Old Abbott and Newman's RET confusion

In a press conference yesterday about improving prospects for manufacturing, Tony Abbott made a statement that appears ominous for the renewable energy industry:

And the RET [Renewable Energy Target], well look again, we support sensible use of renewable energy and as you know it was the former Howard Government which initially gave us the RET and at the time it was important because we made very little if any use of renewable energy.
We've got to accept though, that in the changed circumstances of today, the renewable energy target is causing pretty significant price pressure in the system and we ought to be ….an affordable energy superpower…. Let’s make the most of the comparative advantages we've got and cheap energy – affordable energy – ought to be one of our comparable advantages.

However, there’s a silver lining because the funny thing is the RET is actually reducing energy costs for energy-intensive manufacturers.

This is completely counter-intuitive and it’s understandable that those outside the electricity sector find this hard to understand, including the prime minister and probably many of those people he trusts and respects – like Maurice Newman, the man who will be advising the manufacturing taskforce Abbott is establishing.

In my conversation with Mr Newman in July this year, he was convinced that the Renewable Energy Target and the carbon trading scheme were almost entirely to blame for the doubling of power prices since 2007, even though the Australian Energy Market Commission and every state government utility regulator has provided information that shows this is not accurate (as explained in the article, A power price reality check, March 25).

For this group, the logic is that renewables must require a price higher than what existing power generators charge, otherwise why would you need the subsidy from the RET in the first place?  

Now, this is true for that portion of power we get from large-scale new renewables (currently about 7 per cent of electricity and rising to around 16 per cent in 2020).  But by adding extra supply with near-zero operating costs to an already oversupplied power market, it also acts to depress the price received by the remaining, far larger portion of our power coming from fossil fuel generators. 

As Environment Minister Greg Hunt’s new adviser complained in a submission while he was an employee of the owner of some large coal and gas power generators:

“It [the RET] imposes highly subsidised energy into the generation mix, the result of which will be a reduction in the wholesale energy price…..Customers certainly potentially face lower wholesale energy costs as a result, at the expense of existing investors [in existing power generators].”

Now, on top of this reduction in the wholesale price, energy intensive manufacturers are granted an exemption from between 60-90 per cent of the subsidy cost to support the extra renewables. So, for those manufacturers where electricity costs are significant to competitiveness, they get to capture savings off every unit of electricity they buy while only paying around 10-40 per cent of the subsidy cost associated with the small proportion of electricity produced from renewables.  

To illustrate with an example, imagine a smelter purchases 100 megawatt-hours of electricity. Of that, 16 per cent is renewables receiving a subsidy of $60 per megawatt-hour (current market price is actually $35) which represents an extra cost of $960. But because the smelter is deemed to be energy intensive it is exempted from 60 per cent of the cost and pays only $384 extra. But at the same time the extra renewables supply pumped into the power market has reduced prices across the entire 100 megawatt-hours the smelter purchases by $5 (energy market analysts have estimated wholesale price reductions in this realm) representing a total saving of $500. Overall the smelter’s power bill is $116 lower ($500 minus $384).

Now, of course, this isn’t much fun for investors who own the other power generators that see power prices go down. As Industry Minister Ian Macfarlane observed in the press conference yesterday:

“..in terms of the RET review; we're facing an enormous challenge in terms of an excess generating capacity in electricity in Australia. To be adding large quantities of generation into that situation has to be questioned. The review process will go through those things but as the Prime Minister says, in terms of the cost of energy, the fact that a coal-fired power station is dispatching electricity at a lower price now than it was five years ago…”

Did you hear that? Coal power stations are suffering lower prices because of excess generating supply. And the RET will add to that excess supply.

And you know what? Many of these poor old companies that own these coal fired power stations bought them after the government had announced the enlarged renewable energy target in 2007. So they can hardly complain that they didn’t know this was coming. Heck, they may have even paid discounted prices for the power stations because of the RET.

Every large brown coal generator in Victoria and South Australia, bar Yallourn, has changed ownership since after the enlarged RET was announced (AGL bought Loy Yang A, GDF Suez bought Hazelwood and Loy Yang B as well as gas power stations in South Australia while Alinta bought Northern and Playford B). Also, a large chunk of NSW’s coal generation capacity was acquired by Origin Energy and Energy Australia in recent times. Plus, the rest of NSW's coal generators should also change ownership shortly.

