Is coal to blame for high power prices?

Sounds like a silly question.

But there’s a recent push by renewables advocates to shift the blame for rapidly rising electricity prices.

We’ll take a look at two recent articles leading the charge to shift the blame:

  • Why coal – and not renewables – is root cause of surging Australia power prices (link)
  • Renewable energy reduces power prices by more than cost of subsidies, study finds (link)

Make no mistake, this is a concerted effort by renewables advocates to avoid criticism and scrutiny of the role wind and solar have played in skyrocketing prices.

This is a complex topic, so we need a little background information.

Let’s dive in, starting with a quick overview of some key points.

First, electricity prices have risen steeply this decade. Well above CPI.

Part of the cost increase is the rapid increase in wholesale electricity prices across the NEM, in lock-step with the increase in wind and solar capacity and retirement of coal capacity.

But wholesale prices are only part of the equation.

Back in June the ACCC handed down a report titled “Restoring electricity affordability and Australia’s competitive advantage”.

The opening paragraph defines the problem perfectly:

Australia is facing its most challenging time in electricity markets. High prices and bills have placed enormous strain on household budgets and business viability. The current situation is unacceptable and unsustainable.

The report goes on to identify measures in the following areas:

  1. Boosting competition in generation and retail
  2. Lowering costs in networks, environmental schemes and retail
  3. Enhancing consumer experiences and outcomes
  4. Improving business outcomes.

Key system problems:

  • Network ‘gold plating’
  • Sale of government-owned generation assets resulting in concentrated markets, prone to ‘gaming’
  • Substantial solar and wind subsidies encouraging installation of capacity without regard to their ability to meet demand
  • Confusing retail pricing offers

The result:

Residential consumers have faced a price increase of around 56 per cent (figure B) in real terms over the period from 2007–08 to 2017–18.

Note that the above ‘environmental’ category of 1.9c per kWh currently costs around $3 billion a year.

Here’s a more detailed view of subsidies:

Recommendations to improve affordability and reliability include:

  • Network reliability requirements for new generation capacity to avoid reliability issues
  • The small-scale renewable energy scheme should be wound down and abolished by 2021 to address affordability and equity issues
  • To reduce the costs associated with premium solar feed-in tariff schemes:
    • any costs remaining from such schemes should be borne by state governments through their budgets, as Queensland has done for the next three years, rather than being recovered through charges to electricity users, and this should be done on a permanent basis
    • where a premium solar FiT scheme has finished, as is the case in NSW, the collection of charges previously used to pay FiTs through network premiums should also end
    • ongoing scheme eligibility rules should be reviewed and tightened to ensure that costs of these schemes are minimised.

With the above in mind, let’s return to the articles and their attempt to shift the blame.

In short, energy policy, which has driven renewables deployment through billions in subsidies, has driven down reliability and driven up the wholesale cost of electricity. Now renewables advocates are attempting to convince us that we can shave a bit off that cost increase caused by wind and solar, if we deploy more wind and solar.

It all comes down to the ‘cost of intermittency’.

The attempt to shift the ‘cost of intermittency’ caused by increased wind and solar penetration is the core issue. Wind and solar advocates seek to externalise this cost, even though they are responsible for it.

This is not good for renewable advocates who are scrambling to explain away the inconvenient truth that South Australia has the highest electricity prices in the world and that nowhere in the world does high wind and solar penetration coincide with affordable electricity.

Admittedly, it’s a good ploy. Most folks don’t have the time or background understanding to expose this new, contorted narrative.

The first article, by Giles Parkinson over at www.reneweconomy.com.au is a promotion of a recent report by Bloomberg New Energy Finance (BNEF), citing rising black coal prices in NSW and Queensland as the “root cause” of the increased wholesale electricity price in Australia.

The second, by the ABC, spruiks a ‘landmark’ study that claims to show renewable energy in South Australia has reduced wholesale power prices by more than the cost of subsidies.

In the first article, both BNEF and Parkinson either fail to understand, or intentionally ignores, a couple of fundamental dynamics. Which is understandable, because their job is advocacy, not objective analysis.

In short, renewables advocates have been underestimating the cost of wind and solar.

Here’s a quick summary of the reasons why followed further down by a more detailed discussion.

