Senator BOSWELL (Queensland) (9:18 PM) — I seek leave to speak for 20 minutes.
Senator BOSWELL —We are going on leave in a couple of days, and it is probably time that both the government and the coalition reviewed some of their policies on power. If the government does not review its policies on power, then power prices, which are already skyrocketing because of factors beyond our control, will go up even further because of factors that are within our control. Every dollar spent subsidising wind power is ultimately another unnecessary dollar on our power bills. We should be doing everything we can to reduce rather than to increase the rate of growth in power prices, but we are doing the opposite.
The government is attempting to engage in massive subsidisation of wind. The subsidy it is trying to implement is off the budget, but if it is successful it will be on consumers’ power bills. It works like this: the government has put an effective floor on the price of renewable energy certificates for the large-scale renewables sector, and it is a very high floor. If the liable identities who have to account for the government’s renewable energy target of 20 per cent by 2020 fall short, they will be hit with an effective 90 per cent penalty for every megawatt hour they fall short.
That is a bid to ensure that the generators of wind power not only get whatever the market rate is for power on the day but also have a renewable energy certificate worth up to $90. That is a fantastic subsidy and a magnet for investment. Depending on the power price at any given time, that figure is double—or perhaps even triple—the value of the product that is being generated, and it will ultimately end up on consumers’ power bills. The liable identities are the ones who will play up front, but in the end it will flow through, and it will be a big flow-through to industry and to householders.
It is estimated that around 40 per cent of the renewable energy target will come from wind farms. That means that the government is targeting about 18,000 gigawatt hours of wind. So far, the existing wind farms are capable of generating only around 1,700 gigawatt hours. That means that turbines capable of generating over 16,000 gigawatt hours will have to be built between now and 2020. There are plenty of people observing this industry who say that the government will have to be even more reliant than that on wind, and the cost of wind power under the government’s policy will be enormous because of a number of factors that drive the level of that subsidy and make wind such an expensive nonsense.
For example, AGL, in partnership with Meridian, is building one of the first industrial scale wind farms in the country at Macarthur in Victoria. It will have an installed capacity of 420 megawatts, and the companies say that the total cost will be around $1 billion. The construction cost will therefore be $2.4 million per megawatt—that is, about 2½ times the cost of the construction of either a gas generator or coal-fired generator.
The only way that ridiculously high construction costs can lead to profitability for investors is if there is a big public subsidy—and they are getting it. The industry expectation is that the renewable energy certificate price will quickly reach the default level set by the government. In today’s terms, that means wind energy will cost anywhere from around $110 to around $150 per megawatt hour, which is made up of the actual price achieved on the market for the power produced plus the REC price, which is the REC subsidy. Why would anyone in their right mind, given the other pressures on power prices, force householders to pay more than twice the going rate for power?
The fans of wind energy, and they obviously include the government, suggest it is a good idea because wind power is emissions free. Looked at simplistically, wind is emissions free—but that is only superficially true. Wind farms are not emissions free because wind is an intermittent and unreliable source of power. When the wind blows at just the right speed you generate power, but if it blows too hard or at less than a certain speed you do not. It if is not blowing at all, which is the case much of the time, you cannot generate power. Because it needs such particular conditions in which to operate, conditions that are just right, the rule of thumb around the world is that wind turbines will be producing power about 20 to 30 per cent of the time, relative to their installed capacity. This results in a capacity factor for wind of around 0.2 to 0.3 compared with a gas or coal fired plant, which can have a capacity factor closer 0.8. In other words, the annual power output of a 100-megawatt wind farm, measured in megawatt hours per year, is actually the output you would expect from a 40-megawatt coal or gas fired generator.
The cost of construction of that wind power is around $2.5 million per megawatt and the cost of the coal or gas fired capacity is around $1 million per megawatt, give or take a take a couple of hundred thousand dollars. In other words, you have to spend $250 million in up-front capital costs to get your 100 megawatts of installed capacity of wind, but you can get the same energy output by spending just $40 million to install 40 megawatts of coal or gas fired power.
That is just the beginning. With a coal or gas fired plant, you turn it on and it works—it generates power. When you want power, you simply fire up your generators. With wind farms, you are at the mercy of the wind. You do not know when the wind is going to blow; you therefore do not know when you are going to get power and when you are not. But when the wind blows you will have power whether you need it or not.
This unreliability means that you have to have highly reliable, conventional fossil fuel fired generators, either spinning or ready to fire up at a moment’s notice, to step in and take the place of wind farms. Grant King of Origin Energy has estimated that, to manage this intrinsic problem with wind and to plug that gap, we will need to have somewhere around 6,000 to 7,000 megawatts of conventional plant in the system over and above what we would otherwise need. There is a valid debate about the numbers that King has used but certainly not the principle. The debate around the numbers engages several factors. Firstly, currently, because of the doubt about the future pricing of carbon, major new baseload power generating capacity simply is not happening. Construction presently underway is largely open-cycle gas—think of a big jet engine bolted to a slab. They are expensive to run and only really come into play when the power price goes through the roof at times of peak demand.
