We have gone from having close to the cheapest electricity in the world to among the most expensive. We have all the feeder stock we need — coal, gas and uranium — yet electricity prices have doubled in a decade.
The Australian Energy Market Operator report released this week on the reliability of the electricity system points to the reasonably high likelihood of demand exceeding supply in South Australia and Victoria in the coming summer, with reliability a continuing issue for the next few years in these two states. After 2022 and in the event of the closure of the 2000-megawatt Liddell coal-fired power station in the Hunter Valley, the reliability of the supply of electricity in NSW becomes increasingly problematic.
These predictions of the AEMO come notwithstanding a veritable torrent of investment in intermittent, renewable energy in recent years. At the present rate, we should hit the target of 33,000 gigawatts hours by 2020, although the requirement of back-up for these projects will generally be observed in the breach.
What has happened is a higgledy-piggledy flow of projects, mainly bunched in SA and Victoria and generally located a long way from the established grid. The early wind farms, which were encouraged by virtue of renewable energy certificates and various state government incentives (enabling planning approvals and payroll tax concessions), actually made the system more unstable because of their failure to incorporate the required software.
But here’s the thing: the greater the penetration of renewables, the more unreliable the system becomes even with the latest software being in place. This is not just about the laws of physics (which AEMO emphasises) but the fact that most of eastern Australia shares the same weather patterns, so any gains from heterogeneity (dissimilar weather patterns) are very small.
However, the kicker is the fact renewable energy, with its preferential dispatch status and low operating costs, sends dispatchable power plants into early retirement and kills off the incentives to build new ones. Note that since 2011 nearly 6000 megawatts of coal-fired plant capacity has been withdrawn from the market, or close to 12 per cent of total capacity.
Now the point is often made that we have reached this appalling position — high-cost, unreliable electricity affecting, in particular, the competitiveness of our heavy industries — because of very poor government policy.
But whether the outcome was entirely unintended is not so clear-cut. From the time John Howard introduced the first version of the renewable energy target, it was a one-way street to more subsidised, intermittent renewable energy and an investment strike in dispatchable energy. This was the aim; it could not have been otherwise.
To be sure, there has been plenty of toing and froing in the policy space. The carbon tax, at the ludicrously high figure of $23 a tonne of carbon dioxide-equivalent in 2012-13 (rising to $24.15 the next financial year), was a high water mark of stupidity. Don’t forget this tax, which was nearly three times the EU price, was imposed in combination with a ludicrous RET of 41,000 gigawatt hours.
That the tax was abolished and the RET wound back by the Abbott government meant that imminent disaster was averted, but the future possibility was not removed entirely.
Sadly, most of the expensive apparatus attached to the carbon tax policy, such as the Clean Energy Finance Corporation and the Australian Renewable Energy Agency, survived, chowing down taxpayer money at the rate of knots to be handed out to the green panhandlers that have flourished in this environment. We also have to put up with the pointless but prejudiced Climate Change Authority.
There have been some major porkies told about energy policy, such as the one about wholesale electricity prices falling upon the renegotiation of the RET in 2015. The assumption there was that there would be no retirement of coal-fired power stations until 2040. Yes, pigs might fly; it’s just unclear why the politicians didn’t cotton on….
Forget all that tosh about needing investment certainty: this is just code for a continuing subsidy arrangement for renewable energy.
The most pressing need of the government is to secure the future of dispatchable electricity generation and to do so at reasonable prices. Everything else is a side-show.