Broken power system still fuelled by calls for subsidy

A plea by energy retailers for higher prices to compensate for the rising use of household rooftop solar is an inevitable and predictable confirmation of the dysfunction that now characterises Australia’s electricity system. It represents another chapter in a tale of cascading subsidies that have become necessary as a system rooted in baseload generation from coal is forcibly switched over to one dependent on variable sources of renewable energy such as wind and solar.

If retailers get their way, energy users who have been forced to subsidise renewable energy projects, including rooftop solar, will be asked to pay more for the projects that these renewables were designed to force out of the market in the first place. The new cost would be included as part of the regulated price that retailers are allowed to charge. The power retailers also are largely the owners of the coal-fired power stations that still supply most of the nation’s electricity but are being rendered unprofitable by design and forced to close.

Climate Change and Energy Minister Chris Bowen has upped the ante on the subsidy regime with a turbocharged Capacity Investment Scheme that will underwrite the profitability of 32 gigawatts of new renewable projects, up from 6GW previously. Like rooftop solar, the overbuild of large-scale renewables is needed to meet Labor’s target to cut greenhouse gas emissions by 43 per cent from 2005 levels by 2030. This target also is being revised upwards.

A large amount of wind and solar is required to deal with the fact individual projects will produce for only some of the time. But when they are all working together it is likely there will be a glut, as is the case with rooftop solar on sunny days when there is low demand. Wholesale prices are now often negative in the middle of the day.

But regardless of how many wind and solar projects are built, it’s likely there still will be periods of shortage that must be plugged when intermittent power generation is not sufficient. The experience in Britain has been that baseload generators have demanded subsidies to be available still when needed under a capacity market. Renewable generators that are producing power that is not needed have demanded to be paid as well.

Projects designed to help, such as the Snowy 2.0 pumped-hydro and expanded transmission network, are proving to be slower and more expensive than promised. Under Mr Bowen’s latest scheme, taxpayers will be on the hook to ensure all of the projects approved as part of the 32GW target achieve a minimum rate of return. Ironically, the subsidies will make renewable energy, the so-called cheapest option, more expensive than it otherwise would be. But a price guarantee and overbuild ensure that other options such as nuclear will struggle to find space in the market to justify their cost.

If adopted, the latest call for assistance from electricity retailers will be felt directly by energy users. Retailers want a higher price because of fierce competition from rooftop solar as well as the looming impact of batteries and offshore wind that will depress prices in the evening, after the sun has stopped shining and when wholesale prices traditionally have spiked. Retailers are urging the Australian Energy Regulator to factor the rise of solar into its considerations when determining the default market offer from July.

After two years of big increases in the default market offer price, the political pressure will be for the AER not to approve another big increase. But the laws of physics dictate that power will have to come from somewhere and private sector economics suggests absorbing sustained losses is not an option for generators.

This leaves taxpayers and users on the hook to continue Band-Aiding a system that has been broken by ideology and a lack of proper planning.