Debunking the myth of low-cost renewable energy is a step towards restoring secure, reliable, and affordable power for all Australians, writes IPA Senior Fellow Kevin You.
Political leaders and their consultants regularly claim that renewables, particularly wind and solar, are the cheapest forms of energy. On this basis energy consultant RepuTex claimed in December 2021 that, under an Albanese Labor government’s renewable transition, “annual average retail bills are projected to be $275 lower by 2025”. This would have been the equivalent to a decrease in energy bills of 18 per cent. Rather than decreasing, however, between the December quarter of 2021 and the June quarter of 2024, retail electricity prices increased by roughly 20 per cent. This increase coincided with the sprint towards greater dependence on renewables after the historic commitment, made by then Prime Minister Scott Morrison in October 2021, that Australia would reach the arbitrary target of net zero carbon and carbon equivalent emissions by 2050.
This was followed by Labor’s election commitment in Rewiring the Nation to achieve 82 per cent renewable generation in the National Electricity Market (NEM) by 2030. In government, that commitment was embedded in the energy system’s Integrated System Plan. This was analysed by IPA Executive Director Scott Hargreaves in his Winter 2022 IPA Review article, Unrealistic Unreliable Unaffordable. The title makes his findings abundantly clear.
In contrast to the desktop modelling of analysts and consultants from RepuTex and the Commonwealth Scientific and Industrial Research Organisation (CSIRO), actual data from the Australian Bureau of Statistics (ABS) shows that the more renewables, the higher the price. This is consistent with the lived experiences of Australian families, workers, and businesses continually struggling with Australia’s ongoing cost-of-living crisis.
But the ABS consumer price data only highlights one part of the problem arising from the increased reliance on renewables. It hides another critical issue, namely the reduction in supply reliability. The reliability crisis faced by Australia’s electricity grids was brought to the surface by a number of panic-ridden ‘Electricity Statement of Opportunities’ reports for the NEM by the Australian Energy Market Operator (AEMO) subsequent to the rollout of Rewiring the Nation.
Addressing renewable-induced reliability problems, as highlighted by AEMO, will require even more price hikes, which will have the flow-on effect of pushing up the cost of consumer goods and services, from parcel deliveries to housing developments.
AN ACCOUNTING TRICK
The claim that renewables are the cheapest form of energy is based on the Levelised Cost of Electricity (LCOE) estimate: a financial metric used by the CSIRO in its annual GenCost reports. LCOE is an assessment tool grounded on the financial framework for assessing a project’s net present value, which calculates expected future profits from an investment, by expressing them in today’s dollars using an assumed interest rate. This metric is used by investors to assist their decisions about investing in a new asset, project, or business venture.
The CSIRO’s LCOE approach utilised a variation of this analytical method to justify the government’s drive towards a renewable-only future. Rather than model the expected profits of a project, an LCOE calculation rearranges the terms of the net present value calculation to yield an estimate of the average electricity price that a new generating asset must command throughout its operating life to break even. The methodology used by the CSIRO’s GenCost reports assumes:
- an unrealistically high capacity factor for wind and solar, compared to baseload generators.
- transmission and storage facilities to support wind and solar come free from the heavens (an assumption partly rectified in the most recent report due to the public and expert backlash).
- nuclear power stations must shut 40 years earlier than normal for no given reason.
- all existing coal-fired power stations should be flattened and need to be rebuilt from the ground up if we are to continue using coal.
Coal!Photo: Paul Downey
Should all these artificial assumptions hold true, then wind and solar could—possibly—be shown to be the cheapest form of energy. In a similar vein, if all coal-fired assets were flattened and their sites (complete with transmission connections and skilled workforce) made unavailable for use by future nuclear generation facilities, then it might also be possible to argue that nuclear energy is too expensive for consumers. Alter the assumptions to better reflect reality and the outcome is very different.
IPA analysis of the application of the LCOE metric in the CSIRO’s studies, outlined in the working paper Issues with levelised cost of electricity, released in April 2024, concludes that:
LCOE accounting fails to explain the actual cost of electricity seen in Australian families’ ever-increasing energy bills. And it says nothing about the value of being able to produce electricity on demand.
CSIRO’s LCOE is inherently biased towards projects with lower upfront costs (such as renewables versus, say, nuclear) and was applied in a way that fails to capture the cost of the supporting infrastructure necessary for variable renewable energy (wind and solar) to adequately replace dispatchable power. This is why Federal Opposition Leader Peter Dutton rightly dismissed the CSIRO’s methodology as having been discredited.
