The crazy world of Renewable Energy Targets

Nothing makes sense about Renewable Energy Targets, except at a “Bumper-Sticker” level. Today the AFR front page suggests* the federal government is shifting to remove the scheme (by closing it to new entrants) rather than just scaling it back. It can’t come a day too soon. Right now, the Greens who care about CO2 emissions should be cheering too. The scheme was designed to promote an  industry, not to cut CO2.

UPDATE: Mathias Cormann later says “that the government’s position was to “keep the renewable energy target in place” SMH.  Mixed messages indeed.

We’ve been sold the idea that if we subsidize “renewable” energy (which produces less CO2) we’d get a world with lower CO2 emissions. But it ain’t so. The fake “free” market in renewables does not remotely achieve what it was advertised to do — the perverse incentives make the RET good for increasing “renewables” but bad for reducing CO2, and, worse, the more wind power you have, the less CO2 you save. Coal fired electricity is so cheap that doing anything other than making it more efficient is a wildly expensive and inefficient way to reduce CO2. But the Greens hate coal more than they want to reduce carbon dioxide. The dilemma!

The RET scheme in Australian pays a subsidy to wind farms and solar installations. Below, Tom Quirk shows that this is effectively a carbon tax (but a lousy one), and it shifts supply — perversely taxing brown coal at $27/ton, black coal at $40/ton and gas at up to $100/ton. Because it’s applied to renewables rather than CO2 directly, it’s effectively a higher tax rate for the non-renewable but lower CO2 emitters.

Calculating the true cost of electricity is fiendishly difficult. “Levelized costs” is the simple idea that we can add up the entire lifecycle cost of each energy type, but it’s almost impossible to calculate meaningful numbers. Because wind power is fickle, yet electricity demand is most definitely not, the real cost of wind power is not just the construction, maintenance and final disposal, but also the cost of having a gas back-up or expensive battery (give-us-your-gold) storage. It’s just inefficient every which way. Coal and nuclear stations are cheaper when run constantly rather than in a stop-start fashion (just like your car is). So the cost of renewables also includes the cost of shifting these “base load” suppliers from efficient to inefficient use — and in the case of coal it means producing more CO2 for the same megawatts. South Australia is the most renewable-dependent state in mainland Australia, and it’s a basketcase (look at the cost stack below). Real costs only come with modeling, and we all know how difficult that is.

If the aim is really the research and development of renewables (and not “low CO2”) then I’ve long said that we should pay for the research and development directly, not pay companies to put up inefficient and fairly useless versions in the hope that companies might earn enough to pay for the research out of the profits. Tom Quirk points out that it’s all frightfully perverse again, because most innovations come from industry, not government funded research, but in Australia we hardly have any industry making parts used in power generation — we don’t have the teams of electrical engineers working on the problem anymore. I suppose the theory is that Chinese companies will profit from solar panels and do the R&D for us (keeping “our” patents too)? It would be cheaper just to gift them the money direct wouldn’t it — rather than pay an industry to produce and install a product that no one would buy, which doesn’t work, and hope that the “profits” translate into discoveries that will produce royalties and jobs for people overseas. I’m sure Chinese workers and entrepreneurs will be grateful. Yay.

Meanwhile, Green fans have suddenly discovered the idea of sovereign risk (where were they while the Rudd-Gillard team blitzed Australia’s reputation for stable, predictable policy?). According to the AFR, the government is scornful (and rightly so):

The government source said the market was oversupplied with energy and there was no longer any cause for a mandated use of any specific type of power. The source said while there would be investment losses if the RET was abolished, or even scaled back, investors “would have to have been blind to know this wasn’t coming’’.

On Catalaxy files, Judith Sloan mocks the Fin for pushing a press release from a rent-seeking firm, and guesses the Abbott government will be too “gutless” to ditch this economic and environmental dog of a policy.

—   Jo

 

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Renewable energy sources – Complications!

