The Labour party’s recently announced “aspirational target” policy for 50 per cent renewable energy by 2030 has everyone abuzz.
Supporters of increasing the penetration of renewables are understandably excited while opponents claim that it will cause electricity prices to skyrocket. The opponents base this claim on the statement that renewable energy technologies are more expensive than conventional ones. There is one way in which this is true, but many ways in which this is absolutely false.
It is worth firstly noting the fundamental distinction between costs and prices. There are several facts related to these that must be noted:
Prices and sunk costs
The current price of the predominantly coal based wholesale energy in Australia’s market is between $30 per megawatt/hour to $60 per megawatt/hour (three to six cents per kilowatt/hour) depending on where you are. This is NOT representative of the cost of building and running the power stations if they were built today.
Many of the power stations around Australia were built so long ago that their construction costs are already paid for and they do not need a very high price to make money. Hence, comparing the price sufficient to satisfy the owners of existing coal plant with the cost of new renewable energy is comparing apples and oranges.
Cost of new power generation plant
The cost of building a new wind farm in comparison to building a more conventional power plant can be measured in the same units using the Levelised Cost of Energy (LCOE) methodology used by the federal government in the Australian Energy Technology Assessment in 2013 to develop a framework for comparison of different (old and new) generation technologies. This analysis, one of the most robust in the world, showed that the latest technology coal plant in Australia is more expensive to build than a new wind plant. So when building a new plant, cost-wise we prefer wind! This is even in the absence of a carbon price or a subsidy. The recent wind auction in the ACT delivered a lowest price of $81.5 per megawatt/hour for a wind farm. That is lower than the $84 per megawatt/hour for a best of breed black coal plant.
So this is where opponents such as Senator Ron Boswell on the ABC’s Q&A program on July 27 get it right and wrong. They compare existing prices with new build costs. Of course replacing an aging plant that is dirt cheap to run with a new plant will cost more, but that is the price one needs to pay if one is to address climate change. Boswell’s argument against using renewables for developing countries such as India, Africa and Indonesia where people don’t have any power yet is completely wrong. They will never get coal power at the prices Australians pay for it now. They are better off moving to renewables such as solar which when integrated with batteries and some diesel backup within microgrids (small stand-alone power systems) will be the cheapest option from now to 2030 and beyond.
There are other factors at play, however, such as the fact most of the plants we have are old and will have to be decommissioned almost entirely by 2030, so we will have to build new plants. It may as well be renewables. The costs of other renewables as well as wind will continue to decline over this period, so it will only get easier to make renewables competitive.
More renewable generation pushes down wholesale prices
There is also the downward pressure placed on wholesale spot prices due to the competitive nature of the wholesale spot market. The highest fuel operating cost generator sets the prices while renewables use no fuels and have almost zero operating cost. Hence the effective demand seen by fossil fuel generators is decreased, resulting in lower wholesale prices.
This is an argument used by some renewable energy advocates to argue that renewables reduce electricity costs. While there is some truth in that, I caution against this type of argument as it only tells half the truth. You still need the addition of renewable energy certificates in Australia or another subsidy as in other countries. This partially offsets the benefit of the lower wholesale price and in the long run, new renewables still need higher total revenue per unit energy than existing old coal plants to be economic. It is thus difficult to predict the final outcome on electricity prices, as again you are not comparing apples with apples.
End user price impacts depend on the transition path
To fully understand the impact of a transition to renewables in developed countries such as Australia, one must take into account all the impacts and trends mentioned above. This is a complex scenario but it is clear that it critically depends on the rate at which one shuts down coal plants and builds new plants. The only guide to how quickly we should do this is the climate science, which tells us world emissions have to peak by 2020 in order to keep the chances of a greater than two degree temperature increase to less than one in three.
In the meantime, it is worth looking at the impacts of renewables on the electricity price to date based on data from the Australian Energy Markets Commission. Figure 2 below shows the incredibly small contribution (orange and light blue) to the final retail price. This is for 2014 when the target was around nine to 10 per cent. Once can see how it’s dwarfed by the network costs and existing generation costs. Once must remember that the network costs in some jurisdictions (NSW and Queensland) almost doubled between 2009 and 2014. Let’s get some perspective.