Low energy government isn't fixing power

Now that the dust has settled on the 2019 federal election the pathway to cheaper, reliable electricity with emissions reductions consistent with meeting Australia’s Paris obligations is no clearer. Government promises of lower electricity prices cannot be kept through popular, ad hocinterventions that will elevate levels of sovereign risk, killing off the new investments in electricity generation the country desperately needs to offer globally competitive electricity prices. Less intervention in electricity markets and greater certainty for investors is more likely to achieve lower electricity prices.

Australia’s electricity generation continues to be dominated by coal. The nation’s electricity grid was built on coalfields and connected by transmission wires to major population centres on the east coast. Neither will be fit for purpose by the end of the next decade. Substantially replacing them will be a monumental task.

Both sides in the climate wars are obliged to acknowledge a reality: no new coal-fired power stations will be built by the private sector in Australia. Those who want action on climate change welcome this reality while those who don’t are appalled by it but can’t change it. The reason is that potential financiers consider the commercial risk associated with constructing and operating such a capital-intensive, long-lived asset in a decarbonising world to be too great.

Australia’s coal-fired capacity will continue to decline over the coming decade as ageing plants are retired. Nine coal-fired plants closed between 2010 and 2016. In addition to the announced closure of the Liddell power station in 2022, some others could be retired, while the business case for replacing boiler units in other stations that blow up or wear out will become increasingly hard to make. 

Renewables will continue to out-compete coal’s high fuel costs during much of the daytime but the lack of decisive progress on large-scale battery storage will necessitate continued reliance on firm energy generation after dark and when the wind isn’t blowing. Here’s where the Turnbull government inserted Snowy 2.0 into the equation, proposing to pump water up a 26 kilometre tunnel at times of day when electricity from renewables is cheap and releasing it to generate power when renewables are unavailable. 

But what happens if Snowy 2.0’s indicative completion date is missed? The original estimate was 2025 but construction is now looking more like eight years and the geological assessments of rock types have not been completed. A safer bet might be 2030. 

Meanwhile, with this giant leaning over their shoulders, proponents of other firming capacity for commissioning well before 2030, such as gas-fired power stations and smaller pumped-hydro sites, will need to take account of the prospect of being out-competed by a government-owned corporation after 2030. 

Gas was considered the transition fuel to a low-carbon future when an emissions trading scheme was introduced in 2012. It still is. But the creation of an east-coast export market for LNG, combined with faster declines in Bass Strait production, unanticipated moratoria and bans on unconventional gas and the rising cost of developing new fields, have forced up domestic gas prices. 

Combined-cycle gas power stations, which are more energy-efficient but less flexible than open-cycle plants, are likely candidates to fill the gaps in Australia’s firm electricity supply during the coming decade. They would also halve the emissions from the coal-fired generators they replace. 

But the era of $4 per gigajoule gas is long gone and, as the Grattan Institute’s Orange Book and Professor Paul Simshauser have demonstrated, the correlation between quarterly average electricity and gas prices over the period 2011 to 2019 is almost perfect. For the future, cheaper electricity will require cheaper gas from new, large-scale gas sources.

The messages for the federal government are clear. First, politically motivated, ill-considered interventions into the gas and electricity markets are likely to increase sovereign risk further, choking off new investment in gas and electricity generating projects. The government’s ‘big stick’ legislation falls into this category – an attempt to reduce electricity prices during an election cycle that can only increase them through the economic cycle by removing incentives to invest for existing retailers and prospective new entrants. 

Second, while domestic gas reservation might form part of a regime for future gas developments, applying it retrospectively to existing developments would kill off new investments. 

And third, in gradually moving the electricity transmission system away from the coalfields, the government should maintain the decision-making role of independent agencies and resist the temptation to use subsidies to connect less-valuable renewable energy sites in marginal electorates. If we are to avert an energy crisis in the 2020s, we will need all sensible hands on deck. 

 

Source: https://www.afr.com/policy/energy-and-clim...