Low-emission’s missing link: reverse auctions for clean power

When it comes to reducing emissions, most serious analysts agree: the market works best, but the market is not enough. The International Energy Agency, the OECD, leading British climate economist Nicholas Stern, and Australian government adviser Ross Garnaut are among many analysts who conclude that…

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Sold to the lowest bidder! The carbon price will not transform Australia’s power supply without further steps to help low-emission technologies into the market. Flickr/sashafatcat

When it comes to reducing emissions, most serious analysts agree: the market works best, but the market is not enough.

The International Energy Agency, the OECD, leading British climate economist Nicholas Stern, and Australian government adviser Ross Garnaut are among many analysts who conclude that market mechanisms need to be complemented by policies that will enable low-emissions technologies to begin producing power at large scale and low cost.

Step beyond carbon pricing

In other words, there is a further essential step that government must take in order to ensure Australia meets its emissions targets over the next 40 years. A new Grattan Institute report, Building the bridge: a practical plan for a low-cost, low-emissions energy future, sets out what that step might be.

The problem that a carbon price alone cannot address is the great difficulty of getting low-emissions technologies into the marketplace at large enough scale to produce substantial amounts of power. That is because early investors face high costs, low returns, and the risk of competitors free-riding on their initiative.

They also require a reliable, long-term carbon price to underpin their investments. Yet the carbon price is inherently uncertain because it depends on the decisions of governments. If they do not keep making decisions that constrain emissions, the carbon price will not rise sufficiently to make low-emissions technologies competitive with traditional sources of power such as coal and gas.

Allocate contracts through low-bid auctions

To overcome this problem, the Grattan Institute’s report proposes that government contracts with project developers to deliver low-emission electricity at a price that makes the technology viable. Contracts would be awarded through reverse auctions (meaning the lowest bid wins) held every six months.

Technologies such as large-scale solar thermal energy that are out of the R&D stage and ready to proceed to market would bid for power contracts in specific categories. A successful bidder would receive two payments: one that covers it for the risk of investing in an unproven technology, the other for the risk that the carbon price will not be high enough to match the long term climate change targets that would make the technology commercially viable.

A strength of our auctions proposal is that it would support a range of low-emissions technology options. This is important when no one or two technologies have yet emerged that can meet Australia’s emissions reduction needs. Also, the market would choose these technologies, rather than government picking winners, which it is ill-suited to do.

The proposal has other major benefits for both parties. Investors can proceed with firm contracts, while government is able to use competitive market pressures to drive down cost.

To ensure that only credible projects are awarded contracts, proponents would be required to secure finance before bidding and to post a refundable bond. The guarantee of repeated auctions over a 10-year period would provide opportunities for technologies that lose in one round to come back again in later rounds.

Over multiple rounds, technologies that show they are reducing in cost will gain further support. Technologies that do not will have support withdrawn.

Get projects up and running

The critical goal is to get projects up and running. All experience shows that as technologies are deployed, their costs fall. As that happens, and as the carbon price rises in order to meet the long-term emissions reduction target, government support would fall away. This is a key design factor: the intent of the auctions scheme is to produce commercially viable technologies, not to provide long-term subsidies as too many recent policies have effectively done.

The difference between the Grattan scheme and existing policies such as capital grant schemes, feed-in tariffs and the Renewable Energy Target is that the former is designed expressly to get low-emissions technologies into the marketplace at lowest cost. It works closely with a carbon price, whereas existing policies are generally superfluous, and even tend to increase the cost of meeting our emissions reduction targets, once a robust carbon price is in place.

Auction schemes are not without risk. Companies can bid unrealistic prices and then fail to deliver the projects. Our proposal contains several safeguards against this. They include the refundable bond, a requirement for commercial credibility and payment only on delivery.

Works with Coalition policy, too

Policy menu: should Tony Abbott become PM, the Grattan proposal would fit with the Coalition’s Direct Action Plan. AAP/Miranda Forster

A change of government would lead to changes in the policy environment. The Federal Opposition’s Direct Action Plan would award tenders for emissions reduction through an Emissions Reduction Fund. While a market mechanism with a carbon price is unquestionably the best way to address Australia’s climate challenge, Grattan’s auction proposal could work with the Direct Action Plan to enable it to achieve its objective.

