TRISTAN EDIS. Turnbull was knifed by a lie: Renewables are already bringing prices down.

Sep 1, 2018

Australia has replaced yet another Prime Minister mid-term via a leadership coup.

Malcolm Turnbull’s demise appears to have been precipitated by a concerted campaign to stir up anger amongst the Liberal and National Parties’ membership base. This was led publicly by such people as Tony Abbott, Craig Kelly, Eric Abetz and George Christensen, as well as media commentators including Andrew Bolt and Alan Jones.

Their rallying call for the rebellion was the proposal to introduce the National Energy Guarantee, a policy that would impose an obligation on electricity retailers to meet a carbon emission target.

To paraphrase this camp’s argument for rejecting the NEG and deposing Turnbull it essentially boiled down to the following:

The electorate are extremely angry about large rises in power prices that now stand at record high levels. The cause of these power price rises is too much renewable energy that drove the Hazelwood Coal Power Station to close. 

The Liberal-National Coalition could resurrect their electoral chances by harnessing the electorate’s anger over power prices by generating fear that Labor’s policy to increase the share of renewable energy to 50% would drive power prices skyrocketing.

To do this effectively the Liberal-National Coalition also needs to abandon any policy that might be seen as supporting renewable energy. This will ensure it distinguishes itself from the Labor Party to clearly brand itself as the party of lower power prices, while branding efforts to lower emissions as driving up power prices.

However, there is a big problem with this narrative – it doesn’t align with what has actually unfolded with power prices.  What happened with power prices in the past two years is not so much a story of coal versus renewables, but rather a simple case of Economics 101:

  • We took a large chunk of supply out of the market with the closure of Hazelwood and Northern Coal Power Stations and unsurprisingly prices went up. Further exacerbating the problem is with their closure we also lost some significant competitors to the dominant incumbents.
  • Now we are adding a substantial amount of extra supply (which happens to be renewables) and prices are going down. What’s also helpful is that some of this extra supply is also associated with new competitors like SIMEC Zen, Pacific Hydro and Flow Power.

Figure 1 – Energy Action Index of retail contract prices per kWh offered to business customers excluding network charges

Energy Action Price Index (Business) which tracks the average energy price of retail electricity paid by Australian businesses based on a Standard Retail Contract (commences in 6-months and operates for 2½ years). See for details.

Importantly this price represents an offer to supply electricity not for the day in question, but over a two and half year contract period commencing in 6 months’ time. In that respect it is forward looking but also it will rapidly adjust to new market information relevant to the contract period as it becomes available.

I use this index of prices because unlike residential prices is responds relatively quickly to new events and information while, unlike the spot market, it provides a picture of prices that smooths out short-term, temporary events and considers the impact of events several years ahead.

Over much of 2014 power prices were relatively stable or in slight decline. Then around mid 2015, South Australia power prices spiked upwards which was largely a function of the withdrawal of Alinta from the wholesale contract market in advance of the closure of Northern Power Station.

For the rest of the mainland NEM states, power prices began their rise around mid-2016.

While it was not yet publicly confirmed at that time that Hazelwood Power station would shut, my understanding is that the owner of Hazelwood – Engie – began to pull back from offering hedging contracts at this time in preparation for the eventual closure of Hazelwood (which they only officially confirmed publicly in November 2016).

Prices then really spiked upwards after the Hazelwood closure was officially confirmed.

For those who’d like to blame renewable energy as the cause of the price rises, the problem is that renewable energy investment had largely dried up in the period preceding the closures and price rises.

The chart below illustrates that construction commitments were almost non-existent over 2014 and remained inconsequential over 2015 until the final quarter of 2016 (the yellow bars).

Construction commitments only rose to substantial levels after September 2016 (the blue bars) when The Age newspaper revealed Engie would close Hazelwood power station by April 2017.

This surge in new capacity only started to add power to the grid since late 2017 as the first wave of projects have begun reaching construction completion.

Figure 2 – Renewable energy capacity committed to construction in NEM states by quarter

Source: Green Energy Markets Renewable Energy Index – July, based on Green Energy Markets’ Power Plant Database

The capacity committed from 2014 until September 2016 (the yellow bars) we estimate would produce about 2,600GWh per year spread out across the entire NEM.

By comparison Hazelwood and Northern Power Station produced an average of about 15,000GWh per annum and the total annual consumption of electricity across the NEM was about 186,000GWh.  Renewable energy wasn’t exactly swamping the NEM’s wholesale market.

As explained in my article back in November 2016 – Understanding the decision to close Hazelwood and other old clunkers–more fundamental issues were behind Hazelwood’s closure.

Prime amongst them is that when a coal power station gets to 50 years of age it’s likely to be wearing out.

But what is really difficult for anti-Turnbull camp to explain is what has happened to the power price chart since mid 2017.

If the insipid amount of renewable energy investment over 2014 to the third quarter of 2016 was so destructive, then you would have thought the huge amount of capacity committed to construction after September 2016 would have been disastrous for electricity prices.

Yet within the window that the post September 2016 surge in renewable energy projects could be expected to reach construction completion and influence the 2.5 year contract prices illustrated in figure 1, we’ve seen prices steadily fall.

I should note that the extra supply from renewable energy is not solely responsible for this fall. The large and rapid dip seen in June 2017 was a product of the Queensland Government instructing one its power companies to stop using its substantial market power to push up prices.

But prices then kept on going down well after this instruction was issued, while the amount of extra renewable energy announced to enter the market kept on rising.  Since October 2016 slightly more than 7,200MW has been committed to construction, which we estimate will generate 20,000 GWh per annum.

That is more than 10% of total NEM-wide electricity consumption added to a market with static demand for wholesale market electricity.  Its full impact on wholesale power prices will progressively flow through as they reach construction completion, with almost all the capacity generating to the grid by 2020.

In all the political controversy and spin surrounding the National Energy Guarantee, one of the most significant findings from the Energy Security Board’s economic analysis seemed to be missed.

Putting the NEG to one side and assuming it is never implemented, the economic modelling by ACIL Allen estimates that wholesale power prices will drop almost in half from $85 per megawatt-hour this year to a bit under $49 by 2021.

I don’t intend to suggest this is some magic peculiar to renewable energy, but rather an entirely logical product of adding so much extra supply to the market within a short period of time.

Yet what it also clearly demonstrates is that Malcolm Turnbull has been deposed based on a proposed pitch for re-election built not on evidence, but a hope that people can be fooled.

This article was published by Renew Economy on the 30th of August 2018. 

Tristan Edis is Director – Analysis & Advisory with Green Energy Markets. Green Energy Markets assists clients make informed investment, trading and policy decisions in the areas of clean energy and carbon abatement. 

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