There is lots of stuff in the carbon tax policy – and I am not going to try and cover it. But one part of the ABC’s story worried me. There will be an extra $10b for ‘large scale renewable projects’ and the assumption appears to be that much of this will go to solar. I hope this assumption is wrong for the following reason.
In the absence of mass power storage, solar electricity may reduce carbon emissions but it does so in a way that pushes up electricity prices. The problem is that, without storage, solar power cannot provide peak-load security. This means that cheap solar simply ‘crowds’ the non-solar capacity that is needed for peak security so that it must recover its fixed costs over a shorter period of time with less dispatch. This means lower carbon emissions but higher electricity prices.
As an example, suppose peak demand is 10,000 MW. Further suppose that this peak may occur on a hot summer’s day (due to airconditioning) or a cold winter’s night (due to electric heating). Solar helps meet capacity on a hot summer’s day, but doesn’t help on a winter’s night. So on the winter’s night the price will rise until the non-solar generation is producing 10,000 MW and covering the peak load.
But the non-solar power stations have to cover their fixed costs. Let’s suppose that they previously covered these costs by the price rising to $5000 per MWh in both the summer and winter peak periods. Now more solar generation means that the price in the summer peak is lower and/or less non-solar is dispatched in the summer peak. Either way, the non-solar generators must be earning more money in the winter peak if they are to cover their fixed costs (given that they earn less in summer). So increased solar will push up the price of electricity in the winter peak.
A bit more economics (assume free entry in non-solar generation) shows that, if there is to be enough generation capacity to cover the winter peak (or, more generally, give system security even when solar is not operating) then non-solar plants must still be accruing the same annual revenue (to cover their fixed costs) with or without solar. As solar reduces the amount of electricity sold by the non-solar generators, this means that consumers must be paying higher electricity prices on average.
Note that this argument does not depend on the price or efficiency of solar power. Solar power could be dirt cheap and extraordinarily efficient. Rather, the argument depends on the inability of solar power to provide system security for peaks in demand that arise at night.
Another way to think of this is the following: solar adds to generation capacity at some times but can’t be used for system security at all times. So if there is an increase in solar generation, customers must pay to cover all the non-solar generation needed for system security and also pay for any new solar capacity. This means they will be paying more in total for electricity.
Now there are a range of assumptions here. First, solar can help system security to the extent that the electricity network has summer peaks (e.g. South Australia and Victoria) rather than winter peaks (e.g. New South Wales). So solar may enable some decommissioning of non-solar plant in some states.
Second, the analysis is long-run. In the short term, the existing generators have sunk their costs and if they do not recover them then they will keep operating, so long as they cover average variable costs. So solar power may drive down electricity prices in the short term. Some existing non-solar generation owners may go bankrupt but someone else will buy the plants at a low price and keep operating them. But as older non-solar plants need maintenance and refurbishment, they will be taken out of the system if the electricity price is not high enough to pay for their continued operation.
Third, as the mix of generation needed changes, some coal-fired base-load generation may be pushed out and replaced by gas-fired peaking plant. Solar may take over some of the ‘base load’ responsibilities. But the gas-fired peaking plant will still be needed for system security and it will need to earn an economic return.
Note, however, that the above argument disappears with renewables that do not depend on the the vagaries of nature (the sun shining or the wind blowing). So, for example, tidal power stations may be an appropriate solution (I would have to rely on the technical people for this). It also, of course, disappears if electricity becomes economically storable in large amounts.
All of which means that, if there is $10b on the table for renewable energy, large scale solar and wind generation projects may be the exact wrong place to start.