Questions for Public Ownership of Renewable Energy in Queensland

What are some of the drivers for the call for public ownership of renewable energy?

There are calls from a group for the Queensland Government to own and operate all of the major renewable energy generators for a number of reasons including lower cost of debt, lower emphasis on profit generation (leading to lower electricity prices) and the creation of assets which will generate returns in perpetuity.

Let’s examine some of these reasons.

What might happen to electricity prices?

I like to refer to how prices have changed over time. In 2015, we published a report on electricity prices in the US. Electricity prices over the last several decades had risen in real terms but a full look back shows that electricity prices had fallen substantially (more than 90%) twice in the 1900s with the mid-1900 decline produced by low interest rates (post-depression) and government expenditure on hydroelectric dams.

Source: Cornerstone Capital Group

What this chart says to me is that while the electricity market seems to be staying flat or rising, it has a history of major drops. In Australia, electricity prices fell in real terms from 1955 to 1994.

Source

Electricity prices have then risen in real terms due to a range of factors including transmission and distribution cost increases.

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We know that solar and wind installed costs have fallen and these costs are locked in as there are no material operating costs (unlike fossil fuel generators). Therefore a significant roll-out in fixed price, low cost renewable energy (solar and wind) will create a set of price ceilings where electricity prices in high sun or high wind periods cannot go above. The existing generators lose but electricity prices in those periods are materially lower. It then depends on the roll-out of storage as to whether excess generation from solar and wind can be held moved into other periods and reduce prices there as well.

All other things being equal, increased renewable energy will reduce electricity prices but not because of a changed profit motive. It is the fact that there is no inflation from operating costs (i.e. commodities) and that the capital costs of renewable energy project are falling rapidly.

What might happen to dividends from government owned generation?

The Queensland Government owns the two major generation companies Stanwell and CS Energy in Queensland as well as the transmission and distribution companies. In 2016-17, the energy companies provided a $1.62 billion dividend to the Queensland Government, up 11% from 2015-16. In comparison, the total taxes and royalties (not including dividends) is about $13 billion. The dividends were driven by higher electricity prices but not a commensurate increase in costs suggesting that these companies have some cost advantage like low cost of input fuel.

What might happen to these dividends? Given that these generators are primarily fossil fuel and dependent on largely rising electricity prices for profit, it is likely that large renewable energy penetration will significantly dampen the amount of dividends that these companies provide to government.

Will government owned renewable energy generation provide similar amount of dividends? At least in the medium term, it is unlikely that renewable energy projects will generate dividends similar to the current amounts. The current financing structure of renewable energy projects (fixed price arrangements) means that there is limited ability to generate outsized dividends while these arrangements persists. Once a renewable energy projects finishes its fixed price period (say 20 years), there are no ongoing costs and degradation is minimal so it becomes similar to current hydroelectric prices in that the generator produces extremely low cost electricity. Electricity prices will be lower if there is significant amount of fully-depreciated renewable power plants that are still generating at 80% of their original capacity.

A government owned renewable energy company will have largely fixed revenue in the short to medium term. There is a potential (especially if there is substantial interconnection or new demand) for significant dividends in the longer term but

A reduction in dividend should be considered as part of a decision on government ownership but high penetration of renewable energy should reduce prices.

What about using the government’s low cost of debt?

I am a fan of using government’s low cost of debt to increase the amount of renewable generation within the state. I was a fan (and a minor participant) in the decision to establish a 42 cents per kilowatt-hour feed in tariff in Brisbane which was very high but drove rapid installations. I applaud the state government’s role as a low risk counter party for smaller renewable energy projects and a project financier for big projects as essential.

All government expenditure should be subject to a form of prioritization and the electorate should be the ultimate decider on the priorities as is appropriate for a democracy.

What should we do?

Renewable energy could be treated as nation building infrastructure where long term benefits are given higher weight. Large roll-outs of renewable energy are likely to reduce power prices but there is going to be a negative impact on dividends to government from existing generation. This, however, is what I believe to be the role of government.