• Was the private hospital diagnosis this results season as unpleasant as this year’s flu season? read here

The three myths driving the national energy debate

12092017 energy debate

The three myths driving the national energy debate

It’s hard not to shake your head in disbelief at the misinformation and spin being peddled by our politicians around an issue that is dominating domestic political debate: energy policy and prices. In this blog, I’m going to tackle three big myths that some of our leading advocates would have you believe.

(I won’t be talking about the other big national debate going on right now – gay marriage – which, according to this writer, should not be an issue/debate at all as it should just be settled by a court deciding that it is not ok to discriminate against a certain portion of the population.)

Coal is the cheapest form of energy

This is not true if we include the cost of construction. Goldman Sachs shows it well in the chart below through showing the Levelized Cost of Energy (LCOE which is a measure of the lifetime cost of energy including construction and maintenance cost) for different types of energy. Solar and wind are indeed the cheapest cost of energy to construct for new energy and hence the people calling for Australia to build new coal fired power stations have, even if we disregard the long-term climate change costs, no leg to stand on. Even at current gas prices, it does not make sense to build coal fired power stations!

Screen Shot 2017-09-11 at 11.21.41 AM

One should also be aware that even just keeping a power station operating past its scheduled life can cost significant amounts of money. Prime Minister Malcom Turnbull has during the last few days had a public spat with the CEO of AGL, which owns Liddell power station, about operating the station past its scheduled closure in 2022. Liddell opened in 1972 and is currently 46 years old and will be 50 by the scheduled closing time. Maintenance scheduling for a power station is a very complex science and to decide to extend the life relatively close to scheduled closure date can involve a significant investment, meaning that the cost of that power can very well be higher than burning gas in a gas power station. Now, I do not propose to have any detailed insight into the cost of extending the life if Liddell by another 5 years, but based on the figures I am familiar with from the Northern Power station in South Australia, it will most likely be in the 100s of millions of dollars.

Recent increases in energy prices are caused by the increase in renewable energy generation

Without going into too much detail on how the National Energy Market (NEM) works, it is neither coal nor renewable generation that sets the electricity price. Coal runs as a base load with low marginal cost and renewable generation has zero marginal costs and both types of generation is, in the short term, not really dispatchable (being able to be ramped up or down to respond to demand). Due to its easily dispatchable nature, it is gas generation that sets the electricity price, especially when demand and prices are high.

It has been obvious for a long time that the cost of renewable energy would come down significantly over time and eventually become by far the cheapest source of energy as well as by its very nature not having any greenhouse emissions. The policy for a long time has therefore been to transition the electricity generation to renewable energy and away from coal for both economic and climate change reasons. Given the unpredictable nature of the generation from solar and wind and the high cost of energy storage at the time (battery storage costs are coming down rapidly but are still not at a level where it makes commercial sense to deploy at large scale – I believe we will get there within 3-5 years depending on the technological progress driven by electric cars). Pumped storage costs are not coming down at all so the decision to invest untold billions in Snowy Hydro 2 looks very strange to me as by the time this is finished, the cost of battery storage and solar generation will likely be significantly reduced so this has the potential to become a big white elephant, the decision was taken to use natural gas (methane) as the transition fuel before a full transition could be completed.

Natural gas has certain advantages over coal:

  • It is much quicker to ramp generation from a gas power plant than for a coal power plant (5 minutes vs. 6-18 hours) meaning that you can match the generation much better to the actual need and not run excess generation.
  • It is a much cleaner burning fuel with much lower emissions of both greenhouse gasses and particles.
  • Australia has plenty of reserves of natural gas.

This was very sound policy but, unfortunately, the implementation of the policy was very flawed and that is why we are seeing the very high electricity prices today. So, what was wrong with the implementation?

The main problems were:

  • The most fundamental problem was that at the same time as natural gas was supposed to be used as the transition fuel, the Liquefied Natural Gas (LNG) export industry started up on the west coast of Australia through 3 consortiums constructing LNG export facilities on Curtis Island in Queensland.
  • Now, exporting things that we find in the ground is what the majority of foreign income for Australia is coming from so this is not a negative in itself but indeed a significant positive for Australia.
  • The problem was that the exporters were allowed to sign up export contracts on more than the gas reserves/production they had themselves. Santos in particular committed to much more export than they themselves could produce and hence they have had to buy gas in the domestic gas market to cover their export commitments (if we look over to Western Australia, they also have a big LNG export industry but they have a domestic reservation policy in place and domestic gas prices are 1/3rd of what east coast gas prices are at the moment (~$4/GJ vs. +$12/GJ)).
  • This led to the domestic price of gas being reset to (at least) the export price less the cost of liquefaction and transportation. The companies that has extra capacity to produce above their export commitments (Shell in particular) has held back developing new wells as they can drip-feed the domestic market with gas and keep prices high and make good money without depleting their reserves and domestic gas prices are indeed higher than the customers in Japan and Korea are paying for the same gas.
  • The three competing consortiums were allowed to all build their own LNG export infrastructure in the same place next to each other. This lead both to higher capital costs that needs to be recouped and no incentive to trade with each other to optimise the production of gas.
  • At the same time, NSW and Victoria have in effect banned development of coal seam gas which further reduces the available gas supplies to the east coast from the non-LNG exporters.

