Forgive us our energy sins: drill down to the details

A sin of commission is what you do; a sin of omission is what you choose not to do: the truth withheld or the duty neglected. In some ways a sin of omission is more insidious because the fault hides in the gaps of a good life.

This week, two articles on what is pushing energy prices ever higher contained both kinds of sin.

The first article was by millionaire weathervane moralist and political dilettante Simon Holmes a Court in The Australian Financial Review; the second was by seasoned economist Rod Sims in these pages. Both claim that wind and solar generators are innocent bystanders in power price hikes, despite the evidence written in your bill and the experience of every country attempting to gather most of their fuel from the heavens.

The Holmes a Court article says more about the author than the subject. He wasted most of his column inches in insults aimed at perceived energy transition heretics, including the 18-year-old founder of Nuclear for Australia, Will Shackel. One day that young man will cast a long shadow over the puerile taunts of the Luddite left.

Holmes a Court embodies the evolution of the bunyip aristocracy: immense inherited wealth wrapped in a Messianic sense of self. Even his name carries the faint perfume of old money and his tone rings with the hauteur that comes from being slow-marinated in cash. He plays at the energy transition as if it were polo, a pastime for the rich whose Sisyphean stables are mucked out by the poor.

Sims is a former chairman of the Australian Competition & Consumer Commission and his arguments deserve a serious response.

His starting point is that in 2005 “Australia had some of the lowest electricity prices in the world”. This is beyond dispute and this huge competitive advantage on the east coast was built on black coal in Queensland and NSW and the dirt-cheap brown coal from Victoria.

Three things to remember before we continue.

First, it is the highest-cost generator running at any given moment that sets the wholesale spot price on the eastern national electricity market.

Second, while wind and solar do deliver nearly zero-cost power when they generate, they are off more often than they are on. They almost never set the wholesale price at times of peak demand because those moments come when the sun is rising or setting and the breeze is fading.

Third, wholesale costs make up only about one-third of your bill; you pay the total system cost, which includes network and retail charges and the permanent green subsidies.

The cheap coal-fired power we enjoyed in 2005 cost between $30 and $50 a megawatt hour. The Australian Energy Market Operator’s latest figures show that in the third quarter of this year, brown coal delivered electricity at $37/MWh and black coal at $81. But when demand rises, or the weather turns, the market is forced to higher-cost plant: hydro at about $111/MWh, gas at $167/MWh and batteries at $185/MWh. Ponder this and fear the future: the highest prices are being delivered by resources essential to turn a flukey wind and solar-dominant grid into an electricity system.

The story for households and business is simple. Electricity is only as cheap as the most expensive generator needed to keep the system standing. Coal still delivers the most consistent, on-demand, low-cost electricity on the grid. As it exits, the price will rise as higher-cost generators set the wholesale price more often.

The great sin of omission in this debate is the omission of reliability created by a weather-dependent grid, the one thing a power system cannot live without. Wind and solar leave massive supply gaps. Filling those gaps comes at immense cost. Sims unintentionally underscores this when he notes “the four most severe price events of the past seven years were driven by unplanned coal generation outages”. Those events were not a warning about keeping coal; they were a warning about losing it.

The sin of omission here is that those price shocks prove that wind and solar cannot step up to meet demand when a dispatchable unit fails. They will give whatever the weather delivers, not what we need.

Whether it was the Victorian heatwave in 2019, Queensland’s coal-fired plant explosion in 2021, the June 2022 market suspension or the NSW spikes in 2024, the pattern was identical. When the system came under stress the weather-dependent fleet routinely clocked off as everything that could be directed into supporting demand was working overtime.

What these events show is not that coal is unreliable but that without coal the system is exposed to violent price shocks whenever the weather turns against us. And that creates another problem. More volatility means more risk, and more risk pushes up the cost of hedging contracts in the forward energy markets. Those contracts are meant to contain power prices and their cost is rising. When volatile weather drives the power system, everyone ends up paying a premium simply to manage the uncertainty.

The costs of the system Sims champions go well beyond the cost of wholesale electricity. He notes that most people do not realise transmission makes up “around 45 per cent” of a household bill and points to big price increases between 2005 and 2015 coming with the “gold-plating” of the network.

“This self-induced problem saw Australia go from having relatively low to relatively high electricity costs by OECD standards,” he wrote. “Household prices doubled in real terms.”

But Sims then falls silent on what this means in a weather-dependent grid. Moving from dense, dependable coal to widely dispersed, unreliable wind and solar demands a far larger geographical footprint of generators linked to distant cities.

If gold-plating a compact, coal-centred grid doubled household bills, what happens when you apply the platinum coating of 10,000km of new high-voltage lines to service wind and solar farms scattered from sea to shining sea?

But wait, there is more. The market operator has warned recently that shutting coal-fired plants also means unplugging the system strength and stability services that come as a free by-product of their generation. Inside each unit is a huge steam-driven wheel spinning at 3000 revolutions a minute. That spinning mass sets the system’s heartbeat and acts as a giant shock absorber. Without that beat the electricity organism dies.

