No longer ‘alternative’, mainstream renewables are pushing prices down
On the first day of autumn tens of thousands of Victorians received a welcome surprise from their power company — their electricity bills were going down. Prices were cut 5% because the retailer increased their investment in renewable energy.
This will likely come as a surprise to many. Since the prime minister, Malcolm Turnbull, and the energy minister, Josh Frydenberg, decided that bashing renewables would play well for them — perhaps more so in the party room than in the electorate — hardly a day goes by without claims that renewables have made our grid unreliable and have pushed prices sky high.
As we emerge from a hot summer without even one second of generation-related blackouts, the dissonance is high.
The Australian Energy Market Operator has demonstrated their ability to keep the lights on, despite a spate of large coal and gas generator failures — 51 since December. This is the result of more conservative operating procedures, the new “mega battery” in South Australia and a “demand management” program where energy users are compensated for voluntarily reducing energy consumption for just a handful of peak hours.
A fleet of backup diesel power generators in South Australia and Victoria sat idle, and despite Frydenberg’s claims that they were burning “up to 80,000 litres of diesel an hour, just to keep the lights on”, outside of testing, they didn’t burn a drop. (Were they a waste? No, no more than your home insurance was every year your house didn’t burn down.)
No, renewables haven’t made our grid unreliable, and now we can see they’re bringing down prices.
In mid 2017, Meridian Energy, the parent of Powershop, announced that they were in the market for more renewable energy. They were swamped with more than 70 proposals — a few hydroelectric dams and a bunch of solar and wind farms. Meridian executives were stunned by the low prices on offer.
A decade ago, power from a large-scale solar farm was unthinkably expensive at close to $200 per megawatt hour, equivalent to 20c/kWh, almost five times the grid average at the time. Wind energy was less expensive, but, at $120 per megawatt hour still much more expensive than coal and gas.
Renewable energy prices have since plummeted. “Five years ago, when we built Mt Mercer, the equivalent cost was in the 80s” reports Ed McManus, chief executive officer of Meridian. Power companies are notoriously tight-lipped about their contract prices, but McManus said about the offers “we saw solar pretty consistently in the 60s and wind pretty consistently in the 50s, including very low 50s”.
Meanwhile the price of gas has tripled, now that we’re sending most of what we produce offshore, and prices for thermal coal are the highest they’ve been in almost a decade. High fuel costs and a tightening of supply, exacerbated by policy uncertainty, have pushed up prices to record levels. For energy companies in a position to make long term commitments, it’s now possible to buy power from wind and solar farms at a price below gas and most existing coal — one of the reasons why Powershop was able drop prices.
The other reason is more complicated. Electricity retailers are basically risk managers, buying energy on the wholesale market, where prices change every half hour, and selling it at fixed prices. The higher the risks, the higher the price you pay for energy.
By broadening their energy portfolio across technologies and geographies a retailer can lower their risks. Until recently, Powershop only had contracted supply from two wind farms, one in central Victoria and another on the Eyre Peninsula in South Australia. The expanded portfolio now includes hydroelectricity stations near Albury, Canberra and Tamworth, additional wind power in NSW and Victoria, and solar in sunny north-western Victoria.
Says McManus, “We’ve almost doubled our contracted generation, but the minimum amount of generation we can expect goes up more than 10-fold. This means customer exposure and risk can be managed more effectively, and importantly, at lower cost”.
The old guard can’t understand why prices for wind and solar have dropped so far, so fast. It’s not sleight of hand, just the cumulative effects of three factors:
● The technology has improved in leaps and bounds. A 150m tall wind turbine built this year will generate energy for almost 3,000 average Victorian homes. A decade ago, a top-tier turbine would have generated well less than half as much.
● Unlike coal plants, solar panels and wind turbines are products not projects. Repetition leads to cheaper manufacturing and more efficient supply chains. China now produces seven solar panels every second — providing countless opportunities to trim unit costs.
Last week I spoke with a solar farm installer who quietly boasted they had multiple crews installing 15 MW of solar a week. In the year to March 2008, Australia’s entire effort totalled just 7.9 MW.
● A decade ago, few banks understood renewables, and investments were seen as “alternative” and risky. Now that renewables are mainstream, the risk premium applied by banks for renewables is much lower than for coal projects. Capital intensive projects are extremely sensitive to the cost of finance.
As our experience over summer and a letter from ten energy retailers to the government attests, Australia doesn’t have a reliability problem. And even Josh Frydenberg has acknowledged that the new renewables coming on line will push energy prices down.
Economics now dictate that a transition to a cleaner energy system is inevitable. Our grid operator has demonstrated it needs no government interference to keep the grid reliable.
With renewable energy pushing down prices and cleaning up the grid, it’s time Turnbull, Frydenberg and their band of backbench reactionaries stopped white-anting renewables.
• Simon Holmes à Court is senior adviser to the Energy Transition Hub at Melbourne University
Originally published at www.theguardian.com on March 16, 2018.