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Power of the wind - how renewables are lowering SA electricity bills

Renewable energy sources such as wind and solar power appear to be the impetus behind a South Australian proposal to substantially drop electricity prices, just as other states are hiking theirs. The Essential…

Wind and solar power appears to have been behind a drop in wholesale power prices in South Australia, leading to a proposal to reduce retail prices for consumers.

Renewable energy sources such as wind and solar power appear to be the impetus behind a South Australian proposal to substantially drop electricity prices, just as other states are hiking theirs.

The Essential Service Commission of South Australian (ESCOSA), which regulates retail electricity prices, has released a draft price determination that proposes an 8.1% reduction in the electricity standing offer, (that is, the default retail price that must be offered to South Australians, at a minimum).

The proposal, which follows an ESCOSA investigation into the wholesale energy costs, translates to a reduction of $27.19/MWh, potentially lowering South Australian electricity bills by an average of $160 per household.

And while it is not specifically acknowledged in the determination, this may be the first time the “merit order effect” of renewable energy sources can conclusively be seen flowing through to consumers in Australia.

The Merit Order Effect

There is nothing special about the “merit order effect”. Quite simply, if you introduce more of a product into a market (that is, increase supply) then prices fall.

The introduction of new capacity upsets the prevailing merit order (the order in which electricity is dispatched, from lowest to highest cost) lowering market prices.

Historically this has been observed when new coal power plants have been added to the market. But the Renewable Energy Target (RET) and other schemes such as the state based feed-in tariffs, are introducing more renewable electricity (supply) to the national electricity market.

Renewables typically have no fuel costs (free sun and wind), and thus have the lowest short run marginal cost of production. This ensures they are lower in the merit order and dispatched prior to anything else in the market. Like a new coal plant, this additional (and low marginal cost) supply also lowers wholesale prices.

This merit order effect has been well documented internationally, and is now widely recognised in South Australia, which has both the highest installed capacity of wind (1203 MW) in Australia, and the highest per capita installation of rooftop Photo Voltaic (PV) solar power.

The volume weighted wholesale prices in SA have reduced from $70-$80 /MWh between 2008-10, to around $45 in 2011, in parallel to the installation of wind and solar capacity (and the flat-lining of demand).

The Australian Energy Market Operator (AEMO) has noted that the South Australian wholesale prices are lower than they have been since the start of the national electricity market, and that the wind “tends to depress the South Australian regional prices”.

A UNSW study demonstrated that periods of high wind output are in general associated with lower market prices, and also appear to contribute to extreme negative price events, while the impact of solar power in South Australia is “blindingly obvious”.

While ESCOSA did not explicitly identify renewables or the merit order effect as a cause of the wholesale price reduction in its draft determination, it did note that: “recent developments in the wholesale electricity market suggested that the forward cost of wholesale electricity may be materially lower than the current [wholesale] allowance.”

It is hard to discount the recent and substantial installation of both wind and PV in the South Australian market as a significant contributor to the suggested “recent developments”.

It should be noted that the wholesale spot price is only part of the picture: spot prices do not reflect the overall cost borne by retailers (for example, the cost related to managing risk). ESCOSA noted that the wholesale electricity cost allowance does not and should not reflect the average “spot price” alone.

The true cost of renewables?

Earlier this year The Australian ran a front page article decrying the cost of renewables, and in particular solar, which argued it would add $140 to the household annual power bills in South Australia. (this is a perhaps a misleading suggestion given it represents two and a half years of costs levied in a single year).

The actual cost of the feed-in tariffs and the cost of the RET is substantially less concerning when put in the correct context of the resulting wholesale price reduction.

According to the draft determination, the cost of compliance with the RET scheme (both small and large scale) is $8.56 per MWh. The annual cost of the Feed-in Tariff scheme in SA is approximately $10.93 per MWh (based on the annual cost, not two and half years of costs).

Combined, these costs are a fraction of the proposed reductions in the wholesale component of the bill. That is, the cost of supporting renewables may be completely offset, (even if only a proportion of the wholesale cost reductions are attributed to the renewables).

Referring to the direct costs of renewables, without including secondary effects such as the merit order effect only paints half the picture and presents a deceptive view of overall costs.

Join the conversation

26 Comments sorted by

  1. John Newlands

    tree changer

    I suggest the 'merit order effect' is an example of what economists call dissipation of rent. That is some kind of advantage (such as a subsidy) is frittered away. A related phenomenon is that of negative pricing whereby a generator pays others to take their output in order to keep the subsidy rolling in. I'm saying the 'merit order effect' = not-quite-negative-pricing.