International data, analysed in the IPA report Liddell The Line In The Sand, published in May 2023, reveals a strong positive relationship between the share of wind and solar in a country’s electricity system and the retail price of electricity in that country.
The IPA’s report further noted:
Germany’s Energiewende policy has been held up as the wunderkind of the bold transition to renewable energy. But instead of being the inspiration for a global renewable energy movement, Germany serves as the perfect example of problematic policy-led energy systems … Germany’s energy policy has been an exercise of replacing what worked with what people hoped would work. The outcome has been higher prices, reduced economic growth, and increased risk to the nation’s energy security.
This is the danger facing Australia’s energy system today as state and federal governments seek to replicate Germany’s disastrous experience.
HIGHER PRICES
Data from Australia’s NEM shows that, between the first quarter of 1999 and mid-2023 (the most recent data at the time of writing), there was a positive and statistically significant relationship between increased renewable penetration over time and wholesale electricity prices in Australia’s main electricity grid.
On the other hand, there was a negative and statistically significant relationship between the share of electricity output from coal and wholesale prices. Simply put: the more renewables, the higher the price; the more coal, the lower the price.
Coal is being driven out of the wholesale electricity market by the influx of renewable energy because the design and operation of the market, at present, do not put a price on dispatchability. At times of high wind and ample sunlight, coal generators cannot compete with renewable generators because the latter offer such a low price to retailers (by swamping the market with unwanted energy) that they often clear the market in negative territory.
In other words, they pay retailers to take away their energy because demand is insufficient to absorb unwanted excesses in wind and solar supply.
At times when the wind does not blow and the sun does not shine, baseload generators can receive the spot price—but they are not otherwise compensated for the stability they provide to the grid. This is because the market was constructed without the understanding that governments would have to impose intermittent sources of generation on the electricity grid on a massive scale. The higher cost of wind and solar, however, goes beyond what is reflected in the wholesale trend. The wholesale component only makes up about a third of a consumer’s electricity bill, as shown in Chart 3.
The chart above shows just how small a component the ‘retail margin’ is. It is therefore absurd to blame ‘price gouging’ for high prices. The majority of an electricity bill is made up of the combination of network and environmental costs—which includes the burgeoning cost of integrating renewables into the energy grid.
RENEWABLE COSTS UNDERSTATED
Building and maintaining transmission towers, distribution channels, and energy storage facilities is not cheap. The cost of land acquisition alone is tremendously high, not to mention the labour of skilled technicians and the specialised equipment necessary for each project to commence. But renewable advocates have been at pains to ensure the public is unaware of these astronomical costs. Rather, they argue that because the marginal cost of wind and solar is zero on paper, they must be the cheapest forms of energy.
There is, actually, a kernel of truth in the claim about cheap renewables. In times when they are not needed, wind and solar are so cheap they have evidently become a worthless nuisance, so much so that grid operator Ausgrid has started to impose a fee on its customers for dumping unwanted solar energy onto its grid: just as council rates pay for the removal of garbage.
The lowest cost electricity system is the one we have.
As reported in Nine’s A Current Affair, in June 2024:
The ‘sun tax’ will soon charge solar panel owners who send their extra electricity back to the grid at peak times, typically during the day. The tax was developed to reduce congestion in the electricity network, which is grappling to handle the influx of power being sent to the grid at times of high demand.
The imposition of the ‘sun tax’ exposes the folly of equating zero marginal cost with ‘cheap energy’. Without the infrastructure needed to process sunlight and wind into something useful, their energy cannot be converted into electricity.
IPA Visiting Fellow in Energy Security, Stephen Wilson, notes:
Customers pay for what they use, but far more of what we pay is required to cover the costs of the physical infrastructure, from generation to our meter, than for generating the electricity itself. To expose the full costs of providing electricity, we need to focus on Total System Cost.
Professor Wilson’s report, The Ruinous Cost of Free Energy, published by the IPA in July 2024, finds that, if the Total System Cost of electricity production, transmission, and distribution is taken into account:
- The main power system that Australians inherited on a foundation of low-cost coal can provide bulk electricity in the $50 per MWh cost zone. This is in line with the average quarterly wholesale (NEM) electricity price during periods when solar and wind made up below 10 per cent of grid generation.
- Peaking gas, which helps to stabilise the grid and marginally costs roughly $10 per gigajoule for a generator, corresponds to the $100 per MWh wholesale electricity cost zone.
