Australia is a wonderful living experiment for nations worldwide of how a people with more energy resources per capita than anywhere else in the world can sabotage a perfectly good electricity grid in the hope of appeasing the Weather Gods.
At the request of Senator Malcolm Roberts, Alan Moran slices up our “Chief Scientists” report (known as the Finkel Review) and gives us some home truths. Electricity costs have doubled in Australia, Finkel’s plan would take what isn’t working, and do more of it — in the process pretty much destroying one fifth of our manufacturing base, costing us thousands of jobs, and adding almost $588-$768 per household annually to energy bills. Let’s ask Australian voters if they want cheap coal power or if they’d rather spend $600 a year to make the weather unmeasureably nicer in 2100? Why don’t we have a plebescite on that?
In other basic truths Moran points out that while Finkel seems to think new coal fired plants are uneconomic, everyone else is building them around the world. Old plants don’t have to be blown up on their 50th Birthday either. They can be maintained instead, like lots of other perfectly good 50 year old industrial workhorses.
The big cost of Electrons-for-the-climate is not just the higher electricity bill consumers pay, but the awful effect that expensive electricity has on our manufacturing sector (leading to the double whammy where people have higher bills at home, and no job to pay them). Moran points out that higher costs eat directly into profit margins. A 2% rise in costs can wipe out 13% of the total profits. This is why businesses flee from high-cost countries.
How do we fix it? Let the free market solve it for us
Moran recommends we return to a free market in electricity, dump the Renewable Energy Target, abolish subsidies, stop the SRES scheme and state based plans giving money to roof top solar with preferential feed-in tariffs, and stop tossing taxpayer money to the Clean Energy Regulator and the Clean Energy Finance Corporation. All new generators should pay the costs of the transmission lines required to connect them to the grid, and ensure they can operate “reliably”.
Cheap electricity: How Australia went from the top of the list to the bottom
In 1999 Australians had some of the cheapest electricity in the world:
By 2015 Australia has a lot more renewables, and a lot more expensive electricity.
Working out the lifetime cost of electricity is difficult. It is even more difficult to find a nation with lots of wind and solar power that also has cheap electricity.
Electricity prices skyrocket in Australia
Thsoe government subsidies $4.9 billion
Specifically $3.7billion from the Feds, $1.2b from states
Finkel Myth: The old Coal fired fleet has to close
Alan Moran replies:
“Some argue that many of these power stations are old, and the Finkel report contemplated a forced closure of power stations over 50 years old. The absurdity of such notions should be clear: US global military power is dependent on its 10 Nimitz class aircraft carriers which were first launched in 1972, and many rail lines and ports are over 100 years old. Even most of Australia’s commercial hydro power stations are over 50 years old. In all cases, older established plant has been renewed and revitalised over the years. While totally new facilities can be lower cost, it is wasteful to scrap facilities which continue to be competitive.
Companies will leave if electricity costs add just 2% to their total costs
I thought the devastating effect of a small rise in costs was particularly well explained.
“It might be said that even if electricity comprises 20 per cent of costs, a price rise that brings as much as a 50 per cent increase in these costs might be affordable. After all this would be an arithmetic increase in overall costs of a mere 10 per cent.
Such logic however overlooks the drivers of industry location in a market economy. One sees global brands like Adidas and Puma relocating their manufacturing source in response to two or three percentage points of costs. The reason behind this is the amplification effect of costs on profits, the driver of firms’ decision making. Profits are the residual benefit to the owner and decision maker after all other costs are covered. If profit comprises 15 per cent of the overall cost, a 10 per cent increase in costs eliminates two thirds of the income of the owner.
This amplification is the key to the creation of efficient economies the world over. Firms strive for seemingly tiny cost savings because of the effect of these in the income of the firm’s owner and decision maker. Even a two per cent cost increase would, where profit is 15 per cent of total cost bring a 13.5 per cent reduction in profits. Such a loss of income to the owners would, where the loss was being experienced in only one location, cause a shift away from that location.
A key competitive strength of Australian industry has been the cheap energy endowment that its mining and energy utility businesses have successfully tapped. p35 – 36
- Governments are subsidising the building of intermittent renewable energy that are reducing reliability and security while increasing prices. The Finkel recommendations entail an amplification of these subsidies, the outcome of which has been a doubling of wholesale electricity prices and a degradation of supply reliability. Compared with wholesale electricity prices of around $40 per MWh prevailing during the first 15 years of the present century, prices now exceed $80 per MWh.
- The Finkel review accepts that its policy proposals will not return wholesale electricity to their historical levels but mistakenly argues that this would be impossible. Moreover, its over-optimist assumptions on future costs of renewables mean that its proposals would make even its $80 per MWh price goal unattainable.
- Implementation of the Finkel recommendations would bring a further deterioration of system reliability and lift wholesale prices to at least $100 per MWh. This is already evident in prices of electricity on futures markets. Returning to the previous market-based electricity supply system that has been have gradually undermined by regulations over the past 15 years would result in new coal plants, wholesale electricity costs at around $50 per MWh and the restoration of a more reliable system.
- Household energy bills, even under an optimistic view of the Finkel proposals, would be between $588 and $768 per year more than would be the case under an outcome that removed market distortions by eliminating all subsidies.
- More injurious to households than the lift in their direct electricity costs, the Finkel recommendations would vastly increase the costs of electricity to commercial users. By more than doubling electricity costs, the Finkel proposals would force the virtual cessation of production in energy intensive, trade-exposed industries; these account for one fifth of manufacturing and include some of the nation’s most productive activities including metals and smelting, pulp and paper, sugar and confectionery. Competitiveness and future growth would also be adversely impacted across most agricultural and mining sectors.
- A regulatory-induced elimination of the industries able to take advantage of Australia’s natural advantage in low cost energy supplies and the forced increase in all other industries’ electricity costs would severely reduce Australia’s living standards.
- In general, the Finkel proposals should be rejected and regulatory distortions on energy supply should be removed. In particular, the Commonwealth should:
- Abolish the Commonwealth’s Renewable Energy Target (RET) and the subsidies, presently about $75 per MWh, it creates for wind and large scale solar; and
- Eliminate the Small-Scale Renewable Energy Scheme (SRES) under which electricity users in general are forced to provide a subsidy of $40 per MWh to roof-top photovoltaic installations.
- Cease all government subsidies through the budget including guarantees to bodies like the Clean Energy Regulator and the Clean Energy Finance Corporation (CEFC).
- The electricity market management should require, in line with the Finkel proposals, that all generators pay to ensure they operate reliably and require new generators to pay costs of transmission that their grid connection entails.
- State government should remove subsidies like the Queensland Solar Bonus scheme and preferential Feed-in-Tariffs for PV generated electricity.
Finkel Report (2017) Independent Review into the Future Security of the National Electricity Market. Blueprint for the Future
Moran, Alan (2017) The Finkel Report’s Recommendations on the Future Security of the National Electricity Market:
Impacts on the Australian Economy and Australian Consumers, Regulation Economics. here