Philip Harrington
Energy Economist and Consultant
Presentation to the Australian Economics Society (Tasmania),
UTAS, 31/3/2016
Scope
 Challenges
 Climate change
 Growth and change -
economic/population/
technology
 Energy investment climate
 The current situation
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Storage trends
How large is the shortfall?
Revealed willingness to pay
Opportunity costs
GHG emissions
Avoiding lock-in of inefficient
solutions
 Optimal responses
 What is optimal?
 Energy efficiency
 Renewable energy diversity
and investment
 Other opportunities
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Transport
Fuel switching to RE
Additional link(s)?
Storage?
 Planning and governance
 Integrated, diverse/multidisciplinary, representative,
long-term, transparent,
accountable
Climate change
 Climate Futures for Tasmania (2008-11)
 “One of the greatest challenges [Tasmania] faces now and in the
future is around responding to climate change...”
 “Warming of the planet will have consequences for climate
extremes, water runoff, the viability of water catchments and the
incidence of floods. There will be a wide range of impacts on
agriculture.”
 “The challenge is to understand how climate change affects the
natural environment, human welfare and activities, and to provide
the right information to underpin policy responses.”
 HT downgraded the long term capacity of the hydro system by
~11% in 2007 to 8700 GWhs
 cf current ‘native demand’ ~10,000 GWhs/year

What’s the outlook?
https://www.nccarf.edu.au/content/climatefuturestasmania (emphasis added)
Climate change
 Every significant state, GBE and local government decision
needs to take account of this reality
 As a state, we need to move beyond passive denial (saying it’s
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real but doing nothing about it), boosterism (it’s a great
opportunity, we’re world leaders) and minimising the risks
(we’ll be right)
We need sober, comprehensive, strategic, sufficient responses
from the Tas Govt/GBEs and all Councils (and pressure on
Aust Govts)
Sustained, clever public education campaign
Published climate impact assessments for all major policy,
project, planning and infrastructure decisions (state/GBE and
local)
Tas Govt to demand and support ongoing climate research
Growth and change
 Population and economic growth will place upward
pressure on energy demand and emissions ceteris paribus
 Our energy system will (need to) change due to global
technology shifts and consumer/producer sovereignty
 PV, local storage, electric vehicles, ICT, virtualisation of the
economy, etc
 We also need to be planning to eliminate fossil fuel use as
soon as practical – creating opportunities for clean energy
 These changes will have significant implications (+ve and –
ve) for our economy and require leadership
 What’s our strategic positioning as a state? Are we ahead of
or behind the curve?
Energy investment climate
 Tasmania has a competitive electricity market in name only
 In reality, state-owned monopolies dominate most sectors
 This creates hidden barriers to entry for private investors
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Lack of counter-parties for hedge contracts, PPAs; pool price risk; GBE
influence over government policies and decisions
 HT’s two main wind developments have started or ended as
private equity partnerships
 But not all private investors will find this model acceptable

While the GBEs are capital-constrained by their owners
 As a result, total investment in new RE capacity in Tasmania has
been low during the global clean energy revolution
Current energy crisis
 Storages at historical low of 13.9% and falling ~0.1%/day
 HT now expected to bottom-out at 12% in early May,
assuming 50% of normal inflows (as per last 3 months), plus
diesel and gas generation

NEM Watch today (12.15pm) showed 21 MW of diesel actually
operating, 43 MW solar, 133 MW wind, 300 MW gas, 558 hydro
 Video (Mick Lawrence, Tasmania Video)
 Since 2010, average annual demand has exceeded LT
sustainable hydro yield by around 12%
 Average monthly imports across Basslink since 2010 of 33
GWhs (incl. carbon tax export period)
Storage trends
 Despite imports and wind, storages have been falling
on average since 2011