- Empirical study estimates that a system which relies on renewables, backed up by expensive storage mechanisms such as the Snowy 2.0 and the contentious Pioneer-Burdekin pumped hydro dam, delivers electricity in the $200 per MWh cost zone.
Given the limitations of baseload sources of power (such as coal and nuclear) with regard to their ability to fluctuate energy production on demand, some use of peaking gas and hydro is unavoidable. But marching towards a $200 per MWh wholesale cost zone is a decadence Australian families cannot afford to finance. Neither can they afford the $9 trillion price tag that a renewable transition carries, according to Net Zero Australia’s final modelling—or the instability and energy insecurity inherent in a renewable-based electricity system.
A renewable-based or renewable-only electricity system requires the dismantling of the electricity system that has delivered the prosperity and abundance Australians have taken for granted for generations. The outcome of such a process would be the blackouts and blackout risks that states such as Victoria and South Australia have experienced since the Morrison government committed to the policy of net zero emissions by 2050.
Wilson’s analysis concludes:
The lowest cost [electricity] system is the one we have, and the next lowest cost system is one built on
new baseload power plants, whether they be coal or nuclear.
AUSTRALIANS DESERVE HONESTY
Australian governments owe the public an honest explanation as to why they champion renewables over other sources of energy, such as coal and nuclear. If their justification rests on the wisdom of emissions reduction and limiting global warming, then they should welcome:
- a debate about the role of carbon dioxide (CO2) in warming the planet.
- an assessment of how much Australia contributes to global emissions.
- an appraisal of the value of nuclear as a baseload, low-emissions source of electricity.
The concentration level of CO2 in the atmosphere is at roughly 420 parts per million (0.042 per cent). It has been argued that about a third of the volume of CO2 currently in the atmosphere is attributable to human activities. Australia’s share is comparatively miniscule. The effect of additional carbon dioxide on the climate is highly contested. But even if the effect were significant and detrimental, reducing Australia’s greenhouse emissions would not make a material difference, in light of its miniscule contribution to overall emissions.
End this doomed experiment.
Australia contributes roughly one per cent of global emissions, and Australia’s share of the man-made global cumulative CO2 in the atmosphere also adds up to about one per cent. In contrast, China emits well over a quarter of the world’s share of greenhouse gas emissions. China emits more carbon equivalent emissions every two weeks than Australia does in a year. China, India, and the United States combined annually produce more than half of the world’s entire anthropogenic greenhouse gas emissions.
Reducing Australia’s greenhouse gas emissions from one per cent to zero per cent of global emissions will have either a negligible or no effect on the climate. If price, and therefore the market viability of different sources of energy generation, is of primary concern (rather than the impact of emissions on climate), then the government should allow the market to decide what energy mix it wants. That means allowing renewables to compete fairly against other forms of energy in the market. It means repealing the nuclear ban as contained in Section 140A of the Environment Protection and Biodiversity Conservation Act 1999 (Cth).
Australia’s reckless sprint to a renewable-based energy system is unjustifiable on the basis of climate impact. It is also unjustifiable on the basis of economics. Yet renewable proponents, including the federal government, have sought to hedge their bets and launched both the climate and economic arguments—hoping for the public to be receptive to at least one of them. While one can only admire the creativity of their accounting and the brazenness of their arguments, neither contention is consistent with observed reality.
CHEAP RENEWABLES ARE A MYTH
The claim that renewables are the cheapest form of energy is a myth detached from reality and the lived experience of Australian families. It is inconsistent with observed data, and the taxpayer-funded subsidies needed to maintain renewables’ low-cost appearance are increasingly unsustainable. Australian families are being gaslit by the political elites and media establishment about the cost of renewables and told to ignore their struggles, while power prices continue to rise with increased renewable penetration.
There are, indeed, times when solar and wind are cheap—so cheap, they are unwanted and effectively worthless. Australian families are expected to pay good money to dispose of unused solar energy as they might pay cleaners to dispose of garbage. And when they are needed, wind and solar often fail to perform.
Australia’s electricity grids cannot be dependent on the vagaries of the weather. After three years of net zero policy failures, during which renewable penetration escalated along with power prices, it is now time to formally put an end to this doomed experiment. Australia must adopt an agnostic approach to energy. On behalf of Australian families and businesses, policymakers must prioritise security, reliability, and affordability above all other goals.
This article from the Spring 2024 edition of the IPA Review is written by IPA Senior Fellow Kevin You.
