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The Energy Crisis is all the Fault of Governments

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When the idea of an emissions trading scheme (ETS) was first mooted, Gary Banks, who was the boss of the Productivity Commission (PC) at the time, was asked to model the cost of such a scheme.

He demonstrated that, if an ETS was introduced without derogations or exceptions, the Rudd government’s carbon reduction targets could be met for a cost of $7 a tonne.

The take-out from the PC’s report was that an emissions reduction scheme would be the cheapest way to reduce carbon emissions provided that the only policy objective was emissions reduction and not a preference for one form of energy generation over another.

The Greens, under Bob Brown and Christine Milne, had entirely the opposite view of emission reductions: they saw them as the opportunity to develop a new economic driver, the ‘green economy’.

This entailed significant preference for renewable energy over and above that which would have been derived from the carbon price.

When Julia Gillard entered into an ‘alliance’ with the Greens after the 2010 election, Labor adopted the ‘green economy’ policy as an article of faith.

The main vehicle for its implementation was the renewable energy target (RET) which was originally introduced by the Howard government in 2001.

The Gillard government also introduced ‘renewable energy certificates’ that could be sold to energy wholesalers to enable them to meet a target that exceeded invested generation capacity.

In addition state governments introduced feed-in tariffs that compensated householders for installing home solar power generators.

Gary Banks, who has now retired from the Productivity Commission and has taken up the post of Professor at the Melbourne Institute of Applied Economics, was recently moved to re-enter the energy debate following a statement by South Australian Premier Jay Weatherill to the effect that the energy crisis is a consequence of market failure.

At a forum organised by Infrastructure Partnerships Australia, Professor Banks responded to the Premier’s comments: “The inconvenient truth is that the increasingly high prices for increasingly unreliable electricity are a direct consequence of the increasingly high utilisation of renewable energy required by government regulation,” he said.

“Energy markets are admittedly complicated things. However, the logic is unassailable that if a cheap and reliable product is penalised, while expensive and less reliable substitutes are subsidised, the latter will inevitably displace the former. No amount of sophistry, wishful thinking or political denial can change that basic economic reality.

“The energy crisis is self-evidently not the result of market failure but of government failure,” he said.

Professor Banks didn’t leave the Turnbull government out of his criticism.

He accused it of compounding the problem by in troducing an ACCC inquiry into energy retailing and spending $2 billion on a redundant Snowy Scheme 2.0, another example of subsidised renewable energy.

The same objections would apply to clean coal technology if subsidies were to be used as an incentive for its introduction. He said the problem compounded itself when high prices led to subsidies for intensive users of electricity.

The consequence is a third rate energy system.

Last week Alan Moran, drew on the words of the late head of the Australian Energy Marketing Organisation (AEMO), Matt Zema, to show that governments had been warned about the threat to the grid from renewable energy a year before the blackouts occurred in South Australia.

Dr Moran quotes Mr Zema, speaking at the Regulation Economics Conference: “The renewable developments and increased political interference are pushing the system towards a crisis. South Australia is most vulnerable with its potential for wind to supply 60% of demand and then to cut back rapidly. Each new windfarm constrains existing ones and brings demand for more transmission.

The system is only manageable with robust interconnectors, but these operate effectively only because there is abundant coal-based generation in Victoria…wind, being subsidised and having low marginal costs, depresses the spot price and, once a major coal plant has a severe problem, it will be closed …wind does not provide the system security. But the politicians will not allow the appropriate price changes to permit profitable supply developments from other sources. And the original intent of having the generator or other beneficiaries pay for transmission and services over and above energy itself has now been lost so there are no market signals, just a series of patch-ups that obscure the instability and shift the problemto include Victoria. In the end the system must collapse…”

Matt Zema’s comments make explicit the dynamics that led to the failure of the grid in September last year and the high prices that have prevailed in the last few years. At the same time they

confirm Gary Banks’ thesis.

As Dr Moran points out in his article, the combination of government interventions in the market is leading to a plethora of exotic energy solutions such as those proposed by Tesla billionaire Elon Musk and Lyon Solar which proposes to build a solar and battery plant in South Australia’s Riverland.

These energy sources require a subsidy of $83 per megawatt hour which will be passed on to the hapless consumer. However, given that they are not required to be operational 100% of the time and may only be used at times of peak demand, the consumer will be paying massive subsidies for power that is not even used.

Without engaging in complicated mathematical modelling, it’s clear that it would have been much cheaper for the South Australian government to keep the Northern Coal Fired power station, owned by Alinta, open to meet the back-up needs of the South Australian grid.

AEMO is of the view that Hazelwood power station in Victoria can close and not reduce electricity supply below projected demand however it’s obvious that the ideological cause of replacing fossil fuel with renewables will cause enormous disruption in the short term.

Dr Alan Finkel has to deliver his report on energy security shortly after the budget’s brought down.

It is to be hoped that he will include a reference to the approach recommended by Professor Banks in his original report. We now also have the prospect of a report from AEMO and the Climate Change Authority on much the same issues, courtesy of the deal done with Nick Xenophon to ensure passage of the business tax cuts through the Senate.

This may be problematic since there may not be a Climate Change Authority: in recent times Clive Hamilton, John Quiggin and Danny Price have all resigned.

If the trend continues there may not be anyone left.

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