing.
It’s now cheaper to buy Australian gas in Asia. A fortnight ago, gas from West Australia’s giant Gorgon project was sold to India at $8.70 a gigajoule. East coast gas sells here for $17.50.
That’s why the Federal Government has shanghaied gas producers like Santos to direct export gas back into the local market.
If Australians could get the same deal on our gas that Indians have secured, our electricity would be much cheaper.
Renewables or coal: What is the cheapest?
A line chart showing the price of LCOE dropping dramatically since 1983.
When it comes to cost, coal lobbyists usually refer to the subsidies doled out to the renewable sector to argue the industry wouldn’t exist if it had to stand on its own.
That’s a valid point. But it overlooks two things; the vast billions handed out to the coal industry and the increasing competitiveness of renewables.
Every coal fired generator in Australia was built, not just partially subsidised, entirely with taxpayer funds.
When they were privatised, many were given state owned coal mines with contract prices way below market, effectively a further subsidy.
Then there are the health costs.
A health study in the Latrobe Valley last year identified much higher respiratory and asthma admissions to hospital than the Victorian average while life expectancy was significantly lower than the state average.
But it is the cost of energy generation where the game really is changing.
As the Goldman Sachs graphs above show, renewable energy costs have plunged by up to 70 per cent since 2009 and will be the cheapest form of generation in Europe this year and in the US within eight years on a levelised cost basis.
When the cost of installation is taken into account, however, the story changes.
Wind and solar are much cheaper. Not only is the fuel free and faces no regulatory risk — in the form of a carbon price — but the technology is simpler and quicker to install.
Australia’s chief scientist Alan Finkel went one step further. He factored the extra costs of adding gas or battery backup to ensure stability or baseload power in the system.
Wind still came out cheapest, with solar only marginally more expensive than black coal.
Renewable plants can be built within one to three years while coal-fired plants take between four and seven years to build.
Putting aside arguments about climate change, the main problem with coal-fired electricity is that the numbers no longer stack up.
It’s too expensive, it has much higher regulatory risks and renewable technology is rapidly advancing.
It will take more than a taxpayer subsidy to build one here. It will need a full taxpayer handout. And it will result in more expensive power bills.
Coal is simply a form of stored solar energy. New technology has delivering cleaner, more efficient and cheaper ways to directly harvest solar energy to power our lives.
Don’t expect that innovation to stop.
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