The Destruction By Government Of Australia’s Electricity Market

Written by:
1 July 2017
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Throughout the western world over the last 20-30 years in particular, we have witnessed the tightening hand of the state, which has become ever more bold in insisting where and how we live, who we can work for or employ, what we can say and think, whose car we can get into, whose home we can stay in, and what we’re allowed to put into our mouths.

But these remarks are about how government intervention has destroyed the electricity market in Australia and throughout much of the western world, and what it means for personal and economic liberty, now and in the future.

Let me start by outlining what a market should be, and how it should work with electricity.

A real market is simply a place where consumers and producers meet, and agree on a price and means to satisfy consumer demand.

A real electricity market is one open to all fuel technologies – coal, gas, uranium, wind, water or the sun. Where producers compete to grow market share and increase their profit based on efficient production, with all consumers – household and business – the winners.

A real market is one where producers, facilitated by government through the regulatory system, work to satisfy consumer demand.

To a large extent this is what we had throughout most of Australia until 2006, with a wholesale cost of electricity bouncing along at between $25 to $40 per megawatt hour – or around 3 cents an hour to burn 10, 100-watt lightbulbs.

States played to their strengths, with Queensland and New South Wales largely powered by black coal, Victoria brown coal and Tasmania hydro, with gas playing an important role, coming on to the market in times of high demand.

Blackouts occurred, but were rare and typically localised due to temporary power line damage.

Unfortunately what we now have, is anything but a real market, and it’s bipartisan, state and federal government decisions to use the electricity system to drive carbon dioxide emission reductions, at the expense of electricity affordability and reliability, that is largely responsible.

The major vehicle has been the national Renewable Energy Target, which started as a small industry assistance policy by the Howard Government in 2001 that aimed for an additional 2% of Australia’s electricity to be generated from renewable sources by 2010

Government programs of course rarely go away, particularly subsidy schemes, and the RET has since been expanded to aim for a 23% share of renewables by 2020.

Let’s be clear what the RET is – the federal parliament has passed a law forcing electricity retailers to buy renewable electricity.

Under the RET, new renewable generators like wind and solar farms, get paid twice for their electricity output – the wholesale market price at the time as well as the value of the Renewable Energy Certificate, currently around $80.

As they have this guaranteed second source of income, it doesn’t matter what the official price on the market is, because they still get paid a decent return.

As more and more solar and wind producers come onto the market, chasing the subsidies available under the RET, State Government power-purchase agreements where they guarantee to buy output from new wind and solar, or new programs like the Clean Energy Corporation’s looming solar thermal funding round, they are also destroying the market for everyone else.

Our coal power stations, which are responsible for 75% of the nation’s electricity have stopped investing in anything other than core maintenance and their owners are almost all talking about the dates they’ll close.

Given that electricity demand is constant, but wind and solar only work when there’s wind or sun, consumers and businesses are increasingly reliant on a smaller number of coal and gas fired power stations and the handful of interconnectors between the states to keep the lights on.

Between 2006 and 2016, retail electricity prices doubled, wholesale prices in some areas tripled and the three major retailers recently announced additional price rises of around 20% which actually started this morning.

The Australian Energy Market Operator is now talking about ‘demand management’ – which is code for electricity rationing – as a desirable response to limited supplies and we’ve had the South Australian Government getting stuck into BHP for not having their own power back-up at Olympic Dam.

Who else but government would say to their biggest customers – “you want too much!”

Access to affordable and reliable energy is the single most important reason for the massive decrease in the percentage of the world population living in poverty from over 94% in 1820 to less than 10% in 2015. The number of people living in extreme poverty declined by nearly 80 percentage points between 1981 and 2015 alone.

Affordable electricity is responsible for the increased production and safe storage of food, clean drinking water, the mass manufacture of clothing, the ability to heat and cool our homes and businesses, a better quantity and quality of housing, access to and safe storage of medicine, and the ability to transport ourselves around our local neighbourhoods, cities, countries, and internationally.

Unless as a planet we want to go backwards – this is why this debate matters.