The proposal seeks to build a bridge between the current carbon market and the market for low-emissions technologies Australia needs. It has a cost, but it frees up constrained investment and innovation now in order to avoid much greater cost in the long run.

Comments welcome below.

Join the conversation

42 Comments sorted by

  1. Anthony Ervin

    Mathematics Teacher at New South Wales DEC

    I like the sound of this. I wonder if Julia Gillard knows about it? Hopefully Tories Luny costly and uncosted polices are not put in place and the more efficient and as the Author says widely acknowledged "best" mechanism for Carbon reduction Emission Trading Scheme is kept. Also, hopefully the message is passed across properly by the media (no chance in News Ltd right?).

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  2. Mark Duffett

    logged in via Twitter

    Sounds good, so long as ALL low-carbon technologies are able to bid, on a level playing field. What does "power contracts in specific categories" mean?

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  3. Luke Weston

    Physicist / electronic engineer

    "The problem that a carbon price alone cannot address is the great difficulty of getting low-emissions technologies into the marketplace at large enough scale to produce substantial amounts of power. That is because early investors face high costs, low returns, and the risk of competitors free-riding on their initiative."

    Not to mention legal restrictions against fission energy, the only technology that can actually do the job at a realistic coal-plant-replacement scale, a high capacity factor, and a plausible price.

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    1. Anthony Ervin

      Mathematics Teacher at New South Wales DEC

      In reply to Luke Weston

      What about the waste? Where do you store it? Guarantees about meltdowns, leaks, contamination etc.... Not so straight forward as saying we must have fission i'm afraid.

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    2. Gary Murphy

      Independent Thinker

      In reply to Luke Weston

      Latest Solar Thermal:

      http://cleantechnica.com/2012/02/06/twin-solar-thermal-plants-commence-operation-in-spain/

      100 MW with energy storage.

      And the cost:
      "Finally, the study acknowledged how technology for CSP was improving and how this would result in a drastic price decrease by 2050. It predicted a drop from the current range of €0.23–0.15/kwh to €0.14–0.10/kwh."
      http://en.wikipedia.org/wiki/Concentrated_solar_power

      That is 19-29 c/kwH now and getting cheaper. (Exchange rate 0.8?)

      What are the costs of nuclear?

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    3. Mark Duffett

      logged in via Twitter

      In reply to Gary Murphy

      Costs of nuclear: $0.06 c/kWh, give or take, levelised. http://bravenewclimate.com/2011/08/17/tcase14/

      And that's in 2009. Remember that nuclear technology isn't in stasis either, it too will have improved well before 2050. Such as Generation IV reactors, which extract 100 times the energy per unit fuel of currently operating designs, and consume what is presently considered nuclear 'waste'.

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    4. Chris O'Neill

      Telecommunications Engineer

      In reply to Anthony Ervin

      Australia has quite a few salt pans. I'm sure we could spare one of the smaller ones. There is no law of physics that says nuclear reactors must be physically capable of melting down. Even if there was, it doesn't have to be put in a city or town. Believe it or not, the Japanese way in the 1960s is not the only way.

      In any case, if you really believe nuclear energy is more expensive than alternatives then you have nothing to worry about.

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    5. Chris O'Neill

      Telecommunications Engineer

      In reply to Anthony Ervin

      Australia has quite a few salt pans. I'm sure we could spare one of the smaller ones. There is no law of physics that says nuclear reactors must be physically capable of melting down. Even if there was, they don't have to be put in a city or town. Believe it or not, the Japanese way in the 1960s is not the only way.

      In any case, if you really believe nuclear energy is more expensive than alternatives then you have nothing to worry about.

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    6. Gary Murphy

      Independent Thinker

      In reply to Mark Duffett

      OK - I'm going to ask the obvious questions.
      Does that include:
      Long-term Waste storage (how long does that waste stay toxic?)
      Risk (Insurance)
      Decommissioning.

      I found this:
      http://thinkprogress.org/climate/2009/01/05/202859/study-cost-risks-new-nuclear-power-plants/?mobile=nc

      which estimates costs at 25-30 c/kwH

      and links to a Time Magazine article which states:
      "...while new nuclear energy is on track to cost 15¢ to 20¢ per kilowatt-hour. And no nuclear plant has ever been completed on budget."

