Electricity Prices Lower Because of Wind

Hi there, I’m Jervis Whitley. Today’s Friday, 5th of July, and you’re listening to WindFront, the weekly roundup of the wind industry from Australia and around the world. Today, I’m gonna cover the top three wind earners for this week, and I managed to chat with Ben Burge, the CEO of Meridian Energy, about how the LRET, or the renewable energy target, could actually be saving us all money.

Hi there, I’m talking with Ben Burge, the CEO of Meridian Energy Australia and also Powershop. Ben, how are you going? Very well, mate. Thank you for having us. Ben’s here to talk about the news latest report. Ben, can you tell us the title of the report? Well, we commissioned Sinclair Knight Merz to undertake an economic study of the impact of the renewable energy target on retail electricity prices for consumers. And so this report’s been making waves in the news. You might have read it in the Age and a few other sources recently and I thought it’d be really interesting to get you on to just dive in and just have a chat about some of the stuff underneath the covers.

But just before we begin, for those who aren’t sure what an LRET is, Ben could just quickly cap off what an LRET is. Well, 1st of all, yeah, what does it stand for? Because our industry is pretty sinful in terms of creating acronyms that no one else understands. So the LRET means large scale, renewable energy target, and the mechanism of the LRET is that a percentage of, you know, total energy served to customers needs to be, needs to come from renewable energy sources. So it’s an obligation that’s imposed on retailers. So if you’re, you’ve got to, you know, you’ve got to build at home, where you, you know, be served by whichever retailer you’re with, a fixed percentage of that of what they or what you use needs to come from a renewable energy source. The way that a retailer demonstrates that they’ve supplied that fixed percentage from a renewable energy sources, they surrender what we call large scale generator certificates, or LGCs, one LGC equals one megawatt hour of energy, coming from renewable sources. And so for the, you know, a measurement period, you know, you’ve got to surrender as a retailer, you’ve got to surrender a number of certificates representing that fixed percentage of what you’ve served. So, as a consequence of that, what happens is that that provides a market signal for people to say, you know, we’ve got to, you know, build a certain volume of renewable energy projects that can supply that, that volume of renewable energy in order to satisfy the obligation of the retailers.

And if I, if I’m a mom or dad, just to continue that idea, if I’m a mom or dad, and I want to pick your green pack, 100% renewables, how does that, does that tiny that scheme? Is that separate? That’s sort of separate in the sense that whether or not you want to be grown as a retailer, some percentage of your total consumption will be offset by green power or renewable energy. That’s just a baseline obligation of the retailers that, like I said before, a fixed percentage of the energy that they serve to customers, has to come from real energy sources. Over and above that, retailers, well, sorry, customers can choose to become more grain than what is required. So what you’re talking about is, you know, 100%, carbon offset or 100%, you know, green product, it means that, you know, for your personal usage, 100% of that is attributable to renewable energy, that’s been generated. Okay, so you will pay a, there’ll be something delta in terms of, you know, what you pay versus what the, a customer who would not, you know, want that additional that additional renewable energy would pay. Yep. Okay. Right, excellent.

So getting back to the report then. So we understand that what the LRET is in respect to the market for that and the resent rendering of certificates and things like that. But you’ve done some report, reporting showing at the fact, the incentivising wind farms and the fact that wind farms and renewal energy has had on wholesale electricity prices, am I right? Yeah, so we were, yeah, there’s a lot of debate about the LRET or the large, large scale renewable energy target, politically and in the public domain. As a new retailer in Australia, what we were very interested in was, you know, what’s the real impact on consumers? Because if we don’t understand the true impact on consumers, then, you know, how can we kind of, you know, be good retailers? How can we give the customer a good deal? And like, like many things in energy, you know, the impact of the LRET or the LRET is, it’s all about not just what’s the 1st order impact, you know, the cost of the scheme, but what’s the 2nd order impact? You know, how does that affect the demand supply balance and, you know, 3rd order impacts, et cetera.

So, what we found, what the key finding, which, as it turns out, you know, we’re not the only people who study this, right? So, you know, we’re not alone and coming to this conclusion, but, the key finding from this study is that the LRET basically signals them to the market that, you know, new renewable energy is required to be injected into the system in order to satisfy the targets that have been set. That injection of new supply, actually just, you know, microeconomics 101 brings down the cost for everyone. Okay, so in terms of the wholesale energy price, the wholesale energy price comes down significantly as a result of new supply coming into the system. When you measure that reduction in cost, in prices, wholesale prices, against the direct cost of running the scheme, i.e. the cost of the certificates, on a net basis, most consumers are going to be better off, right, over the period 2011 to 2025. Okay. So net of all the costs of running this game, most consumers are going to be better off. And in fact, on a weighted average, Australian consumers are going to be better off.

