The renewable energy industry as another popular burden on taxpayers

Australian public opinion has long been protectionist, with majorities agreeing with statements such as ‘Australia should continue to use tariffs to protect its industry’. But some Essential Research polling published today partially qualifies this finding.

Q. Thinking about Australian industries and the ways in which the Government can give them assistance and support – which forms of assistance and support do you think the Government should give to the following industries? (multi-response)

In this survey, which allows respondents to distinguish between different types of industry protection and between different industries, traditional protections from overseas competition have substantial support only in manufacturing and agriculture, and even then it is plurality and not majority support. Service industries are the least popular recipients of government largesse.

Years ago when I was researching public opinion on economic reform I concluded that (unsurprisingly) there was strong path dependency in people’s attitudes to industries. Where there was a history of public subsidy or tariffs continuing that support was always popular, with much less support for industries which had typically operated in a market. That pattern is evident here.

Alas, this means that the renewable energy industry is headed towards being another infant industry that never grows up, and will become a long-term mendicant that relies on politics rather than profits to sustain itself.

18 Responses to “The renewable energy industry as another popular burden on taxpayers

  • 1
    Winton Bates
    November 8th, 2010 18:22

    It is interesting that the percentage supporting protection of media from overseas competition is quite low. I expect the responses would have been different if people had been asked whether they support local content requirements.

  • 2
    November 8th, 2010 19:11

    Well, it’s good to know seven percent of the population has a brain. While a decent proportion of agriculture and manufacturing would be viable without tariffs or subsidies, the same cannot be said for renewable energy. Wind and solar will not be viable any time soon without extremely generous subisidies. As a value-generating activity, renewable energy is a dog.

  • 3
    November 8th, 2010 19:26

    And I would add that a $40/tonne carbon tax would not, by itself, be sufficient to make renewables viable. So this idea that coal and gas power only continue to be attractive because they are ‘subsidised’ by the absence of a carbon price is a furphy.

  • 4
    Robert Wiblin
    November 9th, 2010 06:13

    Assuming we wanted to speed the development of renewable energy, what do you think would be a policy that was both cost effective and easy to withdraw Andrew?

  • 5
    Robert Wiblin
    November 9th, 2010 06:17

    Sleetmute: You’re probably right that solar won’t be competitive for some time, but wind isn’t that more expensive right now:

    On the downside, the cost of wind isn’t falling very fast and many countries lack places to stick turbines (not Australia fortunately).

  • 6
    November 9th, 2010 08:23

    The most widely-used source of electricity generation costs in Australia is the ACIL Tasman report (1.5MB) prepared for the Inter-Regional Planning Committee.

    Since that report was published in April 2009, coal (and gas) prices have risen substantially. But even assuming a doubling of coal costs (say, an increase in the short-run marginal cost (SRMC) of new coal-fired power stations from $12.50/MWh to $25/MWh – see Table 50), the long-run marginal cost (LRMC) of coal would rise to about $65/MWh (see Table 52) assuming a capacity factor of 85% (ie the plant runs at 85% of its rated capacity). The costs of gas-fired power stations would also be higher than the ACIL Tasman numbers, but probably not by as much. So the LRMC for new gas would perhaps be about $65-70/MWh.

    In comparison, current wind capacity costs are about $2,500/MW (see Excel data available at this ABARE link). Assuming a capacity factor of 30% (because the wind does not always blow), the LRMC of wind is about $100/MWh.

    With a $40/tonne carbon price, the LRMC of new coal plant would rise to about $100/MWh and gas to about $85/MWh (due to the higher carbon intensity of coal). So a $40 carbon price would cause a strong switching of new generation investment from coal to gas but not towards wind.

    But the real problem is the unreliability of wind. The Australian Energy Market Operator found that wind in South Australia only made a firm contribution to summer peak demand of 3% of its rated capacity). That means that for wind to ‘work’ without a specific renewables subsidy, wind capacity would effectively need to be almost entirely duplicated by open-cycle gas turbine plant, which is flexible enough to accommodate the fluctuations from wind. Needless to say, this would be extremely expensive, as Western Australia is starting to find out.

    Other renewables such as solar thermal do not suffer from quite the same problems as wind. However, they would need a carbon price north of $50/tonne to start becoming economic.

  • 7
    Francis Xavier Holden
    November 9th, 2010 08:41

    I’m in the wrong game – clearly I need to move into a farm with a few cows and a few wind generators , perhaps with a clothing factory in the back paddock.

