Australia finds itself in an extraordinary, almost comical position. On the promise from Tony Abbott that we would become a low cost energy superpower, we abolished the carbon price and rolled back the renewable energy target by a fifth. And now we find ourselves with some of the highest wholesale electricity prices in the world, about double what they were when the carbon price was in place.
Some say the reason for these ridiculously high power prices is that Abbott was not ambitious enough with his axe to climate policies. He should have abolished the renewable energy target completely.
Yes, coal-fired power stations are cheap to run once built. But the problem in Australia is that many of ours were built decades ago and they are beginning to wear out. Engie, the owner of the recently closed Hazelwood coal power station acknowledged it would need to spend $400m in upgrades to address an array of safety problems with the plant identified by the Worksafe Authority. Rather than sink such money into a plant whose days were numbered if the government took its emission reduction targets seriously, they shut it down. The coal-fired power stations shut in South Australia faced a similar predicament.
With investment in renewable energy frozen under Abbott, these closed plant have been largely replaced by gas power plants. Due to a tripling in gas demand from the start up of liquefied gas exports, gas prices in Australia have doubled and even tripled. So these gas power plants are very expensive.
So if we cut back renewable energy further what do we expect will happen? Guess what – we’ll need even more expensive gas-fired power.
The private sector isn’t going to invest the billions of dollars required to build new coal-fired power stations. Investors can see such a plant is completely inconsistent with either the Liberal-National party or Labor’s 2030 emission reduction targets.
If we look a bit farther afield to countries overseas we’d see something very interesting. Governments from countries as diverse as India, Chile, Peru, Brazil, Mexico, the United Arab Emirates, and Morocco have elected to run auctions where they offer long-term power purchase contracts to new power projects.
In some cases, these are focused exclusively on one technology and sometimes they are open to any technology, including fossil fuels. Under these auctions, prices are being struck for new solar and wind projects that are cheaper than fossil fuel alternatives. Importantly, they are substantially cheaper than the wholesale contract power prices prevailing in Australia currently.
What many of those engaged in Australia’s energy policy debate don’t seem to realise is wind and solar power technology has followed the well-worn path of a range of mass-manufactured electronic goods. Just like mobile phones, computing, and flat-screen televisions, solar and wind power have got cheaper as they have achieved large scale production.
The International Renewable Energy Agency has been tracking the progress of solar and wind power prices under government power procurement auctions since 2010. As the chart below illustrates, prices (in US dollars) have declined markedly. The latest round of auctions have been hitting about US$50 per megawatt-hour or about $65 in Australian dollars. By contrast Australian wholesale power prices across the east coast of Australia are above $100 per megawatt-hour.
Our report, Overcoming ideology to support new power plant investment and reduce power prices, explains that the government actually has a very pleasant choice to make. We can make no further effort to reduce carbon emissions and power prices will stay extremely high. Or the government can put in place policies, like the auction schemes overseas, that would drive electricity emissions down to levels consistent with their 2030 emission reduction target and power prices will actually go down. This is because such policies will drive the addition of new supply from renewable energy that will act to displace more expensive gas and coal.
Those that suggest this will lead to unreliable power supplies seem to misunderstand how our energy market works. There are very large rewards on offer for power plants in circumstances when power demand is high and solar or wind power is in short supply. While we will need gas and coal plants less often over time, many will stick around to take advantage of the spaces of time when solar and wind are in short supply. Furthermore, battery prices are rapidly declining. By around 2025, when wind and solar will begin to reach high shares of the market, batteries are likely to represent an affordable option to help manage their variability. In addition, the Snowy Hydro expansion could also be in place by that time.
Ric Brazzale is the managing director and Tristan Edis is a director with Green Energy Markets.