With the Australian wind industry in its death throes, the industry and its parasites are lying around the clock in an effort to preserve the greatest rort of all time – as they seek to fend off the inevitable dismantling of the mandatory Renewable Energy Target.

Lies about the number of jobs at risk. Not jobs in the real economy, mind you, but fantasy jobs that would (might) be created in the wind industry if the mandatory RET were left alone. When we say “fantasy jobs” the numbers given are in the order of 18,000 – which is nothing short of utter bunkum (see our post here).

Lies about the impact of wind power on power prices; always starting off with reference to the wholesale market. Last time we looked, Australian households and businesses were paying the retail price – which has gone from being amongst the cheapest in the world to the most expensive, in less than a decade.

Adding to the litany of wind industry lies, is a story that the marginal cost of delivering wind power is zero – which appears to originate with the “wind is free” myth. This, of course, ignores the upfront capital cost of installing turbines, transmission and network gear etc; and it also ignores the very substantial costs of maintaining, repairing and replacing the major components of turbines.

We’ll debunk these and other myths in a moment, in the meantime here’s The Australian dealing with some of the more outrageous costs associated with the mandatory RET.

Wrong call on energy costs
The Australian
Adam Creighton
20 June 2014

EVEN climate-change deniers may shed a tear over our stillborn carbon emissions trading scheme.

The former government’s policy to link Australia’s scheme to Europe’s, due to start next month at a paltry price of €6 a tonne, was an opportunity to enjoy all the self-righteousness of “doing something” about climate change without much of the cost. All along, imposing a carbon trading scheme and using every dollar of the permit proceeds to cut the bottom two rates of income tax would have been the best policy and, sold well, broadly should have kept everyone happy.

Further, in the unlikely event the rest of the world, which emits the remaining 98.7 per cent of global carbon dioxide, ever agrees on a universal cap and trade system, we would have been prepared — emissions trading remains the most efficient way to limit carbon emission.

Alas, we are governed ineptly: the Coalition has expended its climate-change zeal excising the least bad policy and left us with two worse: the renewable energy target, and the nascent Emissions Reduction Fund (the crux of the Coalition’s direct action policy). Plus we are still lumbered with the absurd carbon tax compensation and higher tax rates to boot.

In 2011 the Rudd and Gillard governments ratcheted up fivefold the Howard government’s 2001 token RET, spurring mainly construction of wind farms, especially in South Australia.

The requirement for retailers to buy what by 2020 will equate to about 27 per cent of total electricity from renewable sources has been a boon for wind farms but a drag for everyone else.

The RET is a highly interventionist and prescriptive way to curb Australia’s carbon emissions, costing about $125 a tonne, or five times the cost of the outgoing carbon tax according to Deloitte Access Economics.

Because it mandates a particular set of technologies (mainly wind), it stops use of much cheaper but non-renewable energy sources, such as gas, that are less carbon intensive.

The insidious cost ripple is significant. Last November the Centre for International Economics concluded the RET was already adding between 4 per cent and 5 per cent to the typical household electricity bill.

Another consulting firm, BAE Economics, concluded in 2012 that the RET would reduce Australia’s national income by between 0.2 per cent and 0.3 per cent and real wages by 2.5 per cent by 2020. Job losses will outweigh job creation (in the renewable sector) by about 4900 by 2020, Deloitte says.

Yet the Clean Energy Council argues the RET will reduce wholesale and perhaps even retail prices too.

This may well occur: renewable energy is characterised by very high upfront costs and zero or close to zero marginal costs. Wind energy, assuming it is sufficiently windy, can compete with gas and coal fire power stations in the wholesale market.

Advocates for renewable energy are seduced by the psychological appeal of zero marginal cost energy.

But that property, however alluring, does not obviate the need for massive set-up costs. Unless the welfare of the present generation is irrelevant compared to those of the future, forcing purchase of renewable energy does not make sense. By definition, if renewable energy were currently able to lower overall costs in energy production it would not need help from government regulation. Investors would be building wind farms regardless.

