Why power generators suddenly care about consumers

A picture is now clearly emerging from the submissions to the Climate Change Authority: the dominant incumbent power generators (with the exception of AGL) are all gunning for the Renewable Energy Target to be slashed.

Companies including TRUenergy, Origin Energy and most recently International Power have changed their position from meekly accepting the target, to outright opposition.  In conjunction with the state government-owned coal generators and the Australian Coal Association, they are all united behind Grant King's rallying cry to reduce the RET to reflect reductions in electricity demand.

These are all couched behind a supposed concern for energy consumers, who it is claimed will now bear a greater cost from the RET. But this doesn't really make much sense. The cost of delivering renewable energy equal to 41,000GWh the small scale renewables (the SRES) doesn't change because overall electricity demand is lower. It's the same number of biomass steam turbines, wind turbines and solar panels as it's always been.

While it might be true that the cost of the RET per megawatt-hour of electricity consumed will be higher, one of the primary reasons electricity demand is down is because many customers are consuming less megawatt-hours. It's not as if electricity demand is lower because we have less households in Australia, or even less businesses. While this is a potential issue for the competitiveness of large energy consumers that are trade-exposed, they are largely exempted from the cost of RET.

If this alliance of electricity companies was genuinely concerned about the cost to consumers there are a myriad of ways, other than reducing the target, to address this.  While saying this won't earn me many friends in the renewables sector, it is a disgrace that renewable energy projects built prior to 1997, indeed as far back as the 1960s, can earn renewable energy certificates (RECs) all the way out to 2030. In addition, projects operational prior to 2008 should also have their RECs allowance cut off at 2020.  These projects were financed on the basis of RECs only being available until 2020 (or not available at all for hydro). Receiving RECs beyond this time is a straight windfall. 

Such a change would save energy consumers several billion dollars without altering the total amount of renewable energy in Australia. It could also be implemented without anywhere near the same angst and negative consequences. But strangely not one of the incumbents has put this idea forward.

Another complaint made of the RET by electricity incumbents is that it will primarily support wind, and fail to expand the range of viable abatement options for Australia. While not really true (solar PV and hot water have been important beneficiaries), this is an entirely legitimate concern because wind alone will be insufficient to meet our future needs for zero emission energy. There is a desperate need to progress other technologies. 

However how does reducing the target actually do anything to improve this situation? Considering the RET will provide an important additional revenue source to supplement funding from ARENA and the Clean Energy Finance Corporation, the RET will play a key part in supporting a diversity of low emission technologies. The problem is more that the $5 billion in funding for renewable energy given to the Clean Energy Finance Corporation could be put to better use through a different policy mechanism.

But you know what, neither of these proposals actually address the real concern that has led these incumbent electricity companies to move from grudging acceptance to outright opposition. The drop-off in electricity demand in the last few years has had a horrific impact on wholesale electricity prices. One that will last for some time. There is simply way too much power generation capacity chasing too little demand, with all conventional generators hurting.  

While they were never all that happy with the RET cutting their lunch, they could tolerate it when electricity demand was expected to expand by more than the extra supply induced from the RET. But it has now become clear that this drop off in demand is not a blip and demand will remain subdued.  So for these incumbents the addition of 8,000 to 10,000 megawatts of renewable generators with near zero operating costs is now about more than cutting their lunch, it is about survival.  

The RET had already knocked off much of a need for new gas combined-cycle power plants over the next decade. Much to the irritation of Origin and Santos, as that would have increased their sales of gas at inflated prices thanks to LNG. In combination with the carbon price it has also knocked off SA coal. Now the NSW coal generators – including the ones that Origin and TRU just bought into with gentrader rights – are in the firing line.

All of this then makes me extremely curious as to why TRUenergy's ACIL Tasman's modelling omits any detailed results on how a change in the RET would affect wholesale electricity prices. This is especially intriguing when the consultancy provides a table of wholesale pool prices based on current policy, but not under TRU's preferred scenario of a dramatically reduced level of renewables.

While ACIL acknowledges that reducing the RET will lead to what is claims are “marginally higher” wholesale prices in the period to 2020, it doesn't actually take these into account in its calculations of the RET's costs. ACIL claim that this is too small and unimportant to examine. 

But it doesn't take much of a reduction in pool prices to have a considerable offsetting effect on the costs of the RET. For example, if the RET was to reduce overall pool prices by just $2 per MWh, this still adds up to a big saving because its multiplied by the entire amount of electricity consumed. According to Origin, this will be close to 250 million megawatt-hours in 2020 resulting in a saving to consumers of $500 million per annum. This reduces the net cost of the RET to consumers by around a fifth.