Top 10 Facts to Keep in Mind

Putting the Australian market aside, there are 10 facts that I would like to highlight.

  1. World Demand for Fossil Fuels Including Coal is Strong

Let’s start with the big one, because the contrary argument is something the environmental movement promote all of the time.

According to last month’s annual BP Statistical Review of World Energy, coal, oil and gas are still responsible for over 85% of global energy consumption and together with nuclear and hydro 97%!

Despite the billions that’ve already gone into them, renewables represent only 3% of the world energy market. This equals around 11 days’ worth over the course of a whole year.

The International Energy Agency has predicted that world electricity consumption will grow by nearly 70% over the next 25 years and that more coal will be consumed for electricity in 2040 than today, even if countries keep their promises to the 2015 Paris Climate Change Agreement.

In 2040, coal, oil & gas will still be 74% of Total Primary Energy Demand or 84% with hydro & nuclear.

But let’s not just ask the independent forecasters – let’s also look at the details of what some renewables activists are saying.

Greenpeace found in early 2017 that a total of 62 countries are planning over 800 gigawatts of new coal-fired power stations, equal to over 30 times Australia’s current coal-fired capacity.

Bloomberg New Energy Finance last year found that global investment in new coal and gas power would be worth $1.2 trillion and $892 million respectively between 2016 and 2040.

And need I remind you that you need 800 kilograms of coal to make one tonne of steel and 220 tonnes of coal to make a single wind turbine.

  1. The Paris Climate Change Agreement Will Not Cut Emissions

The dirty little secret of the environment movement is that even in the unlikely event that all countries adhere to their Paris Climate Agreement promises, carbon dioxide emissions will still rise over the period to 2025 and 2030.

Putting aside differences of opinion about the effect of increased carbon dioxide levels on global temperatures and accepting the climate models, even though the Agreement aims to limit global temperature growth to within 2 degrees of pre-industrial levels and aspires to hold them to 1.5 degrees, in the unlikely event that all national pledges are honoured, temperatures will still rise by 2.7 degrees by 2100.

Listen to the language activists use.

China and India are NOT cutting emissions – in both cases, particularly China, their commitment is to cut their ‘emissions intensity’ which is basically an artificial construct of carbon dioxide per person – negated by a larger population and economic growth.

These two countries alone will counter the genuine emissions reductions pledged by the west, which just means a massive wealth transfer from west to east, for no environmental benefit.

In actual fact, the only thing driving emissions reduction in the west is de-industrialisation.

As is well documented, the reason Europe chose 1990 as the start of the previous Kyoto Protocol was that it allowed it to count the collapse of industry following the fall of the Soviet Union in 1991.

Emissions reduction in Europe has actually stalled in the last two years and pretty much the only country that has cut emissions is the United States because of fracking and substituting gas for low quality coal – not the embrace of renewables.

  1. China and the Developing World are Not Going Renewable

Neither China nor India are dropping coal or gas power.

Yes, China is closing over 1,000 coal mines, but that is because it had over 10,000 in the first place. This is about economic efficiency, and it is a good thing.

China installed 52 gigawatts of new coal in 2015, which is more than the whole of Australia’s generating capacity in just one year.

In fact, one theory why China is potentially installing more coal power than it needs right now, is so that it can, a few years down the track, suddenly declare it is building no more and accept international kudos while it backfills its empty capacity.

Similarly India recently announced it would close 37 coal mines – a fact quickly jumped on by the green movement who conveniently ignore that it actually has over 400.

India installed 18 gigawatts of new coal in the 12 months after it submitted its Paris Climate change target which is more than 10 Hazelwoods and in its National Electricity Plan (released last December) India confirmed it was building 50 gigawatts more.

Despite what you hear, India is not ending coal imports. It is aiming to cease importing coal for its government-owned, internal coal power stations for efficiency reasons but its energy minister has consistently said that this does not apply to the privately owned, coastal power stations like the ones owned by Adani.

