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The RET & the REC: the anatomy of a National fraud
May 4, 2013 By stopthesethings
A little while ago one of our readers posted a comment including what would appear to be a fairly simple question, The Callous Wind wrote:
I have a request for STT. Would you be able to please explain to us mere mortals, how the REC’s do actually work? There seems to be a lot of false information being put out there on both sides of the argument. Are the REC’s only paid on power produced, or are they paid on the rated capacity of the particular wind turbine project? Do the wind turbine companies receive any other incentives from the Government, besides the REC’s. I believe the REC’s are around $38 per megawatt hour and are likely to go to $90 per megawatt hour, is this correct?
The answer, however, isn’t quite so simple. This scam (oops, we mean “scheme”) was designed to mislead and confuse “mere mortals” with the help of an industry so cunning that you could stick a tail on it and call it a weasel.
Let’s start at the very beginning which, as Sister Maria, told us was always a very good place to start.
The Renewable Energy Target (RET) is the product of Commonwealth legislation being the Renewable Energy (Electricity) Act 2000, the Renewable Energy (Electricity) (Large-Scale Generation Shortfall Charge) Act 2000, the Renewable Energy (Electricity) Regulations 2001 and the Renewable Energy (Electricity) Amendment Act 2010. Those looking for a little extra bedtime reading can find the key legislation here, here, here and here.
The RET requires retailers of electricity to source 20% of all electricity sold from “renewable” sources by 2020. How we got to that target and who was and is responsible for it appears in this detailed article by Ray Evans and Tom Quirk. Back in 2009 Tom and Ray predicted with chilling accuracy the escalation of power prices due to increasing wind power generation here.
Ray and Tom concluded that because of the much increased capital cost of wind power installing an extra 26,000 MW of wind power capacity to reach the 2020 target will cost $52 billion. Adding to that cost will be the need to have backup generation capacity of at least 23,400 MW – from baseload sources such as coal or gas – to ensure continuity of supply. And to absorb the intermittent and unpredictable wind power generated by wind turbines dispersed over Tasmania, South Australia, New South Wales, Victoria and Queensland – all feeding into the South-Eastern grid – there will need to be at least $30 billion invested in a duplicated transmission network.
What they mean by duplicating the transmission network includes $107 million for an interconnector for no other purpose than to send South Australian generated wind power to Victoria at night-time – as reported by The Age.
All of those additional costs will, of course, be borne by the electricity consumer or “sucker”, as the electricity industry lovingly refers to us. And anyway, $80 billion to set up a feel-good green boondoggle doesn’t sound like much if you say it fast enough. But that’s just the cost of the additional and otherwise unnecessary infrastructure needed to support the wind farm scam; we haven’t even got to the subsidy trough yet. And put aside the fact wind farms simply can’t reduce greenhouse gases because they have to be continually backed up by fossil fuel generators.
The RET mandates that retailers MUST take wind power in preference to other sources, irrespective of the cost; although the retailer could, instead, choose to cop a “fine”. If the retailer fails to acquire 20% of the electricity that it sells from renewable sources it gets whacked with a fine of $65 for every MW/h that it falls short of the target - here and here.
Any fines paid by retailers will, no doubt, be added to the wholesale cost paid by the retailer and passed on to power consumers.
The fine is tipped by insiders to be increased from July 2014 to $75 for every MW/h that the retailer falls short of the target.
With a captive market, the wind power generator can, therefore, dictate the wholesale renewable power price, which it does through long-term power supply agreements with retailers called Power Purchase Agreements (PPAs).
Over the last few years wind power generators have been signing PPAs with retailers at wholesale prices between $90 to $110 per MWh, with the agreement running for up to 15 years.
That cost compares with gas or coal thermal power which wholesales from between $25 to $40 per MWh. So retailers are paying up to 4 times the price for wind power which turns up on your power bill. Yippee! Don’t ya just love green tokenism? But, wait, there’s more.
Adding to the price paid by retailers is the cost of “peaking power” needed to urgently backfill the grid when the wind stops blowing and demand outstrips available supply: think 40 degree summer’s days when there is no wind blowing anywhere and air-conditioners are running full throttle.
Windfarm operators like AGL supply “peaking power” using gas turbines at Macarthur and Hallett, which are more or less 747 jet engines strapped to tiny generators that cost more than $300 per MWh to run. Because the grid would otherwise collapse, peaking power generators have gotten away with charging $2,000 per MWh and up to $10,000 per MWh to cover peak load demands, which occur when the wind stops blowing. And yes, you guessed it, these costs are all passed on to you, the electricity sucker. Some might call it “chiseling”, STT calls it State sponsored theft.
Under the RET legislation a Large-scale Renewable Energy Certificate (REC) is issued by the Federal Government’s Clean Energy Regulator to a wind power generator for each MWh of electricity supplied to the grid. The REC is a little like a coupon which can be cashed in at any time. If there are lots of coupons their price falls; the price rises if there are fewer of them.