    Then I could get on Australian Story

  • 8
    November 9th, 2010 11:44

    ” …another popular burden on taxpayers”
    What? Like the justice, defence and health systems? If something has to be done, and the market won’t do it, then the government should. Simple as that.
    If government support for renewable energy is popular it’s because people aren’t so stupid as to think that drifting steadily towards catastrophe while waiting for market forces to save them is a good strategy.

  • 9
    Andrew Norton
    November 9th, 2010 12:16

    On the other hand, if there is no need to make renewables profitable will they ever achieve it? Too many government sponsored industries never grow up.

  • 10
    November 9th, 2010 12:50

    Profit is not the point.
    “Too many government sponsored industries never grow up”
    True. Just look at our symphony orchestras, why don’t they grow up and do commercial stuff instead? Why would anyone want an orchestra that couldn’t turn a profit.

  • 11
    Andrew Norton
    November 9th, 2010 12:56

    Symphony orchestras are a minority entertainment, energy affects every person every day. A reliable and efficient source of it is essential.

  • 12
    November 9th, 2010 12:59

    Getting it done – urgently – is the main thing.

  • 13
    November 9th, 2010 13:24

    Getting what ‘done’ is the main thing? Slowing man-made global warming? Well, we know that the US isn’t going anywhere on that front so what impact will we have. Reducing Australia’s CO2 emissions? But that can be done more effectively and cheaply through a carbon price and without expensive subsidies to renewables.

  • 14
    Robert Wiblin
    November 10th, 2010 20:06

    Thanks for the info Sleetmute. As you show the difference between wind and coal/gas is significant but not massive. Compared with other less developed renewable tech, wind is nipping at the heels of fossil fuels.
    I’ve never looked into the baseload power issue but the claim that variability in supply and demand is a big deal is disputed by some smart people. Among them:

  • 15
    Robert Wiblin
    November 10th, 2010 20:59

    Disregard the link above sleemute, reading again I see you were talking about supply variability not demand variability.

  • 16
    November 11th, 2010 04:44

    Well, “not massive” is a matter of opinion. The cost of wind is presently 50% higher even if you ignore the unreliability problem (which is profound). If petrol prices were to rise 50%, I’m sure many people would consider that to be pretty massive!
    Today’s Age reports on the waste of a solar subsidy scheme:

    MORE than $1 billion of taxpayers’ money was wasted on subsidies for household solar roof panels that favoured the rich and did little to reduce Australia’s greenhouse gas emissions, a scathing review has found.
    The review of the now scrapped federal government solar rebate scheme, conducted by ANU researchers Andrew Macintosh and Deb Wilkinson, also found the rebates did little to generate a solar manufacturing industry in Australia, instead sending hundreds of millions of taxpayers’ dollars offshore.

    Incidentally, re the Quiggin post about baseload demand, I am not sure he is right about a number of points. He assumes that off-peak demand would halve if off-peak prices “weren’t discounted”. But off-peak prices are not presently discounted to households or small businesses. And off-peak electricity demand for almost all households and firms is not so elastic that, say, a doubling of price would halve demand. Even putting that to one side, I’m not sure geothermal would be capable of meeting 25% of Australia’s peak demand at a price comparable to present tariffs. Quiggin “hints” that issues created by the variability of wind could be addressed by prices, but it is not clear how. As I said before, wind requires a flexible complement in supply such as OCGT (or hydro) to allow it to meet demand reliably. OCGT is a very expensive way to provide capacity and hydro in Australia is not easy to expand.

  • 17
    Andrew Norton
    November 11th, 2010 04:55

    And I suspect that off-peak power consumption will have negative externalities – such as people running noisy applicances at anti-social times, keeping their neighbours awake.

  • 18
    November 11th, 2010 07:05

    A number of competing arguments are made by advocates of green action in the electricity sector. On the one hand, Quiggin seems to be saying that the difficulty of supplying baseload electricity demand with renewables is exaggerated because underlying baseload demand is relatively low. On the other hand, the case for rolling out smart meters (which allow time of use tariffs and potentially remote switching of appliances) is that much peak demand could be shifted to off-peak periods. This would tend to increase baseload demand. The main appliances open to time-shifting are washing machines, dishwashers and dryers, which may disturb neighbours in blocks of flats but probably not in suburbia.