The government’s RET review, chaired by known climate-change sceptic Dick Warburton and due to report next month or August, will very likely conclude the RET is an inefficient way to abate carbon. But it will likely recommend a freezing of current requirements rather than outright abolition.

This is a shame because arguments about sovereign risk — that, in this case, it is unfair to investors in renewable energy to suddenly drop the policy — are not strong.

If Canberra suddenly nationalised Westpac, that would create sovereign risk. But dropping a policy that investors always knew was highly inefficient and that was introduced against the will of the bulk of Liberal Party members does not. By this definition all government actions — raising taxes, cutting taxes — create sovereign risk and nothing should ever change.

Arguments the RET bolsters Australia’s energy security — by diversifying the range of energy options we have available — are laughable given the rich endowment of mineral resources this ­nation enjoys.

Indeed, owners of black and brown coal power plants should be encouraged to bid for the ERF to help start construction of a commercial-scale nuclear reactor. Such a facility ultimately would contribute massively to carbon abatement and also encourage development of a skilled workforce.

With near 40 per cent of the world’s uranium reserves and a significant quotient of isolated, uninhabitable land in which to store nuclear waste we are perfectly placed to shift towards nuclear energy, which already supplies 15 per cent of the rich world’s power supply.
The Australian

In an otherwise well-crafted piece, unfortunately, Adam Creighton appears to fall for a couple of classic wind industry furphies – of the kind we mentioned above.

The first is that wind power can be produced at or near zero marginal cost.

Nothing could be further from the truth.

“Marginal cost” relates to the additional cost of delivering the next unit of production (good or service). In general terms, “marginal cost” at each level of production includes any additional costs required to produce the next unit. For marginal cost to be zero, the additional cost of delivering an additional unit must be zero.

Wind farm operating costs are typically in the range of $25 per MWh dispatched to the grid. That is, every additional MWh delivered, costs an additional $25 to produce; therefore, the marginal cost of production is (at least) $25 per MWh, not zero.

In this glossy tissue of lies (click here for the pdf) Infigen (aka Babcock and Brown) sets out the financial “performance” of its American and Australian operations. From page 26, here’s Table 16 relating to its Australian operations, where it reports “Operating Cost (A$/MWh) as $23.93 for 2012/13 compared to an “Average Price” of electricity sold of $96.57 per MWh.

From page 29, here’s Table 20 where, on total operating costs of $36.3 million, $17.2 million is attributed to “Turbine O&M” (ie operation and maintenance); $0.9 million to “Balance of plant”; and $7.5 million to “Other direct costs”. Infigen’s US operations reported similar operating costs of US$24.18 per MWh for 2012/13 (refer to Infigen’s report at page 20 and Table 15 on page 24).

Those typical operating costs figures are hardly evidence that wind farms operate “at or near zero marginal cost”; but are evidence entirely to the contrary. Bear in mind that wind farm operating costs of $25 per MWh compare with the ability of Victorian coal fired power generators to profitably deliver power to the grid at less than $25 per MWh.

The bulk of wind farm operating costs are taken up by maintenance and repairs (see Table 20 above).

Blades, bearings, gearboxes and generators naturally wear out over time; and often require repair or replacement within the first few years of operation.

At AGL’s Hallett 1 (Brown Hill) wind farm near Jamestown in SA, 45 Indian designed and built Suzlon s88s were used; commencing operation in April 2008. Not long into their operation stress fractures began appearing in the 44m long blades; Suzlon claimed that there was a “design fault” and was forced by AGL to replace the blades on all 45 turbines under warranty. The “old” blades are still sitting on the wharf at Port Pirie, apparently awaiting collection by the manufacturer – now known as Senvion: collection is highly unlikely, as Suzlon/Senvion is in deep, deep financial difficulty.