  • The BNEF position is black coal prices have doubled over the past two years, causing the wholesale electricity price to double
  • BNEF is notoriously opaque with their analysis and their modelling assumptions around interest rates, utilisation rates and future fuel costs are highly biased and usually paywalled, so we don’t get to interrogate them
  • New coal plant capital assumptions by BNEF include ‘high risk’ interest rates that result in exaggerated figures, making them ‘appear’ less financially attractive than otherwise open market solutions
  • The levelised cost of electricity (LCOE) and other similar measures exclude the additional costs of integrating wind and solar into the grid
  • The chart below excludes the cost of renewable energy certificates (REC’s) and other subsidies, which adds $65-$80 per MWh to wind and solar via retail charges rather than transparently through the wholesale price.

The real cause of higher electricity prices is simple but not generally well known because the likes of BNEF intentionally underestimate the cost of wind and solar, and misleadingly inflate the cost of new non-renewable sources of energy.

The proposition that the offer or bid from coal has been the primary driver of wholesale price increases is a furphy; the National Electricity Market (NEM) wholesale price is set at the margin, generally by gas, not coal. The increase in coal price will have some impact, but it’s increased gas use, driven by wind and solar intermittency (and the closure of coal power stations), that is the primary driver.

You see, the grid requires a certain ‘quality’ of electricity. Without getting too technical, it has to do with the need for synchronous power (50Hz) and inertia as described in this article. Wind and solar don’t deliver that level of quality, and it costs a lot to integrate them.

Unfortunately, the NEM structure, combined with renewable targets and subsidies, literally allows the tail to wag the dog.

The BNEF report includes a chart showing an increased coal bid price…

Parkinson rightly mentions one factor – rising coal costs in NSW and Qld due to international parity pricing – but fails to mention the ‘primary’ driver of the increase in the coal bid price: the cost of intermittency.

Here’s why:

One of the factors that never gets mentioned is that baseload coal power needs to operate to a predictable schedule in order to be efficient. What we have is a system that deliberately forces coal power to go on standby whenever the “renewables” are working. This is forced by the RET and compounded by the ‘hollowing out’ of demand during the day by solar PV.

This means that all of the running and capital costs of coal power continue to be charged to the coal station regardless of the output and are added to the MWh’s that remain. That cost does not get charged against wind and solar, even though they are causing it.

The real cost of wind and solar is its levelised cost of electricity (LCOE) + subsidies + integration costs (distributed transmission, load balancing) + firming cost (be it gas, coal, hydro or batteries).

Evaluating the cost of wind or solar based on limited price signals in an already distorted market creates further distortion.

We cannot evaluate the cost of wind and solar as stand-alone devices, but that is exactly the approach used by BNEF. We need to recognise the ‘low reliability’ nature of the electricity provided by wind and solar, primarily due to intermittency, and factor in the additional cost of ‘firming’ and ‘balancing’ these less reliable sources.

This problem of intermittency and price distortion is important, even at low rates of penetration.

Levelised Cost of Electricity (LCOE), Energy Return on Investment (EROI), Life Cycle Analysis (LCA), and Energy Payback Period (EPP) are the common ways of measuring and benchmarking different power generation sources.

Wind and solar are not really stand-alone devices when it comes to providing the kind of electricity that is needed by the grid i.e. on demand, stable frequency, sufficient inertia. Grid operators, utilities, and backup electricity providers must provide hidden subsidies to make the system really work.

This problem is ignored when evaluating wind and solar, using techniques such as LCOE, EROI, LCA, and EPP. As a result, published results suggest that wind and solar are much more beneficial than they really are. The distortion affects both pricing and the amount of claimed CO2 savings.

The very act of adding subsidised wind and solar changes the needed pricing for dispatchable types of electricity. The price per kWh of dispatchable electricity needs to rise, because their EROI’s fall as they are forced to operate in a less efficient manner. This same problem affects all of the other pricing approaches as well, including LCOE, making intermittent wind and solar look much more beneficial than they really are.

The solution?

We need to work backwards from the objective, and that objective is to economically deliver grid-quality electricity, when required, with declining CO2 intensity.

With regard to each technology, we need to ask, what overall ‘package’ will deliver that outcome?

For wind or solar to deliver such an outcome, the required ‘package’ consists of the necessary adjustments to bring them up to grid quality, without hiding the cost via opaque subsidies.

This requires either pairing it with existing coal, gas or hydro (or a combination thereof), and adding the idle cost of that back up to the ‘package’ cost of the wind or solar, or adding new dispatchable capacity or storage, such as batteries or pumped hydro.

And don’t forget the additional transmission infrastructure needed to get the electricity from disparate sunny and windy locations.

