FactCheck: Would Labor's renewable energy plan cost consumers $60 billion?

(It) will mean a massive bill, perhaps A$60 billion or more, that will have to be carried by the consumers of Australia. – Prime Minister Tony Abbott, speaking to reporters about Labor’s plan to source half the nation’s power from renewable energy sources by 2030, July 27, 2015.

Abbott’s quote, a response to the new Labor policy to set a goal of 50% renewable energy by 2030, appears to be drawing on reported comments by Paul Hyslop, chief executive of ACIL Allen - the company used by the government’s Warburton review into the existing Renewable Energy Target (RET).

The prime minister’s office sourced the A$60 billion figure to an article in The Australian last week that quoted Hyslop saying of Labor’s 50% renewables pledge that:

If this were met by wind power it would require 10,000 to 11,000 additional turbines… with capital costs for the turbines alone of $65 billion.

Hyslop’s ACIL Allen colleague, Owen Kelp, told Sky News this week that the A$60 billion was a “fairly simplistic, back-of-the-envelope calculation”.

When asked by The Conversation for a copy of any calculations to see how the A$65 billion capital costs figure was reached, Hyslop said the internal analysis was not publicly available, but explained that:

To get to the 50%, you need about another 80,000 gigawatt-hours… To build that with renewables, the current cheapest technology would be wind. We estimate between 10,000 and 11,000 additional wind turbines with a bottom end estimate of around $65 billion in capital costs… Would it have an impact on consumers? It really depends on the trade-off on the cost of funding the subsidy versus the downward pressure on electricity prices. We don’t know exactly what that would look like. That would be a significant piece of modelling.

Capital costs versus consumer costs

The first thing to note is that ACIL Allen’s estimate referred to capital costs, not cost to consumers. So it is misleading for Abbott to say that the A$60 billion (or A$65 billion) would be “carried by the consumers of Australia” directly.

The additional investment will be borne by the electricity companies.

They will recover this investment by amortising it over the lifetime of the plant and factoring this into the levelised cost of electricity they sell to consumers. (The LCOE is the cost of generating electrical energy using a given technology that includes whole-of-lifetime costs for the plant).

As Hyslop points out, we don’t actually know what the direct impact on consumers would be.

Prices falling

But even if we assume the prime minister misspoke and meant to say A$65 billion in capital costs, there’s reason to believe the capital costs of additional wind turbines could potentially be much lower.

There are a series of continuing trends that could all conceivably reduce the capital cost, including:

• reductions in the cost of wind turbines
• technical improvements in turbine efficiency
• reduction in the demand for electricity (having fallen by 9% since 2010)
• growth in generation from rooftop solar.

However, even then this focus on capital costs overstates the case, given the following considerations:

Ageing power plants. More than 75% of our fossil-fuel power plants are past their use-by date. Assuming a 50-year lifetime, more than a third of the existing coal-fired power plants will be retired by 2030. Replacing these with the most cost-effective new sources has to happen anyway, and this inevitably means new capital costs – no matter what the energy source.

Wind’s cost-effectiveness. According to the 2013 Australian Energy Technology Assessment of LCOE, wind is the most cost-effective form of commercially proven new-build power generation, even without a price on carbon (and will be joined by large scale solar by 2030). The 2014 ACT Government wind power reverse auction has now demonstrated this to be the case, having achieved an LCOE of A$81.50 per megawatt hour (MWh) locked in for 20 years. This is equivalent to a discounted LCOE of about A$65 per MWh at current rates, which outcompetes existing gas and new-build coal generation.

Carbon pricing. This fossil-fuel retirement would be accelerated by the introduction of a price on carbon – something that many analysts believe is inevitable worldwide, whether through emissions trading schemes (ETS) or other mechanisms. If Australia doesn’t introduce a carbon pricing mechanism like an ETS – acknowledged by Paul Hyslop and most economists) as the most efficient carbon-reduction mechanism available – then Australia runs the risk of being isolated by effective trade barriers.

Renewables' effect on power prices once built. Allstudies of theRET’simpact – including the government’s own study by ACIL Allen – show that introducing competition from renewables puts downward pressure on electricity prices, that in the long term compensates consumers for the price contribution from the RET.

The costs of the status quo. The economic cost of doing nothing about climate change is much more than the cost of the solution. Fixing climate change will inevitably involve a cost, but it will be a lower cost than ignoring it. The faster the solutions are implemented, the lower the cost will be.

Acting earlier by mandating 50% renewables in 2030 – combined with introducing a carbon price through an ETS – will help reduce the cost for all generations.

Verdict

Tony Abbott’s statement that consumers will pay A$60 billion or more for Labor’s 2030 50% renewables pledge is misleading.

Much of the existing coal-fired generating capacity will have to be replaced anyway, and this re-investment is always reflected in the price charged for electricity. Wind power will likely be the most cost-effective replacement as it is now the cheapestnew-build power source.

Many studies (including the government’s) show that because of this, a high renewable energy target is likely to increase competition in the energy sector, with the potential net effect of putting downward pressure on electricity prices.

Review

This is a sound analysis. I agree with the underlying principles noted and we must remember that the cost of energy delivered is only partly related to capital cost. Renewable generation does have a large up-front capital cost, but it also has no fuel costs. I agree that there are ageing traditional electricity plants (many in areas where there are more than sufficient renewable energy resources) that need replacing and we should look at more sustainable options with the levelised cost of electricity of wind and solar now providing an economic alternative. – Craig Froome

Ken Baldwin receives funding from the ARC.

Craig Froome does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.