Both countries are taking advantage of every technology to increase electricity for their people, including coal, nuclear hydro, wind and solar, and are actively building new coal and gas power stations and modernizing their existing fleet.

  1. Consumption is Being Driven By People Wanting to Improve Their Lives

In 2014, the United Nations projected that the number of people throughout the world living in cities will increase 3.9 billion in 2014 to 6.4 billion in 2040.

In India, 404 million people will move to cities, which is equal to 1,000 people every hour for 25 years and in China the figure is 292 million.

Just think about those massive infrastructure changes that will be needed to make this possible – and the business opportunities that it will create for countries like Australia.

Currently, 1.2 billion people throughout the world, including 240 million in India, don’t have access to electricity and 2.7 billion people, including 840 million in India, burn oils, dung, crop waste and other material in household ovens to cook their meals and heat their homes.

These people are not prepared to accept poorer living standards than we enjoy in the west, no matter what environmentalists intend, and neither they should.

By way of example, in October 2015 Scientific American published an article on the small rural Indian village of Dharnai where Greenpeace set up a solar micro-grid as part of its fantasy to have the people of Asia and Africa bypass grid electricity.

What ended up happening is instructive. The grid was set up, but as the villagers tried to use modern electrical appliances the batteries quickly drained.  Greenpeace then tried to restrict supply to 5 hours per day and limit the use of appliances, whereupon the villagers led a protest against a visiting government minister saying that: “We want real electricity, not fake electricity.”

The village was then quickly connected to the grid.

It is simply not possible to industrialise the world on wind and solar power.

  1. There is a Very Big Difference Between Capacity and Generation

Listen very carefully when renewables advocates talk about how big a particular solar or wind project is.

Capacity to deliver is not the same as ability to deliver.

The human body has the capacity to work 24 hours a day, but the reality is that output is normally one third of that, after 8 hours of sleep and 8 of play.

Renewables are the same. Unlike coal, gas and nuclear machines which can generate electricity 24 hours a day, 7 days a week at over 90% of their capacity for 30,40,50 years – solar and wind power typically operate at 25% to 33% of their potential and of course at night or in still conditions deliver 0%.

This is why coal-fired power stations are cheap to operate – because they can recover their cost every second of the day.

Just because renewables occupy 40% of the capacity of the grid, as they now do in South Australia and as the Government of Victoria has now pledged, doesn’t mean that they can deliver 40% of the electricity.

In fact wind farm operator Infigen warned the Stock Exchange last week that its production in the financial year that concluded yesterday was down some 40% on the previous 12 months which suggests it will deliver a lot less than the 30.1% capacity detailed its 2015-16 Annual Report.

And if you read for example that a wind project can power 100,000 homes it doesn’t actually mean it can guarantee power to 100,000 homes. It just means that, wind and sun willing, its expected total output is equivalent to the consumption of that many ordinary homes.

  1. Fossil Fuel Subsidies Are a Problem, But Not for Us

Yes, there are fossil fuel subsidies throughout the world and it is a problem, but it isn’t as bad as you may think.

According to the International Energy Agency, world fossil fuel subsidies dropped from costing $500 billion per year in 2014 to $325 billion per year in 2015, and it isn’t Australia, the US and Europe that are the culprits, it is Russia, Iran, Saudi Arabia, Venezuala and similar places who use taxpayer money to artificially reduce the cost of production or cost to consumers.

These are the world’s real fossil fuel subsidies and the ones that should be eliminated.

Interestingly, world renewable energy subsidies are climbing and the IEA has estimated they are now worth $150 billion. In Australia, research for the Minerals Council found renewables subsidies cost $3 billion in 2015-16.

  1. Germany Proves that Renewables Will Always Be Expensive

Germany, and similarly wind-farm laden Denmark, have the most expensive electricity prices in the world.

When German’s Renewable Energy Levy started in 2000 at 0.2 cents per kilowatt hour the then Environment Minister, a Green MP, said that the cost to consumers would be no more than “a scoop of ice cream.”

Sixteen years later it has increased by over 2,000% to 6.88 cents per kilowatt hour and there is no relief in sight, despite a market share of over 30%.

