The "net zero" counterfactual argument in 2 questions

I want to spend some time collating my thoughts on a counterfactual arguments for the current state of Energy policy in Australia. 

With a Federal election announcement imminent and some significant policy differences across the spectrum of possible power holders, including minors in a hung parliament situation, there is very likely to be yet another change in energy policy.  

In addition , global political influences, particularly from the US, may push policy far further toward the other end of the spectrum that could have be imagined even just a few months ago. 

Australia has a terrible track record on Energy policy stability, as I will explain  with a short background on recent history and how we got here.

Australia’s climate policies has flip-flopped like a dying fish for decades. The reasons for this are relate to the political economy of electricity prices. As I have mentioned previously , there is strong evidence to suggest Australia's care about climate policy but only when it has marginal cost impacts on them. Once energy prices go up too much, support evaporates and politicians run for the hills. 

The Renewable Energy Target or ‘RET’ was legislated in 2000, but due to the dynamic described above has been reviewed at least 6 times, watered down, paused, unpaused , renamed and in the end failed forward to deliver a low-ball target and a half-baked certificate system in lieu of a price on carbon, or a carbon trading scheme.  Along the way energy policy, including carbon policy, has seen the end of many an Australian Prime Minister. Four if I remember correctly.

With this in mind Australia's investment path in VRE has been a stop-start affair which continues to this day.  Early on , even with the policy vacuum , investments slowly grew and RET targets, although watered-down were met in 2019.  By that time the cost for new entrance has fallen low enough that large-scale VRE was a realisable investment that could compete against existing thermal plant.

But it's all easy in the early days , in simple terms adding up to 20% VRE into the grid has no material impact aside from the cost of the generators. After that technical issues start to emerge and the re-architecting of the system as-a-whole has to occur... then come the costs.

The political history of energy policy means that politicians are keenly aware that energy price rises sink policy so the status-quo from all sides of politics is to obfuscate facts and bury costs inside other programs.

And this is where we find ourselves today. 

As we enter an election, neither side of politics will answer a straight forward question of costs and the bodies that should be providing independent advisory have very obviously been told to tow the political line. 

Climate Change and Energy Minister Chris Bowen has repeatedly said that renewables are the cheapest form of electricity production and that the total cost to 2050 of the new generation, storage and transmission required to reach net zero emissions is $122bn as listed in AEMO's ISP .

But this is very easily disproven on three very obvious and simple points.

1. The ISP is based on estimates of projects, not real world costs.
2. The ISP is missing parts of required investment that have multiple investment paths that are yet to be determined by NSPs.  
3. There is no account of the wholesale market dynamics caused by the introduction of VRE and the flow-on impacts of that to consumers bills. The initial infrastructure costs are only half the story.

The other point is that the ISP takes input from the CSIRO GenCost report which, by design, only considered future mechanisms of electricity generation that could meet the government's environmental policies. So it's not the cheapest form of electricity production at all, it's just the cheapest under the constraints of zero-emissions future, as defined by the government.   

It's obvious by now that no-one actually knows the final costs of the required infrastructure build out , and secondly they certainly have no idea of what the wholesale costs will be either.  

The only thing that is obvious is that consumer prices are going one way, and that is up.

And this brings me to the counterfactual that anyone arguing for the continuation of the green energy transition in this environment, especially the pollies, will have to have good answers for  .. in two simple questions.

1. If you remove the net zero and environmental constraints on the energy system then do the whole-of-system costs  for the renewables still make sense in comparison to any new or existing sources of electricity generation ?
2. Whether you believe in human-driven climate change or not, much larger nations continue to grow their thermal fleet at huge pace, completely offsetting any effort Australia could possibly make in regards to global CO2 emissions. Why give away our natural resource advantage, have higher energy costs, and wear the risks of the unknowns of re-architecting our energy network when the overall outcome on the world's environment will be inconsequential. 

And here are a couple of charts to back-up that second dot point.

 

The revealing costs of ancillary services

 

In a previous post I had this to say about synchronous condensers.

To give you an idea of the scale of the investment required for ancillary services, one of the leading solutions to this problem is the installation of a synchronous condensor. This is a significant piece of equipment that is likely to cost $80-100M per unit to install and commission.

It turns out I was too conservative, with the news today that Transgrid is asking the NSW state government for more money to cover some costs

The enormous spinning metal machines, each costing as much as $150 million, don’t generate electricity but provide stability for the grid, which has typically been provided by coal-fired power stations, but that is getting weaker as electricity generated by those power stations is phased out.

