In the Victorian Government's pre-Christmas issues paper, "Driving investment in renewable energy in Victoria", ministers John Thwaites and Theo Theophanous said "the Victorian Government has already committed to" two new renewable energy polices. These were that:
- Renewable energy is to comprise 10 per cent of Victoria's electricity consumption by 2010.
- The Government will facilitate the development of up to 1000 megawatts of wind energy by 2006.
These initiatives come on top of a galaxy of subsidies, supports and concessions already in place. These measures -- established at both state and federal levels -- are designed to assist exotic forms of renewable energy, especially wind power, that cannot compete in the market.
Several political entrepreneurs, including at least one union super fund, seem to have persuaded the Bracks Government to force consumers and taxpayers to provide subsidies for windmills. The primary objective is to reduce emissions of carbon dioxide. Sometimes, however, proponents of wind power argue that it is an "infant industry" screaming to be born as a new wealth creator and requiring only a short tug with the forceps. Australia, to its great cost, has time and again proved a sucker for such stories.
It surely has been said before but, if wind is really so efficient, why do we not use sail for commercial shipping? Why did we abandon the 19th-century clippers in the first place? And why is nobody contemplating their resurrection?
The Government did not talk about costs in its pre-Christmas issues paper. However, it did express its faith that renewables will gradually becoming more competitive with electricity generated by standard means. And, just to give this a push, the Government is promoting a National Emissions Trading Scheme -- a tax on the coal and gas-based electricity generation that provides 98 per cent of Victoria's electricity!
There are several ways to work out the costs of the Government's plan. The most straightforward starts with the penalty from requiring renewables. The requirement is that renewables comprise 10 per cent of energy by 2010. The issues paper estimated this would require subsidies for a further 2500 gigawatt hours.
Conventionally generated electricity for delivery in 2009 is trading for $34 per megawatt hour. Wind, the least expensive of the available exotic renewables, costs about $78 per megawatt hour. Added to this however, wind power is of a very low quality. It can be counted on as reliably available for less than 10 per cent of the time, which means it must have conventional plant standing idle and ready to back it up at a moment's notice, at a further cost of $10 per megawatt hour. Hence the additional cost of wind power is $54 per megawatt hour, more than double the cost of conventional electricity.
A cost premium of $54 per megawatt hour for 2500 gigawatt hours means an annual cost of $127 million. But this is not a subsidy that can be turned on and off. Governments will need to give assurances of support for at least 15 years if any facilities are to be built. At a discount rate of 7 per cent, this puts the total cost at more than $1.2 billion.
A cost of $1.2 billion is in itself a high price to pay. But because Victoria depends heavily on cheap electricity, especially for aluminium smelting, its effects will reverberate throughout the economy, raising the cost even further. At some price there will be a tipping point that will force Alcoa to up stumps and move out of Portland and Point Henry -- and the Government's cost impositions have surely eliminated any chance of the company expanding here.
"Quixotic" is an appropriate term for Victoria's energy policy. Ostensibly targeted at greenhouse gas emissions, it is also, confusingly, designed to promote an inefficient windmill industry. The outcome can be nothing but trivial in terms of emission reductions but serious in terms of cost to Victoria. Moreover, the measures represent a policy invasion by the Victorian Government, which is muscling in on an area of Commonwealth responsibility.
The upside for the Labor Party is that efficiency sapping energy measures will help cement Green preferences which might deliver Labor control of the State Upper House. But $1 billion and a legacy of hopelessly uneconomic windmills is a high price to charge the Victorian people for the privilege of representing them. There are certainly more responsible ways of governing and there are surely lower cost ways of buying the preference vote of loopy environmentalists.
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