Green Fairy Gods of Economic Management
Another unintended consequence of policies to control the climate. Who would have guessed? Laws aimed to disrupt the energy market, disrupted the energy market. Just like Germany, parts of Australia are now dumping expensive gas, resurrecting old coal burners, and voila: The Fairy Gods of Economics tinker — and get the opposite of what they intended.
Here’s the chain of events as best as I can figure. The greener-governments raised the cost of all electricity, but tried to slap an advantage on some forms at the expense of others. The catch is that there is just not enough alternate energy to go around.
More projects used gas, partly due to other state based green schemes like the Gas Electricity Scheme of Queensland. So gas demand rose and gas became more expensive. At the same time, those who owned gas found that export markets will pay more for gas for other uses. So it didn’t make sense to keep the gas for the power-stations here when they could sell it for a greater profit elsewhere. Meanwhile, other forces were also at play. The Green drive created a glut in fickle solar and wind power. On the one hand that makes gas stations more appealing because they cope with the fickleness, but on the other it made everyone’s power bills higher, so people used less electricity. Plus more red-tape, green-tape, and botched over-management of the economy helped drive Australian production down, which also meant business used less electricity. All this created an oversupply of electricity, and that created the big-squeeze on generators: despite the fact the consumer was paying more for electricity, the generator’s marginal profits were less (the government was taking a bigger cut, and making generators use less efficient practices). The bottom line is that thanks to fiddling with complicated multivariable free markets, the electricity generators face even more pressure to pick the cheapest supply. Hence coal wins.
Reader Scott the trader explains that the opportunity cost makes coal much more appealing than gas:
“…ignoring thermal efficiency for the moment, burning coal at $2/GJ is obviously better than opportunity cost of $9/GJ gas for the same electricity revenue. Or put another way $2/GJ coal converts roughly to $20/MWh fuel only cost vs being able to sell gas at $9 which if you were using it for fuel would equate to ~$70/MWh.”
True free markets obey no one.
QUEENSLAND’S largest power generator will today declare that Australia is one of the world’s most expensive countries for energy and warn that the electricity market is being distorted by the carbon tax, mandatory renewables target and solar-rooftop subsidies.
After Stanwell took the extraordinary step yesterday of announcing it would mothball its biggest gas-fired power station and resurrect a coal facility built in the 1980s – sparking predictions that gas-fired power plants would be withdrawn in other states – it will today call for a scaling back of the renewable energy target.
Before the introduction of the carbon tax, the RET scheme and solar feed-in tariffs, the abundance of coal had made Australia a source of low-cost electricity, the company will say.
“These policies appear to have been implemented for ideological reasons with little analysis of the impact on electricity prices and economic growth,” Stanwell chief executive officer Richard Van Breda will say.
A carbon market where the price is too low means coal outperforms gas:
Origin Energy managing director Grant King has previously said it would take a carbon price of $40-$60 to create “fuel switching” — to make it more economical to build a gas-fired power station than a coal-fired plant for baseload generation.
National Generators Forum executive director Tim Reardon said that “as the gas prices increase trickles down into other states, we would expect to see other gas plant withdrawn”.
“The carbon price would need to be much closer to $100 a tonne before it changes the economics of electricity generation,” he said.
But if the carbon price was high enough to drive the us to use gas then the country would become too poor to keep the indulgent Green Gravy trains running. The dilemma, eh?
Mr Van Breda said he was concerned about the oversupplied nature of the energy market.
Demand for electricity had fallen due to a slew of factors, including the decline in manufacturing and falling demand from households stung by higher power bills.
The Australian has learned that analysis by the National Generators Forum finds that if electricity consumption continues to decline at the same rate as it has over the past four years, the electricity sector could achieve a 5 per cent reduction on 2000 emissions levels as early as 2017-18 without government intervention through the RET or Direct Action Plan.
Yes, the old chop-the-GDP works to reduce carbon dioxide emissions every time.
H/t To Scott the trader for advice and the tip.
Image: Adapted from a photo by Michel Villeneuve
