Those who say they want a “free market” in carbon still don’t understand what a free market is.
In Australia the Renewable Energy Target (RET) in theory, helps wind and solar, so we lower CO2 emissions and cool the world, slow storms, things like that. But Tom Quirk calculates it costs $57 a ton (at best) for those “savings”. Since the Direct Action plan cost $11 a ton, we could reduce five times as much CO2 if we blew up the RET scheme.
The secret is that the Abbott plan tackled CO2 directly rather than picking winners (see “competition”,
“free markets” that sort of thing). Predictably, the Greens hated it — who needs CO2 reduction if you can support big-government-loving industries instead? (Especially the kind who lobby for the side of politics that wants more bureaucrats, more handouts, and less independent competition?)
Those who say they want a “free market” in carbon still don’t understand what a free market is. It’s pretty simple, if they want a reduction in CO2, they need to pay for a reduction in CO2. That’s not the same as paying the wind industry. When a subsidy is applied to a secondary, indirect factor, it has perverse effects other than the supposed original aim. Quirk shows that we are not just paying a bit more to reduce CO2 this way (like 500% more), but quixotically we effectively pay more to displace gas emissions rather than brown coal.
The other perverse effect is that by insisting we take wind and solar “whenever” — these generators are not competing in the wholesale market at all, they simply bypass it and head straight to the retail level. Effectively, they take a chunk out of the demand side of the wholesale market which would be useful at peak load times,
The RET started at 2%, is now 12.5% and is climbing to 25%.
In Table 2 we see that utilization (or capacity factor) is very low for all the generation types in SA. A great deal of infrastructure and capital is just lounging around drinking pina coladas or something. Ironically, the whole free market idea is so botched up that SA has an oversupply of electricity, yet pays more for electricity and suffers more blackouts. Tom Quirk calculates that the RET currently adds 2.15c for wind power and 0.26c for solar to power bills in SA. This does not include the cost of state based schemes, nor the diabolical effect of having an excess of supply at the wrong times and perverse subsidies: price spikes and volatility. The real cost is o-so-much higher…
States of confusion
Guest Post by Tom Quirk
The Renewal Energy Target (RET) scheme is a splendid example of the growth of a policy cancer that if not checked will do substantial economic damage. The scheme was introduced during the time of the Howard government with a target of 2% contribution from renewable sources of electricity and has grown tenfold within the federal government jurisdiction and has spread to state governments that aim to double the present federal target of some 25% renewable energy contribution by 2030.
The wholesale electricity market has been bypassed for roof-top solar PV and wind power has impaired the financial basis for baseload power supply.
The following examines the lack of logic in forming the scheme and the example of South Australia which may well be the best example of what should not be done in mixing renewable energy into state electricity supply systems.
The logic of RET subsidies
Generators of renewable energy in Australia, mainly wind farms and solar PV, are being paid a subsidy of $85 per megawatt hour (MWh) for wind and $40 per MWh for solar PV, as well as state subsidies of order $20 per MWh for electricity produced. These sources of electricity displace that generated from conventional power plants. This is an indirect equivalent of a carbon tax. If one MWh of electricity from black coal is displaced that stops the emission of one tonne of CO2 so the carbon tax is $85 per tonne of CO2. But for brown coal electricity with 1.5 tonnes of CO2 per MWh the equivalent tax is $57 and gas turbines have equivalent taxes of $170 to $213, an increased tax for a lower emitter than the black coal generators! The tax equivalents for these energy sources are shown in Table 1 for wind and solar PV.
The intention of having renewable sources in the electricity supply system was to drive out the highest emitters of CO2 but the cost structure of the wholesale electricity market is such that the coal burning power stations are the lowest cost generators and higher cost but lower carbon emitting generators became more vulnerable to being stood down.
So the wholesale market is distorted by energy from roof-top solar PV that simply varies the demand to be met by the wholesale market while wind farm energy goes into the market to take the going price and in addition the RET subsidy. This is the case for either non-dispatchable or semi dispatchable wind power as a suitable bid price would ensure that the bid was accepted. Finally the RET scheme has a price structure that is the opposite of the intention to drive the highest CO2 emitters from the market.
The example of South Australia
The latest AEMO report on the performance of the electricity market in South Australia illustrates the major problems of integrating intermittent energy generation into a state supply system.
South Australia has the highest installed renewable energy supply in Australia. This can be seen in Table 2 where wind supplies 30.0% of demand and roof-top solar PV 6.5%.
The subsidies are paid to the wind farm and the solar PV suppliers of energy but these subsidies are by legislation turned into charges to pass on to all consumers of electricity. The average subsidy for the year was $72 per MWh for wind and $40 for solar PV. So spreading a charge of $309 million over all 14,400 GWh consumed becomes $21.5 per MWh from wind energy and a cost of $38 million becomes $2.6 per MWh from solar PV. This is the equivalent of a $24 carbon tax on a tonne of CO2 emissions.
There are three problems that can be seen developing in South Australia as shown in Table 2:
- The coal fired baseload power stations have low utilisation with a capacity factor of 39%. The high capital cost of a coal fired power station should have a capacity factor of about 80% so that it can supply low cost baseload power. But this is not the case in South Australia as the intermittency of wind power has all but eliminated steady baseload power.
- A consequence of the intermittent wind power has been the use of interconnectors to draw power from Victoria. This is also intermittent demand that can be as much as the interconnectors can deliver and stresses the Victorian power supply system.
- Worse still is that on occasions there is so much wind power in South Australia that the surplus is exported to Victoria where it adds supply variations to a system with much larger demand of some 6000 MW with 300 MW from wind farms. These events mostly occur in the early morning between midnight and sunrise and can be as much as 200 MW which is a substantial disruption at a time of best baseload generation.
Finally the intermittent wind power in South Australia is correlated with wind power variations in Victoria. So if the government of Victoria has a renewable energy target similar to South Australia then that may lead to the destruction of baseload operations in Victoria.
The conclusion from this analysis is that renewable energy policies have not been well thought out and if continued without some thoughtful modifications may have severe economic consequences.
But we should not expect much from our politicians as their methods are best described by H L Mencken as – The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.
However capping the RET scheme now but allowing all approved wind farms to proceed might stop the various state governments from encouraging and adding wind farms to meet their 50% renewables aspirations.
Tom Quirk trained as a nuclear physicist at the University of Melbourne. He has been a Fellow of three Oxford Colleges. He was a founding director of the Victorian Power Exchange, the first wholesale electricity market in Australia and Deputy Chairman of Vencor, the Victorian Energy Networks Corporation, which looked after Gas and Electricity after the formation of the AEMO.