Guest post by Tom Quirk

Early in 2014 the Committee for the Economic Development of Australia (CEDA) issued a report entitled The Economics of Climate Change[i]. This report proposed a way forward in assessing and ordering the development of technologies to combat the uncertain source of climate change, fossil fuel emissions of carbon dioxide (CO₂).  The report casually mentions that the science is “settled” for understanding climate change despite the obvious failures of climate models to predict the almost constant global temperature of the last 12 years while atmospheric concentrations and fossil fuel emissions of CO₂ have continued to rise.

In passing it is worth noting that many countries offer subsidies to renewables similar to our Renewable Energy Target (RET) scheme. CEDA does not consider the scheme very helpful for emission reduction. The table below shows just how extraordinary the scheme is. Generators of renewable energy in Australia, in fact mainly wind farms with some small solar contribution, are paid a subsidy of $40 per megawatt hour (MWh) for electricity produced. This source of electricity displaces that generated from conventional power plants. The equivalent carbon tax is the $40 subsidy paid for one MWh of wind generated electricity with no CO₂ emissions displacing one MWh of electricity from black coal that would give rise to one tonne of CO₂ but for brown coal electricity with 1.5 tonnes of CO₂ the equivalent tax is $27. The tax equivalents for these and other energy sources are shown in Table 1.

Table 1: Carbon tax equivalent for $40 per MWh subsidy paid to renewable generators

Plant Type	t CO2 per MWh	Carbon tax equivalent per t CO2
Brown Coal	1.5	$27
Black Coal	1.0	$40
Gas turbine (open cycle)	0.5	$80
Gas turbine (combined cycle)	0.4	$100

So the payment of a subsidy to renewables has the peculiar structure that implies a higher carbon tax on the lower fossil fuel emitting generators – the opposite of the intention to reduce the use of the highest CO₂ emitters.

The intention of having wind farms in the electricity supply system was to drive out the highest emitters of CO₂ but the cost structure of the electricity market is such that the coal burning power stations are the lowest cost generators and higher cost but lower carbon emitting generators became more vulnerable to being stood down. This is abundantly clear looking at the short run marginal costs of generation (see the figure below). These costs are the fuel needed with any additional variable operating and maintenance cost but no carbon tax to produce a MWh of electricity[i]. The cost stack orders the low to high marginal cost generators and gives a rough indication of which generators are dispatched as prices change with changing electricity demand. The order to a generator to start producing electricity is termed dispatch.

 

 

The rewards to the wind farms were thus likely to drive out the lower carbon emitters. This is a splendid example of policy making without informed analysis.

Now returning to the CEDA report, on the assumption that the science is settled, it is worth examining the methods proposed for sorting and developing new technologies. There are two parts to this, firstly assessing technologies and second understanding innovation.

Levelised Costs

A common starting point for many assessments of alternative technologies is levelised costs. Levelised costs are the $ per MWh cost appropriately discounted of building and operating a generating plant over an assumed financial life and duty cycle. The CEDA report considers levelised costs for geothermal, nuclear, super critical pulverized brown coal with carbon capture and storage, solar with central receiver with thermal storage and wind.

The problem with levelised costs is that there is no level playing field. There are two distinctions that must be made, first whether the power source is dispatchable and second the time characteristics of electricity demand.

Wind power is not dispatchable; it is accepted as and when generated. While solar power with storage is an attempt to become dispatchable as would be the case if storage were to be added to wind power generation. Sources such as wind power require a backup of dispatchable generators to compensate for the inherent variations in the supply of power. On the other side of supply is demand. Demand varies continuously over a twenty four hour cycle. It is different from State to State and, more generally, from region to region depending on climate, industry and spread of population. There are rough common characteristics with minimum load in the early morning and peak loads around breakfast, mid-day or dinner times. The ratio of these in Australia is the peak being about two to three times higher than the minimum. In Victoria the demand varies from 3,000 MW to 9,000 MW but with random demand variability of the order of 10s of MW per minute.  So the power supply has to cope with changing demand. In general thermal power stations can cope with following demand variations at a rate of about 20MW per minute. But to complicate matters supply from wind power also varies unpredictably like that coming from demand and so increases the difficulty of matching supply with demand. South Australia is the extreme example with demand varying from 900MW to 3,000MW but with wind capable of contributing up to 1,200MW.  The matching of supply and demand is essential not only for a stable transmission grid and constant voltage to avoid brown- and black-outs but also to provide frequency stability so that time clocks do not distort arrival and departure times of workers! Two examples of the performance of supply systems are shown in Table 2 below for Victoria[3] and South Australia[4].

