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Clean Power energy-australia-new-capacity

Published on July 30th, 2014 | by Giles Parkinson

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The Real Cause Of Overcapacity: Dud Investments

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July 30th, 2014 by  

Originally published on RenewEconomy

One of the main arguments proffered by the owners of Australia’s fossil fuel generation fleet against the renewable energy target has been the massive over-capacity on the country’s main National Electricity Market.

Last year, AGL Energy estimated this overcapacity to be around 9,000MW. The arguments put forward in the submissions to the RET Review have said putting more renewables into the market is counter-productive. Not only will it reduce wholesale electricity prices – and therefore revenues for the coal and gas incumbents – but it is likely to force existing plant to retire earlier than might have been planned.

But whose fault is this overcapacity? The implication from the submissions is that it is the fault of the RET, and the build up of renewables.

But check out this graphic presented by EnergyAustralia retail chief Adrian Merrick at a recent energy conference hosted by UBS. It shows how much capacity has been added in the last five years.

Wind energy accounts for a little more than one quarter, and there has been a small amount of hydro. Around 70 per cent of increased capacity has come from coal, combined cycle gas plants and peaking gas plants.

energy australia new capacity

Why did they do that? Pretty much for the same reason that the networks asked – and were granted – permission to build $45 billion of new and upgraded poles and wires: they assumed that demand would continue to rise, as it had done for the previous century.

But they ignored the warning signs on energy efficiency and the imminent rise of solar PV. As the red line shows, demand peaked five years ago and has been falling dramatically ever since.

The generators made the wrong call, and now they want the rollout of renewables stopped – or at least slowed down dramatically – to protect those dud investments.

This is the point that must be made clear. It is the only reason that generators have for wanting the RET stopped or diluted – to protect their assets. It has nothing to do with consumers.

EnergyAustralia built some of that capacity. It has already taken a $94 million write down on the value of its Tallawarra baseload gas plant in NSW, built in 2009. Other gas and brown coal generators have also been written down. Origin Energy has had to convert its newly built Darling Downs generator into a peaking plant, rather than a base load operator.

This is the third major myth around the renewable energy target that has been blown in the past week.

Other reasons proffered by the government and its urges to repeal the RET have also been dismissed, even by the federal government’s own hand-picked consultant. These include the contention that the renewable energy target cannot be met, an argument proffered by the major generators who are trying not to sign contracts with wind and solar farms. ACIL Allen – along with global energy supply giants such as General Electric and Vestas – says it can.

The RET also lowers prices for consumers, even if Prime Minister Tony Abbott continues to insist otherwise. The ACIL Allen report admitted to that as well.

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About the Author

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.



  • spec9

    “Not only will it reduce wholesale electricity prices – and therefore revenues for the coal and gas incumbents – but it is likely to force existing plant to retire earlier than might have been planned.”

    Sounds good to me.

  • Offgridman

    I so look forwards to seeing this same situation happening in the US in ten years.
    Why does this seem possible?
    The ongoing battle against net metering which will likely balance out with VOST’s which in ten years will put the values closer to wholesale.
    The continuing reductions in the cost and improvements in the quality of solar that are going to have more and more people attempting to replace their bills with their own generation.
    The now established policies towards higher efficiencies for homes and industries including the new EPA rules on coal plants
    The recent and ongoing build up of natural gas generation plants based on our supposed boom from fracking.
    Which also leads to the reality that the boom in supplies is going to be short lived as more of these wells settle down to their long term output which is only five or if lucky ten percent of the first year or two of output. Along with the associated problems of methane emissions, earthquakes, and environmental damage becoming obvious to the public.
    And finally the recent polls showing that a majority of the population are at last realizing that global warming is an issue and thinking that our government needs to take action to reduce and or stop reverse the effects.
    I have been waiting forty years and it still could take another ten or even twenty years but the perfect storm is coming where the US will go renewable and self sufficient for our energy.
    My happiness over the inevitability of this situation may seem a bit premature but will give my yahoo now for the sake of my sons in case I am gone when it does happen.

  • piyanis

    awsome

  • JamesWimberley

    Is it so obvious what to do now? The fossil generators (and in Australia grid splurgers) were never dotcom startups, entering a competitive market at their own risk with eyes open, They have been and still are players in a regulated industry relying on formal and informal guidance and assurances from governments. Now renewables, encouraged by the same governments (until last year in Australia), are causing them large losses. There is a certain justice in their running to government for protection. “Let them go bankrupt” is not a morally defensible call.

    The cleanest solution, as with the housing crisis, is nationalisation. A state corporation with no expectation of making a profit (Badcoal) would buy the stranded assets at an above-market rate that would let shareholders and creditors walk away with a reasonable but not generous return, close to the government bond rate. Badcoal is then wound down over 20 years. You fund its loses either from general taxation, or an earmarked surcharge on electricity bills like the German EEG one, This is not so far from the shuttering of the French coal industry by the nationalised Charbonnages de France, finally disbanded in 2008.

    • Jan Veselý

      Or you can just let them go bankrupt. Someone will definitely buy and run part of the powerplants which are posibly profitable. And government can step in and buy some assets for “emergency backup”. But I agree that your solution is more ellegant and seamless.
      And they can earn extra money by selling whole powerplants or their major parts to the second hand market, somewhere to Latin America, Africa, etc.

    • piyanis

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    • No way

      The only morally right thing to do is to let them fall and fall hard. That will make the transit go much faster and for the remaining big companies that survive there will only be one option, 180 degrees turn toward renewables to maybe get a portion of the market.

      • Jan Veselý

        But you would be target of the classical spin: “Lights wil go dark, you will freeze/boil to dead, economy will stop, …”

    • Eric Gerber

      The Eraring Power Plant is one of the largest in Australia. Note that it was just privatized (search Eraring and privatized) a couple of years back and now is being incompetently mismanaged (search Eraring and Fire) as they milk the asset at the taxpayer’s expense. This looks like a big shell game with private corporations scheming to line their own pockets. If such a small country like Australia can’t sort basic power supply issues out, it makes me despair for the rest of the world.

    • Matt

      Oh dear or dear whole gets left holding bag for the the fact that the corp over built. Because the thought there profit were based on always building more. Even when data showed they didn’t need more. Yes the government over seers “should” have said wait your projects are full of shit. But surely the corp that have been making money hand over fist are at least part to blame. You should not buy the stranded assets at above market value, which is currently way over valued. More like offer a one time buy out at 0.10 on the dollar, the NG have very little to no value in Oz since NG cost so much now. Nationalize those and close the oldest dirtiest now, keeping some as reserve capacity. Take away all distribution from them and make those into two non-profit groups, long distance and local distribution. Any coal/NG generation kept by companies have to sell into the market as best they can.

    • patb2009

      let them sell to the govt at book value.

    • Ronald Brakels

      It’s hard to really explain how stupid we are in Australia. The state of Queensland owns its generating capacity and is trying to trash wind and solar in order to increase the value of the fossil fuel stations so it can sell them. Of course no one will ever buy the dinosaur plants without being given legal protection from renewables. It’s crony capitalism with the added twist of killing complete strangers in distant parts of the world.

      • Ronald Brakels

        Just for added laughs I’ll mention that the Queensland state corporations that run the fossil fuel plants, Stanwell and CS Energy, lose hundreds of millions of dollars a year which comes out of general state revenue and this is a huge subsidy for fossil fuels. It’s a subsidy that kills friends you didn’t even know you had.

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