Old Abbott and Newman's RET confusion

It's counter intuitive but the RET will help Abbott reduce electricity costs for industrial manufacturers. It's owners of coal power stations who lose out, but most knew this prior to buying their power stations.

In a press conference yesterday about improving prospects for manufacturing, Tony Abbott made a statement that appears ominous for the renewable energy industry:

And the RET [Renewable Energy Target], well look again, we support sensible use of renewable energy and as you know it was the former Howard Government which initially gave us the RET and at the time it was important because we made very little if any use of renewable energy.
We've got to accept though, that in the changed circumstances of today, the renewable energy target is causing pretty significant price pressure in the system and we ought to be ….an affordable energy superpower…. Let’s make the most of the comparative advantages we've got and cheap energy – affordable energy – ought to be one of our comparable advantages.

However, there’s a silver lining because the funny thing is the RET is actually reducing energy costs for energy-intensive manufacturers.

This is completely counter-intuitive and it’s understandable that those outside the electricity sector find this hard to understand, including the prime minister and probably many of those people he trusts and respects – like Maurice Newman, the man who will be advising the manufacturing taskforce Abbott is establishing.

In my conversation with Mr Newman in July this year, he was convinced that the Renewable Energy Target and the carbon trading scheme were almost entirely to blame for the doubling of power prices since 2007, even though the Australian Energy Market Commission and every state government utility regulator has provided information that shows this is not accurate (as explained in the article, A power price reality check, March 25).

For this group, the logic is that renewables must require a price higher than what existing power generators charge, otherwise why would you need the subsidy from the RET in the first place?  

Now, this is true for that portion of power we get from large-scale new renewables (currently about 7 per cent of electricity and rising to around 16 per cent in 2020).  But by adding extra supply with near-zero operating costs to an already oversupplied power market, it also acts to depress the price received by the remaining, far larger portion of our power coming from fossil fuel generators. 

As Environment Minister Greg Hunt’s new adviser complained in a submission while he was an employee of the owner of some large coal and gas power generators:

“It [the RET] imposes highly subsidised energy into the generation mix, the result of which will be a reduction in the wholesale energy price…..Customers certainly potentially face lower wholesale energy costs as a result, at the expense of existing investors [in existing power generators].”

Now, on top of this reduction in the wholesale price, energy intensive manufacturers are granted an exemption from between 60-90 per cent of the subsidy cost to support the extra renewables. So, for those manufacturers where electricity costs are significant to competitiveness, they get to capture savings off every unit of electricity they buy while only paying around 10-40 per cent of the subsidy cost associated with the small proportion of electricity produced from renewables.  

To illustrate with an example, imagine a smelter purchases 100 megawatt-hours of electricity. Of that, 16 per cent is renewables receiving a subsidy of $60 per megawatt-hour (current market price is actually $35) which represents an extra cost of $960. But because the smelter is deemed to be energy intensive it is exempted from 60 per cent of the cost and pays only $384 extra. But at the same time the extra renewables supply pumped into the power market has reduced prices across the entire 100 megawatt-hours the smelter purchases by $5 (energy market analysts have estimated wholesale price reductions in this realm) representing a total saving of $500. Overall the smelter’s power bill is $116 lower ($500 minus $384).

Now, of course, this isn’t much fun for investors who own the other power generators that see power prices go down. As Industry Minister Ian Macfarlane observed in the press conference yesterday:

“..in terms of the RET review; we're facing an enormous challenge in terms of an excess generating capacity in electricity in Australia. To be adding large quantities of generation into that situation has to be questioned. The review process will go through those things but as the Prime Minister says, in terms of the cost of energy, the fact that a coal-fired power station is dispatching electricity at a lower price now than it was five years ago…”

Did you hear that? Coal power stations are suffering lower prices because of excess generating supply. And the RET will add to that excess supply.

And you know what? Many of these poor old companies that own these coal fired power stations bought them after the government had announced the enlarged renewable energy target in 2007. So they can hardly complain that they didn’t know this was coming. Heck, they may have even paid discounted prices for the power stations because of the RET.

Every large brown coal generator in Victoria and South Australia, bar Yallourn, has changed ownership since after the enlarged RET was announced (AGL bought Loy Yang A, GDF Suez bought Hazelwood and Loy Yang B as well as gas power stations in South Australia while Alinta bought Northern and Playford B). Also, a large chunk of NSW’s coal generation capacity was acquired by Origin Energy and Energy Australia in recent times. Plus, the rest of NSW's coal generators should also change ownership shortly.

Why on earth the government would take pity on these guys for declining power prices is anyone’s guess.