Wind and solar farms are limbs without a heart. They supply energy only when the weather delivers it and they cannot form a functioning 24/7 electricity system on their own. To make them behave like one requires an elaborate and costly life-support system of batteries, pumped hydro and gas peakers to cover massive, routine generation gaps, and synchronous condensers to give the system a heartbeat. Every piece of that machinery adds substantial cost.

This transition is not swapping one machine for another. It is creating an entirely new organism, one that is inherently less stable and less predictable than the coal-fired system it replaces. It demands new Renewable Energy Zones, new interconnectors, new substations and new system-strength equipment. All of it is fixed cost, added to your bill at a regulated rate of return and locked in for a quarter of a century.

And all of it must be backed up by a shadow system that runs on gas and diesel.

The astounding network costs of overbuilding, stabilising and providing 100 per cent backup for a weather-dependent grid are a design feature. This is why South Australia led the nation in high electricity prices. It is why crippling electricity bills go hand in glove with the weather-dependent grids in Britain, California and Germany.

Sims points to gas prices linked to international markets as the culprit in driving electricity costs from 2015 to 2025, because gas often sets the wholesale price when wind and solar clock off.

But omitted from this story is what drove the international gas price surge after Russia invaded Ukraine. Germany had built one of the world’s most weather-dependent grids and was shutting its nuclear plants. This system could not function physically or economically without pipelines linking it to cheap Russian gas.

When the pipeline was cut, German demand flooded into global liquefied natural gas markets, pushing prices to unprecedented highs as it scrambled to secure every available molecule.

To any sane observer, this should have been a real-world lesson in what not to do.

To have any hope of bringing down the wholesale price of electricity on Australia’s east coast in the system under construction we need cheap, abundant gas.

Given pipeline constraints from Queensland, getting cheaper gas would be best achieved by developing more domestic supply in NSW and Victoria. But the same people demanding a wind and solar-dominated grid have campaigned against the one fuel that could stabilise a weather-dependent system, halve the emissions of coal and, if abundant, lower the cost of power.

Instead, we now face the absurdity of paying international prices for LNG through import terminals in both states.

Near the end of Sims’s article there is a mortal sin of commission. “Firmed renewables are not weather-dependent,” Sims writes. “Batteries, pumped hydro and low-capital-cost gas peakers can fill any gaps.”

This is simply false. The fuel is the wind, the sun and water. All depend on the weather and all are susceptible to short and long-run droughts. Batteries are not a fuel source. The only technology in this mix that does not depend on the weather is the gas peaking plant. Alas, global demand for fast-start turbines has exploded as system operators twig to the fact that wind and solar-heavy grids cannot work without them and data centres soak up supply. Delivery times have blown out. If you can find one, buy it, because you will make a fortune on the first cold, still night.

Sims has no issue with lifting the ban on building nuclear power but says no one will invest in it because it is too expensive. So let us put that to the test. If the antinuclear brigade actually believes that argument, it has nothing to fear.

Nuclear is no more expensive than offshore wind and it actually delivers reliable power. And if cost is the worry, nothing touches pumped hydro. Snowy 2.0 began life in 2017 as a $2bn project. By 2020 it had climbed to $5.9bn. In 2023 the Albanese government reset the budget to about $12bn. Independent analysts warn the true cost could push well past $20bn. If that is the real-world benchmark for a weather-dependent grid backup project, then nuclear starts to look positively cheap.

To accept the rote slogan that wind and solar deliver cheap electricity demands you disconnect from the real world and move to model land. And how much faith should we put in models?

As this column revealed last week, the market operator’s 2040 system plan vastly underestimates a worst-case wind drought where generation never falls below 14 per cent of its capacity for eight consecutive days. Yet at the moment the model was released southern wind collapsed to half that level. If conditions similar to those in 2024 recur in 2040, the system AEMO has designed would risk blackouts across five states, so its next plan must account for the higher costs of surviving a far deeper wind drought.

This week the Australian Energy Market Commission released its latest Residential Electricity Price Trends report. In just 12 months the commission has gone from saying electricity prices would fall 13 per cent across the next decade to saying they will fall by about 5 per cent in the first five years, then rise 13 per cent in the second five, and end up higher overall.

That is not a minor correction; it is a complete rewrite of the story. What happens next year?

That is the problem with model land. When the assumptions are wrong, they are catastrophically wrong.

The true cost of re-engineering the grid is unquantifiable because there is no single public ledger that captures federal grants, state subsidies, certificate liabilities and off-budget financing vehicles; the bill is scattered across government budgets, network charges and consumer electricity bills. One way or another, you are paying for it.

But we do know this: despite endless pledges of cheap power, both federal and state governments have poured billions into electricity bill subsidies to artificially suppress the pain. And each time a subsidy is removed the price spikes towards its true cost.

The Albanese government now faces a choice: whether to ladle more cash on top of the $6.8bn already sunk into the Ponzi-like recycling of taxpayer dollars into retail electricity bills. If it does maintain the subsidy, it will underscore the government’s lack of confidence in its claim that more wind and solar add up to lower retail power costs.

If the government really believes what it preaches, it should lift the subsidy and let the price speak for itself. Show some faith. After all, the greatest sin is to deceive yourself.