Will abandoning energy subsidies allow the electricity market to self-correct?

Coordination of supply in network industries

Network industries involve firms cooperating in order to meet customer demands.  Their success depends upon parties mutually agreeing on certain interconnection standards in order to combine components together.  This need for coordination was often ensured by keeping the major supply components in-house.

Thus, railways were vertically integrated to ensure that the package comprising train types, tracks, junctions, signalling, workshops, stations and other facets could be coordinated without negotiated compromises with independent businesses.  Difficulties arose in the UK system when track and trains were placed with different businesses and each attempted to foist joint costs on to the other.  Some privately owned freight lines continue to operate like this – notably with Brazilian and Australian iron ore supply routes.  In the case of Australia, BHP and Rio spend hundreds of thousands of dollars a year on legal advisors to maintain control of their rail lines and what they carry; they do so to combat constant attempts by regulatory authorities seeking to force them to open their facilities to other users.  Their imperative is to avoid any interruption to their shipments, since even short delays mean huge costs.

This vertical integration was also standard for electricity supply.  Not only were generation and transmission under common ownership but so also, in most cases, was local distribution.  Integration ensured that the lines and the different sources of supply optimised the needs of the market.  In most of Australia that meant maximising the use of the cheapest source of supply, coal, while using more flexible, higher cost gas or supply constrained hydro to fill in peaks and ensure reliability.  The coal generators remain lowest cost but, since most of their costs are in fixed plant and incurred whether or not they are generating, only when they can continue running continuously for prolonged periods.  Coal generators are also not easily adaptable to stop-start operations.

Of course, with integrated electricity systems, especially where government is the owner and a monopoly is in place, there is a risk that the workforce or politicians will take control and boost costs.  To a greater or lesser degree there was such loss of cost control in Australia.  The competition policy reforms of the 1990s followed by privatisation reversed this  and brought massive productivity gains– in the case of generation in Victoria, the former state government monopoly employed four times as many people (including contractors) as the new private owners and was unable to operate with the reliability the private owners achieved.  Considerable gains were also made in poles and wires operations.  The benefit of these was seen in stable prices, with upward movements in 2007-8 (when the millennial drought cut hydro supplies) and subsequently, when the progressive increase in subsidised renewables forced the closure of coal generators.

Another network industry, air travel, never had integrated services.  But the airports impose requirements on the airlines.  To use an analogy with electricity supply, airports would not tolerate a sizeable and highly variable proportion of their landing slots being taken by aeroplanes that arrive unscheduled and demand to be serviced ahead of scheduled arrivals.  In other words, airports would not allow non-despatchable renewables to squeeze out scheduled arrivals.  Airports which tried to operate in that way would need to make comprehensive adjustments to their charges so that the variable suppliers’ costs were reflected in the prices they paid.  Any such airport in competition with others would find scheduled airlines re-locating to avoid facing discriminatory treatment as a result of the airport’s accommodation of random arrivals.

Disruption from new technologies

While the effects of competition in forcing down costs and forcing suppliers to pass these reductions is standard economics, Schumpeter considered this process to be far less important than innovation where new competitors were so potent that they displaced the established suppliers.  This outcome, now referred to as disruption, can be seen today with taxis, perhaps hotels, certainly newspapers.  Where Schumpeterian market disruption occurs, the losses to incumbent suppliers with sizeable sunk costs in newly obsolete technologies must be accepted.

Many claim that renewable energy is such a disruptive technology.  Bill Shorten is not alone in maintaining that energy from wind and solar is the “technology of the future”.

This may well be its destiny but, if so, it would be one of those very rare technologies that have achieved that triumph as a result of government subsidies.  And the subsidies in place over the past two decades do not, at least yet, appear to have brought the infant industry into maturity.  Its sponsors continue to abuse those advocating a cessation of renewable subsidies under the Renewable Energy Target and under the National Energy Guarantee (NEG).

