Inside Story

The devils in Finkel’s detail

What are the consequences of choosing a second-best scheme?

Tim Colebatch 23 June 2017 2600 words

 A question of assumptions: chief scientist Alan Finkel at the National Press Club on Wednesday. Mick Tsikas/AAP Image

There are two risks in the Finkel report’s proposal that we should use a clean energy target to lower greenhouse gas emissions. The first is that the Coalition party room will find the recommendation’s ideology-free realism too much to bear, and either reject the target or accept it only with absurd add-ons like making taxpayers underwrite a new coal power station.

But the other risk is that the Coalition, and Labor, will accept it as it is, and saddle Australia with a second-best solution – a solution that will be expensive and contentious to change once it becomes clear that the targets it’s designed to achieve are inadequate.

Finkel’s plan has been sold to us as the cheapest solution, and the one that could at last bring the two sides of politics together. But it is only the cheapest solution if the assumptions under which it was modelled turn out to be correct. That is highly unlikely.

And it will only enable our politicians to bury their differences on climate change if it does deliver lower power prices, energy security, and much lower emissions beyond 2030 – and doing that will probably demand faster change than the gentle pace of emissions reduction assumed in the report’s modelling.

The press gallery, as always, is focused on the politics of the issue, and infighting within the Coalition has given it lots to feed on. But we need to focus on the Finkel report itself, and the blueprint it sets down for our energy and emissions future.

In December, Alan Finkel and his colleagues on the review implicitly recommended an emissions intensity scheme, or EIS. The prime minister promptly ruled it out. So now, instead, the Finkel team has proposed a clean energy target, or CET. Is their second preference as good a way as their first to meet the report’s three targets: lower prices, greater energy security, and lower emissions? If it isn’t, what might be the consequences for us?

We need to walk into this with open eyes and informed minds. So far, the electricity industry and environmental groups have greeted Finkel’s report with relief. Sure, no participants or informed observers apart from Finkel and the government he serves seem to think the CET is the best way forward. Industry and environmentalists alike would prefer the EIS that Finkel and his colleagues implicitly recommended in their preliminary report last December. Environmentalists have made a number of criticisms of the CET, the report’s detailed modelling, its implausibly low assumptions on emissions reduction after 2030, and its clunky and expensive solution to the need to provide back-up storage. We’ll elaborate on them in a moment.

Essentially, though, environmentalists and the electricity industry alike just want to end the debate. They want agreement on a scheme that will work, under rules that both sides of politics will accept. This would remove the political uncertainty that is seen as having blocked the investment we need in new generators (or storage systems) to replace the coal and gas plants closing down.

I share that view, as I’ve argued here several times. It is important to close this long, fruitless debate and move on. But it’s also important that we move on in a vehicle that will take us where we want to go: to lower prices (ideally, much lower prices), greater security of supply, and lower emissions (and that means much lower emissions).

We know from experience that if the CET is adopted and fails to meet one or more of these three goals, we will have to reopen the debate all over again – and it could be politically and financially very difficult to abandon it for a better option. It’s better to get it right first time.

So far, with a few exceptions that have attracted far less attention than they deserve, criticism of the CET has come mostly from the Abbotteer right of the Liberal and National parties. A minority of Coalition MPs want to keep building coal-fired power stations, no matter what their economics, their emissions, or their future viability.

As I’ve noted before, no generator has built a new coal-fired station anywhere in eastern Australia for a decade. The last one in New South Wales opened twenty-four years ago, the last one in Victoria twenty-one years ago. The modelling for the Finkel report concluded that – regardless of whether the government adopts an EIS, a CET, or does nothing at all – no further coal-fired or gas-fired stations will be built within the national electricity market.

Only an ideologically driven government would contemplate adding – or guaranteeing – a new coal-fired station now. The three big electricity firms (AGL, EnergyAustralia and Origin) have made it clear they won’t build one. But to placate the Abbotteer minority in its ranks, Malcolm Turnbull and Josh Frydenberg are now considering offering taxpayers’ money to guarantee the finances of a coal-fired power station, if anyone will build it.