As noted in a recent AEMC directions paper 

... mainland TNSPs have an expected investment of 36 additional synchronous condensers within the coming decade. However, TNSPs may face challenges in acquiring enough synchronous condensers to meet the forecast inertia needs within the required timeframe. Subsequently, TNSPs may decide to explore alternative solutions, such as the conversion of retired thermal-based generation to synchronous condensers.

It's not clear that all 36 will be required, or available, and there are likely to be substitute service agreements with existing synchronous plant or new batteries, but either way the consumer will pay top price.

At $150M a pop, that's $5.4 billion of investment in network infrastructure that actually consumes power, not produce it. And then there are the O&M costs.

If storage is minor, then the transition will cost the moon.

I've been mulling over the 2024-25 GenCost report and AEMO's ISP over the last week to try to decipher in my own mind exactly what their authors were attempting to achieve with both documents.   Both documents have been completely politicized  since they were released and it seems obvious to me that the government has directed all and sundry to pretend they are something they are not.  So here is a quick overview of my thoughts and analysis.

GenCost

GenCost is an attempt to model comparative pricing of different energy sources if you were:

1. Building new green-field generation plant.
2. Doing it in a green future environment. 

You can see this by means of their discussion around future coal technologies and really only pricing in ultra-supercritical coal or carbon-capture technologies. Overall the document is bound by a great number of assumptions mostly that the continuation towards net-zero will continue and therefore a number of existing technologies will be seen as unviable.

But to be clear, it is NOT the comparison of the cheapest forms of electricity production and makes no statement about whether any of these options will be cheaper than the current system.

The other issue with GenCost is that parts of it make no sense.

This is figure 6.2 in the report which as far as I can tell it suggesting that the storage component of VRE costs is some small ratio of the cost of generation. This is simply not the case, more on that later.

Integrated Systems Plan

I think this is the most confused document that I have ever read, and it certainly has caused massive polticial issues because the government pretended it is something it is not and then seems to have forced everyone involved to do the same. 

As far as I can tell the document is actually a plan of all the major things that need to happen in order for the electricity network to transition to meet the government's net-zero targets.  Aside from the fact that it does not contain ALL the things that are required, the major issue with it is that it is totally undeliverable and completely under-costed.

I have significant issues with the modelling. My experience with economists within the energy sector is they have limited real world experience, they will model efficiency and "optimal path" based on what their spreadsheets tell them rather than physical reality and their models suffer from extreme bias due to this.

This is likely to lead to estimations of effort and risk/cost analysis being way off the mark and therefore real world "deliverability" being completely understated. As I have said before, the more you have to do the more likely for things to go wrong.

As per my concerns with the GenCost report, as I have spoken about earlier, is deliverability and cost. Let's continue with the with the same problem from above, VRE storage, to demostrate my concerns.

The ISP states:

“In total, the NEM is forecast to need 36 GW/522 GWh of storage capacity in 2034-35, rising to 56 GW/660 GWh of storage capacity in 2049-50. ”

and has this chart - Storage installed capacity and energy storage capacity, NEM (2024-25 to 2049-50, Step Change) 

Snowy Hydro 2.0  (which I will discuss another day) will provide 320GWh of storage capability to the NEM and "hopefully" be available in 2029. It is  completely over budget at $13 billion (which doesn't include Humelink now at $5 billion) so the projects true costs are more like $20 billion, but let's go with $13B to be kind.  On that number this works out to be around $40.625m/GWh or $40,625/MWh or $40.63/kWh. 

So there is around 200GWh of other storage to fill the gap over the next 10 years, at $40.625m/GWh that equates to just another $8.125 billion, but that number is not realisable.

Snowy 2.0 is not a baseline for comparative storage projects in Australia and extrapolating out its $/MWh does not provide a real world estimate of what the additional storage will cost because you need the same scale to get the same costs.  Something Queensland is finding out 

Work on the $14.2b Borumba Pumped Hydro project south-west of Noosa was due to begin next year and deliver electricity by 2030.

The 2,000-megawatt facility was a signature part of the former state government's renewable energy plan to power two million homes.

But a Queensland Hydro report, commissioned before the election has revealed the project will now cost $18.4b and will not be ready until 2033 at the earliest.

Borumba is a step-down from Snowy Hydro 2.0 , being  2GW/48GWh . At $18.4b it will cost $383m/GWh or $384,000/MWh or $384/kWh.  That's nearly 10 times the price of Snowy 2.0

And it gets worse the smaller you go.

