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Careful what you wish for

You might have heard of an aircraft manufacturer named Boeing. They are based in the USA and have been happily manufacturing 737s (a twin engine jet that can carry somewhere between 100 and 190 people, depending on the subtype and configuration) in the USA since the 1990s. Competition comes from Airbus, a European company, that manufactures the A320 family of jets that, depending on configuration, can carry somewhere between 130 and 188 passengers. While Airbus is a combination of various European companies, it has assembly plants in Europe, Alabama, USA as well as Tianjin, China.

What is less well-known is that Canada also builds commercial aircraft. In fact, if you’ve flown around regional Australia on Qantaslink, you have almost certainly flown in a Dash 8 at some point. Dash 8s are manufactured by Bombardier (with assistance from the Quebec Government). In the past few years, Bombardier have developed a small jet, known as the ‘C Series’ which comes configured for up to 130 or so passengers. A major US carrier, Delta Airlines placed a firm order for 75 ‘C Series’ aircraft (with an additional 50 options) during 2016. Boeing (who make only slightly larger 737’s) celebrated the news by claiming that Canada was dumping the aircraft into the USA and calling for tariffs. In Trump’s America, arguments like that are easy to prosecute and the US Government placed a 220% tariff (the claimed discount to ‘full price’) on the ‘C Series”, with an 80% penalty.

What Trump and Boeing probably didn’t see coming was an agreement between Airbus and the cash-strapped Bombardier to form a company 50.01% owned by Airbus to manufacture the ‘C Series’ at the Airbus facility in Alabama. Delta gets the planes, Airbus gets a new product line, Boeing can’t claim the planes were dumped as they are being made in the USA and look rather precious by trying it on.

It’s probably fair to suggest there is little love lost between Boeing and Airbus, there is a reasonable probability that Boeing didn’t consider all the potential consequences when it made claims of unfair trade. As a result of the deal between Airbus and Bombardier, there is a greater deal of perceived industry support for the new ‘C Series’ potentially resulting in more sales as Airbus can sell the plane as a part of their product line and in the future, the ‘C Series’ may be enlarged to make it a true competitor to the 737 and A320.

Prime Minister Turnbull could also be accused of not considering all the possible consequences when he announced the National Energy Guarantee a week or so ago. It seems that as much thought went into the acronym ‘NEG’ as went into the 12-page document circulated to Energy Ministers at the time of the public announcement. Fairfax reported:

There was a moment of stunned silence at a hastily arranged teleconference of energy ministers on Tuesday evening, just hours after the government’s long-awaited electricity scheme had been released.

Some of those present at the meeting — described as “testy” by several participants — had requested more detail on the plan. All they had received were two briefing papers — 12 pages in total — and a media release.

With a decade of policy failure by both sides of politics, including Opposition Leaders being rolled over the issue, the then Prime Minister fell into the trap of naming a carbon pricing initiative as a tax when it clearly wasn’t during an election campaign, and a former Prime Minister suggested that ‘climate change’ was the 21st century religion in a speech in the UK as recently as a month or so ago. The whole debacle could have been compared to Nero fiddling while Rome burnt (which apparently didn’t happen — but why ruin a good story).

Despite the odd name and really easy takedowns such as ‘NEGative energy’, ‘NEGative vibes’, ‘NEGative chance’ and so on; Katherine Murphy from The Guardian correctly points out that:

Abbott was apparently lulled by the victory he thought he’d chalked up with killing Alan Finkel’s clean energy target, and in the ensuing lull, the cabinet, and the bulk of the party room came over the top and signed off on a proposal that looks a lot like a regulated carbon price. By acclamation. That’s really quite something in Coalition terms.

Turnbull emerged with a concept called the national energy guarantee. Calling it a policy is a massive stretch. It’s a prototype. The organising idea is energy retailers would face a reliability obligation, and an emissions reduction obligation.

Business and finance reporting organisation Bloomberg has suggested

“Although still in the early stages of development, the concept is innovative and elegant, and could well prove ingenious,” said Kobad Bhavnagri and Leonard Quong from BNEF [Bloomberg New Energy Finance] in Sydney.

