The dark side of Teflon Tony's carbon plans

Prime Minister Abbott's remarkable selling ability was on full display on Friday, as he stood beside UK Prime Minister Cameron and spoke about Australia's response to new carbon emission reduction targets being set by China and the US.

While critics slam Abbott for getting carbon policy all wrong, Teflon Tony's performance before the cameras was exemplary.

First, he noted, those two nations together emitted around 45 per cent of the world's carbon, while Australia was responsible for only about 1 per cent.

Second -- having underlined that old theme that it's really not up to us to set the pace for carbon reform -- he reiterated his unshakeable belief that his government's Direct Action policy would reduce our emissions by the current goal of 5 per cent below 2000 levels by 2020.  

It's a convincing sales pitch and his main way to fend off the accusation from pesky economists that Direct Action is a much more expensive way to reduce emissions than Labor's emissions trading scheme, which his government repealed. (And let's put aside for a moment that there is no guarantee Direct Action can hit that target, as Tristan Edis has explained.)

The fact that the same policy, if used to meet stricter post-2020 emission cuts, would be hugely more expensive is a debate for another day. Abbott responded to the new US and China targets for 2030 by saying wasn't focusing on “something that might happen in 16 years' time”.

This adds up to highly polished pitch to voters: Australia was way ahead of the world with the carbon tax, it will meet its obligations with Direct Action, and if the world demands more action (as Bill Shorten thinks it will) post-2020, let's worry about that then!

However, Abbott has only polished one side of the coin. On the other side is a world of trouble, due to the way the Coalition successfully conflated power price increases and the ‘carbon tax' during the Gillard years.

As Business Spectator pointed out many times during those turbulent years (see, for instance, A carbon tax win but not for the Greens, October 2012), the carbon tax was responsible for only a small part of the power price rises. The lion's share was due to government-regulated ‘gold plating' of power networks.

Now, with the carbon tax gone, the real state of our power generation, distribution and retailing is clear for all to see. We are powered by an industry whose business model is creaky at best and collapsing at worst.

Any satisfaction that Abbott derives from thinking that Direct Action will hit its 2020 targets must be tempered by the sure knowledge that power prices will continue to rise, perversely enough because demand continues to flatline or fall.

And in a week where Labor histrionically walked away from negotiations to water down the Renewable Energy Target, and in which the Palmer United Party was split on whether or not to support this watering down, there are signs that the whole RET debate could soon be past its use-by date altogether.

Why? Because technology, and price rises caused by the over-investment in power networks, are rapidly converging to reduce the need for governments to set renewables targets at all.

That's because of the inversion of supply-and-demand principles in the case of distributed power. Consumers have been so scared by the Gillard-Abbott carbon wars that they learned to use less power. And sadly, the ongoing decline of energy-intensive manufacturing industries also means falling demand.

And so as both demand less, the power companies have to charge more to cover their huge investments and try to turn a profit.  That's the inversion bit. Normally, falling demand also means falling prices.

At the same time, technology is rushing into the country faster than the government, Australian Standards, or even the power companies themselves  can respond.

Specifically, the ongoing decline in the price of storage devices -- particularly lithium-ion-battery-based units -- means the cost of installing and running local energy storage is getting closer to the cost of buying expensive energy across the networks.

Lachlan O'Shea, who runs the small off-grid solar business Lockstar Energy, has just returned from a tour of the China-based factory of BYD Energy.

He says it is now marketing a storage unit, which comes complete with the sophisticated computer controller and power inverter required to charge lithium ion batteries safely over long periods of time, that can be delivered to Australian customers for around the $17,000-mark.

Those systems claim a ‘useable' 7.5 kWh storage capacity, which makes it large enough to run a typical household. While the average house uses 15 kWh per day, the idea is to use solar panels on the roof while the sun is shining, and have enough energy stored in the BYD unit for when it is not.

Panels to run such a system would cost around $6,000.

So for around $23,000, a consumer can become a ‘grid defector' and leave grid-connected users to pay for the gold-plated networks.

That sounds like a lot, but at current interest rates such a system could be added to a householder's mortgage for about $185 a month ($550 a quarter), assuming that the system needed replacing or upgrading in about 15 years' time.

That might be more than typical grid-connected power bills, but there are a growing number of consumers who want the certainty of knowing what their power bills will be in future. O'Shea says he's seen enquiries for going ‘off-grid' double in the past couple of years.

And O'Shea says that his systems would break even at 45 cents/kWh, which doesn't look too far off for network power that costs around 30 cents/kWh.

Power prices will continue to rise, and the price of storage systems will fall, especially if, as Matthew Wright has detailed, ‘gigafactories' start churning out lithium ion batteries for the new generation of electric vehicles.

And what happens when those two prices cross? Well, even as they get closer, the Abbott government will have to explain why carbon pricing was not the cause of power price increases.

But more importantly, there is a growing risk that entrepreneurial businesses such as O'Shea's will take a growing number of people away from the grid -- the much discussed ‘death spiral' for the distributed power industry.

While environmentalists might cheer such a prospect, if the business model of distributed power continues to weaken, we will be headed into an era in which governments either force consumers to support the big power companies (as Florida has done by making connection to the grid mandatory and enforcing high fees for connection) or allow companies to fail and power outages for the grid-connected consumers to increase.

Neither is an attractive prospect, particularly for the Abbott government, which rode to power by implying that the carbon tax, not dysfunctional energy markets were the real problem.