There's a lot of public support for the renewable energy target, which
requires electricity retailers to get 20 per cent of their power from
renewable sources by 2020. But now the country's being run by climate
change "sceptics", let's get with the program. Forget the threat of
climate change, stop worrying about your grandchildren and focus on what
matters most: what this do-gooder scheme is doing to your cost of
living.
Although before the election Tony Abbott professed support for
the target, since the election he has instituted an expert review of
it, headed by businessman Dick Warburton, former chairman of Caltex and
prominent "sceptic".
The review commissioned a leading firm of
economic consultants, ACIL Allen, to undertake modelling on the future
effects of the target.
The preliminary report found that, between
2015 and 2020, the target would increase the average household
electricity bill by $54 a year - a tad over $1 a week. This five-year
average, however, conceals the estimation that the cost of the scheme
will fall as each year passes.
So by 2020 itself, the increase
will have reduced to just $7 a year. By the end of another 10 years, in
2030, the scheme is estimated to be actually reducing average household
electricity bills by $91 a year, or $1.75 a week.
It's common
sense that requiring electricity retailers to buy a certain proportion
of their power from more expensive renewable sources - mainly wind
power, but also solar - would add to the cost of their power, with the
extra cost being passed on to consumers.
So why has ACIL Allen's
modelling concluded the target will add to the price of electricity
initially, but eventually subtract from it? The short answer is because
electricity pricing is a complicated business.
It turns out that
adding to the supply of renewable energy available reduces the wholesale
price of electricity. This is because the price being paid for energy
being put into the national electricity grid by particular generators
varies minute by minute according to the balance of supply and demand.
In
the middle of the night, when little power is being used, the wholesale
price is very low. But on a cold evening - or, more likely these days, a
very hot afternoon - the wholesale price can be stratospheric.
The
trick to renewable energy is that it tends to be available when the
demand for electricity is high. Experience around the world confirms the
Australian experience that renewable energy does a great job of
reducing spikes in wholesale prices on very hot and very cold days.
Another
part of it is that though it costs a lot to build wind and solar
generators, once they're built there are few "variable" costs. Wind and
sun are free; coal and gas aren't. So the renewable generators offer to
supply power to the grid at very low prices and this lowers the prices
the coal and gas generators are able to ask for.
But none of this
changes the fact that the electricity retailers have to pay for the
"renewable energy certificates" that the target scheme requires them to
buy. These certificates reduce the capital cost of setting up the wind
and solar generators whose operations then reduce the wholesale cost of
power.
So it turns out the renewable energy target scheme has the
effect of reducing the wholesale cost of electricity while also adding
to the costs of the electricity retailers. ACIL Allen's modelling
suggests that, for the next five years, the extra retail cost will
exceed the saving in wholesale costs, but after that the saving will
exceed the extra cost.
See what this means? The case for saying we
must get rid of the renewable energy scheme because it's adding too
much to the living costs of struggling families has collapsed.
But
there's where the story takes a twist. Modelling of the future cost of
the renewable energy target, published by an equally prominent firm of
economic consultants, Deloitte, comes to opposite conclusions.
Deloitte's
modelling accepts that the renewable energy scheme is reducing
wholesale costs, and roughly confirms ACIL Allen's finding about the
higher cost to household customers until 2020. But whereas ACIL Allen
expects the scheme to start reducing household costs after that,
Deloitte expects the cost to stay positive until 2030, causing household
bills to be between $47 and $65 a year higher than if the scheme was
scrapped.
Why have two leading economic consultants reached such
opposing conclusions? Perhaps because Deloitte's modelling was
commissioned by the Chamber of Commerce and Industry, the Business
Council and the Minerals Council.
Deloitte doesn't conceal that
its modelling is in reply to ACIL Allen's. Would it surprise you if the
fossil fuel industry wanted to see the renewable energy target abolished
and was alarmed to know that modelling commissioned by the review had
demolished the argument that continuing the target would add to people's
electricity bills? Now the review will be able to pick whichever
modelling results it prefers.
How did Deloitte reach such
different results? By feeding different assumptions into its model. It
seems to have assumed the cost of wind farms won't fall over time (which
it probably will), whereas the price of gas for gas-fired generators
won't rise much (which it already has).
Regrettably, economic modelling has degenerated into a device for bamboozling the public.
