A reaction against renewables is a symptom of lazy prejudice, writes Tristan Edis, who has identified the real culprit in price volatility in South Australia.

Reading many of the newspapers over the last few months you’d think South Australia had become a horrible case study in the dangers of too much renewable energy.  Yet they have completely missed the main cause of a doubling in SA power price rises – a doubling in gas prices. What makes it all especially worrying is that this was cleverly orchestrated by the lobby group for the big power generators concerned about how renewable energy was in fact depressing power prices.

Like all good PR spin it is built on a few grains of truth that can exploit people’s preconceived beliefs that renewable energy is expensive, while coal is cheap.

South Australia does have one the world’s highest shares of wind and solar in its electricity mix – 35% last financial year (41% if you ignore imports of power from Victoria). Also to be financially viable wind and solar generally require prices for their power that are higher than what our other existing power generators receive.

It is also true that South Australia has experienced almost a doubling in the contract price customers pay for power from the wholesale electricity market (a subcomponent of retail bills) since June last year when it was announced that the state’s Northern coal power station would be permanently shut down (as well as the already mothballed ancient coal clunker Playford B). The chart below reveals prices around $48 to $50 per megawatt-hour prior to June, and then a rapid rise to around $90, around which they’ve subsequently hovered.

 

Price per megawatt-hour for South Australian baseload 2016 futures contract

graphasx-energy

Source: ASX-Energy

The Adelaide Advertiser had clearly taken the bait and was unambiguous in who was to blame for SA’s high wholesale electricity prices in an editorial titled “SA power prices threaten future of economy”: “SA pays around $70 per megawatt hour for wholesale power. The AER predicts that will rise to $94 in 2018. Victoria, in 2018, will be paying $41. SA’s reliance on wind and solar power is responsible for these absurd prices.”

The Australian newspaper has reported that an energy crisis has been created in South Australia due to “over-reliance on untrustworthy and expensive wind and solar”.

While The Australian Financial Review editorial complained, “The South Australian Labor government’s rush into renewable energy, particularly wind power, … has helped generate a surge in South Australian electricity prices.”

Yet if you take the time to examine the actual data on power generation and bidding in the wholesale market you get a rather different story.

A review of generator’s bid prices into the SA wholesale market in the months before and after the Northern Coal Power Station was taken off-line reveals SA wind farms, without exception, bid their entire available output into the market for a price less than a single dollar. Instead they passively took the price determined by the marginal fossil fuel generator.  And it’s not as if households with rooftop solar are busily bidding up prices into the wholesale market.

This is not to suggest renewable energy imposes no costs. But these media reports indicate a complete ignorance about how these costs are recovered. It is certainly true that to be commercially viable wind and solar have required a subsidy over and above historical wholesale electricity prices. This is provided from the national Renewable Energy Target scheme. But this subsidy cost is distributed equally across all electricity consumption around the nation; it isn’t allocated to states depending on how many wind farms or solar panels they have installed.

So renewable energy power plants simply can’t possibly be responsible for SA’s increases in wholesale power prices. In fact, logically, all this additional renewable energy bidding in at zero in South Australia can only help to depress wholesale prices, displacing the need for fossil fuel generators that are bidding in at far higher prices.

This is where the chief lobby group for the big power generators, the Australian Energy Council, comes in.

Back in 2014, the lobby group and the Abbott government largely failed to convince the general public and a majority in the senate that slashing support for renewable energy was a good idea. It all hit a fatal road bump when the Abbott government’s own economic modelling showed that the cost of the subsidy to support additional supply from renewable energy would be outweighed by savings from this extra supply depressing the wholesale market electricity price received by all the other generators.

So late last year the lobby group switched to a new argument, launching a new public relations campaign aimed at painting South Australia as an “accidental experiment” in the dangers of high levels of renewable energy. Yes, renewable energy is depressing wholesale market prices, they acknowledged. But they argued it is pushing them so low it is increasing prices.

Uh, you ask?

In launching their public relations campaign in October 2015 they argued: “South Australia sources around 39% [this excludes imports from Victoria] of its generation from variable supply renewables, specifically wind and solar. …The increased penetration of these technologies has … increased volatility in wholesale prices, it has increased the state’s reliance on the interconnector to Victoria and it has contributed to the closure next year of Alinta’s two brown coal generators at Port Augusta.

“The net effect of this is we are now seeing increases in forward wholesale contract prices. This reveals the simple truth about increased use of intermittent renewables: it cuts greenhouse emissions, but as it forces out existing generators it ultimately increases, not decreases, wholesale prices.”

The logic is a bit convoluted but the gist is that renewable energy by reducing prices has driven Northern power station out of business and therefore is responsible for the subsequent large rise in prices driven by SA’s gas power plants.

So what if we wound back the clock before coal had to compete against wind farms and solar panels?

It turns out we’d have experienced exactly the same thing.

Before wind and solar became significant and Northern coal power station was going strong, SA was very heavily dependent on gas-fired power and its interconnection with Victoria. What’s changed since that time though is that the price of gas has doubled.

The chart below illustrates that back in 2002-03, when wind and solar generation were negligible, gas supplied 50% of SA’s power needs and it peaked as high as 56.5% in 2007-08 while renewables were still less than 10% of the market (and the drought had led to less generation available from Victoria). Also contrary to the Energy Council’s assertions, SA relied very heavily on imports from Victoria via the interconnector back then. Imports represented close to 20% of supply between 2002-03 to 2005-06, all while renewables were less than 6% of supply.

Compared to 2002-03, gas, coal and the Victorian imports have all ceded market share to wind and solar. Since Northern shut down the share of gas has certainly increased but it still remains no higher than it was before renewables came along and Northern was going strong. The interconnector is also a lower proportion of supply than back in 2002-03.

 

South Australia’s share of electricity generation by fuel type (from 2002-03 to post coal period)

graphnemreview

Data from NEM Review

 

So why are power prices so high now?

Between 1998 to 2007, before gas-fired generators began to substantially cede market share to renewables, gas cost roughly $4 per gigajoule. That translates to an operating cost to generate a megawatt-hour of power from Torrens Island, South Australia’s largest power station, of about $50 per megawatt-hour.

Since then the wholesale contract gas price has risen closer to $8 per gigajoule thanks to the start-up of gas exports to Asia via liquefaction plants in Gladstone, Queensland. Interestingly, that translates to an operating cost for Torrens Island that is almost identical to what we see in forward electricity contract prices of $98.

South Australia’s Northern power station would not have been able to prevent this hike in gas prices from flowing through to power prices. Back in 2002-03, when gas was 50% of power supply and renewables were zero per cent, Northern power station was operating at almost 90% of full output, which reveals its limited scope to push out expensive gas. It has only been with the addition of wind and solar that SA could be shielded from the effect of the hike in gas prices.

So in reality it is not wind and solar that are responsible for SA’s “absurd” electricity prices. Instead, they are largely an unfortunate side effect of our new liquefied gas export industry.

 

Tristan Edis is the director analysis and advisory at Green Energy Markets, an organisation that helps businesses and governments make informed investment, trading and policy decisions in clean energy and carbon abatement.