Is Origin fudging its figures?

Origin Energy has provided a submission to the Climate Change Authority which contains some rather ambitious claims about the costs of the RET that deserve greater explanation from the company, and serious scrutiny from the Climate Change Authority.

In the submission Origin claims that reducing the large-scale renewable energy target from its current 41,000GWh in 2020, to 27,000GWh would provide:

“A cost saving of $25 billion in nominal dollars out to 2030. This comprises $20 billion based on volume and price differential and an additional $5 billion to firm up the intermittent output of the additional wind volumes.”

Origin also states:

“Increased levels of intermittent generation will require significant network extension and augmentation if they are not to lead to violations of network security limits. This will mean a step change in electricity transmission investment, which the community as a whole may not be ready to accept, particularly as we project the wind generation investment is likely to be concentrated in the states of New South Wales and Victoria. Ancillary services costs are likely to increase significantly if the LRET forces large amounts of wind into the system.”

To help put these costs into perspective, Origin's submission contains a chart showing the costs per household (reprinted below) for the RET based on current legislation (red bars) versus one that would reduce the target for large scale renewables (LRET) to 27,000GWh. These costs to make sense must be inclusive of not just the LRET, but also the costs associated with support for small-scale renewables (the ‘SRES').

Renewable Energy Target annual cost to households according to Origin Energy

Note: assumes household annual electricity consumption of 7MWh
Source: Origin Energy Submission to Climate Change Authority

The cost estimates for 2012 look pretty much right based on renewable certificate price and Clean Energy Regulator data. Which then draws the question: why is IPART claiming the “cost of complying with the RET” is $102 per household, when the business doing the complying thinks it's $70.

It also makes you wonder why Origin's submission cites IPART's cost estimates for the SRES when its own numbers show they are badly wrong. Looks like Origin has made a windfall gain of close to $32 per NSW regulated tariff customer they have. This is close to half the actual cost of the RET but with zero abatement and zero additional renewable energy or jobs.

Anyway moving along to where Origin needs to do some explaining. 

While its RET cost estimate per household for 2012, and indeed 2013 and 2014, seems reasonably in line with other sources, it is completely out of the ballpark by 2020.

For example, the Australian Energy Market Commission estimated the total annual cost of the RET in 2020 at $1.5 billion in today's dollars, which works out to about $1.9 billion to account for price inflation. Using Origin's demand forecast of 245 million MWh and deducting the exemptions for industrial facilities (30 million MWh) gives a cost per MWh of about $8.84.  This equates to an annual cost per household of $61.88 versus Origin's $110. The basis for the AEMC's estimates are highly transparent, with lengthy modelling reports accompanying their estimates. 

Now it is possible that AEMC's cost could be boosted based on some reasonable changes in assumptions, but it seems incredibly hard to reconcile such a huge discrepancy. 

Maybe it could be all that extra back-up generation, load-following spinning reserve and extra transmission?

Again Origin has some serious explaining to do. Origin told Climate Spectator that its $5 billion of additional costs to firm-up intermittent generation was based on,

“AEMO's assessment of the firmness of wind generation and Origin's assessment of the cost of Open Cycle Gas Turbines to firm up or provide capacity support to the wind capacity. As more wind is added to the system it will increasingly require investment in the shared transmission system and ancillary services support mainly through additional FCAS (Frequency Control Ancillary Services) capacity.”

However, out to 2020, AEMO's Statement of Opportunity assessment foresees the need for barely any additional generation capacity to meet peak demand, taking into account the RET. NSW, Tasmania and Queensland need no extra generation at all to 2020, while Victoria and South Australia require about 250MW. The capital cost for this plant would be about $200 million and indeed without the RET, we'd actually need more capacity.

In terms of ancillary services and transmission, the AEMC commissioned ROAM to undertake some quite detailed modelling taking into account likely variation in wind farm output based on actual weather data. Based on this work AEMC observed:

“Overall transmission and security of supply costs associated with the LRET were projected to continue to remain a relatively small proportion of overall energy costs and retail electricity prices. Under a carbon emissions price, transmission costs were projected to be lower than if the LRET was not in place [my emphasis]. This is the result of an increased level of biomass, which can meet load growth with limited additional network augmentation. The projected increase in wind generation was also assumed to locate close to the existing transmission network. In contrast, where the LRET is not in place under the counterfactual scenario it was assumed that a far higher level of gas penetration would occur which would require significant augmentation to connect more remote gas fields over time.

In relation to security of supply costs, while the cost of Frequency control ancillary services (FCAS) are not projected to increase significantly in relation to overall energy costs, they are projected to increase significantly in absolute terms. However, as historical bids were used to develop projected security of supply costs, there is the potential that these estimates may overstate likely costs as the pattern of bids may change with increases in costs over time.”

Critically the AEMC RET costs I've cited above take these security of supply costs into account.

Climate Spectator asked Origin for a detailed explanation of its RET cost estimates and was informed that this was not possible due to them including “assumptions on future prices that are commercially sensitive.”

If Origin changes its mind, there is an open invitation for them to provide readers of Climate Spectator a thorough explanation of why its RET cost estimates are so unusually high.