No doubt they’re expecting that it will be a hollow offer, because no firm will take it up. And they’re probably right. But Turnbull and Frydenberg are caught in a wedge of Abbott’s making. If they don’t offer some significant concession to the climate denialist fringe, the Coalition will be split on this issue, with political risks that Turnbull cannot ignore. Yet if they bow to that pressure, it will surely rule out the bipartisanship they are trying to achieve.

Labor, too, has political constraints it can’t ignore. It is far more likely to lose lower house seats to the Greens than the Coalition is to lose them to One Nation. No one could seriously expect it to agree to put taxpayers’ money behind a new coal-fired station.

Indeed, with the Essential poll showing that only 18 per cent of Australians want our future power stations to burn coal rather than use renewable energy, it’s hard to see how it would get through the Senate. It shouldn’t even get through the joint party room. The poll found only 26 per cent of Coalition voters want more coal-fired plants, whereas 57 per cent prefer our future power system to be based on renewables.

The other message that comes out strongly from the Essential poll is how crucial it is that the new blueprint doesn’t add to electricity prices. The poll found 75 per cent of voters would support a clean energy target if it didn’t increase their power bills. But only 41 per cent would support it if it raised prices 5 per cent, and just 21 per cent would support it if it raised prices by 10 per cent.

That is a red line to the government: there is no voter support for a scheme that will raise power prices. And it’s perfectly understandable when electricity and gas will soon cost over three times more than at the start of the century, just seventeen and a half years ago.

As energy specialists Bob Lim and David Headberry argued last week in a terse letter to the Financial Review, the Finkel report made things harder for itself by failing to examine why this catastrophe has happened, and how those price rises could be unwound. Frydenberg took one crucial step this week by terminating the transmission networks’ right to appeal to the all-too-friendly Australian Competition Tribunal against price decisions by the Australian Energy Regulator. He told journalists the Tribunal’s decisions on appeal have already cost consumers $6.5 billion. Good on him, but this is shutting the gate after the horse has bolted. We need a mechanism to wind network prices back – and fast.

The Finkel report’s second weakness in relation to costs has been pointed out by many people. This is the proposal to require new renewable energy plants to arrange their own energy backup for when the wind doesn’t blow or the sun doesn’t shine. This is a cumbersome, expensive way to solve a problem that could be resolved more cheaply and effectively by setting up a national energy storage market.

At the National Press Club this week, Finkel argued that he envisaged the government making renewable energy generators arrange security only for 10 per cent of their output. But that only emphasises the limitations of his plan; we need solutions that provide backup for existing plants – coal, gas and renewables – as well as new ones. This way of doing it adds considerably to the cost of new renewable plants, which are the only ones being built. That can only push electricity prices up.

The problems caused by the intermittent output of renewables are real, but this is the wrong solution. Frydenberg should head it off by commissioning his department to look for solutions that will be cheaper and cover the whole electricity market.

But the biggest weakness of the report is that, as Giles Parkinson argued last week in Inside Story, it is clearly aimed at a political end. When his preferred solution of an EIS was swept off the table in a moment of prime ministerial weakness, Finkel and his team then set about making the case for the second-best solution, a CET, and depicting it as if it were really the best option after all.

It isn’t. The shortcomings of the modelling – carried out by the respected Jacobs group, but under instructions from the Finkel team – were well demonstrated in Monday’s Australian by Adelaide economics professor Paul Kerin. Jacobs was commissioned to model only a single, implausibly mild set of assumptions about future emissions targets, and to ignore any consumer response to price rises. Many critical assumptions were not spelt out in the modelling report.

Crucially, the modelling assumes that Australia’s emissions reductions are spread evenly across all sectors, even though the cost of abatement varies hugely from one sector to another. The biggest contributor to Australia’s greenhouse gas emissions is burning coal; we now have cheap ways to replace that. But we don’t have any way to stop cows and sheep burping and farting methane, which is the second-biggest contributor. It is simply not plausible to demand that farmers cut their cows’ emissions by the 28 per cent reduction that is Australia’s target for 2030 – let alone the 60 per cent reduction in emissions the modelling assumes for 2050.

