The previous post discussed the incoherencies of Australian energy policy. This post discusses the consequences of that incoherence.
Two relatively straightforward consequences of this mess, are, that emissions reduction is failing, largely because of policy issues.
[I]ndustry emissions (excluding electricity) have risen to 60% cent above 2005 levels behind increases in the Oil & Gas (621% increase), Road Transport (122%), Aviation (54%) and Mining (41%) sectors….
Emissions from the industrial sector will surpass electricity as Australia’s largest emitting sector in 2023-24, with companies free to increase their ‘emissions baselines’ under the government’s Safeguard Mechanism scheme.
RenewEconomy 12th Feb 2020 a
And, it appears that, in NSW, more expensive gas production is displacing cheaper coal and solar, due to internal market factors. As the reporters remark:
While more remains to be done to understand this in detail, prima facie this is yet another instance of the exercise of market power by the coal generation oligopoly in New South Wales.
RenewEconomy 12th Feb b
The incoherence of policy is also starting to bite into investment in Renewables, and it is quite possible it was intended that way, but it could have been an unexpected consequence of incoherence. Who can tell?
The level of new investment commitments in large-scale renewable energy projects has collapsed by more than 50 per cent according to new analysis by the Clean Energy Council which reveals a fall from 51 projects worth $10.7 billion in 2018 down to 28 projects worth $4.5 billion in 2019.
Clean Energy Council Chief Executive Kane Thornton said mounting regulatory risks, under investment in transmission and policy uncertainty have contributed to increased risks for investors and resulted in a lowering in confidence and slow-down in investment commitment….
The top reasons for a decline in investor confidence was due to grid connection issues, a lack of strong national energy and climate policy and network congestions and constraints.
Clean Energy Council 30 Jan
As the Clean Energy Council suggests, one of the fundamental problems is lack of working electricity grid, which is certainly influenced by energy policy. As a consequence, The Australian Energy Market Operator has warned of long queues for connection. The gird in some parts of Australia is massively fragile. This may be resolved by the AEMO’s Integrated System Plan, but the earliest this is likely to be built is in 2026 or 2027. So it may take seven years before some new projects can connect to the grid. What this does for investment, should be clear to nearly everyone.
The CEO of AGL remarked that although battery technology was improving rapidly, was cheaper than pumped hydro and will compete with gas peaking plants, fewer renewable energy projects would go ahead because of the costs and economics of connection. “There is a struggle for new projects, there is a struggle to get on, and they are struggling to maintain forecast loss factors… A lot of renewable energy is getting choked.”
There are forces pushing renewable companies out of the market.
One of the biggest contractors and constructors of large-scale solar farms in Australia, the listed constructing giant Downer Group, has signaled a dramatic exit from the solar business, saying it is too hard.
[The CEO said:]
“Developers, contractors and bankers all struggle to come to terms with the risk of large power loss factors, grid stability problems, connection problems, and equipment performance issue”
RenewEconomy 12 Feb 2020
Other companies are also having problems with the complications of the rules around connection and moving out of the field.
“To say this is a significant blow to investors is a major understatement,” said David Shapero, managing director of the Australian arm of German renewable energy developer BayWa r.e., which has one solar farm in Victoria forced to operate at half capacity since September and a second that was due to come online in October but is lying idle. “In the end, we have invested around $300 million in two solar farms and we’re getting returns on half a solar farm.”
Australian Financial Review 24 Feb 2020
Mr Shapero continued, to indicate that inadequate and old regulations were the main problem:
“There is no doubt that AEMO understand the issues. They have very good leadership. But there’s also no doubt AEMO needs assistance from government, other regulators, and the industry to put in place immediate, small changes to the rules.
“These small changes will allow them to ensure such issues don’t occur in the first place, and give them much greater control to manage the transition.”
as above.
Senior economic journalist John Kehoe, who again is not left-wing, generalises the problem to almost the whole economy:
The uncertainty and unpredictable energy market regulatory interventions by the government are contributing to business investment falling to its weakest share of the economy since the early-1990s recession.
Australian Financial Review 22 Feb 2020
Meanwhile the NSW government and the Federal Government are planning to fast track evaluations of three projects under the federal Coalition’s Underwriting New Generation Investment program. This agreement includes:
- extension of the Vales Point coal generator
- ensuring sufficient coal supplies for the Mt Piper coal generator near Lithgow, to keep it going to 2042.
- a gas plant in Port Kembla
- pumped hydro scheme in the state’s North
- work on the grid in exchange for more gas production.
They also are trying to keep the Liddell coal fired energy generator going beyond its planned 2023 closure date which would cost $300m for three years. It is now likely that it will cost more to keep the power station operating than can be recovered in operating profits. It is not clear who would be paying this money.
Vales point gives further information about how business works in NSW. In November 2015, the NSW Government sold Vales Point Power Station to Sunset Power International for $1 million – less than the price of many suburban houses. In 2017 the site was valued at $730 million. The company bought back the shareholdings and the investors received a great cash pay out.
The shareholders are companies associated with Trevor St Baker who controls more than 25 per cent of ERM Power Limited, which purchases power from Vales Point, and which has contracts to supply the NSW Government with electricity. So the NSW government sells a station, used to provide it with power, at a bargain price and then buys power from it, making a fortune for those who invested. That seems like a sensible energy policy.
To make the power station cheap, the NSW government said it would close in 2021, but still sold it massively under the normal commercial rates. And now, the supposed closure date is being ignored, and it may be (according to the Daily Telegraph 14 Feb 2020 “Coal’s $11m turbo charge”) that at least $11m dollars of taxpayers’ money is being used to provide a turbine upgrade and high pressure heaters. This is how the free market works in practice.
This may also be more than government stupidity and policy incoherence, if it was, then why keep supporting the problem?
Nevertheless, the trends are clear. Have policy to make life difficult for investors in renewable energy, and life easy for investors in coal.
Tags: Disinformation, disorder, politics
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