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“Any man’s death diminishes me, because I am involved in mankind, therefore never send to know for whom the bell tolls – it tolls for thee” John Donne 1625

The gutless and the dumb

It’s pretty obvious that there is a lot of hot air and not much rational thought in some quarters of the conservative parties.

This group used to have a reputation for careful, evidence based analysis. The result of their ill-considered reactionary moves to the initial Frydenberg proposal is that the Coalition will find it impossible to come up with a policy that will meet the COP 21 commitments.

The good news is that the responsibility for policy will fall to State Governments and the private sector. Those guys get it and they will get the job done.

15423754_10157886500815296_721550746_nWe suspect that the Prime Minister will come to regret his change of tone on this topic just as Kevin Rudd did. Tony Abbott was very successful with his “no carbon tax” policy but anti GST statements were also very effective against John Hewson.

The time has come for people to stand up to the uninformed, selfish and damaging to the long-term national interest, slogan speak pedaled by politicians who think of nothing but getting reelected. Australia needs Statespeople not short-term politicians.

Any analysis will show that the cost of capital is one of the largest costs of any form of electricity generation.  Support for the conservative rump’s policy of  withdrawing from COP 21, and trying to hold back the renewable energy tide is simply pushing up the price of electricity for all Australians.

And it is hurting business more than households. Let’s look at some facts and ask a few questions.

  • Why is the LRET price sitting near the after tax penalty price? The answer is a lack of policy certainty. New renewable projects are not being financed because the cost of capital is too high because the Federal Government offers no policy support after 2030.
  • Why have electricity futures gone up about 40% this year? Because supply (both coal and gas) has reduced in the face of essentially flat demand. The coal fleet in Australia is very old and needs constant investment. If the closure of Wallerawang, Northern and Hazelwood don’t evidence that, then I don’t know what will. Yet policy paralysis means there is zero Federal policy around which to base new investment. The following table shows that capital costs over the 25 year lifetime of a project are between 30% and 80% of the total costs of a project. Policy uncertainty raises the cost of capital by probably 300 bps or about 3/8. The following table is a quick and rough estimate of generations costs and ignores a carbon price.
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Figure 1 generation capital and opex costs. Source: ITKe
  • Why have gas prices doubled this year? Because we are exporting the gas and State Government policies don’t allow for new gas exploration. So demand has increased dramatically and no new supply is forthcoming. Would you build a new gas fired plant when you see climate change increasing costs and gas supply hard to get?
  • Does anyone really believe Australia is going to turn its back on climate change and just go back to building new coal fired plants

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Is Australia “unilaterally disarming”?  as Andrew Hastie, MP for Canning, claims. I mean this is such a joke of a statement, it’s only worth mentioning to point out the complete fantasy world some politicians live in.

177 countries signed the COP 21 declaration. China’s coal production is down 12% and consumption is down as well. Australia is one of the most expensive countries in the world to build renewable energy projects despite our significant resource cost advantages. West Australia dosen’t have any coal anyway.

Australia’s COP 21 minimum commitment

Australia’s COP 21 commitment is to reduce CO2 levels by 25%-28% relative to 2005 by 2030.  This target is a reduction of about 100 mt.

Screen Shot 2016-12-08 at 2.08.25 PM

There are several blindingly obvious points to make about the current commitment:

  1. It will require a significant improvement on 2005-2015 achievement. Despite three years of a carbon tax and various other policies emissions have at best stayed flattish. 2015 emissions of 529 mt excluding land use were 10 mt above 2005 level.
  1. 2Australia’s current target is nowhere near good enough. It’s now well very well known by anyone who is honest that if you really want to keep global warming to just 2C it requires about 80% reduction in global emissions by 2035.
Figure 3. 20 years left at current emissions rate
Figure 3. 20 years left at current emissions rate

      3. There is next to no chance of getting there if it’s just going to be stationary energy (electricity) that has to do all the work. Transport, agriculture and fugitive emissions put together are just as important as electricity.

Figure 4 Carbon emissions by sector. Source Aust. govt. Figure 5 carbon emissions 2015. Source: Aust govt
Figure 4: Carbon emissions by sector. Source Aust. govt
Figure 5: Carbon emissions 2015. Source: Aust govt

Nature abhors a vacuum

We could start by asking how Australia is going to be meet its COP 21 targets without an economy wide explicit cost  on carbon. But that would be the wrong question for two reasons.

