Renewables in the doldrums

For Australia’s multi-billion-dollar renewable energy industry, marooned in the doldrums of ­investment uncertainty, the big calm before the renewable energy target review storm came last week. For two consecutive days a high-pressure system becalmed southeastern Australia, stranding the nation’s entire fleet of wind turbines.

Figures provided by the Australian Electricity Market Operator show that on July 21 registered wind generation in the National Electricity Market fell to a low of 23 megawatts. The minimum average for any two-hour period was 24MW. That is the power production figure for all wind turbines in South Australia, Victoria, NSW and Tasmania, which have a combined capacity of 3300MW.

The crash in supply from wind was repeated the following day.

There are two ways to look at last week’s collapse of electricity supply from wind. AEMO said there was no generation “shortfall” from the perspective of the National Energy Market because there was more than 36,000MW of electricity available from other sources of generation to pump into the system when wind dropped.

But for others the forced withdrawal of wind energy highlights a fundamental weakness of renewable technology. In oversupplied electricity markets, such as Australia’s, the shortfall may be easy to absorb. But as the penetration of renewables grows the impact of when it goes missing multiplies.

While political attention has been on rising domestic electricity prices there are much bigger issues at play in the federal government’s review of the MRET. Behind the intense ideological and self-interested lobbying for zero-carbon technology, the government ultimately must balance the same competing environmental and economic conflicts bedevilling policymakers worldwide.

Is an MRET the best and most cost-effective way to make the transition to a carbon-constrained world? Can it deliver? Will affordable storage technology evolve quickly enough to beat intermittency issues? What role is there for gas as a transitional fuel and economic game-changer, as it has been in the US? Put simply, is there a better way?

Despite strong support, there have been warnings on the pitfalls of forcing renewables into the system, most notably from Germany. But a discussion paper prepared for the Energy Supply Association of Australia says, like Europe, industrial competitiveness is a major policy topic for Australia, with cheap US shale gas on the one hand, and cheap Asian labour on the other, making competitive energy prices vital to the future well being of the Australian economy.

A new paper prepared for the US electricity industry by Swiss consultancy Finadvice provides some valuable insights.

The Finadvice paper concludes: “The lessons learned in Europe prove that the large-scale integration of renewable power does not provide net savings to consumers, but rather a net increase in costs to consumer and other stakeholders.”

Sound familiar? And this: “Overgenerous and unsustainable subsidy programs resulted in numerous redesigns of the renewable support schemes, which increased regulatory uncertainty and financial risk for all stakeholders in the renewable energy industry.’’

More significant for Australia’s current RET inquiry, due this month, is confirmation of the problems posed by “intermittency” of renewables. Renewable energy operators, including Infigen Energy, claim the German comparison is unfair because of the different regulations and poorer quality wind and solar resources in Europe compared with Australia.

But last week’s wind drought in southeastern Australia shows there will always be a need for power generation equal to entire demand for times that there is no contribution from wind. In Australia, this can be compensated to some extent by interconnection of the national market and the addition of quick-response peaking gas-fired turbines.

But electricity industry experts warn there is a hidden long-term cost. The Finadvice paper documents the financial and technological squeeze that market transformation is imposing in ­Europe. Fossil and nuclear plants are “now facing stresses to their operational systems as they are operating under less stable conditions and are required to cycle more often to help balance renewables’ variability”, the Finadvice report says.

As renewable penetration grows and the wholesale market is crunched by oversupply, new subsidies are required in the form of “capacity payments” to keep ­fossil-fuel generation available on demand. Engineer Paul Miskelly claims the report justifies concerns he raised in a 2012 paper in the journal Energy and Environment. “Not only does intermittent, and highly subsidised wind completely ruin the financial returns on the still essential coal and gas-fired generation, thus decreasing incentives to replace this essential generation as required, it causes actual mechanical damage to the existing plant, resulting at the very least in a significant reduction in both plant reliability and operational lifetime,” Miskelly says.

