Power prices a reality check for net zero

Federal Labor came to office with a ‘Powering Australia’ plan, promising to boost renewable energy, reduce Australia’s emissions by 43 per cent by 2030, and cut family power bills by $275 a year by 2025.

The government must already be nervous about those pledges now.

Labor’s policy is predicated on the belief that wind and solar are now the cheapest sources of energy generation in Australia.

However, wholesale electricity prices more than doubled in the eastern states and South Australia in the year to the September quarter 2022.

Coal shortages also led to a surge in prices in Western Australia.

Once the infrastructure is in place, it is true that wind and solar can generate electricity at near zero marginal cost.

But prices still have to cover the capital cost of the massive infrastructure required – solar panels, wind turbines, poles, wires – and associated maintenance.

The intermittent nature of renewables also means fossil fuel generation will remain in the energy mix for the foreseeable future to ensure demand can be met.

Given the economic costs and political backlash associated with blackouts, governments will have to ensure reliable backup from fossil fuels.

Large-scale battery storage is presently the favoured solution to the intermittency of wind and solar.

However, as the penetration of renewables plus storage increases, consumers will effectively be financing two energy systems.

To ensure fossil fuel generators have an incentive to remain on standby, they need to be paid while producing nothing, a necessity that is infuriating to some.

Further, having to increase and decrease output only makes electricity supplied by fossil fuel generation more costly.

Demand for the raw materials such as lithium and copper required for renewable energy, stationary battery storage and electric vehicles is rapidly outpacing supply.

This is adding to the upward pressure on energy prices and undermining the economics behind renewable energy projects.

In Britain and Germany, the push to replace fossil fuel generation with renewables has led to a sharp rise in electricity prices, fuelling inflation and fears of a recession.

Governments have been able to slate much of the blame for recent increasesin electricity prices to Russia’s invasion of Ukraine and the associated gas crisis.

The announcement this month that Sun Cable has gone into voluntary administration should set some alarm bells ringing.

A highly touted example of our green energy future, with backers including billionaires Andrew Forrest and Mike Cannon-Brookes, Sun Cable proposed a massive solar farm in the Northern Territory that would export energy to Singapore via a 4,200-kilometre underwater cable.

The company’s statement attributed the collapse to, “[T]he absence of alignment with the objectives of all shareholders”.

There are certainly local issues at play regarding the company’s structure, future direction and capital requirements.

That said, the situation facing Sun Cable throws into sharper relief the stability and viability of green energy projects more generally.

It’s a reality check on the economics of wind and solar and on Labor’s promise that the move towards renewables can go hand in hand with a reduction in electricity prices.

The government may need to lean more heavily on the moral imperative behind net zero, as I sense the narrative that it will be costless is going to be harder to sell.

• Professor Mike Dockery is Principal Research Fellow at the Bankwest Curtin Economics Centre