More pain to come on power prices Energy Origin blames renewable target
After the steep rise in power prices over the past five years due to heavy network investment, Origin managing director Grant King said new spending would be needed to achieve the federal government's renewable energy target. This would come as the government seeks to rein in power prices, hoping electricity will decline under a "CPI minus x" pricing regime.
But, according to Origin's estimates, about 2200 megawatts of additional wind generation capacity will be needed annually between 2017 and 2020, "which will require an enormous increase in activity to 2020" in terms of new investment, Mr King said.
Even though wind power is inexpensive to build, it is difficult to obtain the permits and approvals while also needing gas-fired power stations to generate electricity when the wind is not blowing.
This will drive a significant new round of capital spending, which will put pressure on power prices at a time when renewable energy is already a significant burden on households and smaller companies, Mr King said.
The Climate Change Authority recommended leaving unchanged the existing target of 45 terawatt hours of electricity sourced from renewable energy by 2020. But declining electricity output will push the proportion sourced from renewables to 27 per cent of the total by then, more than the 20 per cent initially planned.
"We don't yet know what the RET [Renewable Energy Target] scheme is costing us and we should have known more about that as a result of the [authority's] review, but we don't," Mr King said.
Costs, now excluded, such as the higher expense required to ensure supply from variable wind and solar sources will ultimately have to be counted, Mr King said.
"These are marginal fuels, free-riding on the system," he said. "Once that free ride is over, they will have to pay their way and that will result in increased costs."
It is likely the proportion of environmental programs such as the carbon tax will exceed that of the wholesale cost of generation for many small and medium-sized businesses unable to access compensation under present arrangements, Mr King said.
Programs to spur the take-up of solar photovoltaics had cost about $4 billion or as much as $600 per tonne of carbon abated, he said.
Frequently Asked Questions about this Article…
Origin Energy's managing director Grant King says that after electricity prices roughly doubled due to heavy network investment, a new round of capital spending will be required to meet the federal renewable energy target — and that extra investment is likely to put further upward pressure on power prices over the rest of the decade.
Origin estimates about 2,200 megawatts of additional wind generation capacity will be needed each year between 2017 and 2020 — a level of build that will require an enormous increase in activity and new investment to 2020.
The article explains that while wind is inexpensive to construct, developers face permit and approval hurdles and the system still needs gas-fired power stations to supply electricity when the wind isn't blowing. Integrating variable wind and solar requires additional costs and backup capacity, which will drive significant new capital spending and raise prices.
The Climate Change Authority recommended keeping the RET at 45 terawatt hours of renewable electricity by 2020. Because overall electricity output is declining, that 45TWh would represent about 27% of total supply by 2020 — higher than the 20% share that was initially planned.
King is saying that current accounting excludes many of the extra costs needed to ensure reliable supply from variable sources like wind and solar. Once those integration and backup costs are fully counted, renewables will have to 'pay their way,' which will increase overall costs.
According to Origin's comments in the article, renewable and environmental programs are already a significant burden on households and smaller companies. For many small and medium-sized businesses that can't access existing compensation arrangements, the proportion of costs from programs (including carbon-like measures) could exceed the wholesale cost of generation.
The article states that programs to encourage uptake of solar photovoltaic systems have cost about $4 billion and have been roughly equivalent to up to $600 per tonne of carbon abated, according to Grant King’s remarks.
Investors should monitor planned capital spending to meet the RET, the pace of new wind and solar builds (Origin cites ~2,200MWpa to 2020), government pricing moves such as the proposed 'CPI minus x' regime to rein in prices, and policy updates from bodies like the Climate Change Authority — all of which can influence power prices and energy-sector returns.
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