Energy policy based on feelings doesn't help consumers
Just as many politicians choose to ignore the evidence of criminologists when designing crime prevention policy, the majority of Australian politicians choose to ignore economic evidence in the design of Australian energy policy. That's OK. There's no mention of role of evidence in the Australian Constitution and there's no obligation on parliamentarians to base policy on anything other than the way they feel.
[This article was first published by the Australian Financial Review - here]
Many Australian politicians feel that coal-fired energy is reliable and cheap and that renewables are unreliable and expensive. Again, it's OK to feel that way, but such feelings are doing nothing to help lower the cost of electricity. Of course back in the 1990s a lot of politicians felt that deregulation of the electricity sector would lead to cheaper electricity. But those feelings didn't help Australian consumers either.
Australia doesn't have a problem with the provision of baseload power but it does have a big problem with the provision of peak supply during the periods of peak demand when temperatures, and the profits of electricity generators, soar. Which brings me back to the feelings of those politicians who believe that coal is reliable and cheap. Let's deal with reliable first.
Fossil fuel power stations don't work as well in the heat. Coal and gas generators rely on cooling systems that make them less efficient in hot weather and increase the risk of breakdowns. During last February's heat wave fossil fuel-based power stations failed in NSW, SA and Queensland, and most of these failures were heat-related. In NSW 20 per cent of coal and gas generation (2438 MW) failed on February 10 during the peak demand period.
And then there is cost. While the cost of renewables and storage continues to fall, the cost of building coal-fired power stations is actually on the rise. But the real problem for those who prefer market-based decisions to the feelings of politicians is how quickly renewables can be rolled out. Building a greenfield coal-fired power station means laying out cash for seven years before any revenue comes back. New solar and wind with storage can be up and running in a year. In a world where time is money, coal-fired power stations are just too slow to be a good investment.
Ten years ago electric cars were considered pie in the sky and the idea that passenger would travel between cities without petrol was widely mocked. But China now has mandated that 10 per cent of cars sold in 2019 must be electric or hybrid. All new Volvos released after 2019 will be electric or hybrid and Norway plans to phase out new petrol cars completely within seven years. Things change fast, no matter what powerful politicians feel.
But while voter support, consumer demand and rapidly falling costs are radically changing the world's electricity markets and automotive markets the feelings of politicians can and will influence the pace of that change – even if they can't stop the direction. While supporters of coal are pushing for new subsidies for new coal-fired power stations that might be up and running by 2027 supporters of cheap and reliable electricity such as Audrey Zibelman, the head of the Australian Energy Market Operator, are pushing for new rules to create incentives to supply more electricity at peak times and to pay energy users who choose to use less during those same peaks.
While electricity market rule changes might not feel as important as sticking a silver shovel in the ground at the site of a power station that will open in a decade electricity market rule changes have the potential to deliver cheaper, more reliable power in a short period of time. They should be the priority.
But just because we have good options doesn't mean we will make good decisions. Decades of being "tough on drugs" have done nothing to keep drugs off our streets and decades of advertising the benefits of a healthy diet have done nothing to slow childhood obesity rates. If Australian politicians want to ignore the evidence about the costs of coal and the benefits of embracing renewable energy no other country is going to step in. Indeed, manufacturers in other countries will benefit from our poor decision making.
Richard Denniss is chief economist at The Australia Institute @RDNS_TAI