High electricity prices here to stay

Ross Greenwood speaks to Energy Program Direction at the Grattan Institute Tony Wood about why sky-high electricity prices will become the new norm.

Introduction: High electricity prices here to stay

Ross Greenwood: Great to have your company here on Money News right around Australia. We spend a bit of time on this program trying to tell you how the National Electricity Market works. It really is important because all sorts of people have all sorts of ideas about things like say, for example, we caused a big fight last week with a lot of you, who say the only solution is more coal-fired power stations. The truth is it doesn’t matter how you generate electricity. You’ve got to have the most modern technology, you got to have a ready supply. You’ve also got to have the ability to network it, to transport it to the places it’s needed most.

You also need in some cases when there are either outages that are sudden or indeed there’s spikes in demand caused by generally very cold weather or very hot weather. You need instant electricity. Now, instant electricity can be caused in a few ways, you can either turn on a gas pipeline and fire up a gas-fired power station. You can roll water down a hydroelectric scheme instant electricity or you can have a coal-fired power station which generally doesn’t work well with peaks and throughs, it just works all the time. Of course, as we know solar and wind well, it works periodically when the wind is blowing, when the sun is shining.

Battery technology will come in time but it’s not there yet. The reason for it is because it’s expensive to put in and really it’s capacity to store electricity is minimal at the moment.

Then on top of that, you’ve even got the electricity that comes off your solar panels on household roofs. Eventually, battery technology will improve and this might be yet another source of electricity but you see, it’s all electricity. You just want to make certain that when you turn on lights it works. Secondly, that you don’t get a price that actually guarantees you.

Now, this is because of generations of government policy that has meant that there hasn’t been the proper incentive to put in the right form of electricity sources for Australia. That industry has got problems in making sure it’s got enough reliable supply and that households have got bills that don’t make them basic watering eyes every time they open the envelope. When an organization has done quite a lot of work on this in the last little while is the Grattan Institute and the director of its energy program is Tony Wood is on the line right now. Many thanks for your time, Tony.

Interview with: Tony Wood, Energy Program Director, Grattan Institute

Tony Wood: Good evening, Ross.

Ross Greenwood: I’ll try to sum this up as much as to try and educate people about this as to give them latest news because what you’re giving them is bad news, that people have got to get used to the idea that wholesale electricity prices are going to remain relatively high. What you’ve said is that they’ve more than doubled over the past two years.

Tony Wood: Otherwise, you’re absolutely right and I couldn’t have explained the whole system better myself than you did so well done. I think you need to think this is a little to help people understand what’s been going on. We’ve had, for a long time in Australia, the benefit of very large pretty cheap coal-fired power stations unfortunately, of course, they’ve also been producing greenhouse gases, which we know about. As they age, however, regardless of greenhouse gases at all, they have to be replaced and the reality is that new coal-fired power stations cost more. That’s the reality. New gas powered stations cost more and so on.

As a system, why do we need to replace it and those costs come down any time soon. That’s one of the reasons why–

Ross Greenwood: Okay. Stop there, Tony. You’ve had a look at this. I keep on asking this question, why is it that people will not commit to build a new coal-fired power station, the so-called HELE plants. You’ve got Japan building many off right now. If there was a business case to put in a coal-fired power station, people in Australia would put coal-fired power stations in. Why is there not the business case in Australia to put in a coal-fired power station to provide plentiful, reliable, ongoing electricity to Australian consumers?

Tony Wood: Well, there’s three reasons socially. They are still expensive relative to where they’ve been. That’s one problem. The second problem is that the cost of the alternatives particularly wind and solar with the sort of technology you’re talking about is almost certainly coming down dramatically, it would be cheaper in the future.

Ross Greenwood: Okay, let’s stop there because a lot of people would sit there and go, “That’s rubbish. Coal is cheap. We know that once you’ve actually got it in there, it’s cheaper to generate because you told us just a moment ago, that those big old power stations that we had that they were reliable, they went for generations and that they produced cheap electricity.” How is it you can now tell us that the wind and solar is potentially cheaper than the coal-fired power stations?

Tony Wood: Well, the big coal ones were built back in the 1970’s and 90’s and they’ve been retired at the age of 50. These power stations, when they get to be that age really do become were starting to become expensive to maintain. Everything we know in our lives and motorcars the cycle would become expensive to maintain. You have to pinch them off at some point. Keeping them running is expensive and replacing them equally is ao the new stuff just costs more. That’s the first major point that a new coal-fired power station, if it was that cheap as you said is people are claiming people will be building it.

