Prepare for an expensive energy future

Effectively a non-revenue raising tax on consumers, the 'renewables levy' will require power firms to make big investments in alternative energy. This will neuter the efforts of Rudd or Abbott to reduce power costs via carbon changes.

Currently all the debate is focused on the cost of carbon tax and emission trading schemes. In three years time a much higher renewables cost will start to hit our major power users – what I call a renewable energy levy which for consumers will effectively be yet another tax. Our politicians on both sides are trying to reduce carbon charges and infrastructure costs to help power users but they have forgotten the renewables levy/tax so the politicians' efforts are set to be neutered. And that renewables levy/tax will be much bigger than the current carbon tax, although it will only apply to between one fifth and a quarter of expected power demand. Nevertheless, it will still hit what is left of our major power-using industries plus consumers and moves Australia further away from being a low cost power nation at a time when both sides of politics are coming to grips with implications of the end of the mineral investment boom. There is no point in the politicians reducing or eliminating the carbon charges and leaving the renewables levy in place.

In Business Spectator we encourage different views and I believe diversity is healthy. In particular we have a section called Climate Spectator, which is edited by young enthusiastic green advocate, Tristan Edis. His views are often different to mine but I admire his enthusiasm for the cause in which he believes and he has a strong following. But sometimes in major national interest issues like this we have to set green enthusiasm aside and get the facts right (Gottliebsen is wrong on renewables tax, July 23)

First some history. In Kevin Rudd’s 2007 election campaign he promised to lift the renewables target to 20 per cent of power generation by 2020. The anticipation was that by 2020 Australia would need about 300 terawatt hours of electricity (a terawatt hour is 1,000 gigawatt hours). That means our 2020, 20 per cent renewable target was to be 60 terawatt hours and it was expected to be met via 41 terawatt hours from wind farms and some biomass/landfill; 15 terawatt hours from old hydro and 4 terawatt hours from solar panels and similar domestic installations.

Then two dramatic events took place – first our solar panels were separated from the 41 terawatt required hours of long term renewables investment. Then, aided by generous state incentives, domestic solar panels skyrocketed from an anticipated 4 terawatt hours by 2020 to 11 terawatt hours. So adding the boosted solar panel installations to the legislated 2020 non-solar panel renewables requirements, we then have total renewables of 67 terawatt hours rather then the original requirement of 60.

Second, the collapse of our manufacturing and Australia’s higher cost of domestic power (mainly caused by infrastructure investment and carbon tax) has dramatically reduced the total amount of power used in Australia. Accordingly, the 2020 government predicted power consumption has been slashed from 300 terawatt hours to just 240 – that’s an incredible 20 per cent reduction on the original 2020 expectation. If those government forecasts turn out to be right then renewables will supply almost 28 per cent of the total 2020 power needs, which is about 25 per cent over the original predictions. Naturally the greens rejoice at this but there is a cost penalty, which will change the outlook for the nation.

While there are significant variations, on average most wind farms need about $100 a megawatt hour to cover their very high depreciation charges and other costs. Accordingly most long-term wind power contracts are priced around this $100 MW level. Coal/gas power plants generate power at around $40 a megawatt hour (excluding carbon tax) a difference to wind of about $60 a megawatt hour – that’s the base renewables levy. Of course that renewables levy is reduced by any carbon price levy or tax. Currently the carbon tax effectively reduces the $60MW renewables levy by about $24 but the renewables levy returns to $60 if there is no carbon tax and to an estimated $52 under emissions trading. Accordingly, as far as renewables are concerned it does not really matter whether there is a carbon tax or not – the total of levy and carbon tax remains same at about $60 a megawatt hour.

But there is a twist to the wind story, which could see that renewables levy go much higher. Each year the power retailers are required by law to buy a specified and rising amount of non solar panel renewable electricity. That escalating requirement rises to of 41 terawatt hours by 2020. So, after adjusting for biomass, on current technology, that means 37 terawatt hours must come from wind by 2020. But after 12 years only seven terawatt hours of wind generation capacity has been erected. So by 2020 we are going to need another 30 terawatt hours of wind or four times the current level. In a strange way the avalanche of solar panel installations has made the long term wind task much more difficult because power retailers were able to buy credits from solar installers as a substitute for wind. Most of the retailers will therefore not need extra wind until 2016. But then, in a rush, in each of the next four years power retailers are going to need a vast and escalating amount of wind power – i.e. a total of 30 terawatt hours over just four years

Currently almost every proposed new wind farm is the subject of enormous community protests. If the wind or other non solar panel renewable capacity fails to meet sharply rising 2016, 2017, 2018, 2019 and 2020 legal requirements then the retailers, and therefore the consumers, be subject to an additional renewables levy. That penalty levy means the renewables levy will be increased from $60 to around $93 for the shortfall, and that’s the law. The extra levy could start to kick in by 2016 (three years time) and by 2020 it will be huge unless there is enormous investment in wind/renewables excluding solar panels.

Consumers, including industry, will simply have to pay the levy as the law stands.

It’s true that if we develop wind from a wide variety of areas it reduces, but does not eliminate, the need for high cost gas backup. That backup is a further addition to the renewables levy. Just what will be the cost of the exploded 11 terawatts of power from domestic solar panels is hard to determine because it depends on future actions by state governments but solar panels are unlikely to be cheap so therefore around one quarter of electricity could be subject to a renewables levy by 2020. Its important for Australians to realise that we are moving from a low cost power country to a high cost one at a time when the minerals boom – in words of Kevin Rudd – is over.