Genex kidston pumped hydro is a 2GWh pumped hydro scheme, it reportedly cost $777M, however that didn't included $150M in free money the Queensland government gave them as it also required a 190km HV line they couldn't afford. It took 5 years+ to build and is considered cheap due to the existing suitable geography because it was an old mine site. All in (including debt ) its over a $1bn in required return and that is ignoring O&M. That’s $500m/GWh or $500,000/MWh or $500/kWh. 

If you keep going smaller, into the realm of chemical battery storage the prices don't get any  better and the standard costs of the lower end of large scale storage in the real world looks to be around $500/kWh. 

Once you get to consumer batteries it's $1500/kWh or more.

So the additional 200GWh is not just another $8.1bn it is going to be more like another $80-$100bn of required investment, and this doesn't include any additional system services or other network augmentations that will be required.  

If storage is only a minor part of the VRE all-in costs, as per the GenCost report, then we are all in a lot of trouble.

Gas, transition and the energy trilemma

In a previous post I talked about the energy transition that is underway across the globe and the investment risks that is presents, especially in the Australian context where gaming the system seems to be a national sport.  

I will talk about energy bill and tariff structures in a future post, but for context within this post a standard consumer energy bill is made of 4 major parts.

• Wholesale market costs (Generation and services)
• Transmission and Distribution network costs 
• Retail charges and margins
• Government charges 

The assumptions embedded in the energy transition are that, in the long term, wholesale market costs will go down due to the entrance of cheaper generation, but there is a requirement for a large investment in new transmission to augment the network to re-architect it to work in new ways in order to get there.

The reason it is important to balance these effectively is because within the energy sector there is a set of well-known constraints called the energy trilemma.  This is a simple term to describe what energy consumers expect from energy markets and service providers:

• Affordability – e.g. keeping energy prices down, making energy more affordable for households
• Reliability – e.g. ensuring stable supply of energy at all times, preventing blackouts
• Sustainability – e.g. increasing use of clean renewable energy, reducing carbon emissions

And this is the heart of the issues we are currently seeing.  Independent studies do show that people care about sustainability, but only if affordability and reliability are not impacted in a measurable way.  The need for new investment in transmission , both in new network and network services, means that there will be an increased cost in transmission over the next decade and without a corresponding offset in some other part of the consumer bill, people are going to get very upset, very quickly.

And this brings me back to gas , but firstly a quick backgrounder.

The wholesale electricity market operates in a marginal price setter environment. This means that electricity prices are set by the most expensive source that has to be on at any given time. Currently in Australia there is not enough VRE sources (backed up by storage) to provide 100% of electricity needs at any time. This means that there is always a need for coal or gas in the system, in fact on most days coal still makes at least 40-50% of electricity generation , even during daylight hours.

This has two impacts:

1. Until there is enough VRE+storage in the network to provide close to 100% of energy needs,  prices are essentially ‘coupled’ with coal and gas prices.
2. The cost benefits of renewables are not properly passed on to consumers even though they produce electricity at significantly lower $/MWh.

The inevitable outcome of this is that consumers cannot see the advantage of energy transition. The high cost of electricity over the last few years has actually been driven by coal and gas prices, but it is easy for an uninformed public to think otherwise and to blame renewables.

The reality is that large transmission projects in support of the renewable transition have barely begun, and due to the nature of how these projects are funded,  are in most part not even in consumer's bills yet. 

Independent research of the Australian electricity market clearly shows that:

There has been a near-perfect correlation between natural gas prices and electricity prices in Australia’s National Electricity Market (NEM), regardless of the underlying supply-demand balance and despite gas plant only operating for a small percentage of the year.

And that ,

Coal units regularly shadow price the marginal gas unit, as noted by Australia’s competition regulator (ACCC, 2018):

“A bidding strategy document from that same [coal] generator noted that its intention was, after its contract position was covered, to ‘bid our remaining coal generation at the staggered prices that ensure full dispatch at the highest possible price before gas generators start.”

In other words, even when gas isn't in the mix, Coal will be bid at a price just under what is profitable for a gas turbine to be in the market, so basically it is in the market at all times.

So with Australian gas run by a unfettered cartel, wholesale prices are going to be permanently high based on market dynamics, even when gas isn't in the mix.  This will mean that consumers will be paying both high wholesale prices and, eventually, much higher transmission costs at the same time.

And with state government's releasing statements like this.

