Edis misses the point on solar cost competitiveness

Tristan Edis is not alone in giving some airplay to the argument that “if solar and wind are competitive, then why do they need support from the Renewable Energy Target?”.

While meeting the RET Review panel on two separate occasions, I was asked this question by the panel members.

While renewable energy provides innumerable measurable benefits across the Australian economy, particularly in reducing wholesale (and retail) electricity prices and in creating jobs, further justification for subsidy is provided by conventional economic theory, some of which will be explained in the following article.

Just as there are economic reasons for governments to subsidise resource exploration, there are economic reasons for governments to subsidise the deployment of renewable energy. These reasons include:

1.       Addressing barriers to competition imposed by incumbent gen-tailers (large electricity retailers that also own large fleets of generators);

2.       Addressing barriers to deployment of distributed generation imposed by network monopolies;

3.       Addressing barriers to recognition of the total value of exported solar power resulting from structure of the Australian Energy Rules which were written before distributed generation became popular;

4.       Acting to bring-forward investment in technologies with beneficial “learning-by-doing” effects;

5.       Addressing externalities associated with fossil fuel combustion upon human health, agricultural productivity, and environmental health;

6.       Addressing inter-generational externalities associated with climate change.

Barriers to competition

The three major gentailers (large retailers that own substantial power generation capacity) own or operate a dominant portion of the electricity supply chain and have the market power to otherwise inhibit the entry of new competitors.

Why would they support the deployment of energy sources that reduce their wholesale and retail sales of energy? Indeed they have been shown to exercise market power to inflate wholesale power prices (for example in South Australia). The RET acts to open up a door to market entry for new generators that would otherwise remain closed by the incumbent retailers.

Barriers to deployment from network monopolies

Rooftop PV provides the ability for households and businesses to compete with electricity networks, which compose the lion’s share of household electricity bills. The electricity distribution network is considered to be a natural monopoly, and is thus granted a government guaranteed regulated revenue stream from customers. Nowadays solar powers delivers electricity directly to the point of consumption, thereby challenging the premise of ‘distribution network operators (DNOs) as natural monopoly’. However, DNOs control access to the network and can and have imposed punitive connection conditions constraints and costs upon those wishing to install solar power. The SRES acts indirectly to imperfectly compensate for  the barriers imposed by the incumbent network gatekeepers who are favoured with regulatory protection and a guaranteed return on investment.

Addressing barriers to recognition of the total value of exported solar power resulting from structure of the Australian Energy Rules which were written before distributed generation became popular

The nature of the National Electricity Market and the rules that govern it prevents full benefits of solar power systems from being monetised. While there is a highly transparent and well organised market for electricity supplied by large generators to the transmission system, no such market has been created for power produced directly nearby to end consumers. Instead solar producers are subject to the whims of regulators, network businesses and the Gentailers who have a vested interest in deeming that solar power exported to the grid be paid  little more than the wholesale value adjusted for loss[1]. Meanwhile no attempt is made to adjust the market to recognise benefits spread across all consumers (whether solar owners or not) of reduced peak demand loadings on networks, lower loss factors, as well as reduced wholesale prices which the the solar owner may deliver. This structure also means that retailers (and thus solar owners) incur the average cost of distributing electricity from the edge of the network, rather than just the cost of transporting it to their neighbour.

Given these inherent flaws in the market, while often regularly acknowledged, never seem to actually get fixed, the SRES compensates for these market distortions based on rules written long before distributed generation became popular.

Acting to bring-forward investment in technologies with beneficial “learning-by-doing” effects

Considering our ability to maintain a wealthy lifestyle for the next 40 years, the challenge is how to most economically transition our economy to a carbon-constrained world. The least cost thing to do in the short-term may be to replace coal-fired power stations with new gas-fired power stations. But then in potentially less than 20 years we would need to retrofit carbon-capture and storage to those gas-fired power stations (even more expensive than retrofitting coal), or mothball them and replace them with renewables.

Or you could bring-forward renewable energy deployment with a subsidy that costs less overall than the whole gas-fired route, particularly as deploying renewable energy reduces its cost by taking advantage of learning curve effects. The RET acts to bring forward renewable energy deployment, reducing its costs, and preventing new gas fired power stations from becoming stranded assets – for lower lifetime cost.

Addressing externalities associated with fossil fuel combustion upon human health, agricultural productivity, and environmental health

A market can only operate efficiently if all costs are accounted for. Fossil fuel combustion impacts upon the health of humans, agriculture, and the environment - costs that are not paid for by those who cause them.  Because these costs aren’t factored into the price of emissions, then more combustion occurs than would otherwise be optimal. Put simply, society picks up the cost for fossil fuel emissions, just like passive smokers working in a bar. The RET acts to reduce fossil fuel combustion, for greater societal health.

Addressing inter-generational externalities associated with climate change

One of the often-overlooked externalities is the right of future generations to inherit a fair share of prosperity, resources, and health. Inter-generational wealth transfer occurs with the exploitation of any limited resource. The biosphere has a limited bank of resilience; future generations have a right to a prosperous life and should be considered when decision making.

Now, it might be argued that in an ideal world such externalities and barriers might be better addressed with specific policy instruments including improved regulation. However, such instruments don’t exist at present, and experience shows that such policy instruments take many years to develop, and invariably produce unintended consequences.

Better to let the RET continue to partially-address existing market barriers and externalities, and continue to produces many valuable benefits for Australia, which include:

1.       Increased electricity market competitiveness;

2.       Energy diversification and resilience;

3.       Reduction in the wholesale cost of electricity benefiting all consumers;

4.       Reduced peak demand benefiting all consumers;

5.       Jobs in rural and regional locations; and

6.       The ability for households to take control of their electricity bill after five years of network overinvestment drove prices needlessly through the roof.