Twitter is in meltdown about a report by ACiL Tasman commissioned by the Renewable Energy Target (RET) review, which has found that if subsidised electricity is provided to the market, the price falls. Laura Tingle has an article on it in the AFR. On the same page there is an article featuring a trio of rentseekers from Acciona, Senvion and Infigen who have waxed rich on the renewable subsidies and claim that scrapping the RET won’t bring a fall in power prices.
The ACiL Tasman report models the effect of the RET, which forces electricity consumers to incorporate within their supply an increasing proportion of renewable energy as defined by the program – largely wind, rooftop solar and major solar facilities. The proportion consumers are required to incorporate in their supply grows to a theoretical 20 per cent by 2020. The renewable energy eligible for subsidy costs about $100 per MWh for wind, which is nine-tenths of the renewable supply, and maybe twice that for solar. It is intended to displace commercial coal-generated electricity which costs about $40 per MWh.
So how can it bring about a fall in price?
Well the operating costs of the renewable energy are about $12 per MWh (the energy is not free because the windmills need maintenance and the solar panels have to be cleaned). The rest of the costs are sunk. So, as long as the price is over $12 per MWh (and it is three times that even without the carbon tax) the renewables in the ground will continue operating. This drives down the price from what it otherwise would be.
A good thing eh?
For a start, the subsidy to wind has diverted $20 billion of investment into a source of supply that is intrinsically uncompetitive – it is almost as though we decided to subsidise domestic clothing factories in competition with cheaper suppliers in China (oh wait, we used to do that!). That $20 billion is capital equipment deliberately funnelled into low productivity assets.
And, though the renewable energy subsidy puts downward pressure on price, it does so in the same way that distribution of half-priced Mars Bars would pull down the price of all Mars Bars. As in the Mars Bar example, somebody pays (in this case the consumer forced to subsidise the renewables), and the subsidised product has a distorting effect on the whole of production. Were this not the case we could invent the magic pudding and have government subsidise cars, food and housing and in the process bringing great riches to us all.
Subsidies must be paid for and if they had benign effects we would be using them for everything. Not only are the renewable subsidies’ immediate costs offset by higher charges and taxes elsewhere in the system, but they deter commercial investment in new and replacement capacity and therefore need to be constantly increased.
Acil have now posted their slides. https://retreview.dpmc.gov.au/sites/default/files/papers/preliminary_modelling_results_workshop.pdf
They used many assumptions, one of which that a new coal power station would need to get $55 per MWh to be viable – very high when our coal resources are understood. If we could meet US build productivity, (eradicate union monopolies?) we could get new coal power at under $40 per MWh.