Carbon tax period 2012 - 2014
Energy in storage
(% full capacity at end of the year)
60%
50%
57%
53%
46%
40%
30%
32%
20%
24%
10%
14%
0%
2011
2012
2013
2014
2015
2016 to date
Data: HT website
Willingness to pay?
 Diesel cost over 3 months = $110m or ~$335/MWh
(based on published information), cf average Tas pool
price since 2010 of $39/MWh
 Marginal cost appears to be $22m/month (rental incl?,
what about new ‘dual fuel’ units?)
 33.5 c/kWh = revealed willingness to pay for a marginal
unit of energy in the current distressed system
 33.5 c/kWh = 600% of current feed-in tariff for solar!
 Any option cheaper than this (generation or avoided
consumption) should be preferred, subject to timely
availability
How large is the gap?
 Average monthly imports across Basslink equivalent to 122
MW at system average capacity factor (37%)
 Not much! Less than Woolnorth or Musselroe
 Based on AETA average costs onshore wind: 122 MW =
$62.7m (over 15 years), cf $110m for 3 months of diesel
 Or solar, 122 MW = $76.3m (over 25 years), or - if we allow for
lower CF (18% vs 37%) - $156m (for 250 MW installed)
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So, for the cost of 1 month of diesel, we could have 15+ years of wind
energy
Or for the cost of around 5 months of diesel, we could have 25+ years
of solar energy
 In fact, we need more new non-hydro renewable
generation than this for reserve margin, diversity and
rebuilding storages
AETA = Australian Energy Technology Assessment,
Office of the Chief Economist
Opportunity costs
 Apparent opportunity cost of
Basslink non-availability very
significant
Tas vs Vic Pool Prices
(daily) since loss of
Basslink
 Hedging arrangements impact
on net costs and also on the
incidence of costs (who pays)
 A unit of energy/water saved
can be resold (when Basslink is
operational) at peak prices in
Vic
 So the value of the waer saving
is effectively the Vic price at that
time, not the Tasmanian price
avoided
$450.0
$400.0
$350.0
$300.0
$250.0
$200.0
$150.0
$100.0
$50.0
$0.0
21/12/2015
0:00
21/01/2016
0:00
Tasmania: Pool Price
21/02/2016
0:00
21/03/2016
0:00
Victoria: Pool Price
Data: NEM Review
Additional GHG Emissions
 Currently running ~300 MW of gas (combined and open
cycle) and will be running 200 MW of diesel from end
April
 Approximate monthly ghg emissions = ~116,000 t (diesel)
+ 86,000 t (gas) = ~202 kt CO2-e/month
 If maintained for a year = 2.4 Mt CO2-e (larger than apparent net
State emissions in 2012-13! In fact, energy emissions that year were
4.5 Mt CO2-e. Still, greater than 50% increase.
 At a (low) shadow price of carbon of $12/tonne (ERF),
carbon emissions = implied additional cost of $2.4
million/month
 But...emissions in Vic will be lower due to absence of Tasmanian
demand
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Estimate   Based of Feb actual (NEM Review), but 56MW Trent
likely to return to service in April, so emissions will rise
Optimal solutions?
 Crisis management calls for extraordinary measures – do
what is necessary in the short term
 But we should not lose sight of the longer term
consequences of short term decisions
 As soon as feasible, we should replace high cost, high
emissions solutions with better ones
 Also, avoid lock-in for the longer term (eg, dual fuel units???)
 Consider consumer/social benefits from demand side
solutions
 Also, indirect impacts such as avoided greenhouse
emissions solutions; local employment opportunities;
longevity of solutions; Tasmania’s brand/reputation;
strategic ‘fitness for purpose’
Energy efficiency
 Energy efficiency almost always has negative abatement
cost (PV of energy cost savings > PV of incremental costs):
pitt&sherry, Energy Efficiency Master Plan –
Foundation Report, City of Sydney (2014)
Energy efficiency
 Energy efficiency almost always has negative abatement
cost (PV of energy cost savings > PV of incremental costs):
pitt&sherry, Energy Efficiency Master Plan –
Foundation Report, City of Sydney (2014)
Energy efficiency
 Tasmania has no energy efficiency target or savings scheme
(unlike SA, Vic, NSW, ACT)
 was the last state to adopt 6 star housing
 our Commercial Building Baseline Study (2012) shows 36% higher
energy intensity in Tas offices than Aust average
 Low community/business awareness, few service providers
 Little consideration in local government planning schemes
 Standing charge ~$1/day not avoidable
 Move to shift more and more network costs to fixed charges
encourages inefficiency by networks and their customers
 I suggest Tasmania simply adopts a modern policy framework in
its entirety from one of the above states
 Could be done quickly and with significant net social benefits
 Legacy of permanent cost savings, comfort/competitiveness
improvements, improved energy security
Renewable energy
 We need to restore our renewable
energy positioning from a strategic
and security perspective
 We need to generate more,
emphasising non-hydro sources
 Our energy strategy since 2002 has
been to rely on fossil fuels – local and
Vic – for our energy security
 clearly not fool-proof, and uncaring
of ghg emissions/brand/local
economy consequences
 2011 100% RE Strategy appears to have
been ignored
 Other states like SA, Vic, ACT have
leap-frogged Tasmania
 with a crystal clear focus on low/zero
carbon jobs, investment attraction
and economic development
Renewable energy
 Feed-in tariff is 1/6 of current willingness to pay for
temporary fossil fuel energy
 Lift the tariff? Now would be a good time...
 Solar installation creates regional jobs and 25+ year legacy
of emissions- and maintenance-free renewable energy, cost
reductions for households and businesses
 Solar energy is very cost effective – recent pitt&sherry
research found abatement cost of -$76/tonne
 Adelaide’s Low Income Solar Savers program is a good model
from a social equity perspective
 Opposition to solar from publically-owned energy
businesses in Tasmania (and their advocates in
government) does not reflect the public interest in this area
Other opportunities
 Efficiency and low/zero carbon in the transport task
 Active support for active transport, EVs
 Fuel switching in industry away from fossil fuels to RE
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Growth opportunities for electricity businesses...
 Storage revolution is coming, like it or not
 It will soon be cost effective to disconnect from the grid, even
if you live in the city
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Electricity businesses offer service quality and pricing to reflect their
competition...or face their Kodak moment
 More interconnectors?
 Would boost energy security, but at what cost?

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Likely to be higher than options canvassed here, but we await the
feasibility study
Will not be regulated assets unless AER accepts they would deliver
net market benefits
Wrap up
 Peter Boyer, The Mercury, 29/3:
 “At the heart of our power supply problem is a matter of critical public
importance: the separation of government, big industry and power utilities
from the rest of us. The domination of large suppliers and users has led
successive governments to underestimate the potential role of non-hydro
renewables, feed-in tariffs and efficiencies...”
 Tasmania needs:
 Proper separation of powers, removal of conflicts of interest
(regulation by the owner?), re-instatement of the public interest as
the yardstick for decision-making, a plan to build genuine
consumer-friendly competition and service provision
 Integrated, diverse/multi-disciplinary, representative, long-term,
transparent, accountable energy governance arrangements
 To treat climate change as real and central to decision-making
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Not least in defining what is ‘prudent water management’
Discussion?
 Contact: [email protected]