Gas, not coal, the key to fixing electricity mess

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The short-term fix to Australia's soaring electricity prices is to fix the gas crisis. The long-term fix is greater

gas-not-coal-the-key-to-fixing-electricity-mess photo 1 Photo: One of the main causes of the power price spike is the soaring price of gas. (Origin Energy)

AGL boss Andy Vesey made a fundamental miscalculation last week.

The straight-talking American vainly attempted to use logic, honesty and rational economic thought to explain why he is shifting the company out of coal-fired power generation and towards renewables.

That has put him at odds with sections of the Federal Government, some in the mining industry and a rump of frothing shock jocks.

It is not as though this is the first time Vesey or AGL has flagged the closure of the Liddell power station in New South Wales' Hunter Valley. He has been on message, repeatedly, for at least two years. And he is not alone.

The other big players, Origin and Energy Australia, have been pumping out exactly the same message. Banks, meanwhile, consistently have said they will not lend for coal-fired generation.

Why? Simple really. The economics for coal-fired electricity generation no longer stack up.

These are investments that need to last half a century or more. And with the cost of renewables plummeting as coal-fired generation faces potentially crippling price rises, it is a no-brainer for those at the pointy end of the decision-making process.

gas-not-coal-the-key-to-fixing-electricity-mess photo 2 Infographic: Implied cost of new generation.

As chief scientist Alan Finkel pointed out in his recent review, shown in the table above, wind is already cheaper than coal, and solar is close.

Gas, far and away, is the most expensive way to generate electricity.

The catalyst for this latest sudden burst of outrage from Canberra was a warning by the Australian Energy Market Operator (AEMO) that east coast and southern Australian states would be facing blackouts this summer and for years ahead.

Even worse, with the impending closure of AGL's Liddell power station in five years, AEMO warned of a looming crisis.

And so Andy Vesey, who is due to meet the Prime Minister today, suddenly found himself in the cross hairs, portrayed as some sort of corporate greenie intent on undermining the welfare of Australians.

How did we get here?

The short answer is: our politicians have failed us.

Ideology long ago overtook economics, creating a ready platform for the uninformed to manipulate debate for their own ends.

With all the bickering and infighting, policies around climate change, power and carbon pricing have been a chaotic mess; implemented, junked, fought over and partially reinstated, leaving the industry in limbo.

For more than a decade, the power generators have warned our leaders that this was coming.

Coal-fired generators were wearing out. You do not replace them in a few weeks or months. Years of planning are required. And given they last decades, those financing their construction and operation need to know they are at the cutting edge of technology, that they will not be left nursing multi-billion-dollar losses on mothballed plants a few years down the track.

The great cloud hanging over coal-fired generators, aside from the choking and potentially lethal pollution, is the potential for a carbon price.

While a vocal minority of the world's politicians refuse to accept the overwhelming body of science behind climate change, that is not the case in boardrooms around the globe.

Financiers, insurers and the legal industry long ago sniffed the winds of change. Even the big miners have recognised the inevitability of carbon pricing.

It is worth remembering that the primary force behind the implementation of an Australian carbon price almost a decade ago was not the Greens or then prime minister Julia Gillard. It was BHP Billiton chief executive Marius Kloppers.

His call for certainty over carbon pricing reverberated through the corporate sector.

What caused the power price spike?

There are two main causes of the sudden jump in electricity prices. And despite the frothing anger from the shock jocks, it has nothing to do with the rise of renewables.

The main cause is a lack of investment. And the second is the soaring price of gas.

As old coal-fired plants have been retired, there has been insufficient investment to replace them because power companies have been left in policy limbo over carbon pricing.

When Tony Abbott was elected prime minister almost four years ago, he made good on his promise to junk the carbon tax, arguing Australian households would end up $550 a year better off and that electricity prices would drop 9 per cent.

"Because the price of power is a component of just about every price in the economy," he told 7.30's Leigh Sales. "When the price of power falls, other prices should go down as well."

Except that ever since he removed the carbon tax, the price of power has doubled with a 20 per cent rise this year alone.

In addition to junking the carbon tax, the Abbott government decided to reset the renewable energy target (RET). Those moves combined saw investment in power generation plummet.

That has left a shortfall in generation, just as the industry has predicted, as old coal-fired plants are shut. And that has sent prices higher.

How does gas affect electricity prices?

The second contributor to soaring electricity prices has been the sudden spike in gas prices.

In the absence of any political leadership, the power industry correctly figured renewables such as wind and solar eventually would be cheaper and more efficient than coal. That is because the fuel — wind and sun — is free and the maintenance costs of the plants is low.

The problem with renewables is their unreliability. Given Australia's gas abundance, the idea was that gas would cut in whenever there was an energy shortfall.

Unlike coal plants that take weeks to fire up or shut down, gas turbines can be turned on and off at short notice, making them ideal to fill the breech when renewables are offline.

As the last player to enter the market, during power shortages, gas becomes the overall price setter. In case you have not noticed, gas prices have quadrupled because the exporters — many of which are the electricity generators — have sold more gas to offshore customers than their reserves. So, they pillaged local supplies, sending domestic gas prices through the roof.

Electricity and the great subsidy hoax

Ask any economist, and they will tell you subsidies are inefficient and a deeply flawed way to achieve your aim.

They are right. And so on that basis, the RET, the state governments' subsidised feed-in tariffs for home solar and all the other schemes put forth across the nation to encourage investment in renewables are less than ideal.

The cost of those subsidies has been seized upon by those who argue coal should remain our primary source of electricity generation.

There are, however, two big flaws in that argument. The first is that every coal-fired power generator in the country was not merely subsidised but entirely built with taxpayer money.

The second flaw, and the one least mentioned, is the most efficient way to achieve an economic goal is to put a price on it. All those renewable energy subsidies could be done away with if a price was put on carbon emissions.

Even without a global carbon price, and despite the shambolic attempts to reduce global emissions, renewable energy and storage systems are undercutting coal generators.

The breathtaking irony in recent debate is that those who decry the evil of subsidies to the renewable energy sector now argue the Federal Government should build or at least subsidise new coal-fired generators.

That is the only way coal has a future. For no matter what the Prime Minister — a man with one of the country's biggest rooftop solar and battery systems on his house — argues with Andy Vesey on Monday, the AGL boss has been adamant he will not be committing shareholder funds to a dying technology.

Nor will he outlay vast amounts of cash to keep Liddell — a creaking and unsafe power station valued at zero in AGL's books — open beyond 2022.

Why? Here is an excerpt from a Goldman Sachs research paper last week:

"We estimate the costs of these technologies has decreased by around 60 per cent on average over the last seven years, making wind/solar the cheapest way of producing electricity.

"We believe there is still significant room for further cost reduction and expect a further 37 per cent decrease in costs over the next eight years."

The fix to Australia's soaring electricity prices? Longer term, it is greater investment in renewables and energy storage such as batteries. Short term, it is to fix the gas crisis.

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