Former Energy Minister, Josh Frydenberg, argued that the NEG he was promoting was “technology neutral”.  By that he meant the carbon tax (emission intensity scheme) that was central to the NEG placed a price impost on energy supplies in proportion to the greenhouse gas emissions they entail.  It would not actually be technology neutral unless the greenhouse gas free sources are also the cheapest sources.  In the absence of that, their scarcity in relation to the regulatory requirements of abatement would result in them commanding a premium price over alternative generation sources.

Frydenberg may have accepted the industry’s claims that renewables would be competitive five years from now, hence there would be no premium price required.  The ACCC certainly seems to have done so, since it recommended the removal of the subsidy to rooftop solar installations from 2021, as the subsidy would not then, it claimed, be needed.

The NEG also required “firming contracts” for non-despatchable generation (i.e. wind and solar).  Minister Frydenberg estimated the cost needed to “firm up” wind and solar supply would be around $16 per MWh.  That is 20 per cent on the spot price, clawing back some of the $80 per MWh subsidy wind currently receives (small scale solar receives $40 per MWh plus the variable value of feed in tariff subsidies.).  Some proportion of this, perhaps all of it, would be incurred even without a regulatory requirement since risk assessment departments in retailers would require the capacity they contract for to be firmed up.

No market participant really expects wind and solar to achieve cost parity with coal – anyone who did so would also acquiesce in the elimination of the subsidies.  Instead we see these augmented with batteries and the, perhaps now forestalled, $10 billion Snowy 2 water recycling project.  In addition, the Australian Energy Market Operator has embarked on an aggressive purchase of reserve capacity and is foreshadowing a considerable expenditure to link wind rich regions to major markets.

The artificial disruption of established energy supply sources from wind subsidies has undermined the energy markets based on meeting customer requirements at lowest costs.  The effects will now be difficult to unscramble.  Elimination of the wind subsidies and abandonment of new taxpayer subsidies to renewables is an essential first step.  Whether this will allow markets to apply a self-correction in light of the on-going policies of subsidies being promoted by the alternative government is dubious.  But at least the Liberals, having rid themselves of the cancerous effects of Malcolm Turnbull’s mistaken policy preferences, have an opportunity to search out a solution.

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29 Responses to Will abandoning energy subsidies allow the electricity market to self-correct?

  1. David Bidstrup

    The “market” will self correct when politicians realise 2 things. (1): Renewable energy via wind and solar are completely useless and (2): Large coal or gas fired power stations that can sell all their production to consumers without having to make way for renewables is the cheapest and most reliable option, as it was in the past. The other thing that needs to change is the obsession with “emissions reductions” and the Paris Accord. They make absolutely no difference to a problem that does not exist.

  2. stackja

    RGR created the problem. TA tried a solution. MT didn’t help. Maybe ScoMo/JF will.

  3. H B Bear

    There is no capacity for the electricity market to self-correct because the level of regulatory risk is now so great that no coal plant could be built or financed without a long term government take-or-pay off-take agreement.

  4. Tim Neilson

    RGR created the problem.

    Pretty much, though Howard in his pre-2007 election panic didn’t help things. But it’s true that RGR started the chainsaw and began the process of swinging it around in the crowded lift of the Australian energy system.

    TA tried a solution.

    Sort of. It’s not altogether TA’s fault that he was surrounded by ghastly self-seeking cretins, but in hindsight he should have taken the baseball bat to a lot more of them a lot harder.

    MT didn’t help.

    That’s the understatement of the millennium.

    Maybe ScoMo/JF will.

    Don’t mortgage your house to bet on it.

  5. H B Bear

    RGR created the problem.

    The Renewable Energy Target (RET) was introduced by The Father of Middle Class Welfare. The RET was increased during the RGR Dark Ages when a lot of existing knowledge was discarded to appease Gaia.