    Renewable energy targets mean that electricity retailers must take RE whether they want to or not. In a Australia the penalty…

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    1. Zvyozdochka

      logged in via Twitter

      In reply to John Newlands

      "High energy prices have killed off the State's biggest project, the Olympic Dam expansion."

      I think you must have 'read' the Tony Abbott version of BHP's explanation.

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  2. David K Clarke

    logged in via Facebook

    Good article. I'm a bit annoyed that one of my photos has been used without any atribution. (The one of wind turbines at sunset.)

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    1. Chris Aitchison

      logged in via Twitter

      In reply to David K Clarke

      What a beautiful photo. It appears on the side because it is the thumbnail image for a related article. I checked, and it is definitely attributed to you on that article.

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  3. Peter Sommerville

    Scientist & Technologist

    Interesting, given that the last time I looked SA prices were the highest in the Commonwealth. I'll believe it when it happens.

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  4. Ben Heard

    Director, ThinkClimate Consulting

    This is a really curious article. It is full of supposition about the recommended price fall, attributing it to the merit order effect.

    Wouldn't it be simpler and more accurate to just read the ESCOSA statement and go with what they actually say?

    To begin with, page 7:
    "On 15 June 2012, the Commission announced an increase in the standing contract price; this resulted in an average bill increase of 18% for a typical standing contract customer. That price increase incorporated the impacts of…

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    1. Mike Hansen

      Mr.

      In reply to Ben Heard

      Ben. You do not seem to understand the sections that you quoted from the report.

      The report's comment on the 15 June 2012 18% increase
      "That price increase incorporated the impacts of the Commonwealth Government’s Clean Energy Act 2011 (Clean Energy Act) – which places a price on carbon emissions – and the AER’s determination to raise network charges, driven largely by the increased costs of the solar photo-voltaic feed-in tariff (FiT) "

      So the CARBON TAX and the FIT for Solar.

      Your claim…

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    2. Ben Heard

      Director, ThinkClimate Consulting

      In reply to Mike Hansen

      "I think you owe Dylan an apology for the implication in the final paragraph given that you have misread his article"

      On the point of the spot pricing, you are right, I did indeed miss this part. I offer an apology.

      "What happened to the CARBON TAX. - you are being a bit dishonest don't you think?"

      No need to "think" when we can read and know. You are welcome to back track to the June pricing from ESCOSA. They are very clear that it is the FiT, in excess of the carbon pricing mechanism…

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    3. Mike Hansen

      Mr.

      In reply to Ben Heard

      Ok - so your argument is about the 6.9% FIT component of the 18% increase.

      Ben - can you reread the last section of the article and click through to the article in The Australian. Is Dylan not directly addressing the 18% increase? You may disagree with his point but you can hardly claim that he has ignored it.

      You also need to acknowledge that the increase in electricity prices due to the carbon tax (4.6% of the 18%) was lower in SA than the coal states because of the lower carbon intensity of generation.

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    4. Ben Heard

      Director, ThinkClimate Consulting

      In reply to Mike Hansen

      "You also need to acknowledge that the increase in electricity prices due to the carbon tax (4.6% of the 18%) was lower in SA than the coal states because of the lower carbon intensity of generation."

      Why do I need to do that? I never disputed that issue.

      You may be tarring me with an anti-renewable brush. That would be the wrong thing to do. I'm not against either wind or PV. I just think this is a poorly argued article, that does not support the title very well, and seems to run in opposition…

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    5. Graham Palmer

      Industrial engineer

      In reply to Ben Heard

      I agree with Ben, that while the article has included various disclaimers, my reading is that it is implicitly arguing that adding higher cost generation to the SA grid has caused, and will continue to cause, lower electricity bills than if, say, lower-cost thermal generation was commissioned, and uses the merit-order effect to argue the case. Does the author really believe that higher average-cost generation will deliver lower long-run electricity prices???

      To quote Nelson et al (2012) "The merit…

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    6. Zvyozdochka

      logged in via Twitter

      In reply to Graham Palmer

      "Adding higher cost generation to the SA grid has caused, and will continue to cause, lower electricity bills than if, say, lower-cost thermal generation was commissioned". Eh?

      The result of adding lower-cost thermal (CO2) generation would be even lower cost electricity so the actual argument of the author can be re-phrased (as you appear to want it); in spite of adding higher cost generation, the SA grid has seen lower electricity prices, that will be recommended to be lower still.

