New wind and solar generation being built in spite of low prices

Why, in spite of a glut, are new renewables still being built?
2020, like 2019, will see $9 billion spent on new (large scale) wind and solar generators. That is over 6 GW in each year (Hazelwood was 1.6 GW but could run for 90 per cent of the time, whereas wind runs at 33 per cent and solar less).

An apparent anomaly is that, though the Commonwealth’s Large-Scale Generation Certificate (LGC) subsidy for wind and grid-supplied solar continues to be paid to existing supplies, it is not abvailable for new supplies.  It is capped at 33,000 GWh, a level which will be surpassed by supply reaching 40,000 GWh in 2021. New supplies can only get a Commonwealth subsidy by buying out existing facilities.

Even so, the Clean Energy Regulator expects new supplies at half of the very high levels seen in recent years.

The composition of income received by a wind turbine
Wind turbines usually have a price contracted for the life of the turbine under a Power Purchasing Agreement (PPA).  That price would be a combination of its market value and the subsidy it receives.

For wind turbines, a standard 3 MW unit operates a third of the time, generating 8760 Megawatt hours a year.  The LGC subsidy paid to wind and grid-supplied solar is the equivalent of a Megawatt hour.  The subsidy has been worth anywhere between $40 and $80 and has been higher.  So, if an average turbine receives $60, its annual subsidy (8760*$60) is $526,000 per year.

The turbine also earns the market price.  Prior to the 2017 closure of Hazelwood this was around $40 per MWh and in 2019 rose to $90 per MWh.  But the value of energy from a wind turbine or solar farm would be discounted by perhaps $20 because its irregularity needs to be balanced by a “firming” contract from a gas or hydro plant.  Even so, with half its income from subsidies, a standard turbine would have been grossing $1.1 million a year; far greater than the $750,000 rule of thumb for profitable break-even.

Future developments
In the present COVID world, lower demand, a re-direction of gas to the domestic market and a rapid growth of renewables has brought lower prices.  Moreover, the massive build of variable (wind and solar) power is distorting price patterns frequently bringing negative prices during the day.  The current average spot market price is $45 per MWh (under $35 in Queensland) but earnings for wind/solar supplies may be little more than $10 per MWh.  This is because they require hedge contracts to balance their output, which is predominantly during times when prices are low.

The “COVID normal” average price is likely to be something closer to $80 but the panoply of subsidies and the consequent pattern of price distortions makes estimating that very difficult. The AFR reports, “JPMorgan’s base case is for long-run wholesale power prices to recover to an average of $75/MWh, based on the estimated contract price for renewable power plus firming, gas prices and the levelised cost of electricity.” The AFR finds it unremarkable that the new normal price is twice that which prevailed prior to the “renewables transition”.

The main driver for new wind and grid solar now is State subsidies which include:

  • Victorian Reverse Auctions with subsidies aimed at bringing the state’s renewable supplies to 50 per cent by 2030.
  • Queensland’s Power Purchasing Agreements for new solar and wind.
  • The ACT’s “voluntary” additions of 2,200 GWh of renewables.

The 15 year power purchases are said to have been contracted at only $55 per MWh by Victoria and $64 per MWh in Queensland, prices which are extraordinarily low, though far in excess of those presently available on spot markets.

The “COVID normal” subsidy to wind/solar is some $13 billion a year, which includes direct subsidies, renewable-driven transmission and Snowy 2 spending, and the boosting of long term prices due to subsidised renewables forcing closures of coal generators.

The Commonwealth’s continues to subsidise to currently installed wind/solar facilities and is maintaining support to new roof top facilities, Snowy2 and myriad other programs.  Together with state subsidies these policies continue to undermine the economics of coal generation, the cheapest form of electricity.  Equally important, in pushing onto the market massive supplies of variable power, now almost 20 per cent of supply, the measures are causing parlous instability in the market.

Compounding the tragedy, not one of the eight Australian energy ministers and their most senior officials understands the damage they have done and continue to do.

 

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13 Responses to New wind and solar generation being built in spite of low prices

  1. Roger

    Compounding the tragedy, not one of the eight Australian energy ministers and their most senior officials understands the damage they have done and continue to do.

    Nor – in QLD at least – do they understand that we can’t afford this.

