Recent electricity contracts
AGL have announced a contract for electricity from the Queensland 453 MW Coopers Gap Wind Farm at an offtake price of less than $60/MWh (real) for an initial five years, with an apparent option to extend this at the same or a lower price for another five years. The suppliers are a consortium of the Future Fund, QIC and AGL (which retains 20 per cent ownership). AGL originally owned the project (which is to cost $850 million and is scheduled for completion in 2020) and had spent $22 million on it.
This comes after Origin agreed to buy all of the power generated by the 550 MW Stockyard Hill wind farm and the associated Renewable Energy Certificates (RECs) for a “price of below $60/MWh”.
The price of $60 per MWh is difficult to understand since:
- It is lower than the commonly understood cost of wind – Minister Frydenberg in his presentation to the Coalition Party Room put the price at $92 per MWh plus $16 per MWh to pay for intermittency (see this P. 18)
- The renewable program, by forcing the closure of baseload powers station, particularly the 550 MW Northern Power Station in South Australia and Victoria’s 1,600 MW Hazelwood facility, has boosted wholesale prices of energy; for the past year and a half, average prices were around $90 per MWh compared with under $40 previously.
- RECs presently give wind an additional $85 per MWh, meaning at present it would be worth $175 per MWh less the intermittency insurance; forward prices place a value in 2021 of the RET at $48 per MWh and for energy $78 per MWh.
Minister Frydenberg’s estimated intermittency insurance is too low in view of the RET programs’ increased quantities of wind. But assuming the real number is $25 per MWh, the AGL and Origin projects earn a net $150 per MWh (90+85-25) in today’s market, or $101 per MWh (78+48-25) in the expected market of 2021. And the price of electricity is, if firms’ statements of intent are correct, likely to continue to be boosted by the future anticipated coal generation closures (AGL has said it will close the 2000 MW Liddell station in 2022).
Another way of looking at the two contracts in view of the 2021 $48 forward price for large scale certificates, the $60 price AGL and Origin are paying for wind energy and their ability to sell the associated certificates means they are therefore buying the energy at a net cost of $12!
This complexity is absent with the South Australian Government’s purchases of the Tesla batteries, and the solar thermal plant using molten salt to offer some storage.
The latter, with a nominal capacity of 125 MW, is to cost $650 million, with $110 of this paid for by a Commonwealth grant courtesy of an unrelated deal done with Nick Xenophon. It is to provide electricity to government users at $78 but the supplier, SolarReserve would also receive a contribution from the renewable certificates worth $48 per MWh. Even so, the price seems too low given the poor performance of its first plant near Las Vegas.
Developments under the National Market
Government intervention in the wholesale market (chiefly the Renewable Energy Target (RET) for windfarms and large solar and the lesser subsidy for rooftop solar) has destroyed the market as a means of signalling the appropriate investment. From the mid 1990s at the outset of the National Energy Market, we had privatisation and corporatisation that resulted in massive labour shedding from the previously state owned and essentially union run electricity generators. The Victorian generators were manned by less than 15 per cent of those previously employed and lesser but still significant reductions in excess labour use were made in other states.
At the same time the generation facilities were made to work more efficiently, sometimes with some refurbishment, with the result that the de facto production capacity was lifted by about one fifth. In the six years to 2005 prices in NSW, Queensland and Victoria averaged under $37 per MWh, probably half the level of the (notional) price that applied under the previous integrated supply system. Prices moved upwards after that as a result first of the drought and then with the introduction and rescinding of the carbon tax.
Subsidised wind and solar has an initial price depressing effect as the subsidy brings these sources to bid into the market all their availability, with a guaranteed return; any energy earnings are a bonus. In 2015, energy prices were below $37 per MWh.
But then we saw the culmination of wind depressing the price bringing generator closures, most importantly the 550 MW Northern Power Station in South Australia and Victoria’s 1,600 MW Hazelwood facility. The stations had been starved of capital by their owners as a result of the poor price available. In the case of Northern, the facility, which at only 30 years old was relatively modern, was destroyed by the State Government to prevent any possible rescue.
The present position
The upshot of the government policies is 2017 and 2018 wholesale prices averaging around $90 per MWh. That level has become the new norm, compared with a price of around $55 for a system, like that prior to 2002, which is fundamentally coal based with hydro and gas for peak loads. This has a crucifying effect on industry competitiveness and means the economy’s future structure must become less productive with lower living standards.
That aside, the renewables cannot provide the continuously despatchable certainty that is needed for reliable supply. The Finkel solution to ensuring baseload by forcing coal stations to stay on line even when they are unprofitable cannot work. What the government will be forced to do is conduct an open tender for baseload power with a guaranteed future price. This will see new (coal) power stations conforming to some politically correct and over-expensive design, thereby preventing a catastrophe without returning us to the low prices that a market-driven system would provide.
But returning to the wind power contracts that have been written. At $60 per MWh this is electricity cheaper than the Finkel claimed cost of fossil sourced supply. The obvious question is, in that case why do we need the forced subsidies from consumers to wind that the RET brings? On current prices, abolishing the subsidies (see this P. 20) would bring annual savings to the consumer of $2 billion from the renewable schemes plus a further similar amount from other subsidies on and off budget.