In defence of support for wind and solar

Queensland LNP Senator Matt Canavan's article 'Dodgy sums on renewables don’t add up' lambasts the Renewable Energy Target, but he fails to consider the whole picture.

Dear Senator Canavan,

Thanks for the opportunity to debate the merit of the RET with you. I don’t expect to change your mind and appreciate you are a busy person but I hope you might take the time to at least consider the points, references and data below. I have done my best to provide you with non-biased, non-renewable industry links and references.

I would like to say upfront that I admit to having some bias, of course, since I work in the industry. However, I do my best to maintain balance and to stick to facts. My great granddad was a coal miner and I have enormous respect for those in the industry, past and present. I for one, see a great value in a steady and progressive transition from the old to the new, and it can be done in a way that benefits everyone and takes advantage of the appropriate infrastructure that we do have. The RET is helping to do exactly that, in fact it’s the only program we have left now.

Twenty years ago I left the automotive industry to join this industry and, like tens of thousands of others, I have raised my family and made a humble living off it. Industry estimates suggest there are now close to 20,000 people working in solar PV alone and less than half that 9000 working in coal-fired generation. This isn’t a mistake or a travesty; it is positive, innovative progress.

If I may, I would like to address your story and, specifically, respond with some data and facts I am aware of.

The advocates of renewable energy would have you believe that they have discovered the economic equivalent of the fountain of youth. According to them, we can adopt more expensive ways of doing things, yet that will lead to cheaper prices.

Although you sensationalised this headline somewhat, you are correct that RE can lead to cheaper prices. This is not a fountain of youth, it is simple energy market economics. The Merit Order effect is the fundamental issue at play, which you can read examples of in larger markets here. Importantly, and most recently, Watt Clarity are an energy monitoring entity who provide services to the NEM. They have provided real NEM data that shows how renewables are impacting wholesale prices although, of course, they are not the only factor. They also wrote a very balanced story last week on the broader issues.

That renewable energy is more expensive than fossil fuels should not be in dispute. If renewables were cheaper, they would not need the billions of dollars in subsidies they receive every year courtesy of taxpayers.

This is distortion of the facts Senator, because it implies that a) only renewables get subsidies and b) that there is only a cost and no benefit. Firstly, Treasury itself has released figures on subsidies to the non-renewables sector which you can read about here. Secondly, the community-wide or societal benefits of solar were touched on in this report by the highly respected Bloomberg. Whilst it is rational to debate the exact number around value and perhaps not have a firm answer, it is misleading to suggest there is no benefit.

The most recent example of magic pudding economic modelling was released by the Climate Institute yesterday and purports to show that subsidising renewable energy will in fact reduce energy prices. The report concedes, at least in its graphs, that abolishing the renewable energy target will reduce power prices. The Climate Institute claims that after a few years of falling prices, they will increase. This primarily occurs because the modelling assumes that renewable energy will get cheaper through learning by doing. Thanks to this miraculously rapid learning, it is assumed that subsidies to renewables will drop from more than $70 per megawatt hour in 2020 to just over $10 by 2030. The modelling refers to “international studies” to support this assumption without referencing any. So much for peer review.

Senator, the learning curve is not a miraculous hypothesis, it is a well-established model based on economies of scale. I have tracked and watched the price of solar decline staggeringly over 20 years and, most notably, in the last two to three years. In simple terms, 'scale = volume = reduced costs' and the learning curve simply adds a mathematical formula based on past experience. I would refer you to this excellent paper from Berkeley Lab on the topic. Solar costs can’t keep falling at these rates forever, of course, but I work with manufacturers around the world and have seen their data; there is clearly room for continued improvement. Having said this, market volatility kills confidence and investment and is at the core of the issues here in Australia.

I would add that the government's own modelling (from BREE) on the cost of renewables reflects these cost reductions, although far more conservatively that those closer to the issue. This modelling shows that solar renewables are likely to be some of the LOWEST cost forms of energy by 2020.

Windmills have been around for centuries and despite massive investment from countries such as Denmark, they are still not economically viable without subsidies. But if the RET is about to solve the problem of affordable energy, why stop there?

Senator, clearly you are passionate, too, but suggesting that the windmills of yesteryear are anything like the wind turbines of today is once again misleading. Wind turbines produce energy at between $31-$84 MWH in large markets like the US, as you can see from this extensive sample set of PPA agreements (and I’m sure the local industry will have their own too). Do they deserve support? That’s back to the issue of subsidies again but, in principle, surely an emerging technology that has a huge growth trajectory and declining costs is worthy of support?

For instance, Australia has long had a problem producing cheap and competitive cars but we have the solution. All we need is a domestic automobile target. The DAT will mandate that, say, 20 per cent of our cars should be produced domestically. Domestic manufacturers will receive domestic automobile certificates for every car they produce. Importers of cars will have to buy these DACs. We know this will work because it is a market-based solution. Just like the RET, it should magically reduce the price of cars for Australian consumers. In reality, such a scheme would be nothing but a fancy form of tariff. Those who argued for tariffs argued that Australian industry needed protection when it was young, but one day it would grow up and would become cheaper and more competitive. Advocates of renewables use a version of this discredited infant industry argument today.