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    7. Mark Duffett

      logged in via Twitter

      In reply to Gary Murphy

      Yes, it does include those lifetime costs (and note the implications of Generation IV reactors for waste).

      Don't know about the Time article, however I'd wager it's referring only to the US, where the nuclear industry has been strangled for decades in a morass of over-regulation. China (for example) is now punching out reactors far more efficiently.

      In any case, Joseph Romm is not a credible voice on nuclear, see (for one example amongst many) http://nucleargreen.blogspot.com.au/2011/01/joe-romm-and-reactor-construction-by.html. In contrast, the figure I gave originates from a peer-reviewed paper: http://www.sciencedirect.com/science/article/pii/S036054421000602X

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    8. Chris O'Neill

      Telecommunications Engineer

      In reply to Mark Duffett

      "China (for example) is now punching out reactors far more efficiently."

      China already burns more coal than every other country put together and the forecast coal burning by China is for continuing rapid growth. A lot of people don't like nuclear energy but I can't see anything else making as much of a dent in China's coal burning as nuclear energy. We can only hope China develops nuclear energy as much as possible.

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    9. Gary Murphy

      Independent Thinker

      In reply to Mark Duffett

      That paper is not a study of the costs of nuclear - it is a study of the effects of a carbon price on various generating technologies. Anyhow - it is paywalled so I can't read it. Could you let me know where they referenced their nuclear technology costs?

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    10. Gary Murphy

      Independent Thinker

      In reply to Chris O'Neill

      "In 2009 ... . In the same year, the total installed electricity generating capacity was 874 GW"

      "China's total wind power capacity reached 2.67 gigawatts (GW) in 2006,6.05 GW by 2007, 12.2 GW by 2008, 25 GW by 2009, and 44.7 GW by 2010, making China the world leader in installed wind power generation capacity."

      "It is the largest producer of solar water heaters, accounting for 60 percent of the world’s solar hot water heating capacity, and the total installed heaters is estimated at 30 million households."

      "In 2011, China had 11 nuclear power units with a total electric capacity of 11 GW".

      http://en.wikipedia.org/wiki/Energy_policy_of_the_People's_Republic_of_China

      Renewables produce more energy than nuclear in China - and deployment is accelerating rapidly.

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    11. Chris O'Neill

      Telecommunications Engineer

      In reply to Gary Murphy

      It's a pity you don't read what you cite: http://en.wikipedia.org/wiki/Energy_policy_of_the_People's_Republic_of_China because then you might avoid writing garbage or misleading statements such as:

      "Renewables produce more energy than nuclear in China"

      If you had bothered looking at one of the graphs in your citation, http://en.wikipedia.org/wiki/File:Electricity_production_in_China.PNG , then you might have noticed that Chinese nuclear produces a lot more energy than Chinese non-hydro renewables, albeit both a long way behind coal-burning electricity which is sky-rocketing.

      In case you still haven't realized, maximum output power is not the same thing as average output power (or energy output over a long period). Renewables produce a lot less average output than maximum output.

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    12. Gary Murphy

      Independent Thinker

      In reply to Chris O'Neill

      Now now - there's no need to resort to personal abuse.

      That graph you cite only runs up to 2005. Since then there has been much installation of renewables. Much more than nuclear.

      Wind capacity in 2010 was 44.7GW (up from 2.67GW in 2006) - so even at 30% generating capacity wind power alone outstrips nuclear.

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    13. Chris O'Neill

      Telecommunications Engineer

      In reply to Gary Murphy

      "In 2011 they had 62GW capacity (extrapolate to 62000 GWh of electricity)"

      "In 2011 11GW of nuclear capacity produced 54800 GWh of electricity."

      Wind energy MIGHT have produced more electricity than nuclear in 2011 if they were all connected. But 25% of wind generators weren't connected in 2010 so I don't know if they did. This illustrates the problem with wind generation which is going to limit the rate at which it can be connected even though China has plans to install it as fast as possible.

      So it's hard to say how quickly China is going to increase its electricity supply from wind. In any case, it plans to increase nuclear capacity from 11 GW in 2011 to 86 GW in 2020, to 200 GW by 2030, and to 400 GW by 2050. It won't have any new problems integrating this capacity with the grid.

