The Australian embarrasses itself - again

In yesterday's Australian newspaper the editorial team yet again embarrassed themselves with their piece: Taxpayers should not gamble on renewables. In the article they closed off a diatribe against renewable energy with this sentence:

“It is no accident that separate reports recently revealed South Australia had the highest proportion of electricity generated by wind turbines and the most expensive power in the nation.”

The funny thing is that neither of these reports (which I would think are by Bruce Mountain of Carbon Market Economics and the Australian Energy Market Commission) mention anything about wind power being the cause of these high prices. And that's because, in fact, the opposite is the case. The high prevalence of wind power in South Australia's electricity mix is actually depressing electricity prices in the state.

How could this be the case, you might ask, isn't wind power more expensive than fossil-fuelled power?

To understand this you need to consider that while it costs more to build a wind farm per unit of electricity generated than a coal or gas plant, once it is built the operating cost per unit of electricity from a wind farm is close to zero.

The higher construction cost is largely paid for through Renewable Energy Certificates. This extra cost is apportioned across the entire nation in proportion to overall electricity consumption. It is not allocated to customers in the state where the power plants are built.  

Meanwhile, South Australia captures all the benefit from having wind farms bidding into their electricity market at a price close to zero (and in fact even negative prices), thereby squeezing out gas and coal power plants that have significant fuel costs, and lowering electricity prices.

This was documented in great detail by Dr Nicholas Cutler in work he did while at the University of NSW and published in the journal Energy Policy in 2011. The chart below illustrates how during periods of high wind farm output (the red lines), prices in SA are noticeably lower than low wind periods (the blue lines). 

Average daily profiles of wind power and price on working weekdays for low and high wind periods

Source: Cutler, Boerema, MacGill and Outhred (2011) High penetration wind generation impacts on spot prices in the Australian national electricity market, Energy Policy, October 2011

Critics of wind will suggest that wind requires huge amounts of expensive gas peaking power as back-up, and that's where power prices will take a hit. But that hasn't happened, as the chart below illustrates. South Australia has been using less electricity from gas peakers (open cycle gas turbines and thermal gas) over the period that wind power rose from 7 per cent to 21 per cent market share.

Changes in SA energy generation from 2005/06 to 2010/11

Source: Osmond and Osbourne (2011) Windlab Systems

The Australian editorial team appears to be ignorant of the fact that South Australia has always had higher electricity prices than the rest of Australia, well before wind became prominent in the supply mix.

The AEMC report attributes the lion share of increases in SA residential electricity prices to increased expenditure on distribution networks, with very little increase due to the costs of Renewable Energy Certificates.

And in terms wholesale electricity generation costs, it states that high prices in South Australia relative to other states are due to more ‘peaky' demand and:

“A number of other factors unique to the South Australian energy market appear to contribute to higher wholesale prices on average, compared with other jurisdictions. These factors include:

-- A relatively small market;

-- A high dependence on gas-fired generation, which is on average more costly than coal-fired generation; and

-- Relatively limited interconnection capability, which limits the amount of potentially cheaper electricity than can be imported from other jurisdictions.”

The AEMC makes no mention whatsoever of a high proportion of wind contributing to South Australia's very high prices.

I asked Bruce Mountain (the author of the other report detailing SA's high electricity prices) what he thought of The Australian's editorial.

He put it succinctly: “disappointing and wrong”.