Victoria has announced fifteen-year contract for wind and solar capacity amounting to 650 megawatts (the giant Loy Yang is 2,200 MW but renewables only provide about one third as much electricity per MW of capacity). The price is said to be under $60 per MWH, while the state government also garners the subsidies paid by consumers under the Commonwealth’s renewable scheme. The Commonwealth subsidies forward prices are running at about $20 per MWh.
In negotiating auctions, the Victorian government agreed to a poison pill clause that would prevent a Coalition successor unwinding the contracts without severe penalty. If the contracts were as good as the government and its gushing media supporters maintain this would not be necessary.
If some of the forecasts paid for by the different proponents of renewable energy subsidies were to be realised the contracts have some superficial attraction. Two sets of future scenarios (by Jacobs) saw prices in the $70-90 per MWh range over the next decade (last year’s Victorian prices averaged $90 per MWH). Less beneficial as regards the contracts themselves would the fantasy land forecasts of ACiL (under $50 per MWh for most of the 2020s) or Frontier (which saw prices dipping below $50 per MWh before rising to $70 plus later in the decade).
The Victorian scheme, like all renewable strategies, involves injecting subsidised electricity into the system that will run almost irrespective of the spot price. This drives down prices in the first instance. But two countervailing factors offset the initial forced reduction.
The first is that the wind/solar power is low quality – it is highly variable and hence a contract at $60 per MWh needs to be “firmed”so that the supply matches the demand profile. Retailers’ risk departments will insist on their contract arms not exposing their firms to the possibility of supply shortages, which would require augmentations at spot prices that could mean bankruptcy. Hence, “firming” contracts are necessary at a cost of $20-30 per MWh. Already this means the power is $80 plus, which contrasts to a likely free market cost of around $50 per MWh under coal based supplies.
The coal generators cannot readily provide firming support (hydro, gas and maybe batteries do this) so gain no benefit from the requirement for matching stand-by contracts brought about by subsidies favouring intermittent wind and solar power.
Compounding this is a deleterious effect on the existing coal generators. They need to back off to match the intermittency of wind and solar. This increases their own costs and forces premature closure when they are hit by other costs like new taxes on coal or the need to incur high expenses on maintenance.
The Victorian scheme’s apparent cunningness in bringing in subsidised must-run power to compete against extant power sources with very high sunk costs therefore backfires. The forecast lower price from this strategy have patently failed to come about but it adherents have not revised their thinking. Energy modellers focus in marginal costs and assume capital-intensive coal generators will remain on-line. Hence their resulting price predictions give comfort to governments predisposed to intervene in markets and ammunition to the renewable energy rent-seeker. Projecting lower prices from such interventions has provided the modellers with handsome livings.
It may be that the Victorian Government believes the convenient future price scenarios but its main goal is staying in power and the green energy strategies are powerful weapons to fight green incursions into its inner city seats. The damage that this has done to the formerly low cost electricity supply is considerable and will prove difficult to unwind.