      But the problem remains that China is still going to be generating vast amounts of electricity a long way into the future by burning coal.

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    14. Luke Weston

      Physicist / electronic engineer

      In reply to Gary Murphy

      According to the link you provided regarding the solar thermal power plants in Spain, "they will each “produce 160 GWh of power [sic] per year".

      160 GWh / (50 MW * 1 year) = 36.5% capacity factor.

      So there are two plants with a nameplate capacity of 50 MW each, with a capacity factor of 36.5%.

      This does not even come remotely close to being able to replace coal-fired power stations. A typical coal-fired power station, which we want to replace, such as your Loy Yang or Hazelwood or whatever…

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    15. Luke Weston

      Physicist / electronic engineer

      In reply to Anthony Ervin

      You don't just get to say the word "waste" and act like that's an argument. That's not an argument, that's just one word. You don't just get to say the word "waste" and expect to get some sort of Pavlovian conditioned response of fear , uncertainty and doubt.

      What is this "waste" you speak of? Tell me something about it, scientifically. Try and elucidate an actual argument.

      "What about the waste? Where do you store it? Guarantees about meltdowns, leaks, contamination etc.... Not so straight…

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    16. Gary Murphy

      Independent Thinker

      In reply to Chris O'Neill

      "It won't have any new problems integrating this capacity with the grid." - might run into other problems though.

      "However, rapid nuclear expansion may lead to a shortfall of fuel, equipment, qualified plant workers, and safety inspectors."

      "The official target of a capacity of 40 GW by 2020 is unchanged but earlier plans to increase this to 86 GW has been reduced to 70-75 GW due shortages of equipment and qualified personnel as well as safety concerns."

      http://en.wikipedia.org/wiki/Nuclear_power_in_China

      Whatever they do - we can only hope they do it quickly.

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    17. Gary Murphy

      Independent Thinker

      In reply to Luke Weston

      Each collector uses 51 hectares (ha is 100m x 100m). Total 750m x 750m.
      http://en.wikipedia.org/wiki/Andasol_Solar_Power_Station

      You would need 60 collectors to get 10TWh of electricity - that is 3000ha - add another
      3000(?) for ancilliaries (Andasol uses another 100) 6000ha. Total 8km x 8km. I imagine a coal mine / coal power station probably uses as much.

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    18. Yoron Hamber

      Thinking

      In reply to Mark Duffett

      Mark, you wrote "And that's in 2009. Remember that nuclear technology isn't in stasis either, it too will have improved well before 2050. Such as Generation IV reactors, which extract 100 times the energy per unit fuel of currently operating designs, and consume what is presently considered nuclear 'waste'."

      Maybe, but what we have going now is the older type of reactors. China needs a lot of energy, as fast and cheap as possible so they will try for nuclear, as simple and safe as they can find. But :) The waste seems to be there even so.

      As for the ones we have going.
      http://www.guardian.co.uk/commentisfree/cifamerica/2012/may/07/japan-fukushima-nuclear-power-earthquakes

      China will become the new testing environment for those molten salt reactors. And, with time, we will learn if they work out as promised. And what waste they will leave. Give it a decade or two.

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    19. Gary Murphy

      Independent Thinker

      In reply to Mark Duffett

      OK - now I've found this:
      http://en.wikipedia.org/wiki/Cost_of_electricity_by_source

      According to US DOE - nuclear costs are 8.9 c/kwH - and that doesn't include insurance.
      Wind is 8.3c/kwH.
      Solar thermal 20.5 c/kwH.

      UK figures
      Nuclear 0.8-1.05 P/kwH
      Wind 0.8-1.1 P/kwH
      Solar 1.25-1.8 P/kwH

      And the Australian figures: (2006)
      Nuclear 7.5-10.5 c/kwH
      Wind 6.3 c/kwH
      Solar thermal 8.5 c/kwH

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    20. Gary Murphy

      Independent Thinker

      In reply to Mark Duffett

      You've got me there.

      Now - total electricity harvested in the NEM in 2005-2006 was 141TWh.

      http://en.wikipedia.org/wiki/Energy_policy_of_Australia (under depreciation heading).

