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« Cooling off at the Grantham Institute | Main | Belgium shows us the way »
Monday
Aug182014

The cost of wind

An article in the Australian Financial Review takes issue with the Abbott government's plans to scale back subsidies for the renewables industry. The counterargument goes that renewables doesn't actually add very much to the cost of an electricity bill, but I was interested in the graphic that accompanied the article, which breaks down the typical Australian electricity bill.

As far as I can see, nearly every single component cost of the bill is increased by renewables.

  • Conventional power stations are forced to ramp their output up and down to compensate for mometary drops in wind, making them much less efficient. Worse, if wind power is subsidised sufficiently to get a lot of turbines connected to the grid, the economics of conventional power stations can be sufficiently adverse to prevent any new investment in new power stations that would take advantage of price reductions in other forms of energy and would also bring more efficient and therefore cheaper power to consumers. In the UK, this has led to the capacity market, in which all market participants will be subsidised.
  • Wind is a dispersed form of energy generations, requiring prodigious quantities of power lines to connect the turbines to the grid.

Only the costs of the retail end are not obviously inflated by renewables.

It would be interesting to know how much of the 52% represented by network costs is inflated by the need to connect wind turbines to the grid.

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Reader Comments (14)

Well I'm in Australia, and I don't know where they get 28.89 c / kW-hr from, because my rate is closer to 40 c / kW-hr. The summer peak rate is 45 c / kW-hr. (Hence my decision to put rooftop solar on, payback time for me assuming no feed-in is < 8 years).

Some parts of Australia have been spending a lot on "poles n wires" because the regulated environment causes a gaming-of-the-system by that segment, where they get a regulated rate of return (which is greater than the cash rate), thus it makes perfect financial sense to spend up big to get the returns. The shareholders (thats me by the way) love it. The consumers don't.

Most of that poles-n-wires spend is in the lower voltage distribution networks, not the wholesale / high voltage networks at the generators (incl wind). Thus that portion is, I think you will find, close on insignificant.

There are a stack of other big problems with Australian generation and renewables and most vested interest analysts miss the mark somewhat. It also varies a great deal from state to state as each have their own regulatory environment.

To a large degree this is all a set of unintended consequences arising from 2 things: a privatisation of previously state-owned assets (planned for the long term benefit of the population not the commercial activities of a stack of operators); as well as regulatory environments set up to try and get some kind of outcome but which lead to system gaming.

Aug 18, 2014 at 9:09 AM | Unregistered CommenterWally

My vague recollection from years back is that, in the UK, the cost of distribution was (is?) roughly the same as the cost of generation ie a ratio of about 1:1.

I suppose the geographical extent of Aus might explain the 52 : 19 ratio of transmission costs to generation cost but I was surprised all the same.

Aug 18, 2014 at 10:11 AM | Registered CommenterMartin A

"Only the costs of the retail end are not obviously inflated by renewables."

Even that statement is incorrect.

All the retail premises, offices etc have to use & pay for power. [Even if it is a paper-work exercise.] That (extra) cost is passed on to every consumer.

Aug 18, 2014 at 10:31 AM | Unregistered CommenterJoe Public

Surely if renewables don't cost that much then ALL subsidies should be removed.

Regards

Mailman

Aug 18, 2014 at 11:08 AM | Unregistered CommenterMailman

Mailman
Report tomorrow morning for your lobotomy, please.

Aug 18, 2014 at 11:29 AM | Registered CommenterMike Jackson

I thought the carbon tax had been repealed, although I suppose it will take a lot longer to undo than it took to enforce...

Aug 18, 2014 at 11:39 AM | Registered Commenterjamesp

Wally has a somewhat rose colored view of the past performance of the Australian power generators. When they were state owned they were a wholly union controlled industry and the unions exploited their monopoly power without restraint. Privatisation reduced a bloated workforce in Victoria from something like 6000 to 2000. That gives you a sense of scale with regards to the waste built into the system by the unions and their government pals.