Why on earth the government would take pity on these guys for declining power prices is anyone’s guess.

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Duh Tristan, it's because they pay them nice campaign contributions and must be looked after in return and to hell with what's best for consumers or the environment!

Just so.
The quotes alone are enough to make it plain that the barbarians are trying to prop up profitability rather than protect consumers.

Although it seems to me disingenuous (and counter productive) to claim that the RET scheme is going to reduce power costs, there is little reason to be abandon the scheme now: it is about to deliver massive GHG reductions.

As Tristan says, why would the government intervene to help the existing coal-based generators? For example, the brown coal power stations changed hands around 2007 at almost zero value, since it was feared in the investment community that they were going to close down fairly soon. Such changes in ownership is part of the investment risk / reward cycle.

Indeed, there can be no tears for those who bought such assets: they should be popping the champagne, at least on current results.

Yet in the future, the coal-based generators will suffer pain if the RET scheme stays in place. This is also part of the risk/reward cycle for this kind of investment.

Will the Coalition keep the RET scheme, or will it abandon its carbon reduction pledge? It is either one or the other! The time for choice is coming. Is this going to be another Gonski moment for the Coalition?

The only reason anybody would invest in coal fired power stations in 2007. Would have been extremely stupid or they were expecting authoritarian measures to be put in place to insure the investment doesn't go south.
This shows that Abbots extreme right wing ideology, will be the driving force behind all policy decisions.
The extreme far right, No different to any Despot of the ages. From King Louie the 16th of France on wards. Privatizing Profits while socializing loses. They rely on the trickle Down effect in economics. And propaganda to keep an ignorant populous confused and docile.
They can't handle, not collecting every last penny in the market. And roof top power is their main fear turning their customers into competitors.
This is the basis of the trickle down effect economics.

Problem is those nasty State governments insist on getting their slice of the pie, an incovenient fact ignored in this push on RET'S.
Really doesn't bode well if decisions like this are made with a blatent bias towards polluting big businesses.
Surely we need to move forward, not try to impede progress.

I find is amusing that Ministers Corman & Macdonald and Senator Boswell all sat on the Senate Select Committee reporting into Electricity Prices that was published in November 2012. Maybe they could just re-read this report rather than hold another enquiry? If time is critical - just re-read Chapter 3 or just go to page 57 to find out why electricity prices have increased.

As posted by Dermot elswhere, chapter 3 page 57 makes interesting reading.
I was Skyping a relo in Oregon USA earlier today and asked about their electricity costs. Overall cost of their current bill is 11cUS per kwH. Overall cost for my last bill was 30c kwH. You can't tell me we're not being had.

Thanks Liam: still not sure why the "link" to the report on the APH website doesn't work - but glad you've identified where it now is.

True why waste government funds on another inquiry, Unless the decision to ditch the RET has already been made. And a new inquiry into how can we spin this,

Hi Tristan - two points:

1. the situation for EITEs is a little more complicated because their partial exemption from RET costs only applies to the expanded portion, not the original pre-2009 part of the target. Effective rates of exemption are thus a bit lower than the headline 60%/90%.

2. the argument about RET costs and benefits is interesting. The RET does suppress wholesale prices, partly or significantly offsetting its costs to energy users, but this is a distributional effect - from incumbent generators to energy users. The national cost is another matter, since distributional stuff nets out at that level. To my mind the national cost depends more on the opportunity cost of putting investment and resources into currently unneeded capacity, any overall impacts from lower energy prices (positive? more competitiveness for energy intensive industries! negative? unsustainable growth based on artifically suppressed prices!), and contributions to meeting current and longer-term abatement objectives.

If people are focussed on narrow consumer outcomes (as many of us are, and the PM clearly thinks he is), then the RET looks pretty benign, fully considered.

If people are focussed on narrow producer outcomes, (as the generators are and the PM seems to be in practice), then the RET looks like the spawn of Satan in the current market, lowering prices and taking market share.