“Perversely, the (Finadvice) report also shows too clearly coal and gas-fired generation remain essential to back up wind.’’

For Australia, the issue will become greater as the percentage of renewables in the system inc­reases. It is one of the core arguments towards reducing the 2020 RET to a “true” 20 per cent rather than the existing set figure of 41,000 gigawatt hours by 2020, which on present estimates would equal closer to 30 per cent.

Energy company GE says gas has an important role to play, telling the RET review the relationship between gas and renewables will evolve to complement each other rather than compete. “The partnership between gas and renewables is build on supporting each others’ weaknesses,’’ GE says.

“The variability of renewable sources can be complemented with flexibility of gas-fired power.

“At the same time, the zero fuel cost associated with renewable generation can provide a valuable hedge against potential gas price volatility.’’ The gas industry, however, has argued the RET is an economically inefficient policy that should be discontinued.

A report by BAEconomics for gas industry lobby group APPEA found the RET forced higher-cost renewable energy into the electricity generation mix at the expense of lower-cost emissions abatement opportunities from gas generation and elsewhere.

Renewable energy companies have tried to turn the cost argument on its head, claiming low cost wind generation has pushed ­prices down overall in the wholesale market. Infigen Energy told the RET review the low marginal cost of renewable energy was reducing wholesale electricity prices to the benefit of consumers.

But the consumer benefits of the low running cost of renewables is hotly contested. A discussion paper on wind power in South Australia for ESAA says wind farms are able to bid into the National Electricity Market at low prices in part because they receive payments (in the form of renewable energy certificates) from outside the market.

“This distorts the otherwise efficient operation of the NEM,’’ the paper says. In effect the savings on the wholesale market are a mirage because of the high subsidy built into power purchase agreements and RECs through the RET ultim­ately is passed on to consumers.

Outspoken West Australian Liberal senator Chris Back has told parliament power purchase agreements, which are needed to finance renewable projects, lock in prices of up to $120 a megawatt hour compared with the average wholesale price of between $30 and $40 a MWh.

“The price set by the PPA is paid by the retailer irrespective of the wholesale price and passed on to retail customers along with retail margin over the life of the PPA, which is usually 15 and up to 25 years,’’ Back says. He also takes issue with industry claims of sovereign risk, which has been widely cited as a reason not to wind back the RET, saying the RET system was always subject to review that might result in a decrease in value.

Renewable industry lobby group the Clean Energy Council says a reduction of the RET would affect $10 billion of existing investment and imperil $15bn worth of projects now in planning.

Nonetheless, when the federal government finally makes a decision on what to do about the RET, it is expected to be sympathetic to existing renewable energy ­projects. The likeliest outcome would be to scale back the RET to a “true” 20 per cent and exempt “special” cases such as Tasmania’s aluminium industry.

Despite pleas for investment certainty, the review is unlikely to solve the issue for the long term. A clue to the future is contained in the RET review submission lodged by the Australian Energy Market Commission, which makes and amends the rules for the National Electricity Market and elements of the gas markets.

The AEMC says energy and environmental policies have different objectives and it is important they are developed in a manner where any efficiency trade-offs and costs are well understood. The AEMC says it does not consider the present policy of a fixed 2020 target sustainable. It has recommended moving to a floating 20 per cent target to shift the allocation of demand risk from consumers to investors.

AEMC’s alternative suggestion is more radical but ultimately may prove more durable. It is to move the RET to an emissions intensity-based scheme under which generators below a defined emissions intensity level are able to create certificates that generators above the level are liable to purchase.

AEMC says this type of approach will encourage all lower emissions technology options, not only renewable energy, and therefore is likely to meet any emissions reduction target at a lower cost. It is an approach that avoids picking technology winners and AEMC hopes it may contribute to the policy certainty necessary to provide industry with confidence to continue to invest in the energy sector