Origin Energy's missing costs

Last week I explained how Origin Energy’s CEO Grant King, in a speech hosted by CEDA, presented a less than fulsome analysis of the costs involved in managing the variability of wind power.

But this was not the only part of his speech where there were some serious inadequacies.

Today I’d like to examine his statement that:

“Those schemes [the Large and small-scale Renewable Energy Target] do not cost into them the cost of additional transmission and distribution investment, the cost of additional generation necessary to firm the schemes and the cost of climbing up the cost curve and not down the cost curve. So our view is that those costs are seriously understated. The CCA in their review last year completely skipped the opportunity to review the true cost of these schemes.”

Now I’ve already dealt with his claims about the cost to “firm-up” renewables, but his other two claims about the Climate Change Authority completely skipping an examination of the costs of transmission investment; and the “cost of climbing up the cost-curve” are also highly suspect.

Transmission costs

Firstly, on transmission, this has been taken into account by the CCA, contrary to Grant King’s claims. As King would fully understand there are two components to transmission costs:

1) The costs to connect a project to the pre-existing backbone transmission and distribution infrastructure which are borne by power project developers.  In addition the project developer may even be required to pay for upgrades to the pre-existing network infrastructure where it is deemed its generator might compromise safety or reliability of the network without the upgrades.

2) The costs of upgrades to increase the capacity of the existing transmission backbone, which are presently borne entirely by energy consumers, not producers. However this does not mean that a power line will be automatically upgraded if it has insufficient capacity to transport all the generation from a connecting power generator.  

In terms of point 1 these costs are genuine and quite an important element in the economics of wind farm development. But they certainly aren’t some insidious hidden cost that will be hoisted on energy consumers on top of charges associated with retailers complying with the Renewable Energy Target. And they have been taken into account in the economic modelling for the CCA on the costs of the RET.

On page 60 the Sinclair Knight Merz economic modelling report for the CCA states that in estimating the supply cost curve for renewable energy,

Transmission costs varied depending on the distance of the connection, the degree of any deep network upgrades and the voltage level required. Connection costs ranged from $110/kW to $500/kW.

In terms of point 2, the costs to upgrade the capacity of shared transmission backbone have also been examined by not just the CCA’s consultants, but also the Australian Energy Market Operator and ROAM Consulting for the Australian Energy Market Commission. Their analysis simply does not support Origin’s assertions that we’ll need major and expensive upgrades to the shared transmission backbone to maintain reliability and support extra wind generation associated with the RET. 

In fact ROAM Consulting found the opposite in its work for the AEMC, stating,

“The LRET had the effect of reducing the amount of inter and intra regional transmission that would otherwise be required. “

SKM on page 83 of its report explains it specifically excluded projects that would require substantial upgrades of the transmission grid. And on page 60 it explains that it looked at whether transmission upgrades would be needed to maintain reliability:

“A detailed analysis was undertaken on select cases and years to test whether there were any reliability or network issues related to the degree of renewable development….One hundred Monte Carlo simulations were run for each year and case to ensure that there were no adverse impacts of the renewable generation development on either network congestion or unserved energy that would render the solutions infeasible.

"The results indicated that the available renewable energy could be dispatched under all three cases in both 2015 and 2020. There was no renewable generation constrained off due to network constraints. Moreover, due to the surplus supply situation projected, unserved energy did not exceed the 0.002 per cent reliability criteria in any cases or years."

It is true that to incorporate a very large amount of renewable generation, major upgrades to the transmission network will ultimately be necessary. But beyond a modest upgrade to the interconnector between SA and Victoria in the near future (which will support wind but also help address high prices during peaks in demand), there doesn’t appear to be a need for significant transmission upgrades to meet the 2020 Renewable Energy Target.

Climbing up the cost-curve

On the issue of the CCA not costing in the issue of “climbing up the cost curve”; this is simply untrue.

King states in the speech, “even as a matter of logic, we can understand that the costs will go up because largely the economics of wind is driven by capacity factors and location of the sites.”

Now on page 92 of the SKM report it explains this was taken into account,

“The long run marginal costs [of renewable energy supply] vary by region reflecting either variations on transmission costs and/or variations in resource quality (e.g. poorer wind regimes, differences in solar insolation and biomass fuel costs)."

Then on the following page of the report it provides the following chart, illustrating how under its model costs increase with the greater amount of renewable energy supply sought. Now it should also be noted that cost curve is based upon commercially available technology in 2012.  But we know that renewable energy technology, including wind turbines, doesn’t stand still, as I explained in Climate Spectator back in October.

Long-run marginal cost curves for prospective renewable generation in 2012

Source: Sinclair Knight Merz (2012)

No one can doubt Grant King’s dedication to fulfil his statutory duty to defend the interests of Origin Energy shareholders, and this will sometimes require speaking out on matters of public policy. But to do this effectively, one shouldn’t suggest something has been “completely skipped” when it is plainly obvious this is not true.