Explaining electricity markets to dummies

While economic modelling shows that the injection of lots of solar and wind power via the RET will lower wholesale electricity prices, 95% of politicians and 98% of journalists struggle to understand and accept it.

In speaking to members of the renewable energy sector about what they think is most important to the government’s review of the Renewable Energy Target there is universal agreement: electricity prices.

Abbott has been elected to a significant extent off the back of public anger about how electricity prices doubled between 2007 and 2013, and he knows it. 

Getting rid of the carbon tax is task number one in Abbott delivering for these people (even though its 9% drop in prices is a long way short of a return to 2007 levels). 

And for many members of the Coalition and their major supporters the RET is really a mini carbon tax in disguise that should be next for the chopping block. They believe it is driving up electricity prices as well, while undermining Australia’s competitive advantage in cheap and plentiful supplies of fossil fuel energy. OK, the RET might reduce greenhouse gas emissions, but for many of these people climate change just isn’t seen as a legitimate issue.

For these people there is a heartfelt desire that the RET is bad for the country; scrapping it for them is not about gaining political advantage. Indeed, they’d be willing to scrap the RET even if it came at a political cost. But they actually think that such is the household anger over electricity price rises, scrapping the RET and the associated cost they believe it places on electricity bills could be a vote winner. This is even though a range of polls suggest 70-90% of the electorate view wind and solar as their most preferred source of new electricity supply.

But those within the renewables sector believe they have a strong political defence. This is that while the RET involves an extra cost to subsidise the development of renewable energy systems, this cost is largely, or even completely, offset by reductions in prices across the overall wholesale electricity market. 

They have real-world evidence to support the claim from Germany and also South Australia where renewables now represent about 30% of supply. Just today Windlab Systems released a study  analysing South Australian wholesale electricity prices over the past eight years which indicates electricity supply costs have not risen even after including the cost of renewable energy certificates. On top of this, the renewables sector points to economic modelling projecting substantial price reductions in the future if the RET is kept as is (explained here). 

There’s just one problem – such a result is completely counter-intuitive and something politicians and journalists have great difficulty understanding.   

How can a source of power that requires a government support program to be viable because its costs are higher than the electricity market price, actually reduce the market price?

It seems bizarre.

In chatting to a number of key players in the renewable energy sector, there is universal agreement explaining this is an incredibly difficult task.

Kane Thornton, deputy CEO of the Clean Energy Council, says its “bloody hard”. He explains that most people don’t really have an intuitive understanding about how the electricity market works. According to Thornton, outside of the bureaucracy people struggle to grasp the idea that power plants for much of the time don’t recover their overall costs, just operating costs. But then they make it up during short periods when expensive gas power stations are needed.  The idea that renewables could reduce costs significantly by displacing these gas power stations requires a lot of explaining.

The public affairs manager of one of Australia’s largest developers of renewable energy projects is more blunt. He tells me 95% of politicians and 98% of journalists can’t or aren’t interested in getting their head around the concept.

Even energy intensive manufacturers, that closely watch energy markets, have trouble with the idea. One lobbyist close to energy intensive industry explains that the cost of renewable energy certificates is a separate itemised and transparent component on their bill - there’s no denying that this is costing them something - while the extent to which the RET is benefiting them by lowering wholesale electricity prices is invisible. 

Ben Burge, CEO of Meridian Energy’s Australian division, a major developer of renewable energy projects, is almost obsessed with the need to effectively communicate how the RET is lowering wholesale electricity prices. Frustrated by a difficulty in explaining the concept, his company constructed a short YouTube clip (below) to explain how the RET acts to reduce wholesale electricity prices in terms that the average person in the street might be able to understand. Hiding behind its simple story is some sophisticated and also way too complicated energy market modelling undertaken by economists SKM-MMA.

Can the sector overcome the scepticism and complexity surrounding this economic phenomenon?

According to that public affairs manager who believes 95% of politicians and 98% of journalists don’t get it, the problem is partly the complexity of the issue but it’s more than that. He notes that if you can get 30 minutes of a minister’s adviser’s time and get them to focus, they can get their head around the concept. But he says, “they have to want to listen”.

For a number of members of the Coalition, the proposition that the RET doesn’t cost consumers much, if anything, but rather comes at the expense of incumbent power generators’ returns, is a message they sometimes don’t want to hear.

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