  6. Rafe Champion

    A step in the right direction by Gottliebsesn, tell the truth, but he has not quite got to the whole truth, that all of this is based on the absurd assumption that we need to reduce CO2 output, even Finkel said that would make no difference. I was a little surprised that Judith writing in The Aust today seems to regard the acceleration of investment in unreliables as inevitable, as though the rort cannot be resisted.

  7. We’ve tried everything else and renewable energy is now supposed to be as cheap, if not cheaper, than fossil fuel, so why not let renewable energy proponents try it without subsidies?

    And isn’t that the ‘certainty’ that is required when it comes to energy delivery?

  8. RobK

    The non-dispatchable forms would nornally have a low value but the premium due to CO2 mitigation means they have a 300% premium when they should have a discount of 60 or 70%. The central debate is this co2 thing. The subsidies are the problem to cost and reliability. If it was a requirement that RE was dispatchable over its biding blocks well in advance perhaps they could bid into the same market. At the moment low grade wobbly energy gets preference over over premium stable secure energy. There is a way through this but it will mean a much dampened RE industry. It is the best solution to slow the uptake because the capital involved is high for all forms.

  9. Bruce of Newcastle

    Another subsidy that wind turbines get is no fines for environmental harm.

    Fossil fuel operations that kill wildlife are fined heavily, typically $1,000-$5,000 per dead bird.

    It is well known that each wind turbine kill hundreds of birds and bats per year, including many protected species such as wedge tailed eagles.

    Fined at such a rate per dead bird would cost each wind turbine a large part of the value of the electricity they produce. That would be fair treatment, seeing the howling and activist attacks on coal producers and generators.

    Why do wind energy producers get a free pass for the environmental carnage they cause?

  10. cohenite

    Renewables are the useless solution to a non-existing problem: that CO2, not just any CO2 but only human CO2, is driving climate change for the worse. All cost benefit analysis show not just harm to the climate through increased temps, if you ACCEPT CO2 causes increases in temp, but substantial benefits so that by doing nothing and not investing in renewables would mean overall net benefits to the world.

    But of course CO2 does not drive temperature, at best temperature drives CO2. Mostly though no correlation seems to exist:

    http://icecap.us/images/uploads/CO2,Temperaturesandiceages-f.pdf

  11. RobK

    The idea that “firming”(which can mean any number of things) at $16/MWh is going to make RE as stable and reliable as coalfired is not credable. I suspect for $16/MWh you get some short term buffering and perhaps some frequency control FCAS . You dont get load shifting (batteries are around $180/MWh) and for wind or sun droughts you still need backup. On top of this major redesign of the grid is required. On top of that you need extra RE to charge storage and EVs. The cost per MWh will rise steeply as penetration of RE increases. RE is not viable at this time.

  12. RobK

    RE has a place in off-grid applications and in replacing some extremities of the existing grid to off-grid.

  13. stackja

    Do wind turbines create sound that cause health problems?

  14. It is well known that each wind turbine kill hundreds of birds and bats per year, including many protected species such as wedge tailed eagles.

    Way more than that and this is only from 2013: https://www.spectator.co.uk/2013/01/wind-farms-vs-wildlife/.

    Every year in Spain alone — according to research by the conservation group SEO/Birdlife — between 6 and 18 million birds and bats are killed by wind farms. They kill roughly twice as many bats as birds.

    Because wind farms tend to be built on uplands, where there are good thermals, they kill a disproportionate number of raptors. In Australia, the Tasmanian wedge-tailed eagle is threatened with global extinction by wind farms. In north America, wind farms are killing tens of thousands of raptors including golden eagles and America’s national bird, the bald eagle. In Spain, the Egyptian vulture is threatened, as too is the Griffon vulture — 400 of which were killed in one year at Navarra alone. Norwegian wind farms kill over ten white-tailed eagles per year and the population of Smøla has been severely impacted by turbines built against the opposition of ornithologists.

  15. egg_

    Will abandoning energy subsidies allow the electricity market to self-correct?

    Like a stopped clock?

