Modelling from government advisor shows high RET may be cheapest option

Modelling from the Coalition government’s preferred advisor on energy market economics reveals that a high renewable energy target offers the cheapest avenue for consumers to reach the country’s modest emissions reduction targets for 2030.

Now, that is not a headline you would have read late last week or over the weekend – which wanted you to believe that and emissions reduction scheme would save consumers up to $15 billion. 

But that estimate was based on some extraordinary assumptions about solar and gas prices, and according to the modelling commissioned by the Australian Energy Markets Commission would seek to lock in Australia to 80 per cent fossil fuel generation by 2030, with the share of renewables actually falling between 2020 and 2030.

The assumptions from Frontier Economics, a long-time critic of the RET, is based on a cost of large-scale solar plants that assumes them to be barely different in 2040 to what the industry says are attainable now.

It is also based on a benign view of gas prices. If a high gas price – predicted by most people in the sector – is dialled into the modelling, it shows that a high renewable energy target delivers bigger savings to consumers than the emissions intensity scheme.

This is not the first time that Frontier, headed by Danny Price, the man considered to be one of the key architects of Direct Action and its intended transition into a baseline and credit scheme, and the AEMC have joined forces.

As we wrote in 2014, in our story Modelling wars: Moulding data to kill renewables their modelling, then, assumed prices for wind and solar which were up to double prevailing prices, and assumed there would be little reduction over the following 20 years. The AEMC used that modelling to argue that the RET should be significantly reduced.

The latest modelling rakes over familiar territory. It is based on the assumption that large-scale solar will fall to around $80/MWh in 2040. Even in its low-cost scenario, it predicts 2040 costs of $72/MWh. Many in the industry say that those estimate are not far off what can be achieved now.

First Solar last week said unsubsidised solar projects in Australia were currently priced at around $80-$90/MWh.

Not only does the Frontier prediction use a high starting point, it assumes a cost reduction of just 1 per cent a year. Considering that large-scale solar costs have fallen around 40 per cent in the last year alone – mostly thanks to ARENA’s large-scale solar program, falling module prices and improving efficiencies – the assumption that prices will barely move in the next 25 years is absurd.

Not quite as ridiculous, though, as the assumption that under most of its scenarios, very little large-scale solar is built over the next 15 years. Even in the “high RET” scenario, it assumes virtually no added large-scale solar plants until the mid 2020s.

The modellers should get out more. It’s hard to find anyone in the industry that disagrees with the idea that more than half of all renewable energy generation built over the next few years and beyond will be large-scale solar.

The assumptions delivered to the government in this latest document by the AEMC also take a very benign view of future gas prices. Again, this is based more on hope than reality.

Even the Australian Energy Market Operator recently warned that renewables would likely strand gas assets because of the falling cost of wind and solar and the likely rising cost of gas. Its more realistic scenarios suggest 37 per cent renewables by 2030 (graph above)

In its high gas price scenario, favoured by most observers, the declaration by AEMC and Frontier that an EIS is by far the cheapest scheme to consumers is blown out of the water. This is the graph from the report that consumers and policy makers should be looking at.

It shows that wholesale prices over the next 10 years will be considerably lower under a high RET, and even the cost of the renewable energy subsidy does not take that revenue cost above the EIT. Frontier and the AEMC suggest, as they did in 2014, that this lower revenue is a “transfer of wealth” from the generators to the consumer.

Well, that would be a welcome change from the transfer of wealth that has been occurring in the opposite direction for the last decade or so. As the CSIRO modelling suggested, and the Finkel report flagged, consumers will be investing heavily in their own generation and storage so they don’t get ripped off by the utilities.

But the report from Frontier Economics appears to completely ignore the rooftop solar and battery storage market, and the impact that would have on the assumptions.

Given that the CSIRO and the networks lobby agree that the amount of rooftop solar will likely rise five-fold in the next decade, it seems implausible that the share of renewable energy will actually fall, as Frontier and the sponsors of its report, the AEMC, would wish us to believe.

Indeed, it would be fascinating to see what the results of the modelling would be if Frontier dialled in high gas prices, lower utility-scale solar costs, and low demand (recognising the growth of rooftop solar and storage) into the same graph.

But the AEMC makes it clear what its preferred scenario is. As you can see, renewables make a small share of the total generation by 2030, coal remains at 60 per cent and gas is a healthy 18 per cent. (Curiously, open cycle gas plants rate barely a mention in any of the scenarios).

The AEMC says maintaining this high level of fossil fuels (80 per cent) more than a decade from now is good because it means more synchronous generation and inertia – again ignoring the technology alternatives identified in the Finkel report.

In the high RET scenario, gas is reduced to just 2 per cent – hence, perhaps, their push for the EIS scenario.

Mostly, it seems an exercise in wishful thinking and underlines, perhaps, why the AEMC is considered to be such a stick-in-the-mud.

It is responsible for the rules of the energy market, but has been dragging its feet for years arguing that rule changes that encourage smarter and more efficient technologies, such as battery storage, are not needed. Even COAG energy ministers have had to give it a boot up the backside to try to catch up with events.

The CSIRO report with the Energy Networks Australia, and the Finkel Review’s preliminary report on the National Electricity Market, both underlined how Australia’s policy and market rules were so far behind the technologies which are now available.

It seems that the AEMC is still imagining nothing much changing in the next 20 years (a similar picture to what AEMO chairman Andrew Marsden was imagining at his CEDA presentation on Monday).

Presumably, this is the modelling that the government wanted to use to justify its shift to an EIS, before the idea was blown out of the water by its climate science denying right-wing faction.

Which is not to say that we shouldn’t have a carbon price. We should. But we should be careful how we frame one, and we should not introduce one simply for the sake of supporting the gas industry.

A big problem with this modelling is that its calculations stop at 2030. This means that the ongoing fuel cost for gas, and the free cost of already built wind and solar, is not taken into account. This helps inflate the assumed emissions abatement cost and simply provides more ill-informed propaganda for the anti-renewables brigade.

And, it should be pointed out, it doesn’t factor in longer-term emissions reductions targets.

Another major problem with the Frontier report – and the AEMC recommendations – is that they analyse a carbon price and a renewable energy target in isolation. That has never been the intention of any sensible policy proponent, although thanks to the Coalition’s fatwa on carbon pricing, it is what we have ended up with.

Labor, for instance, proposes a combination of an emissions intensity scheme and a renewable energy target. The Greens favour a similar mixture of carbon pricing and specific incentives. This overcomes the market obstacles for renewables (the markets are framed to favour commodity-based generators rather than those with zero marginal costs) and to reduce the cost of abatement via a de-facto carbon price.

They are all designed to work together. But it seems we have learned nothing from all the years of the carbon pricing debate in Australia. We are back to square one, and we are still being asked to believe in fairy tales.  

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