Act now on Australia’s power system or pay more later
Australia has a problem with its power system that goes to the core of many issues we’re facing at the moment — increasing coal and gas prices, changing electricity usage, and climate change. That’s the problem of resilience: how well our power system can adapt to change.
Right now, our power system is not in a position to adapt to change. If temperatures rise as expected; if the global price of coal and gas increase dramatically; if global carbon reduction becomes binding; or we start changing our electricity usage patterns, adjusting the system will be very expensive.
This is mainly because the Australian power industry has put all its eggs in the basket of electricity from coal. Even transitioning to gas — ostensibly a low-carbon alternative — will be costly and uncompetitive.
Diversifying fuel sources for electricity will provide the greatest improvement in resilience and adaptability for the supply of Australian electricity, saving us money in the future.
So how have other countries approached the problem of resilience in the supply of electricity? And what should we be doing? We looked at these questions in a recent paper.
Germany has been hailed for its ambitious roll out of renewable energy. But more than 50% of Germany’s fuel for electricity is imported, which has presented it with an energy security problem.
For this reason, and also because of a commitment to climate change mitigation, Germany has sought to diversify and domesticate their sources of fuel through feed-in-tariffs paid to renewable energy owners. This single policy measure has increased Germany’s renewable energy generation from 3% in 1990 to 22% in 2012.
While critics have pointed to disruption on the grid and in the wholesale market, proponents have cited employment, investment and increased exports.
In our study we found that feed-in-tariffs not only increased renewable energy generation, but democratised production too. Instead of industry, generation shifted to families, villages and farmers.
Ultimately this has resulted in tensions between industry and voters (much as it has in Australia), but the German public remains committed to the policy.
California is also in the news, for its Californian Solar Initiative, a US$2.2 billion program to encourage rooftop solar investment. California’s interest in diversification was founded in an electricity crisis back in 2000, causing black outs, upward price spirals and state bail-outs of electricity companies.
There were many reasons underpinning the electricity crisis. Higher gas prices and flaws in market structure that allowed former energy giant Enron to game the energy market were key factors. As a result, the Californian Energy Commission has been committed to diversifying fuels for electricity, encouraging efficiency measures and strengthening both the infrastructure and the institutional structure of the industry.
Initial attempts to diversify away from gas-fired generation were focused on renewable portfolio standards, in effect the same as Australia’s Renewable Energy Target. These were unsuccessful in transitioning California away from its reliance on gas.
For that reason, the Californian government intervened with the Californian Solar Initiative rebates to boost electricity from solar. Notably, with its hot, dry weather conditions, California also has the world’s largest solar thermal generators which have been constructed and are in the process of being commissioned thanks to support from a variety of federal support mechanisms.
California’s shift to greater resilience and energy security has involved a number of overlapping policy measures. These are now starting to deliver greater diversity of supply and energy security.
China’s gigantic investment in coal-fired generation tends to dominate discussion about how the nation is bolstering electricity systems for the future.
But China has also taken steps to significantly enhance the resilience of their electricity system. Inefficient coal generation has been retired in favour of considerably more efficient generation, which has reduced energy losses, carbon emissions and non-renewable energy use.
The Renewable Energy Law has facilitated deployment of 161 gigawatts (GW) of hydro, 45GW of wind and 11GW of nuclear power since 1990, whilst US$55 billion has been invested in power transmission. Targets are for an additional 93 GW of hydro, 55GW of wind, 30GW of nuclear and 28GW of solar by 2015. This is along side an ultra-high-voltage network to provide a “unified strong and smart grid”.
At the heart of China’s ability to deliver on their objectives and increase the resilience of their electricity system is their command economy. This directs investment according to centrally determined five-year-plans.
State based support for rooftop solar panels has resulted in an estimated 2,368GWh in 2012 as a result of A$8 billion investment by Australian home owners. It also employed more than 17,000 in 2012.
Feed-in-tariffs have recently been removed due to fiscal concerns. But accusations of the high cost of solar are overstated, particularly when we consider the electricity market as a whole.
The reason for that is investing in solar can postpone or entirely cut costs of investing in electricity infrastructure to cope with summer peak demand.
Feed-in-tariffs have provided investment for a diversity of options for the provision of electricity. The Renewable Energy Target can also secure investment, but at the moment Origin Energy and others are trying to reduce the target from an absolute amount of 41,000GWh to 20% of energy generated. This is expected to reduce the renewable energy requirement and is therefore restricting investment in renewable energy.
The majority of academic analysis of the roll-out of renewable energy in the EU similarly concludes that well-adapted feed-in-tariffs are effective support schemes for diversification to renewable energy.
Working with a price on carbon
There is a gap between carbon pricing in theory and application in the real world. The experience of the EU Emissions Trading Scheme and the UK Climate Change Levy show that carbon pricing alone doesn’t automatically reduce electricity consumption. We need something else.
Even back in 1978 economist Martin Weitzman advocated the use of both price and quotas.
So if it’s not the Renewable Energy Target, what else should complement a carbon price?
There is resistance to funding feed-in-tariffs through ever-increasing electricity prices. We propose that a carbon price and what we call a differentiated power purchase agreement need to be rolled out together.
The power purchase agreement is effectively a feed-in-tariff for the power industry, but not for consumers and not exclusively for solar.
In this scenario the carbon price provides a funding mechanism, and the power purchase agreement delivers a specified level of diversification. Instead of paying for a carbon price and a Renewable Energy Target, consumers would only have to pay once, for diversification.
While the debate over the carbon price focuses on electricity prices, we ignore Australia’s vulnerability thanks to our dependence on coal. We need to start adapting the system, diversifying it from its current reliance on coal. We must direct it towards a hotter, drier future where centralised coal and gas-fired generation will no longer be desirable.
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