When properly costed as a ‘package’ wind and solar are very expensive.

But the current market, reports by the likes of BNEF and articles by the likes of Renew Economy either ignore or hide these ‘package’ costs.

And while the market hides the true ‘package’ costs via subsidies, intermittent renewables still distort wholesale electricity pricing by shifting their intermittency costs to coal and gas.

Solar electricity hollows out mid-day peaks in electricity price, making it less economic for “peaking plants” (natural gas electricity plants that provide electricity only when prices are very high) to stay open. At times, prices may turn negative, simply because the total amount of wind and solar produced at a given time exceeds demand. This happens because intermittent electricity is generally given priority on the grid, whether price signals indicate that it is needed or not.

Combined, these problems make otherwise reliable, affordable generation sources unprofitable or more expensive primarily because the same fixed costs need to be allocated over fewer megawatt hours.

So, what happens when we factor in the cost of intermittency?

A study by Weissbach et al. showed that adding pumped hydro to wind and solar, caused a dramatic impact in its EROI:

Energy sources must exceed the EROI “economic threshold”, of about 7, to yield the surplus energy required to support a modern society.

And keep in mind that this study modelled the ‘cheapest’ firming source; pumped hydro, because it is less energy intensive than batteries.

In summary:

  • The black coal price is not the primary driver of increased wholesale electricity prices across the NEM as claimed by Parkinson and BNEF.
  • Increasing quantities of intermittent wind and solar are responsible, due to increased reliance on high-priced gas generation. Black coal pricing is a secondary factor.
  • Wind and solar LCOE figures don’t include the costs of firming, transmission and balancing, nor the subsidies imposed by the RET.

Now, let’s turn briefly to the second article by the ABC, which attempts to approach blame shifting under the guise of an ‘independent’ study.

A lot of the same drivers discussed above apply here, so we’ll look at the unique aspects of this report that attempt to shift the blame.

In short, the report concludes that high priced gas-fired electricity generation has resulted in SA customers paying the highest average price in the world. Agreed.

The report further concludes that the price would have been even higher, if not for wind and solar.

Therein lies the flaw in the logic. It ignores the role that intermittent wind and solar have on gas-fired electricity demand, both in terms of absolute demand in a high gas-price market and in relation to the ‘cost of intermittency’ discussed above.

Put another way: the price would have been lower, if not for wind and solar intermittency triggering gas demand.

The chart below shows the wholesale electricity price (blue columns) relative to the share of generation from brown coal, gas, wind and solar in South Australia.

Note the closure of brown coal-fired plants (orange line) from 2016 to 2017 corresponded with an increased reliance on gas (grey line).

The wholesale gas price increased by 180% from 2013 to 2017, making gas-fired power generation more expensive.

And despite a 7.7% increase in wind capacity from 1,576MW to 1,698MW, wind generation dropped by 58GWh, from 4,398GWh to 4,340GWh.

Bottom line: The point missing in the report is the cost of intermittency.

The report tries to paint renewables as a ‘saviour’ from high-cost gas, where they are in fact the driver of demand for gas generation.

Renewables in South Australia need gas to fill the gap when the wind doesn’t blow, and the sun doesn’t shine.

What the ABC gets right in the article is that gas sets the price (not coal). But the reason that’s the case is energy policy forced subsidised renewables into the market, led to the closing down of coal and caused the reliance on gas.

Gas will still be required, regardless of the amount of wind and solar, but it will require a much higher price to recoup its fixed costs across fewer MWh’s, so it will naturally bid into the market at a higher price. And when gas sets the price, all other energy sources receive the same price, negating any claimed price advantage from wind or solar.

You can expect an increase in articles by renewables advocates that attempt to shift the blame. Hopefully, with the above information in mind, you’ll be able to spot the deception when you see it.

Lastly, we believe a more economically sustainable approach to reducing CO2 intensity is to deploy Coldry-enabled HELE technology in Victoria. Given the political commitment to wind and solar, it’s tough for the government to back-pedal on past commitments to intermittent power generation, even if doing so would improve reliability and affordability, so we’re not holding our breath for a HELE solution. But if HELE is considered, a Coldry-enabled solution could reduce CO2 emissions from brown coal by 43% to 62% while keeping the lights on. It would also help to decouple part of our electricity sector from increases in black coal prices, insofar as they have an impact, and help underwrite affordable, reliable electricity as we sensibly transition to a lower carbon emission future.