Coalition government’s climate change policy too successful for its deniers?

Feb 1, 2021

Scott Morrison’s rationale for using the market to keep power costs as low as possible should make him a devotee of renewable energy. Meanwhile, the Nationals denialism is so absurd that it is pushing for a coal-fired power plant whose electricity would cost eight times that from a renewable plant. 

In devising a climate change policy based almost wholly on technology drivers and the magic of the free market, Scott Morrison has absolved the Government of putting forward a comprehensive interventionist policy. But a central irony is that the policy is becoming too successful for the Coalition to stomach. The market is too powerful for a Government that in reality only wants gradual decarbonising.

Witness the National Party’s ode to coal-fired power plants in The Australian on January 26; Matt Canavan’s reasoning for the continuation of a manufacturing sector based on carbon-based fuels in the same edition and Angus Taylor’s continued spruiking of carbon capture and storage and of gas as a transition fuel.

The problem for the Coalition lies in the recent arrival of two watershed events in power generation. The cost of renewables plus storage is now roughly equivalent to that of coal-fired power generation. Second, the cost of four to eight-hour battery storage is now similar to that of gas peaker plants.

Both events are the product of the truly exceptional decline in the costs for solar, wind and battery storage. In 2009 Lazard put the US cost of producing PV solar at $US359 per MWh, wind $US139 and coal $US111. A decade later the comparable figures are about $US33, $US36 and $US107. And the rate of decline is continuing.

Furthermore, wind and solar are still only midway through their innovation cycle. New technology and economies of scale will continue to drive down costs. By comparison, coal is at the end of its innovation cycle.

Currently, the technically most efficient CFPP is based on advanced ultra-supercritical (USC) technology. Despite its impressive name, its production costs have flatlined in recent years. The US Energy Information Administration sees the production costs for USC plants increasing from the current $US60 per MWh to $US74 in 2025. Because USC plants operate at higher temperature and pressure, they are proving less reliable than their conventional counterparts.

These cost relativities are based on the cost of power produced at the factory gate – the levelised costs of electricity (LCOE). These are only part of energy’s economics.

What is critically important for the national power grid is the value of power generated at a particular time. Power consumption is far higher in the early morning and early evening, when solar is, by and large, unable to contribute and wind’s contribution is uncertain.

The value of coal’s output at these peak times can, therefore, be much higher than renewables, which can change the cost relativities. Meeting this power shortfall can be through CFPPS, gas or storage of excess renewable power using batteries.

It is here that the first watershed becomes important. Battery storage costs have fallen dramatically from $US1,160 in 2010 per KWh to $US153 in 2019, according to Bloomberg. Projections are for more than a further halving over the next five years. Recent calculations put the average cost per MWh of a combination of solar and wind plus battery storage over a 12-hour period at just over $94 – below that of CFPP at $101.

The second watershed is that the cost of battery storage now rivals that of gas peaker plants for four-hour storage – a relativity that will continue to widen as battery prices fall and that of gas peaker plants continues to level off.

Bloomberg NEF’s survey in 2018 of 7,000 power projects across 26 countries indicates that solar plus four-hour battery storage – and particularly in countries such as Australia and India with high levels of solar radiation – are already competitive with CFPPs as a source of dispatchable power.

If carefully managed, Australia’s decarbonising path using renewables can thus be accelerated and continue to be cost effective beyond the 40% renewable level where storage becomes a more critical issue. (Gas peaker plants will not disappear, especially where eight-hour plus storage is needed to meet relatively brief exceptional climatic events.)

A recent survey by Forbes estimated that 42% of global coal-fired generation capacity is unprofitable. In the US it is estimated that immediate closure of plants could produce savings of about $78 billion. Using similar metrics Ross Garnaut and others argue Australia could almost totally decarbonise its power grid by accelerating the retirement of all CFPP within the next two decades. There are 18 CFPPs in Australia with an average age of 30 years. Out of a total capacity of just over 23 GW, 15.8 GW are generated by plants older than 30 years.

Of course, cost relativities are sensitive to the location of power plants and how well the national grid can link these sources. It is here that the technologically and market-driven emission reduction scheme is, in itself, not enough.

Coordination of state renewable energy schemes could have avoided the highly uneconomic locations of some solar farms. The national grid (one of the world’s largest) needs to be restructured to integrate renewable energy and produce a nationally rational matching of storage locations with power supplies.

A note of caution is needed regarding influences on the cost of renewable energy given its high capital intensity. A substantial rise in interest rates would have a significant effect on renewable’s LCOEs. On the other hand, investors in CFPPs face an increasingly hostile financial environment, with institutions reluctant to invest due to a fear of stranded assets. The world’s largest fund management company BlackRock (US$7 trillion in assets) is selling all coal-related investments, based on its admission that “climate change risk represented significant investment risk”.

Similarly, other corporations and financial institutions are exiting coal: the World Bank, the European Investment Bank, HSBC, the world’s largest bank outside China and the world’s largest insurance companies – AXA, Alliance and Chubb. Three of the big four banks in Australia have undertaken to decarbonise their commercial activities by 2030/35. Financial institutions are signalling that the indirect costs of carbon emissions will now be incorporated as a direct cost of investment.

This corporate flight can only increase the cost of investment in coal. The new question is the effect on investment in gas. The modelling in the 2020 report UN Environmental Program report reveals that to limit global warming to 1.5 to 2.0 C, both coal and gas have to be phased out. In December 2019, the European Investment Bank decided to stop financing all unabated fossil fuel projects from the end of 2021. Last month the EU went a step further by effectively disqualifying gas-fired power plants from receiving subsidies (EU governments have reserved the right to use gas in the transition to carbon neutrality in 2050).

In Australia, meanwhile, a virulent offshoot of climate change denialism is appearing in the form of denial of the economics. Morrison’s rationale for using the market to keep power costs as low as possible should now make him a passionate devotee of renewable energy –  even without a price on carbon.

As for the Nationals, cost denialism has reached absurd heights in its call for a Hunter Valley CFPP. Such a plant with carbon capture and storage would cost some eight times more than an equivalent-sized renewable power plant. The cost of electricity from such a plant – according to a study by Victoria University’s Professor Bruce Mountain  – would be seven to eight times the cost per KWh of wind and solar with storage.

The Coalition’s cost denialism is also being married up with what can be termed future cost denialism. This is the refusal to compare the claimed extra cost of renewable energy with the exponentially greater cost of rising global carbon emissions on the economy and on the next generation. Of course, the most severely affected of this generation will be the very farmers and regional residents who inhabit the Nationals’ heartland.

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