      Let's call it 200TWh to fulfil NEM energy requirements. That is 20 of the solar farms I have described above. to supply all of Australia's electricity requirements.

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    21. Chris O'Neill

      Telecommunications Engineer

      In reply to Gary Murphy

      "Each collector uses 51 hectares"

      It actually says:

      "Each collector has a surface of 51 hectares (equal to 70 soccer fields); it occupies about 200 ha of land."

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    22. Mark Duffett

      logged in via Twitter

      In reply to Gary Murphy

      Alas, no. With no more than a day or so's storage, totting up to even 200TWh over the course of a year with solar thermal doesn't mean the watts are necessarily there when they're needed. A great deal of reliable backup would still be required. With all the ballyhoo over solar thermal producing over 24 hrs, note the power is never stated. Even a AAA battery can produce for 24 hrs if the power output is kept low enough.

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    23. Gary Murphy

      Independent Thinker

      In reply to Gary Murphy

      My bad - those UK figures are out by a factor of 10. (P is British Pound).

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  4. John Newlands

    tree changer

    I wonder if the perceived shortcomings of the current regime of $23 carbon tax plus 20% RET would be overcome with much tougher CO2 contraints alone. That could be an ETS with no fee permits or questionable foreign offsets or perhaps a $40 revenue neutral carbon tax.

    Minister Combet likes to point out subsidised or mandated PV has a CO2 avoidance cost of $400 a tonne, clearly not the cheapest option. All technologies should be on the table...nuclear, slaves on treadmills etc. Apart from being made legal I also think nuclear should get loan guarantees and public liability indemnities, both of which have precedents in the solar and gas industries.

    My alternative is thus
    1) bring in a no-freebies tough ETS
    2) drop the RET and allow nuclear
    3) help overcome high capex and perceived risk.

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    1. Anthony Ervin

      Mathematics Teacher at New South Wales DEC

      In reply to John Newlands

      Cannot agree with nuclear power though. I like the idea that we restrict nuclear to medicine and research and not large scale high disaster potential energy use.

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    2. Luke Weston

      Physicist / electronic engineer

      In reply to Anthony Ervin

      What exactly does "high disaster potential" actually mean, though, when you're talking about the safest form of energy generation in the world and especially the safest form of scalable, high-capacity-factor, coal-replacement-scale, constantly-available energy generation?

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  5. David Young

    Post Graduate Student

    The suggestion that the Renewable Energy Target (RET) is 'generally superfluous' fails to recognise its objective - to deliver the greatest amount of renewable energy possible using proven technologies at the lowest cost. The Howard Government's RET scheme was and is world leading. It provides strong long term incentives for any renewable energy technology that can deliver low cost renewable energy. The fact that no renewable energy technology has emerged that is commercially viable without subsidy…

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    1. Michael Hay

      retired

      In reply to David Young

      I still am unable to comprehend why our Federal Government is unable to use some of its income to subsidise the search for technically feasible renewable electricity generation. We hear nothing from it about the making of solar panels in Australia; nothing about seeking out sites for hydro generation; nothing about tidal or wave technologies. Is it it merely a lack in its ability to communicate or is it really that their brains are sodden with politics to the extent that intelligence is completely stultified?

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    2. David Young

      Post Graduate Student

      In reply to Michael Hay

      Although geothermal and wave technologies are still in need of further research and development, wind and solar are already technically proven. The question is whether Government funded research is capable of substantially reducing the cost of renewable technologies so that they are economically feasible without subsidy. Substantial increases in the scale of production and competition between manufacturers are far more likely to drive down costs than Government investment in research. That is…

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  6. Yoron Hamber

    Thinking

    There seems to be two, maybe two and a half ways here. The government subsidies the technology and help it mature. Or the government imposes strict regulations and leave it to the 'market' to adjust, which inevitable will land the bill at the consumer. And then a half :), the government does the second choice but sets a roof on what the 'market' can take out.The problem here is that the 'market' always will try to raise the prise until they get to the pain-threshold, where they have to stay unless they want to lose consumers. But then we have 'energy' which all wants, and needs, for their daily work. Leaving it all to the 'market' sounds remarkably naive to me.

    After all, we're not talking about Santa :)
    The 'market' goes on profit, the bigger the better.

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