The lack of coal power caused the South Australian blackouts

Quite a few politicians keep blaming the lack of coal power in SA for the power blackouts last summer despite the clear conclusions in AEMO’s report that it was basically a combination of 2 factors:

  1. Two tornados that almost simultaneously damaged two transmission lines over 170km apart (please note that both of these lines were south of the Port Augusta power station so having the coal power station working would most likely not have helped as the majority of demand in SA comes from Adelaide).
  2. This caused voltage dips in the network that because of bad programming in their protection systems caused 8 wind farms to turn off resulting in 456MW reduction in generation.

This lead to an overload of the interconnector to Victoria which shut down to protect itself and this caused the black-out of the SA power system.

Granted, having the coal power station on-line might have helped a little bit but the main cause of the black-out was the tornados that destroyed power lines south of Port Augusta. We should also note that Pelican Point, the gas fired power station in Adelaide, was operating at much less than half capacity due to the high price of gas making it uneconomic to run.

I will stop there but these are at least three misconceptions being spread that you should have in mind when listening to the debate.

PS, I will finish off with a TIP! If you have not shopped around for a better deal on electricity or gas within the last year or two, you are to a very high likelihood paying too much and if you have never shopped around, you can with almost 100 per cent certainty save 10-15 per cent on your bill with just a few phone calls.

If you think you are, go to www.energymadeeasy.gov.au and check which are the cheapest three suppliers in your area and for your usage.

Do not sign up directly but call each of them up and negotiate and play them off against each other.

Once you have established the best offer in the market, call your existing provider and tell them you have been offered a better deal and ask them to beat it. Losing a customer is very expensive for an energy company as it costs them a lot in marketing cost to replace that customer and they will be able to negotiate significantly to make sure that that does not happen.

Andreas is a Senior Analyst at Montgomery Investment Management. Andreas joined from Navigo Partners, a M&A advisory firm in Stockholm, Sweden where he was a Director responsible for origination and execution of Scandinavian projects. Before this, he worked for three years in corporate strategy at Alinta Energy in Sydney.

INVEST WITH MONTGOMERY

Why every investor should read Roger’s book VALUE.ABLE

NOW FOR JUST $49.95

find out more

SUBSCRIBERS RECEIVE 20% OFF WHEN THEY SIGN UP


This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary.

14 Comments

  1. One more thing, after recently reading an article describing how some large pension funds overseas are pulling investments from fossil fuel production based not on the out look for lower or higher returns but rather on idealistic views of the management staff and also how banks here in Australia have publicly distanced them selves on social media etc from projects involving fossil fuels here in Aus. Is this artical and Rogers statements of Late eg “coal is dead” on radio etc, a simple attempt to be seen as a good corporate citizen complying with the current popular trends and discussion around these idealistic and very emotional topics ? If so you guys are smarter than I thought ! (Which was very smart to begin with) it makes sense to me and dollars to you I guess. So Yaaaay for the gays and rainbows and jail the coal miners. No offence intended just have a laugh about the world.

  2. Makes me wonder why the Chinese are building 1600 new coal fired power plants in 62 countries around the world to increase coal fired power production by %43 percent globally according to the New York Times and specially when they are the leaders in solar cell manufacturing and battery manufacturing and wind turbine manufacturing, maybe they know something we don’t, and my guess it’s simply economics that are not distorted by government green energy targets schemes and over regulation etc of emissions etc etc .Also the only reason solar production costs have come down so drastically is because they are mostly being manufactured at below cost of production due to over capacity in mainly china and these companies are being artificially kept alive by the Chinese government which own most of them. Also if you think Battery’s are the answer why don’t you ask a few tradesmen how long they last, I’m one of them and my experience says about 2 years max , so maybe factor that cost into the green power cost and see how it looks then. I’d say the Chinese have done exactly that (I mean they have seen all the warranty claims) and decided to stick to coal, in the end we should let markets decide what is best.

  3. Why do we need an RET or Paris Accord to force people onto renewables.

    Was there an equivalent for;
    Horse and buggy to the motor vehicle,
    Abacus to the calculator,
    Typewriter to the computer?