It is another obstacle, however, and that is that over time, the expectation is everyone in the industry would have this expectation already. The cost of producing a megawatt hour of electricity from wind and solar is already competitive with coal. Even when you add storage to it. There’s still a lot of work to be done on storage as you said in your introduction to really get a handle on this but the industry, the people who build these power stations are saying, “Well, we don’t think coal is the right way to go in the future.” Yes, it has a role to play for a while yet because some of our coal-fired power stations are actually not all and all like phase water in New South Wales like Cogan Creek in Queensland.

It’s like running for quite a while yet because they’ve got a long way to go and they can keep producing pretty low cost [crosstalk].

Ross Greenwood: But Tony, if I say, for example, we’re talking to the boss, Mark Howell at Tomago power station he says, “If you close the power stations like Liddell, I get very worried that I’m not going to have enough electricity. In fact, with the contract I’ve got with AGL, I can take the electricity away from me. I can’t have my plant having uncertainty about the people at home would know that the sun doesn’t shine, the wind doesn’t blow. They feel as though they are uncertain about the supply and also even the price on those very peak days in winter and in summer so isn’t surely that reliable source, it’s always on being coal.

The real answer while you don’t have the electricity from say wind or solar and battery storage there as a reliable alternative.”

Tony Wood: What’s happening and absolutely the critical point as to why the energy security border as the doubling is supposing the National Energy what’s called the National Energy Guarantee. Basically, all it is is a policy that puts a requirement into the future to ensure that we do have enough reliable supply to meet our demand whether it’s homes, whether it’s businesses, whether it’s Tomago as well as into the future. That’s exactly why this policy is being developed and it would ensure that the right mix of energy is there to meet our requirements whether it’s extending coal-fired power stations, whether it’s gas-fired power stations or whether it’s pumped hydro and solar and wind, we don’t know yet.

It’s probably not coal but if it turns out, if someone can say, look when I look at this policy, once I get policy certainty and you made the point in the introduction that’s one of the big problems policy uncertainty, if governments can put policy certainty in place then this they can say, “Okay, what I think it’s going to be the lowest possible source of power.” These guys know more about than anybody else. If we think coal-fired power stations the way to go, they will build them. We don’t need governments to be doing subsidies of any sort.

Ross Greenwood: One final aspect of this and that is something that I have always been suspicious of is it if I am the person who generates the electricity. I also have wind and solar and all that type of thing, I’ve got an ability to be able to turn on the wind and the solar at my own, shall I say at my own whim, depending on what the market looks like, depending on the peaks and the troughs of those energy markets. I’m worried that those people who generate electricity also have the ability to game the system, would I be right in saying that you have similar suspicions?

Tony Wood: I do and we have seen some of that. One of the things we’re saying look in Australia like most of our industries, we have a relatively small number of companies competing. Competition is really important but you’ve got to have real competition not less good having only a couple of people who behave more or less like monopoly. You’re going to have real competition, that means you’ve got to have a well-regulated market. Market for foreign, markets are probably better than government ownership but a well-regulated market is important.

Our argument is that we’ve seen some evidence that the rules by which these competitive companies are now working is not delivering the result that we as consumer’s need. They’re not breaking the rules they’re following the rules but they’re taking advantage of those rules. We’re suggesting those rules need to be changed because we’ve seen some evidence as some of these older power stations have closed down, a concentration of ownership which means giving companies power under certain circumstances has to be addressed.

That’s the final piece that we’re saying, look, that has to be done the regulators need to get on top of that and we think there’s two or three things they could do to stop that. What we described as gaming of the system.

Ross Greenwood: I’ve got to say Tony, in all of my observations of this and learning about this over the period of time that is the thing that worries me even more about whether the electricity comes from coal or wind or solar. My problem is about the generators who might very well be able to through the futures markets and through their own operations be able to try to game the system to make certain to create artificial shortages which would push up prices and that worries the absolute tripe out of me. I’ve got to tell you. That was a terrific thing.

We’ll do it again very shortly time because this is a great explanation as to how not only the energy market is working but on top of that the way in which are we generated in the future. Tony Wood is the director of the Energy Program at the Grattan Institute. We’ll take your calls on that one as well on 131873.

 

 

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Image source: 2GB

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