Mona Lisa’s electric smile

Matt Burgess
The National Business Review
31 March, 2019

If the electricity sector were art, New Zealand would be “the Mona Lisa.” And countries like Australia, the UK and Germany would rank somewhere behind graffiti.

New Zealand has an outstanding electricity system.

Renewable energy generates 83% of our electricity. Among OECD countries, only Norway and Iceland generate a greater proportion of their electricity from renewables.

It’s not just that our electricity is clean, it is also affordable the 12th cheapest in the OECD for households, seventh cheapest for industries.

And New Zealand’s security of supply is comparable to other developed countries.

Not bad for an isolated country with five million people scattered mostly over two rocky islands.

Even more surprising is that New Zealand is the only OECD country that for most of the past 30 years hasn’t pushed renewable energy.

Looking forward, the investment pipeline in new generation is almost entirely green, mainly geothermal and wind generation.

This is not the result of overt policy or subsidy. That pipeline was green before the government adopted its 100% renewable generation policy in 2017.

In New Zealand, renewables are asked to compete. And they have.

Other OECD countries use policy to push renewable energy. These policies try to reduce emissions by some combination of payments and rules to drive investment into preferred generating technologies.

These policies succeed in lifting the share of electricity generated from renewables.

But the results have been disappointing. In most cases, the policies have done far more to raise the cost of electricity than they have to cut emissions.

And in Australia, state governments have discovered that blackouts are a great way to kill support for green energy.

It seems that the harder governments push renewables, the higher the cost of electricity.

No country has pushed renewable energy harder than Germany, for example. Its households pay the second-highest price in the OECD. As far as I can tell, only Denmark and a couple of Pacific Island countries pay more.

It would be easy to think the problem is that renewable energy is expensive.

In fact, the problem is the policy.

Electricity systems are complicated. Policy inadvertently but inevitably forces expensive trade-offs within electricity systems. These trade-offs are not obvious but they are real.

Electricity systems solve the problem of producing energy at least cost through specialisation. There is a basic division of labour between baseload and peak capacity.

Baseload specialists are coal, hydro, combined cycle gas, geothermal, and nuclear (overseas).

Other technologies specialise in peaking. These include diesel, open-cycle gas, and hydro. The essential characteristic of peaking generators is they start quickly and on command.

Not all technologies are equal. Specialisation emerges because each technology has characteristics that make it competitive in particular roles.

Geothermal, for example, is expensive to build, perhaps three times the cost of an equivalent-sized gas peaker.

But once a geothermal plant is built, its energy arrives at a low cost.

Geothermal’s combination of high-fixed and low-ongoing costs makes it ideal as a provider of baseload but very expensive as a ‘peaker.’

These subtleties are entirely lost on renewables policies. For the most part, renewable policies take a “more is better” approach, oblivious to the fact that different types of generation are not perfect substitutes.

Witness Germany and its €500 billion attempt to replace nuclear, coal and gas generation with solar and wind energy.

Despite its enormous investment in solar and wind, Germany has found it has had to keep nearly all of its coal and gas generation running to keep the lights on.

There is nothing wrong with solar or wind. But they have generating characteristics that are quite different from coal and gas. Different enough that. despite building thousands of wind turbines and millions of solar panels, Germany is still producing 40% of its electricity from brown coal, about the proportion it was in 2010 at the start of its massive experiment.

Germany has proved, in about the most expensive way imaginable, what could be predicted: that it is possible to invest in one type of generating technology without displacing the need for another.

Germany has essentially built and now maintains two electricity systems. No wonder its households pay double the price for their electricity that households here in New Zealand pay.

The problem is not renewable energy. Germany’s disaster is not the product of any defect in solar or wind.

The problem is policy that pushes renewable energy as if coal and gas can be reliably swapped one for one with wind and solar. They cannot.

For more than 30 years, since the end of the environmental and financial disaster that was Think Big, New Zealand has managed to avoid these excesses.

Until now, that is. In 2017, the government adopted its 100% renewable electricity policy. And although the policy sensibly excludes dry years, it’s still expensive.

On one estimate, the policy could add more than $800 million to the annual cost of electricity.

And at renewable shares close to 100%, the policy will spend well over $1000 to take each tonne of carbon out of the atmosphere – far higher than even the most pessimistic estimates of the cost of carbon.

It would be funny if it were not so predictable.

Governments shouldn’t be in the business of ‘picking winners.’ For a problem like emissions, top-down policy is an especially poor instrument.

Emissions occur in millions of places, and in each of those places the first tonne of cuts is the cheapest.

If we want to cut emissions at least cost – and any good environmentalist should, because it means we can do more to reduce emissions – then the trick is to cut emissions by a little in a lot of places.

Policy is a poor instrument because it tends to cut emissions by a lot in a few places.

The right instrument is price.

Put a price on carbon, and make polluters pay.

We already have a system to do that – the Emissions Trading Scheme.

The scheme remains a work in progress, a first draft. But it could become New Zealand’s Sistine Chapel. Forcing change instead through sector-by-sector policy could ruin our Mona Lisa’s electric smile.

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