ZEN Energy is proud to present this comment piece on renewable energy and associated commentary from our Chairman Professor Ross Garnaut. This comment piece was written by Sydney Morning Herald Economics Editor Ross Gittens, and originally appeared in the Sydney Morning Herald and the Melbourne Age on the 18th of February 2017.
The old joke says the questions in economics exams don’t change from year to year, but the answers do. Welcome to the economics of energy and climate change, which has changed a lot without many people noticing – including Malcolm Turnbull and his climate-change denying mates.
They’ve missed that the economics has shifted decisively in favour of renewable energy, as Professor Ross Garnaut, of the University of Melbourne, pointed out at an energy summit in Adelaide last October.
Garnaut is chairman of ZEN Energy, a supplier of solar and battery storage systems. But there aren’t many economists who know more about the energy industry and climate change than Garnaut, who’s conducted two federal inquiries into the subject.
He says that, since his second review in 2011, there have been four big changes in the cost of renewable energy relative to the cost of energy from coal or gas.
First, the cost of renewable energy generation and energy storage equipment has fallen “massively”.
The modelling conducted for his inquiry assumed the cost of photovoltaic solar generation would fall by a few per cent a year. In practice, costs have fallen by about five-sixths since that assumption was made.
“Similarly large reductions have occurred in the cost of lithium ion batteries and related systems for storing energy,” he says.
There have been less dramatic but substantial reductions in costs of equipment for electricity from wind and other renewables.
The cost reductions come from economies of scale in the hugely increased production by China and others, plus savings through “learning by doing”. Advances in technology will keep prices falling after scale economies have been exhausted.
Second, there have been “transformational improvements” in battery storage technology, used at the level of the electricity grid, to ensure balance between supply and demand despite renewables generators’ “intermittency” (inability to operate when the sun’s not shining or the wind’s not blowing).
Third, there’s been a dramatic reduction in the cost of borrowing the money needed to cover the capital cost of generation equipment.
Real interest rates on 10-year bonds are below or near zero in all developed countries, including Australia.
“These exceptionally low costs of capital are driven by fundamental changes in underlying economic conditions and are with us for a long time,” Garnaut says.
Low interest rates reduce the cost of producing, storing and transporting renewable energy more than they reduce the cost of fossil-fuel energy because renewable costs are overwhelmingly capital (sun and wind cost nothing), whereas fossil fuel costs are mainly recurrent (digging more coal out of the ground).
Fourth, there’s been a dramatic increase in the cost of gas – and thus gas-fired electricity.
Ten years ago Australia had the developed world’s cheapest natural gas – about a third of prices in the US. Today, our prices are about three times higher than in the US.
Why? Because the development of a liquid natural gas export industry in Queensland has raised the gas prices paid in eastern Australia to “export parity” level – the much higher price producers could get by selling their gas to Japan or China (less the cost of liquefaction and freight).
It’s worse than that. Because foreign investors were allowed to install far too much capacity for LNG exports – meaning none of them is likely to recover their cost of capital – they’ve been so desperate for throughput they’ve sometimes bid gas prices well above export parity.
Apart from making gas-fired power more expensive relative to renewables, this has implications for how we handle the transition from “base-load” coal-fired power (once you turn a generator on, it runs continuously) to intermittent solar and wind production.
It had been assumed that gas-fired power would bridge the gap because it was cheap, far less emissions-intensive than coal, and able to be turned on and off quickly and easily to counter the intermittency of renewables.
Now, however, without successive federal governments quite realising what they’d done, gas has been largely priced out of the electricity market, with various not-very-old gas-fired power stations close to being stranded assets.
We thank our lucky stars the cost of energy storage is coming down and we get serious about storage – both local and at grid level – using batteries and such things as “pumped hydro storage” (when electricity production exceeds immediate needs, you use it to pump water up to a dam then, when production is inadequate, you let the water flow down through a hydro turbine to a lower dam).
In other words, the solution is to get innovative and agile. Who was it who said that?
Turnbull’s party seem to be pro coal and anti renewables partly because they know we have a comparative advantage in coal.
We can produce it cheaply and we’ve still got loads in the ground. The rest of the world is turning away from coal and the environmental damage it does, but let’s keep opening big new mines and pumping it out, even though this pushes the prices our existing producers get even lower.
If the banks are reluctant to finance new coal mines at this late stage, prop them up with government subsidies. Join the international moratorium on new mines? That would be unAustralian.
But get this: Garnaut says we also have a comparative advantage in the new world of renewables.
“Nowhere in the developed world are solar and wind resources together so abundant as in the west-facing coasts and peninsulas of southern Australia. South Australian resources are particularly rich…
“Play our cards right, and Australia’s exceptionally rich endowment per person in renewable energy resources makes us a low-cost location for energy supply in a low-carbon world economy.
“That would make us the economically rational location within the developed world of a high proportion of energy-intensive processing and manufacturing activity.
“Play our cards right, and Australia is a superpower of the low-carbon world economy.”