If people are focussed on an Olympian perspective of national outcomes, as the PC would be, then the whole issue is muddier and highly assumption-driven. However the RET probably looks like a pretty mediocre national investment. But given the current state of Australian climate policy, it's a fair question to ask whether there is a better investment on offer.

Trisian on the RET reduces electricity prices - "This is completely counter-intuitive and it’s understandable that those outside the electricity sector find this hard to understand".

Well that is a blatant lie. Those in the elec industry more than anyone else understand its causing electricity prices to rise.

Wrong, the net impact of the Renewable Energy Target for consumers is lower overall electricity prices due to the wholesale price suppression. (Merit Order Effect). Perhaps you need to study up on how the electricity industry operates before you comment.

Matthew is correct, Andrew. There's a bunch of accessible explanations online for the Merit ORder Effect as it operates in Australia and elsewhere (like Germany), even Wikipedia has an explanation. Pretty interesting reading for you it will be too.

It would be nice to have reliable electricity supply in future which Tristan's alternatives to energy won't deliver. I guess the scammers pushing the RET will be able to afford nice Honda diesel generators for their own houses and the money to fuel them that they've ripped off the taxpayers and consumers.

A cynic without an argument-but the usual load of denier insults. Facts are renewables are cheaper than fossil fuels even without counting the immense health and climate costs of burning-which WILL come to pass-whether directly or indirectly. In China air pollution is reducing lifespan by 5 years and the Chinese Government is moving to reduce the cause-coal generation-WE supply the coal! There are already some examples of 100% renewable electricity and many instances of large areas at 50-60. South Australia has achieved close to this at times already. Fossil fuel generators are ripping off consumers not to mention the poles and wires monopolies (up300% in 5 years). The generators are also subsidized e.g in Newman Land state owned generators do not pay the full price of coal and he is keeping State mandated electricity prices are artificially high to get a higher price for the sale of the assets.Might be cheaper for Queenslanders to buy Honda generators-and fuel!!Luckily they have the highest rate of solar generation to push peak supply up and prices down-making Campbell even more blatant with his price rigging and more shrill in his hypocritical rantings!!

Plus Scotland and Tasmania all have ambitions for 100%+ renewable generation by 2020. As storage options and frequency harmonics reduction technologies are deployed cost will fall and effectiveness will rise further pinching fossil fuel generation. And when consumers have to choose between 50c to fill their 'tank' on an EV and $50 for petrol/diesel/LPG guess what's going to happen in the car market. Which will further drive down metal air/flow battery prices to the point where domestic and utility storage eliminates the whole business case of base-load power.

Plus Scotland and Tasmania all have ambitions for 100%+ renewable generation by 2020. As storage options and frequency harmonics reduction technologies are deployed cost will fall and effectiveness will rise further pinching fossil fuel generation. And when consumers have to choose between 50c to fill their 'tank' on an EV and $50 for petrol/diesel/LPG guess what's going to happen in the car market. Which will further drive down metal air/flow battery prices to the point where domestic and utility storage eliminates the whole business case of base-load power.

Maurice, where do you get your "facts" from... China's "promise" is to reduce emissions as a factor of GDP, not in real terms, in real terms they will continue to emit a greater proportion of the world's carbon dioxide... (PS that's the gas you are all so fearful of).
Their actual output will increase and their air quality will continue to get worse... as will the ground and air pollution in the rare earth mining areas... (PS those are the rare earths needed to make wind turbines).

@ mike

wrong!!!!!!!!!!!!!!!!!

australia can easily go to 200-300% renewable electricity

only thing holding it back is vested interests in ff generation

Mike: how did "consumers" get ripped of by the RET as it has a downward impact on the "wholesale" electricity price? Also, taxpayers don't pay for the RET - its off-balance sheet - its paid for by "liable entities" and yes consumers though their electricity price - but its a very small part of electricity price rises. The RET actually makes the Government a small amount of money. I would have pointed you to the Senate Select Committee Report of 2012 which reports on why electricity prices have risen - its not the RET or Carbon - but infrastructure costs - but its been removed from the Parliament of Australia website.

Don't you mean by $5/MWh?

It is explainable by the fact the Coalition is the Coal-ition. The effective purchase of the Liberal Party by the mining industry is only matched by their purchase by the pokies industry.