  • Conservatives who don’t believe in climate change will simply say Australia should withdraw from COP 21 or alternatively pay it “lip service” go along to the meetings but do nothing. So for them it is a meaningless and irrelevant question
  • The second reason is that in fact the lack of Federal Policy is actually an opportunity for both State Governments and the Private Sector to make their own policy. This is already emerging of course. Victoria and QLD’s 40% and 50% renewable energy targets achieved via cost-effective reverse auctions will provide supply to replace lost thermal generation.
  • State Govts can also put in place electric vehicle policies. For instance free parking, lower registration costs.
  • The private sector is not a monolith. Trevor St Baker for instance is perfectly happy to bid a low price for any coal station closing and will propose to run it as long as he can. He has clearly done well with Vales Point. Even he is not building new coal or gas power plants in Australia and in fact no one is really proposing this. Nearly all the new private sector investment, such as it is, is in renewable energy.
    • EnergyAustralia has just agreed to buy 500MW of renewable energy. The CEO called for a market based carbon price
    • AGL has its 1000MW Powering Australia Fund. And the company’s expectations are for more renewables. Its latest proposals are also around gas, a gas and battery plant next tor its Torrens Island gas, steam plant, and perhaps and this did make me laugh, an LNG import terminal on the East Coast of Australia. The latter is surely a stalking horse but shows the reality of the gas debate.
    • ORG has recently signed contracts for and new CEO Frank Calabria has said he is not concerned if there is an emissions trading scheme. ORG’s formal policy statements are even more positive than that. “Origin is uniquely positioned to lead the transition to less carbon  intensive energy” although this is partly about ORG’s gas position.

David Leitch is principal of ITK. He was  formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.  

10 replies on “Gutless and the dumb: Conservatives push up electricity prices”

  1. “West Australia dosen’t have any coal anyway.”

    BUT we do produce more lithium than anyone else in the world. And we also produce other battery raw materials such as nickel, copper and aluminium.

    1. It is strange that they had three coal fired power stations. WA has reduced that down to two:- Worsley Alumina and Muja (Collie), retiring Kwinana years ago.

      1. Ian. Of course you are perfectly correct. WA does have some coal and I was well awaredof that and can recall looking at the Collie mine as far back as when CSR owned it. I exaggerated to make something of a point.

        Furthermore there were some typos in the article that got through the publication process. I regret these, although they continue a 30 year trend in my work of minor errors detracting from the whole.

        1. Perhaps it should be amended to ‘Ironically, Western Australia practically doesn’t have any coal.’

  2. “and perhaps,and this did make me laugh, an LNG import terminal on the
    East Coast of Australia. The latter is surely a stalking horse but shows
    the reality of the gas debate.”…This shows the absolute idiocy of energy planning in Australia where we have exported our total LNG via long term contracts for peanuts and with minimal government revenue($1bn) compared to Qatar with similar export volumes at $20+bn.THEN arises the prospect of having to IMPORT LNG and/or frack our farmlands and pollute our groundwater for desperate gas!!!!

  3. Reality check here.
    Load side technology and falling costs of battery and solar will make coal an extinct idea as the business leaders have accepted.
    Electric cars, also falling costs, minimal maintenance and cheap fuel.
    A carbon price in a few years will be unnecessary. I feel, slightly happy that this federal government doesnt get their hands on one because they will abuse it.
    Lets see how wrong I am. In four years petrol and coal dying.

  4. Re the title of this article, how can failure to act be seen as “conservative”? More accurate adjectives are “negligent” or “lazy”, or …

    1. I think he was using a proper noun not adjective Tim. Those are very conservative adjectives you are using…

  5. “and perhaps, and this did make me laugh, an LNG import terminal on the
    East Coast of Australia. The latter is surely a stalking horse but shows
    the reality of the gas debate.”

    Not so sure about that. I am wondering if AGL may be thinking of all the extra gas Woodside and others are about to start producing on the North West shelf. If those producers’ only current prospect is to sell into a low price market overseas, perhaps they may see an opportunity to meet high priced demand in South Eastern Australia?

    The author tells us State Government policies don’t allow for new gas exploration, demand has increased dramatically and no new supply is forthcoming. As a result gas prices have doubled this year in this market.

    The Queensland LNG export contracts are long term, and community resistance to gas exploration is not going to evaporate. A shortage of gas in South Eastern Australia might be around for many years to come.

    The author’s statement “West [sic] Australia doesn’t have any coal anyway.” is incorrect. There are two coal mines at Collie which were first developed in the 1890s. The mines fuel thermal power stations, also located in Collie.

    I recall that some years ago Carmen Lawrence, when Premier of Western Australia was urged to decree that for environmental / global warming reasons, a major new power station be gas fired. However she succumbed to union pressure and had it source its fuel from the Collie coalfields.

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