“If effective and efficient, it would be a template for policy makers worldwide. Void of any politically unpalatable features and yet likely to be environmentally effective, it could end the climate and energy wars that have claimed so many prime ministers and begun to weaken the Australian economy,” they said.

Reduced down to basics, the NEG will require all electricity retailers to contract with wholesalers for certain percentages of renewable, baseload and ‘dispatchable’ (AKA flick the switch to cover sudden shifts in consumption) power supplies. Assuming the state governments who actually regulate the energy sector comply, a future government could increase or decrease the percentages to suit their political (or, here’s a thought, positive environmental) outcomes. The concept apparently is if a particular retailer decides not to comply, they could lose their license and their business.

To appease the high priests of coal within his government, it seems that Turnbull currently intends to include coal generation as ‘dispatchable’, which it clearly isn’t as it takes time to warm up and cool down a massive coal fire used to generate the steam used to turn the turbines. Despite that, economically the retailers probably won’t be of a mind to pay the extra costs for the warm up/cool down cycle when gas, hydro or (cough) grid scale batteries could perform the same task instantly.

The ABC’s Andrew Probyn wrote

We’ve had John Howard’s ETS (emissions trading scheme), Kevin Rudd’s CPRS (carbon pollution reduction scheme), Julia Gillard’s carbon tax, Tony Abbott’s Direct Action, Chief Scientist Alan Finkel’s CET (Clean Energy Target) … not to mention various dalliances (including Josh Frydenberg’s) with an EIS (emissions intensity scheme).

So when a new plan, an NEG no less, is presented as a “game changer”, scepticism’s instinctive.

But there’s a chance, too, that hope it might offer a way forward trumps any real faith that the modelling behind it bears scrutiny.

Indeed, a Cabinet minister reminded reporters this week that economic forecasting was only invented to make to astrology look respectable.

So when Labor criticises the PM’s plan for its lack of detail, the Federal Opposition knows that community tolerance for more squabbling over energy emissions policy is threadbare.

It is debatable if Turnbull’s claimed domestic savings of around $100 per annum will ever eventuate — so politics may scupper the NEG yet. It is also true the majority of the increases in domestic power prices over the past decade have not been due to environmental compliance on costs.

Since 2009, the electricity networks that own and manage our “poles and wires” have quietly spent $45 billion on the most expensive project this country has ever seen. Allowed to run virtually unchecked, they’ve spent vast sums on infrastructure we don’t need, and have charged it all to us, with an additional fee attached. The spending was approved by a federal regulator, and yet the federal government didn’t even note it until it was well underway.

Let’s be clear: this is the single biggest reason power prices have skyrocketed. According to the federal treasury, 51% of your electricity bill goes towards “network charges”. The carbon tax, despite relentless propaganda to the contrary, is small beer, comprising just 9%. The rest of your bill is carved up between those companies that actually generate your electricity (20%) and the retailers who package it up and sell it to you (20%). The Renewable Energy Target is such a small cost impost, the treasury’s analysis doesn’t even include it; the Australian Energy Market Commission says it makes up around 5%.

Thanks to the networks’ infrastructure binge, we now pay some of the highest prices in the developed world. The impact has been felt most keenly in New South Wales and Queensland, where the networks are government owned and network charges have accounted for two thirds of the price increases.

Regardless of the reality regarding quickly rising power prices, renewables are seen as the enemy and in the minds of the conservative rump of the LNP (at least) should be punished, hence the absolute rejection of any energy program that discourages the use of coal. Using the words ‘clean’, ‘renewable’, ‘cap and trade’ or ‘emission reduction’ are also apparently verboten.

We touched earlier on the beauty (and danger) of the little detail released about the NEG is that future governments will apparently be able to tweak the proportions of the NEG to match their particular ideologies. So, for example, if The Greens were to be the majority party in a coalition, it would be easy for them to dial the acceptance for coal down to zero and move renewables to a significant level.

