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Why big energy wants to kill the LRET

LRET: Large-scale Renewable Energy Target.

 

Ever heard of the merit order effect? Readers of this column may be familiar with it, because it is emerging as a key issue in the Australian electricity sector, and a flashpoint between the established fossil fuel generators and the new wave of renewable energy technologies, and a conflict between short term profits and long term gains.

The National Electricity Market, like many around in the world, is based on a merit order, where the plants with the cheapest marginal cost of fuel get preference. They bid into an energy stack until demand is filled. The price of electricity for that period is set by the bid of the last generator into the stack.

For decades, this has meant that the brown coal generators in Victoria, shoveling in cheap and dirty coal from their doorstep, go first, followed by black coal, gas, and then gas peaking stations when demand is really high. But the rollout of renewables has changed those dynamics, because their marginal cost of generation is next to nil, so they go first, forcing other generators further up the stack, meaning prices are pushed down, and some fossil fuel generators miss out altogether.

This has been a well documented effect in Europe and elsewhere, and is considered a virtue by the International Energy Agency, which says the merit order effect has meant that cost savings on wholesale energy prices have, in some cases, more than compensated for the cost of the subsidies that got the renewables built in the first place. Looked at another way, EU Energy Commissioner Günther Oettinger said this week that this means the ultimate cost of completely decarbonising the grid by 2050 is the same as business as usual, as the higher upfront cost is offset later by the lower running costs.

This is good. But in Australia, the established energy industry considers it to be evil, because it threatens the very business model of current and future fossil fuel generation investments.

The depth of their feeling was revealed in the draft energy white paper released earlier this week. The Investor Reference Group, which includes some of the major generators, market regulators, bankers and bureaucrats, said it is concerned about the “suppressing” impact on wholesale energy prices caused by the deployment of renewables, which are supported by the LRET.

To know more, read Climate Spectator's full story.

 

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