Table 2: Performance of Electricity supply for Victoria and South Australia in 2012

Victoria	Capacity power in MW	Generation energy in GWh	Average Supply MW	Utilisation (capacity factor)	% Generation of total GWh
Coal	6,599	44,808	5,115	77.5%	85.4%
Gas	2,382	2,953	337	14.2%	5.6%
Diesel	0	0	0	0.0%	0.0%
Hydro	2,254	3,162	361	16.0%	6.0%
Wind	400	1,333	152	38.0%	2.5%
Total	11,635	52,440	5,986	53.4%
South Australia	Capacity power in MW	Generation energy in  GWh	Average Supply MW	Utilisation (capacity factor)	% Generation of total GWh
Coal	770	2,238	255	33.2%	17.1%
Gas	2,672	6,786	775	29.0%	51.9%
Diesel	270	12	1	0.5%	0.0%
Hydro	3	6	1	0.0%	0.0%
Wind	1,203	3,483	398	33.1%	26.6%
Solar PV	400	497	57	14.2%	3.8%
Other	16	55	6	39.2%	0.4%
Total	5,334	13,077	1,493	28.0%

 

The fraction of supply and the utilisation of the generators (the last two columns) are often missing from the levelised cost considerations. There is a good discussion of levelised costs from the Energy Information Agency in the United State[5] but again assumptions are made for the capacity factors that are not based on regional electricity demand performance.

Victoria, with relatively little installed wind power draws 85% of it supply from brown coal burning power stations while gas turbines and a gas thermal generator along with hydro are used to match demand to supply and wind power variations. The utilisation of the coal source is 78% while gas is only 14% and this implies very different pricing with such differences in use.

South Australia, with less demand than Victoria and with a relatively large renewable sector, draws 30% of its supply from the latter and needs a quite different pricing for its coal and gas generators with their utilisation of around 30%.

In general, nuclear plants are best run to supply a constant amount of the base load demand.  Geothermal plants may require continuous operation to keep fluid flow through the rocks so also a base load supplier. In New Zealand their utilisation is 90%. The utilisation of a super critical coal plant will depend on the mix of other plant types in the system as would solar with storage. Wind as a non dispatchable power source cannot be considered without assumptions of its extent. None of these considerations cover the size of plants and the transmission costs that are determined by industry and population concentrations.

Thus there is no level playing field for assessing levelised generator costs. It is properly handled by modelling the supply system using the known electricity demand characteristics of the particular State or region.

Innovation – Research and Development

Increased funding of research and development (R&D) is frequently suggested by policy-makers. This was a recommendation of the Garnaut report and is also suggested in the CEDA report. The CEDA report prefers spending on R&D rather than on subsidies. In principle this is the better approach as innovation should either produce a product or service at less cost than those currently in the market. But innovation also serves unmet needs and of course the cause of climate change is a market failure to recognize the need to stop or reduce global warming by curbing CO₂ emissions from fossil fuel use.

The difficulty with the CEDA approach is that it assumes levelised costs. This is not the way to evaluate technical choices for a complicated electrical power system.

There is a deeper structural problem with the R&D approach. In Australia as in the United States and the United Kingdom less than 10% of innovations come from universities and government laboratories.[6] It is industry that makes the major and the most cost effective contribution. Australia does not have large companies that make the components for power generation or transmission and this includes renewables.  So our universities and government laboratories will have to team up with oversea corporations. It could work if we have special skills that others lack but the universities have reduced their intake of electrical engineers who might be the backbone of any initiative. General Motors has kept a special design team in Australia for presumably just that reason of special skills but it has not helped the local manufacture of cars. Innovation is frequently described as a random walk and the nearest CEDA gets to that is the discussion of the ATSE assessment of technical progress and likely success.

Conclusion

The conclusion from the above is that the CEDA report The Economics of Climate Change does not offer any new approach that would help the development of government policy. Levelised costs are not the appropriate way to assess technical options for generating electricity.