Amusingly, the German Renewable Energy Levy is used both to subsidise the construction of new renewables – and also to compensate incumbent renewables producers for the low wholesale price caused by additional renewables.

Nearly 50% of German electricity bills are now government taxes and charges, Germany paid over 1 billion Euros in 2015 to stabilise its major power lines alone,  and the Dusseldorf Institute for Competition Economics last year estimated that the total cost of Germany’s energy transformation would reach 520 billion Euros by 2025, and keep going.

Of course Germany is lucky to have 8 neighbouring countries that it can import electricity from if it starts to run short, all of which have nuclear, coal or gas as at least one of their top two energy sources, a back-up Australia does not enjoy.

It is also ironic that Germany’s most important source of electricity, is actually the much-maligned brown coal.

  1. Australia has Plenty of Fossil Fuels, Including Brown Coal

Australia has the world’s fourth largest reserves of coal, behind only the USA, Russia and China.

According to Geoscience Australia, we have over 100 years’ worth of black coal and 1,000 years’ worth of brown coal with the latter at seams over 200 metres thick in parts of the Latrobe Valley.

New, ultra-supercritical and advanced-ultra-supercritical coal power plants, which are in use and being built throughout the world, use new technology to burn coal at higher temperatures and under higher steam pressure, meaning a reduction on coal consumed and carbon dioxide emitted, of up to 50%.

The Minerals Council of Australia recently estimated that over 1,015 supercritical or ultra-supercritical generating units are currently in operation worldwide with another 1,231 planned or under construction.

Small, modular nuclear reactors are also under development, that can be factory-built, don’t need water for cooling, and are able to better adjust output to demand.

With 30% of the world’s uranium, over 1,000 years of coal, and nobody knows how much gas and oil still to be discovered this country could be the world’s leading exporter of energy technologies.

  1. The World Simply Can’t Afford to Go Renewable

I highlighted earlier that despite world renewable susbidies now costing $150 billion per year, they represent only 3% of world energy consumption.

Of course 65% of renewables output in Europe is from bioenergy, most of which involves burning trees to feed into power stations to make electricity.

Can you believe that under the rules, burning wood is considered carbon neutral?

Last month Bloomberg New Energy Foundation estimated that the global push for renewables would cost $7.4 trillion between 2016 and 2040, but an additional $5.3 trillion would be needed to hold the planet to a two-degree warming trajectory.

India said in 2015 that it would need $2.5 trillion for its renewables transition.

The cost of renewables doesn’t include the vast tracts of land that would be needed for wind farms and solar panels or towers that would equal one coal, gas or nuclear power station.

It also doesn’t include the opportunity cost of the various renewables schemes and scandals including Northern Ireland’s Renewable Heat Initiative which gave out 160 GBP of subsidies for every 100 GBP spend on wood chips, leading people to install burners to heat vacant rooms and factories for 24 hours a day to earn a government-sanctioned 60% return on their money.

Danish statistician Bjorn Lomborg got it right in 2015 when said that “When the wind is not blowing, wind-generated electricity is the most expensive electricity of all because it cannot be bought at any price,” a point equally applicable to other weather-dependent renewables like solar and hydro.

If renewables targets are not pulled back, you will be paying for them in your taxes and in your electricity bills.

  1. We Need New Sources of Generation

You’ll hear from time to time people talk about how the system is changing and how vast networks of batteries in the home and in the garage, smart technology and new interconnectors between the states, will allow people and businesses to trade electricity in a virtual market.

But while this is partly true, just remember that batteries and interconnectors don’t create electricity. They only store or transport the electricity that someone else still has to make.

The South Australian blackout of last September was the classic example of the limits of relying on a connection with far-off generators.

Most household solar systems can barely generate enough electricity to cover that home’s needs, let alone cover that house, your neighbour’s, the guy down the road, and your car and the workplace.