Left to market forces, power costs would obviously have come down given those cost savings. But what government would ever dare to let the market do the work.

Aug 18, 2014 at 11:41 AM | Unregistered CommenterMr Black

"costs of the retail end"

Also complicated by all the extra tariffs, subsidy slicing and accounting. And the associated wage bill.

Aug 18, 2014 at 11:42 AM | Registered Commenterjamesp

JoNova has a post on this that is well worth reading. It also contains a link to a post by Professor Judith Sloan pointing out that ...

It is getting to the point that the Fin cannot be regarded as a serious financial newspaper when its lead story essentially picks up the press release of rent-seeking wind farm operator Infigen Energy, which arose from the ashes of one of the satellites of Babcock and Brown (say no more).

And quoting ‘research’ (independent modelling – hahahahaha) by the Climate Institute – pleeease

Aug 18, 2014 at 12:10 PM | Registered CommenterGrantB

Mr Black...

When the power utilities in Oz were privatised, power prices were promised promised promised over and over by the pollies wot done it... to come down. They did not. Yes, the workforces were slashed and the union power was busted. But in the end the major change was that a single utility owned everything, and this was split into about 7 entities: where I live, 3 generation companies, HV distribution, LV distribution, and initially 2 retailers. It didn't take a great deal of rocket science to work out that:

before sale: margin was about 10% on the total business, ie whats sold to end consumers

after sale: each business wanted margin, and compound interest tells the result: expect price should go from Y where (Y = X * 1.10) for the pre-sale margin, to and after sale result of Y = X * 1.1 (generation) * 1.1 (HV distribution) * 1.1 (LV distribution) * 1.1 (retailer). Thus 110% morphs into 146%.

At the time of the sale I wrote a snotty letter to a local talk back radio show who used to grill the pollies, setting out the above prediction.

And lo, within 18 months my prediction had come to pass.

Where I live power prices have MORE THAN DOUBLED in under a decade. Partly privatisation (power used to be run for the public good with little expectation of a commercial return); partly silly policies. As I stated.

I'm not advocating a return to the previous ways, but to claim that its all well and good in a private market is likewise naive. We have a regulated private market right now, and its being gamed. The poor old public are the mugs who suffer. Hence.... if you can't beat em, join em. Buy shares in the local distribution company. Pays a loverly fat dividend thru thick and thin.

Aug 18, 2014 at 12:41 PM | Unregistered CommenterWally

"It would be interesting to know how much of the 52% represented by network costs is inflated by the need to connect wind turbines to the grid."

=============

That is an inconvenient question. Much sweat may be generated that is not due to any temperature increase/decease caused by the theoretical or theatrical global warming.

Aug 18, 2014 at 5:23 PM | Unregistered Commentereyesonu

Getting rid of the carbon dioxide tax is only part of the solution. The mandatory Renewable Energy Target is another deadweight cost that consumers have to pay for. It is being reviewed, but may remain because of an unpredictable Senate, which needs to sign off on its removal.

Aug 18, 2014 at 7:49 PM | Registered Commenterjohanna

Your family is paying $260 a year on useless green power
http://blogs.news.com.au/couriermail/andrewbolt/index.php/couriermail/comments/you_are_paying_260_a_year_on_useless_green_power/

[T]wo studies of the RET have independently placed its net present value cost at $29-$37 billion. Even if it were closed today its costs would be $6-$16 depending on the assumptions…

In terms of the direct impact on electricity consumers, the burden of renewable requirements this year is estimated by the energy regulator to add 12 per cent to the average household’s electricity costs. That’s about $260 per year.

Aug 19, 2014 at 8:45 AM | Unregistered CommenterStreetcred

Wind and solar are very compatible with local generation in villages such as in third world countries where the cost of a distribution network and protecting it would drive costs even higher.

As to turbines being blights on the landscape, power lines are everywhere

Aug 20, 2014 at 7:36 PM | Unregistered CommenterEli Rabett

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