Ten years ago this week, the Greens voted with the Coalition to defeat the Rudd government’s Carbon Pollution Reduction Scheme, triggering what have come to be known as the climate wars. Among the war’s casualties are household electricity consumers, manufacturing industries and Australia’s international emission-reduction target. As Professor Ross Garnaut’s latest book attests, Australia can again be an energy super-power, this time exploiting the continent’s abundance of high-quality renewable energy sources. But the government nostalgically clings to coal, despite the monumental private-sector risks associated with investing in new coal-fired generation.
Ageing coal-fired power stations
As Australia’s fleet of coal-fired power stations continues to age, the market, left to its own devices, will naturally replace this capacity and energy with a combination of renewables, pumped hydro, gas peaking and batteries. Yet the government has not only committed to a feasibility study for a new coal-fired power station at Collinsville in Queensland, the resources minister has indicated the project has a “really good chance” of going ahead [https://www.smh.com.au/politics/federal/canavan-desperate-for-coal-fired-power-in-pledge-to-back-projects-20191030-p535x0.html]. Federal government subsidisation of new coal-fired power stations would choke off new investment in firming capacity such as pumped hydro and gas-fired generators.
Penetration by renewables
The weakest of the coal-fired power stations are already struggling to compete against solar and wind power when they are available. When renewables are not available, pumped hydro of fast-starting gas turbines can be expected to step into the breach. Snowy 2.0 is the largest scale pumped hydro proposal.
Snowy 2.0 is scheduled to commence production in late-2024 and to be fully operational by the end of 2025. But construction has not yet commenced. A start date of 2027 at the earliest is looking more realistic.
With the Snowy 2.0 behemoth casting a shadow over private sector decision making, the incentive for private investment in pumped hydro elsewhere in eastern Australia is being dampened. The longer is the delay in the commencement of generation at Snowy 2.0, the larger will be the gap in the supply of firming capacity.
Possible closure of aluminium smelters
Australia is a high-cost aluminium producer by world standards, residing in the top quartile of countries. Australia’s mainland smelters are dependent on electricity from coal-fired power stations. Rio Tinto has indicated its three Australian aluminium smelters are “on thin ice” [https://www.afr.com/companies/mining/cashed-up-rio-warns-smelters-on-thin-ice-20190801-p52cs5].
The other Australian smelter, at Portland in Victoria, is receiving a four-year subsidy package from the state and federal governments, but this is due to expire in 2021. The Portland smelter accounts for around 10 per cent of Victoria’s electricity usage. If it closes it will likely bring forward the closure date of the Yallourn coal-fired power station from 2032 into the 2020s.
The closure of high-cost Australian mainland aluminium smelters would accelerate the closure of coal-fired power stations that supply them electricity, since the smelters are big users of baseload power.
The grid is in the wrong place
Eastern Australia’s electricity transmission grid is built between its coal fields and major markets. Recent wind and solar investors, committing around $20 billion over the last three years, have tried to exhaust existing idle grid capacity but in places such as North Queensland they have saturated the grid. Encouragingly, there are now proposals for very large interconnectors, notably NSW to South Australia and expansions of existing interconnectors between states.
An overall relocation plan is needed, but this is difficult when there is no overall plan for the location of electricity generation. Nevertheless, work being done by the Energy Security Board on an Integrated System Plan to improve the transmission system is a welcome development.
Unpredictable policy interventions
Under political pressure to respond to high electricity prices, governments have intervened in the market to regulate retail prices and margins and to threaten large retail businesses with forced divestiture of their assets.
The “big stick” legislation regulates retail margins at the level prevailing when retail prices are high, obliging retailers to lower their prices commensurately when underlying costs fall. By regulating margins when they are likely to be at their tightest, the new law is effectively a form of price control. It will reduce incentives for new and replacement investment.
During the climate wars, Australia has experienced two attempts to put a price on carbon, a Renewable Energy Target, proposals for an Emissions Intensity Scheme, a Clean Energy Target and a National Energy Guarantee, state-based renewable energy targets, subsidisation of rooftop solar including feed-in tariffs, a Clean Energy Finance Corporation, an Australian Renewable Energy Agency and an Underwriting New Generation Investments program.
Whatever the merits of these various schemes and interventions, the changing and highly unpredictable policy environment has greatly elevated sovereign risk for private investors.
A looming crisis
Private investment in renewables and firming pumped hydro capacity has all but stalled. If some existing coal-fired power stations close early, which is entirely possible, eastern Australia could face a critical shortage of firming capacity – even with the government’s underwriting of new firming capacity.
As a result of chaotic policy making, Australia has a looming energy crisis. As long as the federal government’s obsession with new coal-fired generation continues, a stable policy framework will remain out of reach. Electricity prices will continue to be under sustained upward pressure from a lack of necessary investment, and the reliability of power supply will be compromised.