      An excellent outcome given part of the motivation for adding wind and PV is CO2 emission reduction (also achieved).

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    7. Zvyozdochka

      logged in via Twitter

      In reply to Ben Heard

      "I am concerned that these higher penetrations are going to prove difficult and costly to integrate."

      Is this code for protecting a baseload-grid model?

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    8. Jonathan Maddox
      Jonathan Maddox is a Friend of The Conversation.

      Software Engineer

      In reply to Ben Heard

      "But I am concerned that these higher penetrations are going to prove difficult and costly to integrate."

      The cost of integration in South Australia is negligible, given that almost all the "baseload" generation in the state is actually very responsive gas (much of which would be called "peaking" generation anywhere else). Both of the biggest gas-fired power stations and the majority of the state's electric demand are right in Adelaide, and all of the wind farms are also well-connected with that hub. Every kilowatt-hour generated by intermittent renewable sources is a kilowatt-hour's worth of gas not burned.

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    9. Graham Palmer

      Industrial engineer

      In reply to Zvyozdochka

      "the result of adding lower-cost thermal generation would be even lower cost"

      Zvyozdochka, thank you for clarifying the article for me - adding higher cost generation will indeed result in relatively higher cost electricity prices - I must have been taking the title too literally when I read "How renewables are lowering SA electricity bills".

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    10. Zvyozdochka

      logged in via Twitter

      In reply to Graham Palmer

      "adding higher cost generation will indeed result in relatively higher cost electricity prices"

      Nearly there Graham, you're just missing the bit about CO2 free generation in your cost argument.

      If the question were "would prices be lower still if we could add a glorious modern black coal power station" then the answer may well be yes, but that, I hope you'll agree, doesn't really address the CO2 problem does it.

      The only generation capability that should be added to the SA network is in emission free forms, so after having added relatively higher cost wind and PV has still resulted in falling electricity prices (since 2001 even).

      I can sense your disappointment, I'm sure you wanted wind and PV to massively explode SA electricity prices.

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    11. Ben Heard

      Director, ThinkClimate Consulting

      In reply to Jonathan Maddox

      "The cost of integration in South Australia is negligible"

      No, to date it has been acceptable, which is why I am basically cool with the level of penetration we have in SA, but would rather see the other states catch up then press on to higher penetration here. AEMO is making clear warnings on this:

      "the significant growth of wind generation over recent years, and the variability of wind over a short period of time, means that transmission network and power system management is becoming more challenging… while variability is relatively small as a pecentage of total installed capacity, as installed capacity increases, the magnitude of that variability becomes more difficult to manage” . From the 2011 SASDO.

      Yes, wind has lowered our GHG emissions. No argument from me there, never has been.

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    12. Ben Heard

      Director, ThinkClimate Consulting

      In reply to Zvyozdochka

      No, it's code for "I am concerned that these higher penetrations are going to prove difficult and costly to integrate" which is exactly what AEMO are concerned about.

      But on the topic, there is nothing inherently evil about the baseload grid model. It is what we have got. If we had the luxury of starting over we might make something different, but the goal is cutting greenhouse gas emissions while maintaining energy security at reasonable cost, not re-fashioning the grid for the sake of it.

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    13. Jonathan Maddox
      Jonathan Maddox is a Friend of The Conversation.

      Software Engineer

      In reply to Ben Heard

      I too would like to see significantly higher penetrations in all states.

      I don't think I'm quite incorrect though -- yes, the costs of integration will be higher at higher penetrations than the present "negligible", but I think the basic point that even deep penetrations are relatively cheap when the complement is all-gas (thus rapidly adjustable) stands.

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    14. Zvyozdochka

      logged in via Twitter

      In reply to Ben Heard

      Interconnected pentrations of about 40% wind/PV in Europe appear to be causing little technical difficulty.

      AEMO believe 30%-35% wind for SA will be no problem before the Heywood interconnector needs to be upgraded (already in progress, 3 options being considered - Project Assessment Draft Report was expected July 2012).

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  5. Roland Riese

    Mech. Engineer

    The green propaganda machine in action, but what are the facts? With about 30% of cheap wind power contribution the electricity cost in South Australia have gone up by 120% in the last five years making it the most expensive electricity on the planet. Naturally, the average power consumption has gone down because people cannot afford using electrical power anymore. South Australia is on the path to the dark ages for absolutely no good reasons. Where ever you live, green ideology will not contribute to stop climate change; it will produce poverty.

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