So, in your report, the wholesale price and for electricity has been depressed, it’s lower, then it would have been without the scheme, even though that we’re paying for certificates as well. So net of all of that, the net effect is lower. So who’s, so the windows are probably people paying for electricity. Who are the losers? Well, that’s a good question, right? It’s not, it is a 0 sum game. And what we should do, first, firstly, is reflect on the fact that the LRET has been around for many, many years, right? Under a couple of regimes of government at the federal, federal level. There’s actually a Howard government policy in the 1st instance. So, and the key aspects of it have been retained through both, you know, coalition liberal and labour governments. They’ve been recover the calibration of the wrong way. But yeah, fundamentally the scheme has been maintained. So, you know, who, you know, who wins and who loses? Well, you know, fundamentally, the consumer wins. And that’s the important message here. And that’s the message that is, you know, really misunderstood. This whole concept that, yeah, the LRET is a tax law consumers. It’s just, you know, it’s just not true. So the consumer is a net winner out of this out of this game.

Yeah, where does where does that come from? Fundamentally comes from a reduction in what we call the wholesale pool price, right? Which is the price that is enjoyed by various generators in the system. That reduction in pool price, you know, it is felt by people who own coal fire power plants or thermal power plants. Okay? So, if we turn the question, if I turn your question the other way around, which is, you know, who would be the winners and losers, if we were to reduce or scrap the LRET, right? The answer would be if you want it, if you want to play with the LRET, if you want to reduce the LRET, or scrap the LRET, that would result in a direct transfer of wealth from the owners of thermal generation plan. So, it would result in a transfer of wealth from consumers to the owners of the thermal generation plan. So if you’re supportive of a transfer of wealth out of the pocket, sort of, of, you know, mums and dads in Australia, to the owners of thermal generation plant, then go ahead and, you know, reduce the LRET.

Hmm. So, you found that, by, this net effect has reduced the full price. I mean, I guess if you, as you were talking about before, if you look at the 1st order effect, we’re just paying, we’re paying extra money for certificates, right? And that’s going come from somewhere and people think this is a tax, right? And you mentioned before, but if you look at it in the broader scheme, it’s not really a tax, you’ve actually incentivized more entrance and you’ve lowered the price, right? So better competition is good. How does that flow on to mums and dads? Like, what do they see and what do you think? What other ways could they also benefit from something like this?

Okay, so, you know, moms and dads, you know, if they do nothing, if they do absolutely nothing and just sit back and watch the scheme unfold, the typical Victorian household, across the period, 2011 to 2025, for example, would say 35 bucks a year. Okay, doing nothing and just, you know, sitting back, doing nothing, taking no action whatsoever, they are going to save $35 a year compared to a system in which, you know, the LRET did not exist. Okay, full stop. What we hope, though, is that, you know, electricity is a funny thing from a, from a householder’s point of view, it’s really boring. Like at the end of the day, it is really boring thing. It’s boring. It’s a begrudging purchase, right? You get your bill at the end of the quarter or whatever. You’re sitting there going, I don’t know how, I don’t know why it’s so big. I can’t understand what contributed to that increase, et cetera, et cetera. So what we hope is that, you know, number one, we shed light on the true effect of the LRET. But the thing that we’re most interested in, most interested in, is that, you know, customers actually, you know, notwithstanding that it’s boring, it’s actually getting, it’s actually becoming an increasing proportion of my total household bill. So, you know what? I’m going to look at it. I’m going to look at it and I’m going to find out otherwise to conserve energy. I’m gonna find out ways to, you know, purchase my energy in a more efficient way. I’m going to try and get a better deal. Right? And that’s why that’s why we’ve introduced Powershop to this country. You know, we’re not going to be the, you know, the retailer for everyone. And deals, not for everyone. But if we can help consumers to kind of say, you know what, I’m interested in getting a better deal, even if that deal’s not with us, then I think we won. If we help consumers get a better deal.

By doing nothing, you’re saving 35 bucks a year. It’s just a net win. Just a net win. But if someone takes a bit of action, they’re at increased minimum renewal energies and things like that, it’s incentivized new players to enter the market like Powershop, now there’s more choice. There’s people, like the big 3 power companies, they sort of just sit there and, you know, people can default to them if they want. Taking action and going for one of these other guys who are hungry for your business, then you can get a better deal of saying. Increased competition. Yeah that’s right. And it’s a point that’s touched on in the Sinclair Knight Merz report that we’re commissioned. They didn’t quantify that effect, so that $35 that we talked about ignores any benefits that flow through in terms of increased retail competition.