Either that or their brains are scrambled eggs, with the ranting about the price of electricity for people with 'cost of living pressures', but then complaining that the wholesale price of electricity is too low.

The wholesale price depressing influence of renewable generation with no fuel and water costs on an ongoing way has been discussed at length. Tristan puts the case here that the RET isn't the drag on big users that the government claims.

I suggest you amend the Wikipedia article to explain this, Tristan. Then Greg Hunt might find it in his research...

While on the face of it taking anything Tony Abbott says at face value is risky, when he is making veiled threats about environmental matters, it is almost certainly true.

This is no doubt part of a concerted effort to destroy green initiatives of any sort across Australia, alongside a massive anti-nature assault. The capture of the Liberal Party by its right wing means there will never be initiatives like the World Heritage Convention, the protection of the GBR etc any more.

Just a full on assault for vested interests who feather the Liberal nest (eg the $30 or so million in donations and pro-Liberal advertising from the mining industry in recent years), with dodgy arguments and dodgy deals.

Macfarlane's commment says the most. He's really shown the belly of the Coalition's position on Renewable Energy. basically the see outcompeting the fossil fuel industry and it therefore needs to be squashed. Its shocking to hear Tony Abbott repeating the same oil-centric mantra as The Waubra Foundation and Landscape Gaurdians but its also very telling of where there interests (and funding for that matter) are coming from.
In regards to Mr Abbotts comments about the CEFC and the renewables industry being subsidised, well its not an entitrely level playing field, Tony. 3 words, Fuel Tax Excise. Will the Coailtion repeal the Excise Reduction along with the carbon tax legislation? I think not.
What Happens when 50 degree temperatures force the change in the way we source energy? We wont be able to afford change. No demand for fossil fuel reserves will make the greek economy look like paradise to Australia and $10Bn dollars in 20 years time costs far more than it does today. Now you might say that climate science is flawed and we dont have anything to worry about and thats fine if you are Joe nobody but it is an unacceptable position for the PM to hold becuase the risk of inaction to each and every one of us, who he represents, is waaaay too large. it is the ultimate risk.

tristan, what you are saying is that the RET has driven down prices because it is extra capacity; the fact that this extra capacity might be from renewables is irrelevant to its effect on prices (I assume) . If it's extra capacity we want, there are cheaper ways to get it.

Hi Tim,
The way I read it is that the RET takes a fixed chunk of generation. With power usage falling, this leaves under utilisation of coal fired power, and hence lower wholesale prices.

Large industrial customers get a subsidy for the RET portion, so overall they have lower prices - not us.

You are partly correct Tim. But the extra capacity has to bid into the market price at a level lower than the winning bid. Since renewables have no fuel costs, they can bid into the market at a price close to zero. If you can suggest some other extra capacity that is cheaper to build and can always bid into the market at a low price I'm sure we'd like to hear it.

ok, what you are saying is that renewables have very low variable costs, low build costs and fast response to demand. one has to wonder why such wonderful technology needs targets and subsidies.

Perhaps the downward price impact of the RET is due to requirement of utilities to source a certain amount of energy from renewables - and as utilities source more from renewables while overall demand for energy is falling, that means much less demand for coal power - as is indicated by a lower wholesale price for coal. As my electricity bills for home and business are not dropping it does not appear that the lower wholesale price for coal energy is outweighing the relatively more expensive price of energy from wind farms and other large scale renewables.

Missing from the article: the expected trend of overshoot on the 20% target by 2020, that it will more likely be 24% and above. So here is a reason to wind it back.

Also no mention in the article about the impact on the global temperature and environment. Yes as one poster mentions above life expectancy in China is dropping and the presumed reason is bad air. Contrast this with Australia's #1 ranking in the OECD for clean air in our cities and clean air as a #1 like of Chinese tourists here. Cleaning our air more will not help China.

Tristan has not explained to us how it all will work when China will likely increase CO2 by 238% between 2000 and 2020 requiring an unrealistic 470 Australia cutting 5% to compensate. If Australia targets 0% emissions growth by 2020 we might say we are doing our part as Australia's portion of total global CO2 will decline. So are we to crimp our CO2 and economy while China is relatively freer to grow their CO2 and economy? Oh but they are a developing nation and are excused. The weakness of this argument is that once China achieves first world wealth there will be the next crop of aspiring developing nations that want that too. So the CO2 growth is not stopping any time soon.

