Modelling, Schmodelling - how to rationalise policies that would destroy the economy

In a reprise of the feeding of the 5,000 with five loaves and two fishes, the Energy Security Board has offered salvation for the Australian economy with the National Energy Guarantee (NEG).

A cunning scheme has been developed by the alphabet soup of acronymic agencies charged by the government to prepare a plan to regulate the electricity market. The objectives are to gradually remove the lowest cost (coal) generators, thereby reducing emissions, while lowering prices and raising reliability.  All at the same time!

Modelling commissioned by the quangos responsible for devising the policy forecasts great price reductions from what is a new version of the government regulatory interventions that have caused such distress over recent years.  The earlier modelling outputs projected similar bonanzas from the regulations their sponsors supported. No modeller picked the 2015-17 doubling of prices in the wake of the subsidies to renewable energy - and that's because the models assume the losses forced on (coal) generators from the subsidies to wind/solar will be carried indefinitely. 

Underlining the fragility of modelling, the “Guarantee” or emissions intensity carbon tax at the heart of it was estimated to result in a 2030 price of $115 per MWh by Jacobs in 2016, $52 by Frontier in 2017, $68 by Jacobs in 2017.  The latest modelling by ACIL Allen estimates the 2030 price to be $48 per MWh.

The rationale for the NEG is that it provides certainty on top of the supposed lower costs of wind/solar and as a result borrowing costs are lower and these get passed on in lower prices.  There are several problems with this

  • There is no way that the NEG will not be changed by a different government, even the same government if it sees a reason to do so.
  • Minister Frydenberg, in yet another leaked document, has signalled that the 10 year guarantee can be five years, undercutting the NEG’s supposed certainty.
  • The data underlying the ACIL Allen forecasts is inconsistent with the certainty driven by the NEG: all the new generation is rooftop solar which, if the ACCC report is to be accepted, will see the subsidies removed from 2021; there is no new fossil fuel generation and AGL is assumed to maintain its price-boosting decision to withdraw the Liddell power station from the market rather than sell it to a rival.

The ostensible rationale behind this new intervention is the reduction of greenhouse gases, (the reliability provisions are unnecessary as retailers will pay insurance, “firming contracts”, without regulatory direction). Even as a greenhouse abatement , the NEG, on its own numbers fails.  The model shows only a trivial reduction in emissions without the NEG because the costs of wind/solar are assumed to be cheap but not so much so that they can survive without the RET/carbon tax subsidies.

The farce is that this plan has nothing to do with climate change, its ostensible justification.  There is no provision for emission obligations to be sold overseas to accredited (ahem!) sources and very limited, if any, possibility of firms acquitting their requirements by paying other sectors to do so more cheaply. The plan is concocted to pursue a 30 year dream under which renewable energy, always on the cusp of commerciality, displaces all that archaic and politically incorrect energy derived from fossil fuels and uranium. 

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