Clean energy target a non-starter on road to affordable energy

You remember the bloke wanting to get to Dublin. He wasn’t in a good place to start his journey. This sums up energy policy in this country.

But here’s the thing: Dublin is affordable and reliable energy and we have to get there as soon as possible. And let’s be specific: we need electricity prices to halve from today’s levels to return to their historical average. This would mean we have electricity prices comparable with the US, for instance. It’s doable.

Luckily on the trip to Dublin, a little bird tells our bloke that the clean energy target is a non-starter as far as the government is concerned. It was always a completely dopey idea; just a rejigged version of the renewable energy target, which has been one of the most economically damaging interventions imposed by an Australian government.

(Bob Hawke has to be joking: a $122 million postal survey, which is not even an instrument of economic policy, doesn’t make the top 1000 in terms of bad policies.)

To be sure, a CET would have been better than an RET when this dastardly edict was first implemented. Depending on the parameters, a CET could have broadened the range of technologies that would have been incentivised by the scheme. But it is way too late to be talking about this.

The CET as envisaged by the sneaky Finkel report is described as “technology agnostic”. This is a serious stretch in the context of arbitrarily chosen emissions intensity benchmarks and the assumed need to meet set emissions reduction targets for the electricity sector.

The Finkel version of the CET would mean that all new investment in electricity generation would come from renewable energy (42 per cent by 2030) and that coal-fired electricity plants simply would cease to operate across time. It’s just the RET on steroids.

And don’t believe for a second the ridiculous proposition of Finkel that electricity prices would be lower with a CET than without. The same prediction was made about the RET and we know how that turned out.

One of the more useful developments in the energy policy space is the claim by the renewable energy sector that there is no longer any need for subsidies because renewable energy is now cheaper than coal or gas.

Hallelujah, I say. It means that those pesky renewable energy rent-seekers will no longer be camping out in the corridors of Parliament House beseeching gormless parliamentarians to serve up investment certainty so they can get on with their business.

What a lot of hooey is this investment certainty idea. The role of business is to make informed decisions about the investment environment and to commit to certain capital expenditures in terms of size and timing. There is no case for an RET-like racket with its volumetric guarantees and the prize of Renewable Energy Certificates. Thank goodness we are seeing the back of it, although the RET does limp on to 2030.

So what happens in this world of unsubsidised renewable energy? Hopefully there will be a significant dip in the construction of new wind farms, which are so disruptive to rural communities, and solar farms. The activists at GetUp! are predicting a valley of death in the early 2020s as far as renewable energy investment is concerned; I’m assuming they are right.

The key policy action now is to insist that renewable energy can be offered to the market only on the basis of full dispatchability. This condition must apply to existing renewable energy as well as new installations. Unless there is demonstrated firming (back-up) capacity attached to the sources of renewable energy, then the bids should not be accepted.

In fact, if this had been part of the original RET, the economic damage could have been much less. Instead of having a completely free ride — bidding in low and receiving RECs while ignoring the costs of intermittency as well as driving coal-fired plants to the wall — renewable energy providers would have been obliged to offer only reliable electricity.

This rule may double or even triple their costs, but so be it. Everyone believes in level playing fields, don’t they?

There may also be a case for reconsidering the bidding rules that attach to the National Electricity Market. At the moment, the highest marginal bid sets the price for all those who have their bids accepted over the time interval. In an increasing number of cases, it is the expensive gas-fired power stations that are setting the price — up from 12 per cent of cases several years ago to quarter now.

This means that all the intra-marginal bidders, including the renewable energy producers, are making a great deal of money. The system also encourages a high degree of gaming by the generators, particularly in the context of limited competition and the exit of several coal-fired plants.

Take the Queensland generators. It’s not as if they are operating at full capacity. But in terms of making money, it makes sense for one of them, say, to stay out of the market or for them all to make small bids for gas to set the price. But don’t think that it’s just the Queensland generators that are playing this game.

The three big gentailers — generators and retailers — are making hay while the sun shines. The real reason AGL wants to shut the Liddell coal-fired power station in NSW’s Hunter Valley (and not sell it to another operator) is that its exit from the market will further enhance the scope for the company to make money by working the system.

This gaming of the system is one reason the predictions of the Australian Energy Market Operator have become so unreliable. When Victoria’s Hazelwood power station closed in March, AEMO declared: “The security of the Victorian system or the broader NEM would not be compromised this summer.” Six months later, AEMO claimed a “strategic reserve of 1000 megawatts of flexible dispatchable energy resources is required to maintain supply reliability in South Australia and Victoria this summer”. (Same summer.)

A central question is whether the government should reconsider the bidding rules in the NEM and switch to an arrangement whereby bidders are simply paid the price they bid. This really would set the cat among the pigeons, not only for the renewable energy players, absent any RET/CET, but also for companies such as AGL.

It may allow our bloke to get to Dublin a bit faster.