December 9, 2016

Queensland Australia's Renewable Target isn’t ‘Aggressive’, it’s Entirely Achievable

In the wake of South Australia’s state-wide blackout, Prime Minister Malcolm Turnbull urged states to avoid “extremely aggressive and extremely unrealistic” renewable energy targets.

In the midst of this discussion, the Queensland government released a draft report from an expert panel on its renewables target of 50% by 2030. Currently around 7% of the state’s electricity comes from renewable sources.

After South Australia’s misfortunes with its electricity system over the past few months, including price spikes and blackouts, some would say this was an inopportune time to be discussing aspirational renewable energy targets.

But the report provides a welcome discussion about how states can achieve their targets, without the politics and ideology. The panel consulted widely, and commissioned detailed modelling on potential credible pathways for Queensland to meet its target, as well as the economic consequences of those pathways.

Renewables at minimal cost

The cost and impact of any renewable target depends on many factors: the technology mix, how the target is met, the degree of government intervention (or assistance), the regulatory framework, and of course the demand for the electricity produced.

The analysis in the Queensland report attempts to answer a “simple” question: how do you achieve a 50% target at the lowest cost with the least impact on energy security and the maximum benefit to the state bottom line?
  • The pathways examined by the panel delivered the following outcomes:
  • on average, no net impact on household electricity prices
  • a private-sector-driven investment of around A$6bn in the state
  • a required “subsidy” of around A$1bn over the 14 years of the policies
  • no forced retirement of coal-fired generation in Queensland
  • around 6,500 full-time equivalent jobs per year
  • between 4,000 and 5,500 megawatts of new generation will be required after 2020 to meet a 50% target, based on typical wind and solar capacity factors
  • around 14,000 megawatt hours of renewables in the Queensland electricity system by 2030 with system security maintained by coal power stations.

But there are many questions remaining, and these are the questions that many in Canberra are pondering.

How to meet the target

The panel proposed a market mechanism known as a “reverse auction contract for difference” (CFD), similar to that employed recently in the Australian Capital Territory for its renewable target. Reverse auction CFDs are gathering momentum in energy markets around the world.

The basic idea is this: in an open auction, bids are accepted from investors to provide a specific amount of electricity at a pre-defined price (say for instance 100MW at A$80 per MWh for 15 years). The contracting entity (be it government or private) will contract the lowest bid, and then subsidise the winning bid with the “difference” between the bid price and the market value (in this case the National Electricity Market wholesale price).

The investor with the winning bid builds the plant and delivers the electricity. The “difference” may be positive, which ensures that the contracting entity gets paid a subsidy. The subsidy is then passed through to the consumer and the contracting entity underwrites the long term risk.

These mechanisms are a well-accepted tool for pricing and accounting for long-term risk.

The modelling done for the expert panel finds that increased competition and cheap power generation in Queensland’s energy mix will put downward pressure on wholesale prices. With a subsidy counteracted by lower wholesale prices, there is unlikely to be an increase in electricity prices from electricity generation.

Coal power still needed

The modelling found that because the Queensland’s coal power station are relatively efficient and profitable they will remain viable at lower output and continue to provide critical baseload and ancillary services.

A lack of critical baseload and ancillary services contributed to price spikes in South Australia recently.

With a robust transmission grid and interconnection with New South Wales, the Queensland transmission system is also better placed for a high proportion of renewables in the mix.

Joining up the dots

While states are going it alone, nationally Australia is also aiming to increase renewable energy to 33,000 gigawatt hours by 2020 under the Renewable Energy Target.

The Queensland report recommendations include measures to facilitate integration with federal policy, including:
  • reverse auctions in 2017-18 to increase the delivery of renewables in Queensland to meet the national Renewable Energy Target by 2020
  • engagement in the development of integrated climate and energy policy at the national level
  • developing a flexible and adaptable Queensland RET to facilitate integration with the national scheme
  • engagement with the Australian Energy Market Operator to assist with policy development.

There is little in the report to suggest any trade-off between federal and state goals.

For the last 15 years, Germany’s mature approach to renewable energy took it from 6% to 31% renewable energy in its electricity generation. In doing so, it created a renewable energy industry that employs 355,000 people. Electricity prices have increased but that is because Germany, as an early adopter, has subsidised the rest of the world’s low-cost solar panels and wind turbines.

PriceWaterhouse Coopers found in 2015 that 92% of Germans continue to support the rollout of renewable energy. This “aggressive” rollout has not impacted the reliability of the German grid. Germans experienced an estimated 12.28 minutes of outage in 2014. This figure has improved since the arrival of renewables, and indicates higher reliability than neighbouring countries.

For coal-dependent Queensland, customers experienced an average of 243.44 minutes of outage in 2014. Comparisons between Queensland and Germany are not meaningful, but Germany’s reliability statistics suggest that claims of reduced reliability as a result of high levels of renewable energy really need to be backed up by facts, not fear.

What is clear though, as pointed out almost laboriously throughout Queensland’s report, is a need for national leadership, co-ordination, and simple joined-up thinking.

The Australian public largely supports the rollout of renewable energy, so it is up to politicians to find a way to deliver.

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