    $110bn in state debt and rising.

  2. stackja

    Lack in energy MPs and bureaucrats only worry about if there is enough OPM for the ruinables.

  3. Bruce of Newcastle

    An apparent anomaly is that, though the Commonwealth’s Large-Scale Generation Certificate (LGC) subsidy for wind and grid-supplied solar continues to be paid to existing supplies, it is not abvailable for new supplies. … Even so, the Clean Energy Regulator expects new supplies at half of the very high levels seen in recent years.

    They’re betting that Labor will get in and abolish the cap because maaates.

  4. Peter Smith

    Sorry, Alan’s a great guy, doing great work. But my sleep was interrupted last night and trying to follow this kind of stuff is a nightmare. For goodness sake make it simpler.

  5. Professor Fred Lenin

    The carpetbaggers will continue to invest in the free money scam as long as it is subsidised by taxpayers and politicians take bribes from them ,remove the subsidies and watch them run .

  6. Peter Smith
    The problem with making it simple is that the interconnections of different energy sources prevent this and make the industry analysis susceptible to con-men and ideologues mouthing ostensibly simple solutions that have massive adverse ramifications. That’s why senior decision makers, not all of whom are malevolent, do not understand that their seemingly benign actions have destroyed a once highly efficient indiustry.

  7. MACK

    Add the cost of climate madness to the cost of Covid madness, and it’s surprising society actually maintains our current standard of living.

  8. RobK

    Thanks Alan,
    That’s it in a nut shell.
    If they back out now there will still be subsidies to pay until 2030 for existing commitments, then some expenditure to sort out the mess but that will be far cheaper than carrying on the present trajectory. At some stage there maybe a point of no return as commitment to RE struggles to lean on technology fixes that aren’t available or don’t work as planned. There is no solid industrial basis for the planning, it’s speculation on technology that has not been demonstrated to be fit for purpose. The government seems to be falling for it hook, line and sinker.

  9. yarpos

    So, we are starting to sound like climate alarmists on this topic.

    When will problems strike? We say that we are headed for a cliff, so where is the unprecedented tipping point disaster thing going to actually happen? or will we sound like perpetual chicken little like Gore , Flannery, McKibben and co?

    Experience says somewhere in the 30-50% range the wheels start to come off. However in Oz we are more exposed as we have no nuclear or hydro blessed neighbors to lean on. We also dont have a good view on the number of band aids being applied around the NEM. Batteries, synchronous condensors and small scale generation is being added all the time as the house of cards builds. This is on top of major items like the SA to NSW interconnector to nowhere.

    SA learnt their lesson and continue to pay. It seems no other State took anything away from that experience, which is staggering really.

    So once again we wait for summer and roll the dice

  10. BoyfromTottenham

    yarpos, I agree, but up here in Queensland we have the newest, most efficient coal-fired fleet of generators in Australia (fully owned by the Qld government), and regularly send around one sixth of our capacity south to the starving folk, at top prices. But you never hear a word about this in the press, just at sites like this that has folk who actually understand what is going on, and how this whole energy generation and regulation malarkey works. Yes, the southern states will be in deep doodoo as their renewables push out fossil generation and destabilise what is left. SA will be first to go, then Victoria is my guess. Tassie looks good, but only because of hydro, unless they have a drought and/or the interconnector explodes again. How the hell did we get in this mess?

  11. Crossie

    Professor Fred Lenin
    #3607530, posted on October 5, 2020 at 9:29 am
    The carpetbaggers will continue to invest in the free money scam as long as it is subsidised by taxpayers and politicians take bribes from them ,remove the subsidies and watch them run .

    Exactly, politicians’ friends need to make billions out of gullible taxpayers.

  12. Ben

    Adelaide 2017
    Melbourne 2019
    California 2020

    Adelaide, Perth and Melbourne are shaping up as the next city blackouts when the wind falls.

  13. Rob

    The crass stupidity of those responsible for overseeing the utilities that deliver our water, gas, and electricity, goes beyond belief.
    We don’t build dams because “there won’t be rain to fill them.
    We sell our gas offshore then import our needs because we must not drill for more.
    Now we are headed toward tens of thousands of wind turbines with life expectancy of around 20 years or catastrophic failure even earlier.

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