Alan Moran: Wind Power FAILS on all Scores
Renewable energy as a means of reducing emissions fails two key tests
26 June 2014
REGULATORY change will always disadvantage some while advantaging others. But the benefits of deregulation far outpace the costs and Australia carries a weighty regulatory burden, one that has deprived us of enjoying the world’s highest living standards.
The most costly regulations are the ever-mounting environmental red tape and Australia’s unique union-dominated controls over employment conditions. The deleterious effects of these have been somewhat offset by deregulatory progress in import tariffs, for example, and in opening up areas such as ports, travel and telecommunications to greater competition. Privatisation has also helped in this regard.
Unfortunately we have gone backwards in energy supply policy with the carbon tax and forced substitution of cheap coal-generated electricity for expensive renewables. These government measures have resulted in Australian electricity prices being transformed from among the world’s lowest into one of the highest.
This has contributed to placing intense competitive pressure on industry and commerce over the past few years; households have as a result incurred higher prices for the goods and services they buy, as well as taking a direct hit from skyrocketing electricity bills.
While the Palmer United policy remains unclear it seems that the carbon tax is likely to be removed with the new Senate. The future of the other strings to these regulatory bows is less certain. Chief among these is the Renewable Energy Target (RET) under review by a panel chaired by leading businessman Dick Warburton.
The RET forces all electricity consumers to incorporate a proportion of wind and solar energy into their electricity supply. This renewable energy is three times as costly as the energy it displaces and will soon comprise 20 per cent or more of total supply. At that stage it will add 30-50 per cent to total wholesale electricity costs. The RET alone will mean household electricity bills go up by 7 per cent and those of industrial users by 10 per cent. Other state-based measures add to this cost.
The RET review has attracted some 24,000 submissions, mostly from green zealots regurgitating slogans offered up by their leaders. This group is unaware or uncaring that the renewable energy scheme means a considerable increase in electricity costs for industry and households.
Some claim the subsidies help consumers since they drive down electricity prices. But any such price reduction is similar to that which would follow from government supplying cheap bread. The price might fall but not enough to pay for the costs involved and the price falls would result in commercial suppliers ceasing to operate, creating future shortages.
Also supporting green subsidies are a number of publicly-financed bodies. Many of these, such as the cities of Melbourne and Sydney, have no expertise on the matter but their councils’ irresponsible approach to spending involves employing green personnel for vanity purposes.
Others like Climateworks and the Grattan Institute were given taxpayer funding by Labor-Greens government to promote renewable energy.
A second group of submissions is businesses and their representatives who have made investments in subsidised renewables and are keen to protect those investments and even to create additional subsidies.
The third is specific business interests, largely in aluminium, which recognise the deadly costs of the RET scheme and seek to quarantine themselves from its effects.
The IPA mining representatives and the Australian Chamber of Commerce and Industry form a fourth group, which notes that the renewable scheme is a horrendous waste of resources, needlessly drives up electricity costs, and finances lobbying activity that pollutes the political process. These bodies argue that the scheme should be axed immediately and all subsidy payments terminated.
Twenty years ago, the two green technologies favoured by subsidies — wind and solar — were touted as being on the verge of becoming competitive with coal, gas and oil. Almost no serious analyst nowadays believes this.
That bold but discredited technological optimism was joined with a rationale that subsidies to green energy would reduce carbon emissions. As a policy, renewable energy as a means of reducing emissions fails two key tests. It founders on the shoals of adamant refusals by other countries to embark on serious carbon emission reductions and on clear evidence that renewable policies only reduce emissions at a very high cost.
To date, Australia has wasted $20 billion in worthless renewable energy investments, mainly on windfarms but also on solar, including the rooftop panels. Just to put that in perspective, $20 billion would build 100,000 new houses. According to modelling undertaken by Acil Tasman for the RET review, unless the program is stopped immediately a further cost of $13 billion will be incurred. Of course, if we also provide subsidies to new renewable facilities, many more billions will be wasted.
Beneficiaries of the subsidies argue that unless they are maintained, Australia will suffer adversely by being regarded as a nation imposing “sovereign risk” on investors. This, so it is said, will discourage future investments. Sovereign risk is where governments seize property without proper compensation.
But changing a tax or subsidy can hardly be considered an imposition of sovereign risk. Such changes happen all the time and invariably mean losses to somebody.
Moreover we have seen policy changes in recent years that have very severe repercussions on investments.
Take the automotive industry, where reductions in industry protection, changes to industrial relations laws and the energy price hikes have caused investment write-offs amounting to billions of dollars. Or the “alcopops” industry, severely impaired by a sudden and unexpected 70 per cent tax increase. Or cigarette manufacturing, hounded from Australia by tax hikes and restraints to marketing.
We also saw the former Commonwealth government, in response to claims by the ABC about animal cruelty, dramatically close the live beef trade to Indonesia. Many graziers had to shoot their stock and average prices fell by a third.
The victims of these government activities got no compensation. Importantly, nor did the measures bring a rise in investment risk.
While the less government meddling there is in the economy the better, the fact is taxes, subsidies and tax rates do change. No government can reasonably expect to bind its successors to paying a worthless subsidy for 15 years as is nominally the case with the RET. And no investor would sensibly expect this.
The renewable energy scam, alongside the carbon tax, was one of the many targets of the late Ray Evans, whose funeral is today. He was a co-founder of the Lavoisier Group established to combat misinformation about climate change. The current Shadow Resources Minister, Gary Gray, was a former member. Ray did not live to see the costly green edifices of economic self-harm dismantled. But the new Senate, in spite of resistance from the Greens and Labor’s leadership, will begin the necessary economic repairs next week.
Alan Moran is the Director, Deregulation at the Institute of Public Affairs
In addition to the fine analysis above, Alan also had this to say on the Catallaxy blog:
Many governments are seeking ways of escaping the wanton cost impositions irresponsible green predecessors have bequeathed them. None more so than Spain, the former poster child of green energy. Following its election the current Spanish Government has wound-back previously agreed green energy subsidies. This has prompted claims of retrospectivity and sovereign risk, including anappeal to Brussels.
The Spanish risk premium seems unaffected by this and has in fact been declining.
Australia’s renewables rort, with seemingly guaranteed high returns, has provided a bonanza for many union pension funds, but these have mainly provided the capital and sold back the forecast stream of electricity. Those most at risk from a termination of the scheme are the electricity retailers, who have taken long-term contracts on the wind power as part of the portfolio of forward buying to cover the requirements imposed by the current legislation.
Renewables and climate change matters were among the many issues of government imposed costs and liberty curtailments addressed by the late Ray Evans whose funeral is today.
In his Herald Sun piece, Alan refers to modelling by “Acil Tasman”. The firm is now called ACIL Allen and it produced modelling which is fundamentally flawed – grossly underestimating the impact of the mandatory RET on retail power prices – simply because it failed to consider the impact of the Power Purchase Agreements struck between wind power generators and retailers that sets the price paid for wind power at rates 3-4 times the average wholesale price for power (see our post here).
Alan refers to the risk faced by Union Super Funds and retailers. He could have also included the major banks who have lent to wind power outfits (see our post here).
Any banker, Union Super fund manager or retailer who thinks they can safely rely on Clive Palmer’s current “support” for the mandatory RET as a sound basis for their future financial health should think again. Big Clive took the Greens and their acolytes for fools over his brief brush with an Emissions Trading Scheme – which blasted like a comet across the night sky – but went straight to the political dustbin. Anyone betting the house on Clive Palmer’s next move is a very brave punter, indeed.