With his bid to buy AGL, an Australian energy giant, and transition it to renewables, Mike Cannon-Brookes shows he does not understand the broader operating characteristics of the electricity market.
The early retirement of coal fired power stations will drive up the cost to consumers for electricity. This is because of the requirement to invest billions in transmission infrastructure and expensive batteries. This investment would be made over a much longer period if a better managed transition plan to ensure reliability is implemented.
The NEM (National Energy Market) still has a mixture of private and public players but there is now a great deal of intermittent energy in the system requiring backup. While much attention is paid to wind, the bigger recent factor has been solar, with its rapid penetration, particularly rooftop solar, and its falling cost.
As a result of this development, the system has become increasingly unstable and the Australian Energy Market Operator (AEMO) regularly is forced to intervene in the market. Its latest planning document, the contentious Integrated System Plan, envisages even greater take-up of renewable energy but has nothing to say about the impact on prices.
There is now no generation facility that has been or can be built without government assistance. Government intervention has destroyed the efficient, market responsive low-cost electricity market created as a result of the competition reforms and privatisations introduced in the decade and a half from 1985.
Without government intercession, this model in the post 1995 NEM delivered low priced, reliable electricity with new plants coming online in a timely manner in response to market opportunities.
The market excluded payments for spinning reserves and other features that were taken for granted under a coal dominated system, but which are not provided by wind and solar. Nonetheless, these distortions were not too serious to prevent efficient markets to operate.
This pattern was broken by subsidies to renewables.
The apparent price advantage of renewables when they are available is because of the annual $7 billion (US$5 billion) of subsidies paid by the government. This has undermined the base load advantage of fossil fuel power which is not suited to intermittent operation.
The transmission lines serving renewable supplies are also less intensively utilised—and hence more costly on a per MWh basis—than those supplying co-located hydrocarbon plants. This is because large scale solar and wind also carry higher transmission costs.
Their intrinsically lower density power and irregularity means they need some threefold the transmission capacity that coal requires.
The subsidies, without which the growth of wind and solar would be impossible, are effectively doubling the revenue that wind/solar receive. The renewable energy industry’s lobby group, the Clean Energy Council, recognises that even subsidies that amount to half of wind and solar revenues are inadequate to allow those electricity supply sources to expand.
Among further support, the Clean Energy Council is calling for an additional “$20 billion fund to leverage private sector investment in grid infrastructure.”
Following the privatisations and competition policy reforms 20 to 30 years ago prices hovered around $30 to $40 per MWh (US$22 to $29). Prices are now in excess of $60 per MWh and will rise further with the acceleration of the retirement of coal fired plants.
AEMO is influenced by the research of CSIRO which supports the idea that wind and solar have lower costs than coal and gas.
CSIRO’s conclusions are highly disputable. If they were true, we would not see the increased development of coal and gas plants in third world countries.
By their actions, the key rapidly growing countries including China, India, Indonesia, and Vietnam are rejecting measures that would force the substitution of coal and gas by wind and solar.
In adopting such market-based energy policies, these countries are becoming more competitive than those in the “first world.” Energy intensive industries are therefore migrating to them.
Australian government policy is to reach zero emissions by 2050. Government intervention in the market has resulted in distortions and price increases. These were not anticipated as the information used to arrive at those decisions was faulty. The complexity of the market currently makes it very hard to make competent investment decisions.
This is exacerbated by new entrants such as Cannon-Brookes making bold statements not supported by reality.
We need to take a breath and carefully plan the future to guarantee a reliable supply of electricity at an affordable price. This will happen when the government reduces its intervention policy and sets clear goals with which the market can react.