What is needed is new really cheap green energy that does not require massive subsidies that the developing world can no afford. The economics will need to be compelling to attract outside private investment to deploy the technology. Problem is the climate actioners want to try to project everything over the next 100 years with the technology we got today. In my opinion, this is an error of underestimation of technology much like the Malthusian Catastrophe articulated by Malthus in 1798 - that is right 215 years ago - that population will outstrip means to support it. Wrong.

Then there is the militant Greens who have hijacked climate action for whom no amount of CO2 reduction is acceptable - and so have helped climate action lose credibility. Every factory and business closed and investment chased offshore is celebrated in pursuit of preserving pristine environments. That is what they want to do to Australia - like they got going in Tasmania resulting in unemployment several points higher than the mainland, investment chased away, an economy disproportionately dependent on government jobs, and an economy dependent on GST and other handouts from the mainland. The mainland Australia will have no where to turn to get handouts to help support rising debt, deficits and expenditure on social and other Greens programs - so the direction is unworkable.

No Grant that's not why RET makes wholesale energy cheaper. Read merit order effect reference I recommended to another newb on this page. You might learn something and be able to contribute to the conversation rather than dragging it backwards with myth making.

Hey Tristan how about a delete comment function for double posts? (You site seems really slow today) There is no UI visual feedback that the button click "Save" has been registered, so I end up clicking it twice, thrice etc

In regards to your 'merit order effect' of lowest price energy used at the time - my first thought was more a marginal cost of the wind power that would not take into account the capital cost of wind power - and thus on this basis wind could reduce demand for coal power (yet not all the cost of it included in this equation). However, as we know demand for energy varies during the day. Let's take a 40C heat wave in Adelaide. In such a situation the spot market for energy goes through the roof - this is where wind and renewables may have an impact lowering energy prices (assuming the wind is blowing and sun shining).

Those heat wave days you describe, that's when power companies, coal included, make a significant portion of profits since the spot price skyrockets and all bidders get the final bid price. The fact that wind has no associated resource cost means they always win the early bids. Coal is priced out of the market, gas (fast ramping 'peakers' as opposed to more efficient combined cycle turbines) at present stands to gain covering the intermittency issue of wind but as more renewable capacity and more energy storage is deployed for security and frequency maintenance this will start to hurt Gas also. Just look at the SA supply market, wind has 30% capacity and up to 50-60% peak supply at windy periods of year. This has made average wholesale price of power fall in SA.

And don't forget all that distributed solarPV on rooftops is curtailing demand on hot days too.

No Grant that's not why RET makes wholesale energy cheaper. Read merit order effect reference I recommended to another newb on this page. You might learn something and be able to contribute to the conversation rather than dragging it backwards with myth making.

No Grant that's not why RET makes wholesale energy cheaper. Read merit order effect reference I recommended to another newb on this page. You might learn something and be able to contribute to the conversation rather than dragging it backwards with myth making.

All those post 2007 purchases of coal and gas generation plant could well have been 'speculation' around prior knowledge of fire-sale prices combined with a wink and nod from Tony's minders that the fix is in as soon as LNP are returned to the Lodge.

All those post 2007 purchases of coal and gas generation plant could well have been 'speculation' around prior knowledge of fire-sale prices combined with a wink and nod from Tony's minders that the fix is in as soon as LNP are returned to the Lodge.

The government is in the wrong business. Clearly they are a safety deposit box storing favours for their donors whose donations were all made prior to the election. The government's stalling will slow down the change. At least they look like they are doing something for their benefactors. Continued investment in clean energy is bound to improve regardless of RET. RET's removal will cause doubt, but eventually coal will go. Should they go gracefully or will we give them a helpful boot on their way ?

Kick-on Chris. Your bones will be mashed long before coal exits gracefully.

French guillotine is looking cost effective. haha

French guillotine is looking cost effective. haha

Given Tony likes 3 word slogans, it's pretty simple "the fuel is free"

Sorry that's 4 words.