While that debacle was covered by warranty, not every blade, bearing, gearbox or generator replacement is. The cost of replacing major components is colossal, requiring the use of heavy cranes with specialist operators clocking up rates of between $10-30,000 per day – and effective rates of up to $100,000 per day if a heavy crawler crane is required – bear in mind these giant cranes have to be transported substantial distances to the site as oversize loads, involving police escorts – all at substantial cost.

Over the “life” of a turbine (purported to be 25 years by the manufacturers) metal fatigue, fair wear and tear means that the cost of maintaining, repairing and replacing major components can only increase, not decrease, over time. Noting that the manufacturer’s warranty is ordinarily 2 or, perhaps, 3 years at best – this leaves the wind farm operator picking up an ever increasing repair and maintenance tab. That (substantial) increase in the costs of operation over time (as against a fixed revenue stream set under PPAs – see below) means that it becomes uneconomic to repair and maintain turbines beyond about 12 years of operation.

In this detailed study, Gordon Hughes looked at the rapid decline in turbine efficiency, and showed that turbine output declined rapidly after about 10 years of operation. That decline was in part the product of the increased need for repairs, replacement and maintenance over time (resulting in downtime and, therefore, periods of zero output); and the natural deterioration in the mechanical componentry of the turbine, leading to decreased output as the turbine’s components wore out.

It’s that simple fact of engineering and mechanical life that led Hughes to conclude that the average (economic) life span for modern (onshore) wind turbines is about 12 years (see our post here).

The other trap laid by the Clean Energy Council is the “wind power is reducing the wholesale price of electricity” red herring – and is also reducing retail prices. To his credit, Adam doesn’t appear to fall for the trap, but we’ll deal with it anyway.

The first point is dealt with fairly simply: households and businesses couldn’t care less what the wholesale price of electricity is: they get served with power bills from retail providers which, funnily enough, involve the retail price. And there is absolutely no argument that Australian retail power prices have gone through the roof in the last decade. Australia’s wind power capital, South Australia suffers the highest retail power prices in the world (see page 11 of this paper: FINAL-INTERNATIONAL-PRICE-COMPARISON-FOR-PUBLIC-RELEASE-19-MARCH-2012 – the figures are from 2011 and SA has seen prices jump since then).

Retail prices are impacted by the mandatory RET and wind power in at least two major ways.

The first is the price fixed under Power Purchase Agreements (PPAs) struck between wind power generators and retailers. That price guarantees a return to the generator of between $90 to $120 per MWh for every MW delivered to the grid. In this company report, AGL (in its capacity as a wind power retailer) complains about the fact that it is bound to pay $112 per MWh under PPAs with wind power generators: these PPAs run for 25 years.

Wind power generators can and do (happily) dispatch power to the grid at prices approaching zero – when the wind is blowing and wind power output is high; at night-time, when demand is low, wind power generators will even pay the grid manager to take their power (ie the dispatch price becomes negative)(see our post here). However, the retailer still pays the wind power generator the same guaranteed price under their PPA – irrespective of the dispatch price: in AGL’s case, $112 per MWh.

PPA prices are 3-4 times the cost that retailers pay to conventional generators; as noted above, retailers can purchase coal-fired power from Victoria’s Latrobe Valley for around $25 per MWh – and the dispatch price ranges from $30-$40, on average.

The second is the cost of backing up wind power when it fails to deliver every day and hundreds of times each year (see our posts here and here).

Fast start-up peaking power plants – predominantly Open Cycle Gas Turbines – cost a fortune to run ($200-$300 per MWh, depending on the spot price for gas on the day).

When wind power output collapses the shortfall is made up with “spinning reserve” held by coal/gas-thermal plants and OCGTs. Bidding between generators with high operating costs sees the dispatch price quickly rocket from the usual $30-40 mark, to in excess of $300 (otherwise OCGT operators will simply not supply to the grid); and, if a wind power output collapse coincides with a spike in demand, the dispatch price rockets all the way to regulated cap of $12,500 per MWh (see our postshere and here).

Call us spoilsports, but STT is always keen to let the facts get in the way of a “good” wind industry story.