There are two key differences between your automobile analogy and reality. First it is that the RET was always geared to decline over time (in cost) and is already doing so. In addition, virtually every other support mechanism has already been axed or reduced. The industry accepts and is prepared for a gradual change and the RET is that mechanism so why suddenly throw it out? Secondly, one day (depending on your view) a much higher proportion of renewable energy is inevitable; it’s one of the largest and fastest growth industries in the world. Why shouldn’t the government be supporting our participation in this with a planned and gradual phase out of support!?

The models used to support this just confirm the old joke: ask an economist what two plus two equals and he will respond: “How much would you like it to equal?”
Some who can’t bear to defend wealthy companies asking for taxpayer handouts say the RET is cheap. It is true that credible economic modelling shows the RET probably costs consumers about $50 a year. Is that cheap?

Depends what you compare it to, that is true. However, much of the attack on renewables is that it’s too much to bear as a component of electricity costs (because that where its costs are recovered.) I would refer you to the AEMC who have analysed this in detail and show (consistent with all other studies) that the RET represents around 3 per cent of the average bill, is declining and is one of the smallest components of electricity cost. The largest component is network costs at almost 50 per cent and the fastest growing cost component is, in fact, retailer profits. You’re focusing on the lowest denominator for goodness sake!

Last week, the nation was gripped by the spectacle of a “regressive” fuel tax that would cost the average consumer $20 a year. The same people who pillory the Treasurer for indexing fuel excise argue for a RET more than twice as costly. At least fuel excise will help build roads, whereas the RET doesn’t make electricity more reliable or powerful, it just makes pensioners and the poor go without heating or air conditioning to subsidise the lucky few with the resources to invest in the latest fad: renewables.

This is an absolutely outrageous statement. What possible evidence do you have to make a claim that pensioners and the poor are going without basic needs as a result of the RET!? Ironically, you might be interested to know that, in fact, it is pensioners and working class Australians who are embracing solar at the highest rate! You can see the data in this report taken from government data. You might also be interested to learn that energy diversity DOES in fact make energy networks more reliable and robust, according to a number of studies by, among others, the IEA.

Let’s consider air-conditioning, however, since you bring it up. Are you are aware that every single taxpaying Australian subsidies the cost of those with air conditioners? Air conditioners impose a HUGE cost on the networks because they are large loads and operate at times of peak demand (see study). This has two impacts; it requires massively oversized networks to handle to surge and secondly forces electricity pricing into ludicrously high peak spot demand events. Estimates suggest that cost to the taxpayer for each air-conditioner are around $3000 per air-conditioner and only one home gets a benefit. Solar may have costs but the benefits of reduced demand and lower wholesale price are shared by all network users. In short, cross subsidisation is rife and mixed throughout our entire economy. Singling solar or renewables out and ignoring the potential upside is a staggeringly narrow view.

The RET is an extremely expensive form of emission reductions, between double and six times the cost of the carbon tax.

As above, only if you exclude the benefits.

And it doesn’t stop there. The big losers from the RET are those industries that use lots of energy, such as aluminium and fertiliser producers. Some economic modelling finds that the RET will lead to 5000 fewer jobs.

Again this is highly misleading; the majority of energy intensive industries are exempt or partially exempt, as the Clean Energy Regulator describes here in support worth billions of dollars!

There are few supporters left of high car or other tariffs. The biggest protection racket left is renewable energy.

Racket? For the last 10 years it has been bipartisan policy with widespread support and had numerous reviews and adjustments. It is declining, elegantly simple, self-adjusting (to a large degree) and has been in place for more than 10 years. Dumping it now is a waste of (probably) billions of dollars of research, development and investment in getting it right.

The final argument used to stop protection from being removed is that it introduces sovereign risk and would be unfair to those who have invested in an industry based on government policy. Even some who want to remove renewable subsidies argue that we should grandfather existing investments.

There is merit in this but it cuts both ways. When the 20 per cent RET was introduced five years ago it effectively devalued billions of dollars worth of coal and gas assets. Some estimates say the RET will transfer more than $5 billion from fossil fuel to renewable assets in the next 15 years. Such an expropriation also represents sovereign risk. It is fine to talk about grand-fathering renewables but we should also great-grandfather those who invested in coal, gas or aluminium before there was a prospect of a RET.

Indeed, which is exactly why permits for closure and exemptions were introduced. It’s also worth noting since the decision to expand the RET the utilities have continued to invest in non-renewable capacity knowing full well that their obligations were set to change. Complaining that their investments are at risk under this scenario is just ludicrous.

As an economically damaging protectionist policy, the RET should be removed. The adjustment should be done over time and the costs should be shared between fossil fuel, energy-intensive and renewable sectors alike.

It is already geared to do exactly that; so what’s the problem?

Thank you and kind regards,

Nigel Morris

Nigel Morris is the director of Solar Business Services