Because Australia’s energy consumption is becoming ever peakier, as more and more homes have air-conditioners in particular and because of the drought in construction of baseload plant, we are heading towards a situation where we are going to have a lot of peaking plant. Friends of wind suggest that this will reduce the need for specialist plant to balance wind, in the medium term at least—and they may be right. We might not need 6,000 or 7,000 megawatts, but even if it is 4,000 megawatts that will still be around $4 billion over the next decade or so that we would not otherwise have to spend. In any event, the emissions from running that plant to balance the intermittency of wind make a mockery of the suggestion that wind is going to lead to a significant emissions abatement—it will not. Whatever the wind proponents say, it is a universally held view that balancing wind in any system where it becomes a significant generator requires additional conventional fossil fuel based generators to balance it.
But even those two factors—the very high capital cost associated with building wind generators and the need for conventionally fired backup—are not the end of the story. Another additional cost in relation to wind is the effect of joining wind farms to the grid. They are often remote from the grid structure and, to date, they are often very small and all have to be connected to the grid. Keith Orchison, a former senior power executive in Australia of long and very distinguished standing, suggests the cost could be between $12 billion and $15 billion. Again, there is valid discussion around the numbers, but again the principle is not open to debate. As wind power expands we will have to join generators up to the grid, and that is going to involve a cost. In the final analysis, almost half the price of power reflects transmission and distribution costs.
There are three big factors around why wind is expensive. First, there is the high capital cost; second, there is the need for fossil fuel based backup power to keep the lights on when the wind drops or does not blow; third, there is the high cost of connecting remote and often small wind farms into the transmission infrastructure. Grant King says that the overbuild could be 6,000 to 7,000 megawatts, which, in round figures, is $6 billion to $7 billion. Keith Orchison says the additional transmission costs could be $12 billion to $15 billion. Combine those and, at the lower end, they are talking about additional spending of $18 billion and, at the top end, they are talking about an additional $22 billion. We require that sort of increase in our power bills like a hole in the head.
We are already facing massive pressures on our electricity prices. Some of them we can do nothing about—they are built in. For example, we cannot wind back the clock on the huge neglect with respect to transmission infrastructure, especially in New South Wales and Queensland where, under the guise of reform, there was a corporatisation of power entities. That process goes back to the days of national competition policy. Governments made their business operations perform more like the private sector. There were meant to be massive efficiencies and prices were meant to drop. The reality has been very different.
The New South Wales and Queensland governments, especially, simply used the disguise of reform to find a new source of revenue, in the form of dividends and income tax equivalents, loan guarantee fees and special dividends that they imposed on their corporatised businesses. That enabled them to go on spending like drunken sailors, without having to put other taxes up. At the same time they baulked at what Fred Hilmer had in mind and maintained their price controls on power, especially on domestic power. State regulators controlled their investments in infrastructure to ensure that they did not threaten next year’s dividend to the government. Queensland still clings to those sorts of controls. The politicians in New South Wales devised IPART to get themselves at arm’s length from the unpopular decisions that had to come in that state—when they could see that the pressure could no longer be contained.
Similarly, there is nothing much we can do about another of the big drivers in what is now increasingly expected to be a doubling and even a tripling of power prices over the next few years, and that is the increase in the price of fuel. Demand is driving coal and gas prices towards world parity.
An issue we can control, at least for the foreseeable future, is a price on carbon. That is another factor that is clearly, inevitably, causing uncertainty in the whole arena. Generators are telling us that they cannot and will not commit to big new baseload projects, involving the expenditure of billions of dollars, without certainty about the future of a price on carbon. The simple fact is that nobody—and I mean nobody—can give that to certainty to them. It is clear that the world does not have the slightest idea about what is going to happen about a price on carbon. It is one thing to be convinced, as some are, that there will be a price—though many are not convinced—but just what it will be and when and how it will be applied is, as Donald Rumsfeld might say, known unknown. No public statement declaring certainty, no policy statement declaring certainty and no legislative declaration of certainty can be worth the paper it is written on, this side of a global agreement covering all major emitters—and that is obviously not something even on the medium-term horizon.
The only way the generators will get certainty is if this government makes yet another move that will push power prices up—if it is prepared to unilaterally put a price on carbon in Australia. Barring the clear possibility the government will do that, and destroy the economy in the process, Australia has few choices. If the private sector will not build power stations then someone has got to build them. We can build coal and gas fired power stations, as China is now doing, that are at the leading edge of technology for the sector. We can finally engage in the debate we have to have on nuclear power. We can dump roof-top solar, which is now totally discredited as a sensible way to reduce emissions. We, the coalition and the Labor Party, have to thoroughly investigate wind as an option before we tie our industry to an expensive way of generating power that will kill our industry and cost jobs for our children and their future.