  4. Andreas, Roger,
    I might be alone on this matter but if I want advice on gay marriage or the politics surrounding the energy crisis in our country I will switch on the TV or buy the appropriate “left/right” leaning newspaper to get my fill of fake news. If I want to get my fill of investment advice/knowledge I visit Roger Montgomery blog. Not sure I understand your reason to step into uncharted waters…………………
    And by the way, I have spent 40 years running Oil Refinery’s, LNG plants and Power Stations. There are numerous sides to this energy debate of which the majority displayed in your article I would classify as academic. Enough from me.

    • I am more than happy to hear the teams thoughts on any topic. If you don’t like MIM presenting their views on this topic Lester, I suggest you just skip to the next article than boring us with your pointless post.

  5. On a similar vein, I am strongly against nuclear energy for the following reason:

    I had the great pleasure of visiting Tarquinia , which is an Etruscan site north of Italy where there are several tombs with beautiful fun loving frescos on the walls dating back to around 500BC.

    I said to my wife “do you realise that If the Etruscans had nuclear energy, we would still be looking after their nuclear waste even today 2500 years later!! ”
    Just a thought
    Cheers
    PeterB

  6. Did they include in price this:

    If the wind doesn’t blow, there’s no power.
    If the sun doesn’t shine, there’s no power.

    fossil fuels as backup

    millions in solar and wind Subsidy

    Renewable energy increase will require use of more fossil fuels.

    We all love the environment and we all want to protect Mother Earth. We’d all prefer to sound like we’re good people at dinner parties. But believing in green fairy tales won’t keep our lights on – or our furnaces running.

    And by the way can you point to see their research papers to see how they calculated all this.

    thanks ned

    • Oh don’t bother with facts Ned, it’s believing that matters ,just ask Elon Musk the smartest man in the world, economics are just so yesterday and very boring to, didn’t you know that’s what the taxpayer is for, they look after all that debt and money stuff and if they can’t handle it their kids will pay later, so try to stay focused mate.

  7. Paul, buying off the “cheapest supplier” is not helpful advice when they are all far too expensive.
    This issue has been extremely poorly managed and is in danger of crippling our economy as well as causing unfair hardship on many households.
    A national disgrace.

  8. Yes, the South Australian blackouts of 2016 occurred as a result of storm damage to electricity transmission infrastructure on 28 September 2016 and again in December 2016. However, on 8 February 2017, another series of rolling blackouts occurred across the state during a severe heatwave. This was the classic scenario that many experts have warned us about. Demand was very high due to the heatwave. But the wind dropped significantly during the afternoon and by 6pm wind generation was very low (only 96MW available from an installed capacity of 1595 MW, or 6% of capacity) and solar generation was also low (157 MW out of a capacity of 705MW – it was 6pm and the sun was low). The interconnector to Victoria was at maximum and so load shedding occurred. This event demonstrated the very high risks that South Australia have taken by closing down their main baseload generator (Northern Power Station) and relying on intermittent power generation (if the wind stops, the power stops…). It is rather ironic that the SA Government is now rushing to install a large number of ‘dirty’ diesel generators to avoid similar incidents this summer. Recent AEMO predictions indicate that power shortages in SA and Victoria are once again a possibility this summer and also in the summer of 2018-19.

  9. Ultimately, the nation requires power generation that is available 24 hours a day, 7 days a week, not just when the wind is blowing or the sun is shining. This is called dispatchable generation. So a proper assessment of different energy options must include the costs of providing dispatchable power. So, when assessing intermittent generation such as wind or solar, the cost of providing energy storage must also be included. As you have pointed out, Hydro storage is expensive, and there are a limited number of viable sites across the country. However, battery storage is even more expensive. I believe Elon Musk’s batteries for South Australia will come at a total cost of about $50-100 million. But this only provides 100 MWhrs of storage. To power South Australia through one windless night would require about 12,000 MWhrs, at a cost $6 – 12 billion. The cost of energy storage for the larger states is many times higher. IN summary, an initial cost analysis might indicate that renewable energy is cheaper than coal or gas, but only if you don’t mind the power being available on an intermittent basis. Producing ‘dispatchable’ renewable energy is the big challenge, both technically and economically. Base load coal or gas generation will be essential until we crack the energy storage dilemma.

  10. Hi Andreas

    I wasnt fully across what was causing the high power prices/power supply issues so found your article extremely educational – thanks.

    Sam

  11. I’d still prefer no government policy and the governments keep the hell out of power supply altogether. I’ll buy off the cheapest supplier and others can get a hamster to generate their power if they choose

  12. Andreas,

    you should incld a price on “intermittancey” …..

    Sadly, politics gets in the way of making rational decisions……

    rgds
    simon

Post your comments