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Why the State Government's costly power plan is inept

Opinion

The State Government's electricity plan will come at a high cost to South Australian taxpayers and could threaten investment, argues economics commentator Richard Blandy.

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An important example of the South Australian Government’s inept economic strategy that I wrote about in my last article is, of course, its energy policy.

A representative consumer in South Australia pays more for electricity than in any other state, except Tasmania. As explained in a previous article in InDaily, there can be no doubt about why this is so: South Australia’s very high proportion of renewable energy in its electricity generation mix (greater than 40% of wind and roof-top solar) compared with the other states. This is a very high proportion in global terms, and appears to be driven fundamentally by an ideological commitment to reducing South Australia’s output of CO2 to world-leading lows.

A heavy reliance on intermittent generation like wind and solar has the further consequence that energy storage, interconnection to non-intermittent power sources in other jurisdictions, or      reserve peaking power generation using gas will be needed to ensure that supply will be sufficient to meet demand at all times.

The South Australian Government has recently decided to spend $550 million to ensure this happens. So about half a billion dollars is the present estimate of the cost that South Australian taxpayers must pay to fix the mess created by the Government’s ambition to lead the world in addressing climate change.

The Government’s plan concentrates on energy storage and reserve peaking power generation as the main long-run solutions, with good old diesel generators as the interim solution to keeping the air-conditioning on over summer (in the lead-up to the South Australian election next year). It has also kept in reserve, at this point, a plan to set up a new generator to provide for its own power needs, as well as exploring the opportunities for interconnectors with the eastern states.

A $360 million, 250MW gas power plant is the centrepiece of the Government’s solution. This power plant will be owned by taxpayers. There is a good reason for this: it will lose money.

In January, The Advertiser reported that Powerchina was interested in building a $350 million, 250MW gas power plant to be operating in South Australia by mid-2018. What happened to this proposal? The numbers and dates seem hauntingly similar to the Government’s numbers and dates.

We could, of course, have had the same result, at no cost to South Australian citizens…

One supposes that Powerchina has not proceeded with such a power plant because it did not stack up commercially. Furthermore, the Government’s operating plan is said to be to run the power plant to supply electricity into the grid only when power-shedding is imminent. The plant will run at other times to provide “ancillary” services that are in short supply.

One can see the Government’s predicament. Engie is restarting its mothballed, gas-fired, 240MW second unit at Pelican Point which will give it a 479MW capacity available to be used as a peaking generator, filling in supply shortfalls when renewable energy cannot meet demands.

Engie needs competition in this role like a hole in the head. Hence, the Government’s new power plant is described as only supplying electricity when the South Australian electricity market is in extremis – facing an imminent load-shedding situation.

The last thing the Government needs would be for Engie to follow AGL (which had been planning a 200-400MW gas-fuelled, peaking generator, until the Government’s announcement of its own new power plant) and to close Pelican Point because of the Government’s move. This would put electricity supply in South Australia in an even worse supply situation than before the Government came in with its own plant.

If Engie and AGL were planning to add more than 400MW of gas-powered, peaking capacity to supply availability in South Australia, at no cost to the state’s taxpayers – which the South Australian Government must have known – why has the Government proceeded with its own 250MW plant?

If the new Government-owned plant’s role is to supply electricity only when imminent load-shedding is expected, it will not be operated for long enough to make a profit. It could make very large losses if Pelican Point were to fill most supply/demand gaps. But it’s only South Australian taxpayers’ money, so hey, what the heck. This is truly expensive power – but the cost will not be reflected in our electricity bills.

The battery back-up proposal also provides very expensive power and could easily lose money. The interim, diesel generation proposal to carry us over the summer is also expensive.

But retail power prices are likely to fall – at least marginally –  under the impact of greater power availability at what would otherwise be astronomically-high wholesale power price periods. South Australians are likely, therefore, to get more reliable, marginally-cheaper power, under the Government’s plan, but at a significant cost to South Australian taxpayers.

We could, of course, have had the same result, at no cost to South Australian citizens, if the Engie and AGL plans had proceeded without the supply threat now posed by the South Australian Government’s own gas-powered plant. The competitive threat posed by this Government-owned plant will undermine future private sector investment in power generation in South Australia. After all, the Premier made his contempt for private power companies very clear after learning that AGL would not proceed with its power plant.

“If there are big power companies squealing, the (Government’s energy) plan is working,” he said.

This attitude is consistent with the Premier not pursuing the cheapest interim solution of all, of course – paying Alinta $25 million in May 2015 to keep its 520MW power plant at Port Augusta operating until mid-2018. The fact that the South Australian Government did not accept Alinta’s offer shows the strength of its “look at me” ambition for South Australia to lead the world in reducing output of CO2.  That it also resisted the release of this information shows that it is not 100% certain that a majority of South Australian voters will share its ambition, if the cost imposed on we punters is high-priced and unreliable supplies of electricity.

A more modest contribution to addressing climate change – say, meeting an Australian Renewable Energy Target of 23.5%, rather than achieving a world-leading 43% – would be more consistent with achieving a more balanced and prosaic set of goals, including more jobs and higher incomes for South Australians.

Richard Blandy is an Adjunct Professor of Economics at the University of South Australia, an Emeritus Professor of Economics at Flinders University, and a contributor to InDaily.

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