Or as Matt Ridley wrote for The Australian last year, you would need 160 million Tesla Powerwalls to cover one day’s electricity consumption in just the UK – or 3.3 billion of them to cover one week’s consumption if you electrify the country’s heating and transport networks as well.

Powerwalls are not Duracell – they don’t come with six month’s energy stored inside. And when the big industrial generators that make all of the electricity are closed, there won’t be an excess of electricity to put into them.

Conclusion and the Future

I would like to conclude by analysing where we going – and where we should be going, because we are sleepwalking to an energy disaster in this country.

We’ve been very lucky up to now – with unused but yet-to-be-dismantled gas stations, diesel generators, and legacy black and brown coal hanging around able to put out spot fires, but that luck is coming to an end.

South Australia is now a net- importer of electricity. This summer Victoria will be a net-importer during peaks and Tasmania’s independence hangs on rainfall and the Basslink cable with Victoria not breaking again.

The Finkel Review of a few weeks back will not solve the problem – in fact it will make it worse.

Its recommendations, which include new Security and Reliability Obligations’, an agreed federal/state ‘emissions reduction trajectory,’ more bodies, report and plans, are just more band-aids to cover for the fact that we don’t have enough reliable generating power.

If the Greens and their friends get their way, there will be no new coal mines or power stations, gas fields and networks and the nuclear industry will stay banned.

This will be particularly the case in Victoria, where the State Government has aimed for a 40% renewables target. Combine that 40% target with a commitment to no new coal, gas or oil developments, a stance against nuclear energy and limited hydro opportunities and that means there are very few options for the state.

The Greens can’t have it both ways – fossil fuels, particularly coal, can’t be both on the way out and needing to be banned at the same time.

Renewables can’t already be cheaper than fossil fuels but still needing multi-decade subsidy plans or power purchase arrangements from government to be commercial.

Electricity prices will continue to rise and reliability fall if producers are forced by government policy to only install sub-standard technologies.

I fear the short-term response from government will be to continue to find new ways to limit or ‘manage’ demand – and I’m particularly alarmed by the ‘successful’ 2012-2015 trial by an English electricity distributor, which at the press of a central button could remotely reduce each household’s power usage, as I am with Dark Green activist mutterings of a human ‘carbon budget’ or ‘carbon quotas.’

Do you want to be able to decide how much electricity you can consume, provided it is safe and available and you are able to pay for it – or do you want the government to do it for you?

If we want to fix this crisis – or at the very least prevent it from getting worse, then we need to get government out of the market.

Ideally, policy makers should freeze or preferably abolish the Renewable Energy Target, state renewables targets, Clean Energy Finance Corporation and Australian Renewable Energy Agency as well as all other forms of price support for renewables and let them compete in an open market with others like coal, gas and nuclear to satisfy consumer demand.

Government should act as the guarantor of competition and ensure that the regulatory system does not exclude any form of new generation.

State and federal legislative restrictions on uranium exploration and industry development as well as nuclear power should be abolished as should the centrally mandated banning of gas exploration for conventional and unconventional sources of gas.

Did you know that it is illegal in Victoria to even look for uranium and has been so for over 30 years?

We shouldn’t care what technology is used, so long as it’s affordable, and works when needed.

Destroying Australia’s electricity market to reduce carbon dioxide emissions by 30% of 35% of 1.8% of the world’s total is economic madness of the highest order.

The real test of a healthy market is – what happens when the government is doing nothing – which should incidentally be the ultimate end point of policy.

If renewables really are the cheapest form of electricity then we can end all subsidies immediately. And if they are not, after 16 years of subsidies, maybe it is time to draw a line under them lest they become the car industry of the 21st century.

While in the short-term I am pessimistic about what will happen in the electricity market because I believe it’s more likely policy makers will muddle along from crisis to crisis, wasting more and more money as bills continue to increase and reliability worsens; long term I am optimistic because the forces of demand can only be suppressed for so long.

It is just a shame that so much of our – and your – money will be wasted in the meantime.

This speech was delivered by Brett Hogan, IPA Director of Research, at the Students for Liberty Annual Conference on Saturday 1 July 2017.

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