  16. egg_

    Do wind turbines create sound that cause health problems?

    Teh blog owner doesn’t believe in infrasound/its psychoacoustic effects.

  17. Teh blog owner doesn’t believe in infrasound/its psychoacoustic effects.

    For energy companies and landowners sound that is the sound of money going in the cash register. For neighbours it’s simply horrid infrasound.

  18. Eyrie

    “including many protected species such as wedge tailed eagles.”
    Yeah, I’m particularly pissed off about that. Shared thermals many times with wedgies, magnificent birds, often at altitudes where they obviously aren’t looking for prey, just the joy of soaring.

  19. Fang

    We have the issue, of wind & solar $$$ seekers, building as fast and as many as they can, now! As the moment the ret or any propping up the unrenewables $$$$, Is stopped, they will want as much compensating as they can get! It will be huuge dollars $$$$$$$$$$$$!

  20. Disgusted Liberal

    “Whether this will allow markets to apply a self-correction in light of the on-going policies of subsidies being promoted by the alternative government is dubious.”
    But you have been urging this action on the basis that the Liberals MUST do it. What is your remedy, having promoted the disruption that will likely make Shorten’s run to the Lodge a breeze?
    Many of us believe that the disruption of policy by the IPA and others has wrecked our energy markets and is making it almost certain that power prices will continue to rise for the foreseeable future.

  21. egg_

    For energy companies and landowners sound that is the sound of money going in the cash register. For neighbours it’s simply horrid infrasound.

    Wait til they develop a 10 km wide, 200 m high horizontal rotor…

  22. Pickles

    SBS Portillo worth a look.

  23. Craig Mc

    Beats me why the government doesn’t get into the fray and beat the merchant banking parasites at their own game.

    Government owned peaking plants, coming onto the market at $5,000/MWh. Plenty of fat left at that number for the taxpayer, and the $14,000/MWh gouging by bankers gaming the system would be a thing of the past.

    Speaking of merchant banking parasites, how many femto-seconds before Waffleworth joins the board of one of the carpetbaggers?

  24. Bruce of Newcastle

    Do wind turbines create sound that cause health problems?

    Apparently yes.

    French farmer sues energy giant after wind turbines ‘make cows sick’

    “Acoustic Torture” …Austrian Chamber Of Physicians Warns Of Health Hazards From Large-Size Wind Turbines

    Greens In Denial: Health Impacts From Wind Turbines Are Real – And Not “In People’s Heads”

    They’re just three I randomly grabbed out of my bookmark folder. The interesting thing is such stories get reported. It’s like the lady in Indonesia who was arrested on blasphemy charges last week…for complaining the call to prayer in the local mosque was too loud. Complaining about wind farm noise is a similar heresy. I suspect the iceberg under the surface is very large.

  25. Rafe Champion

    This looks relevant, Hayekian commentary on the effect of subsidies.

  26. closeapproximation

    I like the airport analogy.

    I’d love to see what would happen if subsidies were removed in earnest. It’s a difficult egg to unscramble.

  27. davefromweewaa

    It’s only a rort if you’re not in it Alan!

  28. One of the reasons that discussion of this topic often seems to degenerate into circular references is that electricity by itself, in units of kW-hrs of energy is not a commodity in and of itself.
    The commodity that is traded is energy available whenever one needs it. In simple terms, the electricity customer is accustomed to, and demands, electricity which is affordable, reliable, and secure. This customer expects it to be “ON” whenever he flicks the switch, in quantity and quality commensurate with his needs. It is impossible for renewables, wind and solar in particular, to deliver this commodity in terms of these three values. Even hydro cannot always deliver affordable, reliable and secure, as the State of Tasmania discovered in December 2015.
    As a result, reliance on renewables of necessity requires another parallel system of fossil fuels or nuclear to exist in parallel with it. The fact that such duplication is more than twice as expensive should be obvious to any being with at least half an eye and an anus.

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