Published on June 24th, 2014 | by Giles Parkinson2
Renewable Energy Modeling Wars
The debate over the future of Australia’s renewable energy target should properly be fought out in the public arena, among politicians, and in the mainstream media.
Both seem disinterested, so the real fight is happening behind close doors, in the in-camera sessions of the RET Review panel and within the confines of Tony Abbott’s inner advisory group. The weapons of choice (apart from ideology) are economic models.
Welcome to the modelling wars. On one side there is a range of consultants such as ROAM, SKM, IES, Bloomberg New Energy Finance and Schneider, who say that the RET is a good thing and delivers benefits. Scrapping it, they say, and they illustrate this point through their models, will actually push customer bills higher, and achieve little but the ongoing protection of the incumbent industries.
Then there are those – whose reports are used by those incumbent fossil fuel generators – who argue the opposite, and who seek to say that it is the consumer, not them, that will be the biggest victim of this policy.
There is ACIL Allen, whose modelling has been used by EnergyAustralia to argue for a big reduction in the RET, and BAE Economics, whose modelling has been used by the oil and gas lobby to bring the RET to an end. Disconcertingly for the renewable energy industry, ACIL Allen has been hired by the RET Review panel, led by climate skeptic Dick Warburton to do its modelling, while BAE Economics is the firm owned by RET Review panel member Brian Fisher.
Enter, stage right, Frontier Economics, hired by the Australian Energy Market Commission, which sets the rules for the operation of the Australian electricity market, to conduct modelling for its submission into the RET.
Innocent bystanders might believe that the AEMC would be a neutral party in this, but is has been criticised for adopting an aggressively anti-renewable decision. It wants the RET diluted, and its views are likely to weigh heavily on the deliberations of the panel. On Thursday it released the modelling by Frontier Economics that formed the basis of its conclusions.
AEMC should be applauded for releasing the modelling. But it’s an extraordinary document, one that would appear to try to vilify renewables at every opportunity, and push the case for incumbents. Here’s why.
The first is its description on the capital cost of renewables. They use the following table.
Frontier’s modelling assumes the cost of wind energy is significantly more than it actually is. It bases its calculations on a capital cost of $2,658/kW – and then its says (see graph below) that it won’t fall much over the next 20 years. Most other analysis puts it at least 20 per cent below this. The about-t0-be-completed 270MW Snowtown 2 wind farm – built at a cost of $440 million – suggests a capital cost of $1,622/kW.
The modelling also assumes that the cost of solar PV is double the cost of what the solar industry says it is. It assumes that solar PV has a capital cost of $4,000kW, when in fact it is close to $2,000/kW. Even the AGL project at Nyngan and Broken Hill – considered expensive by most (though it is the first project of its scale in Australia) is sub $3,000/kW.
Frontier also assumes no solar cost reductions of any great significance over the next 20 years. So, while solar manufacturers are saying they are cutting module costs by 20 per cent annually, Frontier assumes that costs will not fall more than 35 per cent out to 2035. Bloomberg New Energy Finance, for instance, suggests capital cost of solar at $1,500/kW.
Because of this, Frontier assumes that only wind energy will be built to meet the RET out to 2020, when other analysis suggests that solar will account for more than half of the installation in the latter years. In WA, it is expected that 2,000MW of solar would be installed to meet the current RET.
Having set a high bar for the cost of renewables, the Frontier modelling also appears to take a benevolent view of the price of fossil fuels – gas in particular. It predicts delivered gas prices of $5-6/GJ and rising to $8-11/GJ in real 2013/14 dollar terms by 2030.
Analysts say these estimates on gas are at the low end, with most saying there is a big risk of a pricing breakout. Already, the surge in gas prices has been enough to sideline many gas fired generators, and cause write downs on others.
It also assumes that there will be no carbon price for the next 20 years. (This, presumably, assumes a Menzies-like career for Tony Abbott, but it also has the outcome of raising the cost of the RET).
And then – in an assumption that further raises the costs of the RET, Frontier suggests that even a reduced target cannot be met, and that electricity retailers will choose not to build renewables and will instead pass on a “penalty price” to their consumers.
There are two problems here: One is the assumption that retailers can get away with the idea of charging consumers for something that they choose not to build. This is an arrogance that is shared by many big retailers, who treat their consumers as “ratepayers” rather than customers and assume they are an apathetic lot – this for an industry where one in four customers change supplier each year, and nearly one in four have rooftop solar, and who will, according to UBS and others, find it cheaper to add storage and disconnect (and tell their retailers to go stick it in someone else’s socket) as early as 2018.
The second is Frontier’s assumptions that even a reduced target cannot be met. Global energy suppliers like GE and Vestas, and most developers, say that the current target of 41,000GWh can be met. Frontier assumes that even a reduced target of just 23,000GWh (recommended by Origin Energy and others) cannot be met – and will result in a penalty price. Truly, it beggars belief.
Even after all this, what is the damage to the consumer? Well, it’s absolutely shocking! Frontier Economics, says it could be $25-$75 a year, or between 50c or $1.50 a week.
But wait! That is just the “resource cost”. It hasn’t yet factored in the benefits of the RET – which apart from environmental, emploment and investment – is the ability of renewable energy sources to reduce wholesale prices (because they have a marginal cost of generatio of basically zero).
This is called the “merit order” effect, and incumbents hate it because it means their revenues and profits are reduced.
As Frontier says: “This ‘merit order effect’ on retail electricity prices will offset the direct RET compliance effect to some extent and may overwhelm it. “
In other words, the impact of renewables is to offset the cost of the incentives to build them in the first place. It may in fact reduce costs to consumers. This, it should be noted, is the conclusions of other modellers such as ROAM, SKM, Schneider and, of course, the Climtae Change Authority.
But it is not what Frontier or AEMC chooses to highlight.
Frontier tries to demonise the merit order effect as a transfer of wealth from coal fired generators to consumers (actually many of these generators are retailers as well who hedge against such movements, but it is true to say that this is the nub of the RET issue – it is not about consumer prices, it is about protecting incumbent generators)
Then Frontier goes on to say that this merit order effect reflects increased supply of capacity and is not unique to renewables: a subsidy to new gas/coal capacity would have similar effects and would involve far less resource costs. Really? So why would you give further subsidies to coal? And how much of a subsidy would you need to give to gas so that its marginal cost of fuel is cheap enough to displace coal? It doesn’t say.
And as one observor noted - The merit order effect is the entry of low, or lowest, bidding generation pushing higher priced generation out of the market. This cannot be achieved by expensive gas fired generation with high fuel costs; surely Frontier knows this.
Then it comes to the crunch, highlighting the fact that most generators in the market now are playing a game of chicken – none of them want to be the first to leave the market, because that would mean profits would be restored to others. So everyone stays in the market and no one makes any money. It is a tale of mutual destruction.
And here is an interesting graph that was in the AEMC’s decision but does not appear to be in the Frontier Economics modelling report.
It shows the impact of slashing the RET in various scenarios. Apart from bringing it to an immediate halt, the scenarios of cutting the 41,000GWh target to 30,000GWh or 23,000GWH deliver savings of less than $10 a year to consumers.
That should be an interesting sell for the government: “We are completely stuffing up a $20 billion renewable energy industry, and protecting billions of dollars of revenue to coal and gas fired generators, just so we can save households 80c a month.”
Source: RenewEconomy. Reproduced with permission.
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