This article was published in The Australian Financial Review on 27 July 2016
It is inevitable that renewable energy will provide the vast majority of our electricity in the future. The timing of the transition will depend on three factors:
- The stability and efficacy of energy and climate policies,
- Future fossil fuel prices, and
- Further cost reductions in renewable energy and storage technologies.
There is no denying that the vast majority of those engaged in climate science, and those in global capital markets and business accept that climate change is upon us, and that mitigation action will continue to grow. You can follow the money. In 2015 US$286 billion ($380 billion) was invested in renewable energy worldwide, compared to only $130 billion in fossil fuel generation. For the first time more than half of all new electricity generation investment is in renewable energy. Global forces at play now mean that renewable energy is our future, and all that’s left to debate is the rate of transition.
While nations such as India and China do continue to invest in fossil fuel generation, they are doing so alongside renewable energy investments to meet strongly increasing electricity demand. At the same time they have grown their renewable energy technology capabilities, with China having secured leading global supply positions in both wind and solar technologies over the past decade. This is serious forward thinking.
Developed nations face different circumstances. Australia is fortunate to have some of the best renewable energy resources in the world. But our electricity demand growth is weak, and our power generation system is weighed down with 1960s technology – among the least efficient and worst polluting power stations in the world. No new generation technology, renewable or otherwise, can compete with those old clunkers, so let’s not try to hide behind the “coal is cheaper” argument. It’s not feasible to run a coal plant that’s already 40-50 years old forever, and there will be no new coal-fired power built here.
Some say let’s just let the market work it out. But here’s the problem with that approach. The National Electricity Objective, which sits at the top of the governance hierarchy for our electricity market, doesn’t have a climate or sustainability objective. But the market is expecting the government to develop an energy policy that does. While we wait, uncertainly reigns and investment return requirements rise, with flow-on effects for electricity prices.
Our highly concentrated and vertically integrated electricity retailing industry is largely indifferent to the internal transfer price of wholesale electricity. Households and businesses are left to fend for themselves against the consequences. In other jurisdictions this has led large consumers to cut out the middle guy by contracting directly in wholesale power markets. Smaller consumers head for behind-the-meter solar solutions, as we have in Australia.
Gas-fired power generation is the only credible alternative to renewable energy for new-build here. Costs are driven primarily by the price of the fuel. Australia has captured the value of exporting our gas resources through the international traded LNG market. Absent new discoveries, and with increasing export commitments, comes the need to extract gas from less productive areas at a higher cost.
When international LNG prices are above this cost, they set a floor on the price of domestic gas. Several gas-fired generators have already sold their long-term contracted gas supplies to LNG exporters. But when international LNG prices are low, the cost of extraction of higher cost new resource will set the domestic gas price. It’s lose-lose for domestic gas and electricity consumers.
Further geographic diversification of renewable energy supply coupled with improved demand-side management and interconnection between states will facilitate the continued transition to renewable energy. Australia only needs long term, stable, investible and complementary energy and climate change policies in place to deliver an efficient managed transition to a desired outcome at least cost.
Miles George is managing director of Infigen Energy, and Chairman of the Clean Energy Council. He is also the generator representative on the Australian Energy Market Commission Reliability Panel.