Over time, batteries and pumped hydro will be developed to store excess renewable energy to release when needed. This will gradually reduce dependence on gas. However, until storage solutions are widespread and cost-effective, gas will remain essential for grid stability, ensuring reliable electricity supply during periods of low renewable generation while also reducing carbon emissions compared to coal.

those higher prices are baked in. 

Whatever your thoughts about de-carbonisation and the energy transition there is no way to balance the energy trilemma with gas at current prices. 

If this continues then the transition will stall, energy policy will flip-flop and the consumers will likely end up with none of their 3 wants.

The unexplainable, under-reported gas debacle

I'm writing this post as a backgrounder and as a reference for future posts because you can't talk about energy policy in Australia without a basic understanding of the ridiculous story of the gas market.  

If you know Australia you know we love a good monopoly and regulatory capture and political interference by large industry lobby groups is a national sport, and there is no better example of this than the eastern Australian liquefied natural gas story.

Australia is the world’s second largest exporter of liquefied natural gas (LNG) , yet unlike the country in first place, Qatar, pays a very high price for domestic gas. 

Unlike Western Australia which began it's LNG export journey back in 2002 , until 2014 all of the gas produced in South Australia, Victoria, Bass Straight, NSW and Queensland was sold, via an extensive pipeline network to electricity generators, industrial users and households along the east coast.  The gas was abundant and relatively inexpensive. 

While cheap gas was great for customers it wasn't great for gas companies (Santos, Shell , Origin, Exxon, Woodside) , who looked over to west coast and dreamt of a whole new customer base in Asia and a connection to the international market. 

In 2007 plans were set afoot to build gas liquefication plants in Queensland. By 2014, after major cost and time blow outs three  plants were built at a combined cost of $60bn.  These costs were far beyond the original estimates leading to massive write-downs, but in the long term that did not matter because the east coast gas industry had succeeded in its long-term  plan to push domestic gas prices up significantly. They could now use their monopoly power to claw back the overspend from the unwitting public, with help of a complicit government.

Over the next few years the east coast gas industry hoovered up all of the domestic gas and sent it overseas. Australia’s gas production surged to meet foreign demand while domestic prices soared.  Australia's were constantly warned of gas shortages , even though Australia produces three time the amount of gas required to meet the demand of Australian customers.

Absurdly there have been a times over the last few years where people in Tokyo were paying less for Australian gas than locals, even though it had to be liquified, put in a ship and sent across the sea.

To rub salt into the wound  Qatar pockets over $20 billion in royalties per year which is used to fund public programs, while Australia barely gets $1 billion.  A quick search of tax office data shows the gas industry has an effective tax rate of around 1%.

In 2021 , as Russia invaded Ukraine, global gas prices rose sharply and once again the domestic gas price in Australia shot to the moon crippling Australian manufacturing while the gas industry gained super profits on war profiteering. 

At this point you would wonder why Australia would have ever have done this, and why there isn't some way of fixing it.  

Western Australia has a gas reservation system , it guarantees that 15% of production is available in the domestic market and is has been very successful in ensuring the WA consumer is supplied with cheap gas.  

It turns out the East coast has one too, it is called the Australian Domestic Gas Market Security Mechanism

The Australian Domestic Gas Market Security Mechanism (ADGSM) was introduced in 2017 to “ensure there is a sufficient supply of natural gas to meet the forecast needs of energy users within Australia.” The mechanism enables the Minister to impose export controls on LNG exports if she or he determines that “LNG project’s use of domestic gas” will result in a shortfall in the domestic market

Ever been used ? Nope.  Not even in the peak of the Russia war. And here's a chart of the impact of the differential in the markets.

And it's not like the government doesn't know about all of this. The ACCC wrote a report about the behavior of the East Coast gas market and clearly point this out. Here's the relevant minister in response:

MADELEINE KING: The ACCC report is damning. No doubt about it. It sets out patterns of behaviour, instances of behaviour that are clearly not acceptable in an environment where we do have, you know, internationally and domestically, a supply – energy supply crisis to say the least. So my message to the gas producers is to please read the report. Know that this government is determined to make sure there will be adequate supply for Australians and a reasonable access to it and to manufacturers as well.

There has been no action at all since.

It is clear by now, after 10 years of market abuse,  that Australian Government bureaucrats and Ministers from all sides have very deliberately decided that the interests of the east cost gas companies are more important than that of Australian consumers. 

The government has sat idly by as the slow destruction of the Australian manufacturing sector proceeds and has tried way too hard to hide evidence that lobby groups have had influence on their decisions not to implement market change.

It's a national disaster , but one that you would barely know exists if you read the mainstream media.