Yeah, our thinking is definitely that. The LRET supports new entrant retail competition, because at the end of the day, like what customers want and what the market needs is new entric retailers who are well resourced and here for the long term. You know, having a new engine retailer that sort of comes and goes or whatever, it’s not the answer. So to be here for the long term, you know, you’ve actually got to back up your retail position with, you know, with some generation. And at the moment, you know, the LRET is a signal that helps us, a market signal that helps us to build that long-term generation position that then supports our retail. So they all helps us to deliver, you know, low cost electricity for mums and dads, full stop. And that that benefit is not measured in that 35 bucks a year saving for an average Victorian household. So, you know, that’s over and above that benefit.

And I mean, this, this result, I mean, at 1st glance, I think we might have touched a little, it may have surprised some people. Why do you think that is? Why would people, why would someone be surprised by this report? Well, I think I think the easy the easy argument in the public debate at the moment is to say, renewables are expensive. Renewables are something that Australians can’t afford. I’d like to be renewable or sustainable, but I don’t want it to hit my, you know, my hip pocket. And you know what? That’s a fair policy position. Yeah, we recognise that. In the current economic circumstance, you know, it’s very difficult to get a policy out to justify a policy, if it’s costing me Australian consumer a lot of money. The LRET does not fit into that category. All right? So, you know, why is it a surprise? I guess because the 2nd order effect is not being well understood. Right? And the 2nd order effect, which is if you scrap the LRET, you’re going to, you know, get mum and dad, mums and dads to pay for, you know, the wealth of thermal 5 power plant. That’s not a well well understood, you know, concept. Okay. So I think it’s it runs counter to a populous view, which is that renewables are expensive. Therefore, renewables are paid for by mums and dads, right? The LRET does not fit into that category. The market pays for renewal side of the LRET. And the net cost is borne by people who run the thermal plant.

And by the way, we should just reflect that, you know, coal plant, as an example in Australia, the average age of a coal plant is about 31 years. So, you know, to my mind, you know, I look at all the business cases that we do. You know, basically coal plant, yeah, it’s paid for itself. Anything beyond anything beyond 25 years is sort of, you know, chrome on top. So I’m not sure anyone should be shedding a tear for, you know, the people who, you know, one school is, you know, returns out of those last 5 years.

So, I mean, to wrap up, putting your sort of forecaster’s cap on, what does the around your view anyway? What do you think the next 5 years holds in terms of the LRET in Australia or something like that? Well, I think, um, if, you know, if, if we, if we pick up, you know, the findings of this research, right, number one, is that the LRET is good for consumers, right, full stop. And any adjustment to the LRET, you know, in the downward direction is bad for consumers. Right? They’re basically taking money out of their pocket and giving it to other people in the in the engine industry, which is which is not a not a good outcome. So hopefully this research becomes, you know, well understood, it becomes well, you know, disseminated through, you know, those who are about to make these policy decisions. If that’s the case, then we’ve got to build. And, if that, if that signal becomes, you know, more certain, then people will get on the band, you know, people will get onto the, onto the waggon of building those things sooner rather than later. Because the, you know, there was a target that we’ve got to hit, that, you know, retailers need to discharge. And, you know, the way that, you know, the industry is currently looking is that, you know, you’ve got to build a few more plants in order to make the total. So I think if the if the system works as it is supposed to, it means that we’ll end up with, you know, more renewal projects in this country, more jobs created in order to build those projects and run those projects in the long term. You know, the project that we’re building up at up at Ballarat at the moment. I mean, that’s going to employ over 200 people. So that’s new jobs. That’s new GDP into local communities. So you’re going to get those sort of, you know, projects being rolled out, you know, across the country, and that should be good, should be good for the economy.

Great. Well, Ben. Thanks for your time. Thank you. Was a pleasure.

And so now I’ll cover the top 3 in wind this week. We had Macarthur take out the titles again, just under a $1,000,000. Remember last week they nudged over. Woolnorth and Lake Bonney 2. It was 2nd and 3rd in the earnings. The total takings, Australia wide, for wind this week, would just shy of last week’s bumper crop, had about 5.7 million. Last week was over 6 million. Australia wide in wind. And until I see you next week, keep buying those green electrons.