While that particular scenario isn’t likely to happen next time there is a federal election in Australia, based on opinion polls, it wouldn’t be hard to comprehend a ALP government being elected. The ALP have already pledged to increase renewable energy production so Australia has a ghost of a chance of meeting our obligations under the Paris Agreement. If you run an energy company and are looking for certainty of investment, do you put your money into a coal fired power station with its inherent emissions, a lack of ability to start up or shut down the plant quickly to maximise revenue as well as the inevitable adverse publicity from the environmental lobby? Alternately, do you invest in a form or renewable energy (potentially with grid-scale batteries) ahead of a potential mandate from a possible ALP Government in 2018 or 2019?

Energy company shareholders are there to make a dividend. Being stuck with the debt for a coal fired generator plant that no one will buy energy from in a few short years will not put dividends in the shareholders pockets. The price of renewables is falling substantially and depending on where you look, the cost of generating a megawatt of electricity from renewables is equal to or less than the cost of burning coal. It seems that energy generators want certainty and if the NEG is the way to get it, they will live with it. Boeing apparently attempted to use US domestic politics to shore up their business, and failed miserably. It is likely the Coalition will also fail mixing internal party politics and ideology with energy production. They should be careful what they wish for.

Postscript – Some of the links in this article point to the ‘Plane Talking’ blog hosted by Crikey. The long-time author of that blog, Ben Sandilands, passed away just over a week ago after a long and distinguished career as a journalist. His writing was always clear, well researched and relevant to the subject. Rest in peace Ben, it was truely a pleasure to read your work.

This article by 2353NM was originally published on The Political Sword.

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8 comments

  1. Jennifer Meyer-Smith

    Thanks for presenting the irrefutable economic argument that renewables are the way forward in the minds of investors.

    Who would be stupid enough to support major investment in dirty coal when renewable energy is becoming more and more affordable and accessible?

  2. totaram

    “..To appease the high priests of coal within his government, it seems that Turnbull currently intends to include coal generation as ‘dispatchable’, which it clearly isn’t as it takes time to warm up and cool down a massive coal fire used to generate the steam used to turn the turbines..”

    I don’t wish to detract from the rest of your article, BUT as I keep pointing out, it is not that simple. How much time are you talking of? It takes several minutes to bring a storage hydro generator online at full capacity. A steam turbine running at 60% capacity can be “ramped up” to full capacity in the space of several minutes as well. The “massive coal fire” you speak of suggests lumps of coal burning in a hearth. Nothing could be further from the truth. The coal is pulverised into a powder and blown into the furnace almost like a liquid spray and burns instantly. There is also a subsidiary spray of oil to “stabilise the flame” as required. This mechanism can be ramped up fairly quickly and is called “spinning reserve”. These matters are explained, for example, in:

    https://en.wikipedia.org/wiki/Operating_reserve

  3. Harquebus

    If renewable energy could make money (surplus energy), the capitalist classes would be all over it and none of the rest of us would not get a look in. The few capitalists who manufacture these inefficient devices however, do not mind peddling their wares to the unwary and the gullible.

  4. diannaart

    It is likely the Coalition will also fail mixing internal party politics and ideology with energy production. They should be careful what they wish for.

    Here’s hoping they get exactly what they deserve.

  5. 2353

    @ Jennifer Meyer-Smith – thanks. The ‘feel good’ factor won’t convert corporate thinking, economics will.

    @ Totaram – what are the economics of running a steam turbine at 60% all the time ‘on the off chance’? I’m aware that the coal is pulverised however there is a time lag in bringing the water temperature up to steam so the turbine will spin if the fire is out.

    @ diannaart – here’s hoping . . .

  6. paul walter

    Delightful article.

    Is it ever wrong to come to AIM for a look?

  7. totaram

    2353: Spot on! If you run the turbine at 60% it makes the power station more expensive – of course! So you can claim the coal fired station has some “dispatchable” power but running it that way is costly. This just complicates things in terms of regulation and “the market” for generation.

  8. Shocked And Awed

    I’m confused as to why the government needs to have a policy on any market. Leaving aside questions on climate change, can these problems not be solved by rational actors making economically rational decisions? Or is the population too stupid to make decisions in their own best interests, so the government needs to make those decisions for them?

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