I can’t believe that a Coalition government would try to impose the same emissions reductions on each sector, regardless of cost or feasibility. If it did, it would further increase the costs of meeting Australia’s greenhouse gas commitments, costs that would have to be borne one way or other by households. A sensible government would demand more emissions reduction from sectors in which the abatement costs are cheapest, as in electricity, to protect those sectors (and sub-sectors) where abatement is either expensive or impossible.

Why does this issue matter so much? Because, as Kerin points out, the Finkel report failed to disclose that its modelling found very different abatement costs for the two schemes. With an EIT, it found, greenhouse gas emissions could be reduced for $7.50 a tonne (a mere fraction of the price we expected a decade ago). But to reduce emissions via a CET would cost $10.50 a tonne – 40 per cent more. The gap in resource costs was similar.

Then how did Jacobs find that the CET would be slightly cheaper for consumers than an EIS? The answer is not spelt out in its report, but it appears to assume that the CET creates no pressure to close Victoria’s brown coal stations, which it assumes remain the cheapest coal stations to operate – even after the Andrews government trebled the price they pay for coal. The modelling appears to assume that in 2050 both Loy Yang A and Loy Yang B will still be operating, even though the first by then will be more than sixty years old, and the second well into its fifties.

I don’t understand how anyone in their right mind could take that seriously. Yet the Finkel panel did. If it hadn’t, it would have had to report, yet again, that the cheapest way forward is to adopt an EIS.

The panel’s findings also depend on its assumption of a low level of ambition for Australia’s emissions reductions after 2030. Its modelling appears to assume that Australia will adopt a target for 2050 of emitting about 215 million tonnes a year of greenhouse gases, roughly half as much as in 2030, and a 65 per cent reduction from 2005 levels.

The national electricity market, which generates about three-quarters of our electricity, would still be emitting sixty-three million tonnes of those gases. Under the modelling assumptions, the national electricity market will take until about 2040 to reach the same emissions intensity (that is, average greenhouse gas emissions per megawatt hour of electricity sent out) as the United States and Canada have today. By 2050 it will finally have caught up with the intensity levels of Europe today.

How can anyone accept these assumptions? Or the results they generate, which form the basis of the Finkel report’s recommendations?

I suspect that by 2050 net greenhouse gas emissions from the national electricity grid will be close to zero. The Jacobs modelling itself concludes that the only new plants added to the grid in that time will be renewables – and on current trends, they will be so cheap, and so well supported by storage systems (if needed), that the last coal and gas plants will have long closed their doors.

As Finkel acknowledged this week at the National Press Club, the price of renewables is falling so fast it is almost impossible for decision-makers to keep up. One example: his report’s modelling assumed that electricity from wind power stations opening in 2020 would cost on average $92 per megawatt hour, or MWh.

No, it won’t. Last month, Origin Energy signed up to buy electricity from the proposed Stockyard Hill project near Ballarat for less than $60 per MWh. In real terms, the ACT government will pay a similar price over the next twenty years for electricity from the next expansion of the Hornsdale wind farm, 200 kilometres north of Adelaide. AGL’s ballpark assumptions now are $65 per MWh for wind and $75 per MWh for a large-scale solar project like the 200 MW solar plant the NSW government has just finalised for Balranald, the largest facility of its kind in the southern hemisphere.

No coal plant built now could supply power at that price. That’s why the power companies now focus solely on renewable energy plants. The technical issues that caused last year’s South Australian blackout all have solutions that simply need to be applied. And for twenty-four-hour power security, the costs of large-scale battery storage are plunging, and at this rate it will soon provide the affordable solution to the sceptics’ question: what do we do when the sun goes down and the wind stops blowing?

The technology is progressing so fast that it could sweep the whole debate into irrelevance. But it would help if we adopted the scheme that promises to reduce emissions at least cost, and that can be most easily scaled up to meet bigger targets. That is an emissions intensity scheme. •