Energy sector wilts under government's solar stress

Shortly before Christmas, federal Resources and Energy Minister Martin Ferguson announced seven proposals were being assessed for two spots in the first round of subsidies for large-scale solar power.

Though dwarfed by the waste demonstrated in the $42 billion Building the Education Revolution, the government's Solar Flagship program aims to provide $1.5bn to assist in the creation of intrinsically uneconomic large-scale solar electricity generation.

Infigen, created out of the carcass of Babcock &  Brown, has received preliminary approval from the NSW government for a 100 megawatt capacity solar farm at Nyngan in the northwest of NSW, the cost of which is $300 million.

The simple arithmetic on the investment costs, assuming an 11 per cent return on capital, suggests the project would require its output to be sold at a price of more than $240 per megawatt hour if it were to be viable.  But $240 per MWh is more than eightfold the average spot market price in the 2010-11 year to date.  So how can the proposal be contemplated?

Well, first, it will receive a subsidy of about $80m from the financially beleaguered NSW government.  In a triumph of hope over experience, the Keneally government hopes the project will ''contribute to the development of the utility scale renewable energy industry in NSW''.  An ambitious Victorian solar scheme sponsored by the previous Labor government was to create a new industry and 10,000 jobs, but was mugged by reality and abandoned, with considerable loss to its commercial sponsor.  Second, the Nyngan proposal aims to get another $100m courtesy of the taxpayer from the commonwealth government.  To earn an adequate return on the $120m of private capital invested would still require a wholesale market price for electricity of $100 per MWh, compared with the prevailing $30 to $40 price.  To bridge the gap, there are further subsidies paid by the consumer as a result of government regulations.

The first of these is the renewable energy requirement, which compels energy retailers to incorporate a rising proportion of uneconomic renewable energy into our electricity supply.  Under present legislation this proportion will be 20 per cent by 2020.  To meet the commitment, the retailer has to buy Renewable Energy Certificates, which represent electricity supply that is not derived from any commercial supply source such as large-scale hydro.  The REC price is presently low due to the overfulfilment of rooftop solar systems (another subsidised renewable scam), but if the REC price rises to $55 per MWh, large-scale solar power systems would start to look profitable if they could sell their electricity at $45 per MWh.

This is feasible since, as a result of the government-created risk of a carbon tax, there is precious little investment in new electricity generation from commercial sources.  The upshot is that prices must inevitably rise for electricity as a whole.  If they rise from the present (somewhat depressed) level of $30 per MWh to $60 per MWh, this would provide a cushion and allow a large-scale solar plant to turn a profit.  Hence, to convert a $300m sow's ear that would produce electricity for a cost that is eightfold its value into a silk purse requires four waves of the governmental magic wand:

• A NSW government grant of $80m.
• A commonwealth Solar Flagship grant of $100m.
• The subsidy from the ''20 per cent by 2020 renewable energy'' requirement, which doubles the venture's returns.
• And, bringing home the proposal's bacon, the government-created risk of a carbon tax, which prevents new commercial supplies being built and is likely to increase the ex-generator national electricity price by about 50 per cent ($20 to $30 per MWh).

Government regulations and subsidies therefore leverage an investment with a market value of $30m to one that can be profitable at a cost of $300m.  The Solar Flagships scheme may not be the most extravagant piece of government expenditure, but the ''mere'' $1.5bn it is budgeted to squander in taxpayer resources serves to illustrate just how inured we have all become to misused government spending.  Moreover, combined with other government distortions of the marketplace, the Solar Flagships scheme is destabilising the commerciality of the electricity supply industry.

As such, it is undermining what was arguably the world's most efficient electricity supply industry, bringing adverse consequences directly to the consumer and to industry competitiveness.

ADVERTISEMENT