The wind power generator sweetens the PPA deal with its retail customer by handing over a REC for every MWh it supplies. Of course you wouldn’t expect our ol’ mates at Infigen to give you something for nothing. The projected value of the REC is built into the price set by the PPA; and the retailer gets to sell the REC. There is also a very opaque futures market for RECs, but that is another story for another day.
Since the RET started, the trading price of RECs (yes, there is a market for them) has bounced around reaching $60 prior to the amendment of the RET legislation in 2010 (which created a separate market for residential solar RECs and Large Scale RECs) and is currently around $38 per REC.
In The Age article linked above you might have wondered how wind power generators can afford to sell to the grid at negative wholesale prices? Well, the generator still collects a REC and will also claim a supply on its PPA with its retailer and collect $90-110 per MWh supplied to the grid. You didn’t really think they were giving away power for free, did you?
Take Macarthur, where AGL has 140, 3MW Vestas V112 turbines driving the locals nuts. When the wind is blowing and each turbine is operating at its full capacity of 3MW per hour, AGL collects 3 RECs for each turbine: 1 REC per MWh.
If the wind blew around the clock, AGL would collect 26,280 RECs each year from each turbine: 3 RECS per hour x 24 hours x 365 days.
Assuming, generously, that its turbine operates at its full rated 3 MW capacity around 40% of the time, it will collect 10,500 RECs from that turbine annually.
At current values, 10,500 RECs will “earn” AGL $399,000. AGL will also sell the electricity to a retailer under a PPA for something like $90 MWh and collect another $945,000. And AGL, being the kind-hearted behemoth that it is, recovers every last cent of it from its retail customers. Oh, almost forgot, and the retailers recover it all, plus a fat margin, from the consumer.
A little earlier we mentioned the fine paid by retailers who fail to reach the 20% RET of $65 for every MW/h that the retailer falls short of the target.
The fine is a cost that the retailer can’t claim as a legitimate tax deduction, whereas the REC is – this places an added value on the REC to the extent that its face value can reduce the retailer’s taxable income. That fact, and the pressure that will mount on retailers to reach the 20% target with an undersupply of RECs predicted, means that the REC price is forecast to reach $90 around 2015.
At $90, 10,500 RECs collected from a 3MW turbine running 40% of the time will be worth around $945,000 annually.
Since the implementation of the RET began in April 2001, over 195 million RECs have been created – worth more than $8 billion.
From now until 2031 (when the RET expires) the RECs that will need to be issued to meet the RET, at the price forecast, will be worth an estimated $54 billion; ALL to be added to your power bills.
Labor MP, Joel Fitzgibbon was onto it last October. Pity his Labor mates didn’t have his interest in the plight of small business and families struggling with escalating power bills.
The factors outlined above: the mandatory RET – the penalty of $65 per MWh for failing to satisfy the target, tipped to rise to $75 per MWh in 2014; the price of the Large-scale REC, rising to $90; the need for investment in further backup fossil fuel generation – base-load, intermediate and peaking power sources; and the cost of duplicating the transmission network just to take intermittent wind power all means that retail prices have only one way to go, and that’s North.
In 2011 residential power prices were around 20.4 cents per KWh, by 2017 households and can expect to pay in the order of 36.3 cents per KWh: an increase of 78%. While industry can usually strike better electricity deals with retailers it will not escape a punishing increase in one of the unavoidable costs of doing business. Heaven help any business that uses bucket loads of electricity to make something.
Thanks to its great wind rush, in South Australia wind power now makes up around 35% of its total generating capacity. With such ridiculous reliance on wind power, and more to come, it’s no surprise that South Australians will soon be paying the highest retail power prices in the World, if they aren’t already – as reported by The Advertiser.
As Alby Schultz said: “The only reason people are not rioting in the streets about the unjustified increase in their power bills is that they simply have no idea what is going on.”
Well, now you know.
With the hint that the Coalition is going to review the “Great RET Scam” and scrap the REC altogether, retailers are becoming a little gun shy and simply aren’t signing up to PPAs like they used to. Any retailer with a half a brain won’t want to be caught with a bunch of worthless RECs. That rats might be ready to jump from a leaky ship got the greentard bloggers up in arms last Christmas.
The Coalition made this mess and only the Coalition can fix it; they need to hear it loud and clear from a less than happy mob.
So grab your blazing torches and sharpened pitchforks and we’ll see you on June 18, 2013 at Parliament House, Canberra. Loyal readers, don’t just bring yourself, bring 2 friends – they pay power bills too and have just as much at stake as the good folk in the trenches fighting the good fight against the tyranny of big wind. We’ve got one shot at the title, let’s make the most of it.
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