Why the renewables romance could be headed for divorce

Friedrich Hayek famously said the task of economics includes exposing the fatal conceit of those who insist on planning how the world will work. 

In Australia, he would have pointed to the National Broadband Network that promised higher productivity but had to be written down by $31 billion to deliver accounting returns to keep it off budget. Or the union-pushed Gonski school funding that splurged tens of billions but failed to halt the alarming slide in student learning.And the $52 billion National Disability Insurance Scheme that some said would pay for itself but now costs three times more than initial estimates. 

Now there’s another conceit: the plan to cut Australia’s carbon emissions to net zero by 2050 — relying overwhelmingly on wind and solar — as our contribution to the international effort to curb global warming.  

It was always going to be a massive task to decarbonise Australia’s fossil fuel intensive economy, because we built our prosperity on cheap coal and gas.  

As Ross Garnaut has warned, it’s highly unlikely we will get close to either the federal government’s interim 2030 target or its new goal of cutting carbon emissions by 62-70% by 2035.  And equally unlikely that Australia — or China, the US, India or Russia — will cut their emissions to net zero in the next 25 years. 

But the bigger conceit is believing that trying to do so will drive down costs and power bills.  Anthony Albanese insisted before the 2022 election that Labor’s renewables plan would cut household energy bills by $275 a year. “I don’t think, I know,” he said. “I know because we have done the modelling.”  

Instead, the opposite has happened. Power costs have gone up. And Australia is losing its cheap energy advantage as it relies more on renewable energy. 

Amid the febrile climate wars, it is critical that the public debate understands why. The CIS energy team has provided the best explanation to date in their new paper The Renewable Energy Honeymoon: starting is easy, rest is hard. 

Yes, an isolated kilowatt hour of energy from the sun or the wind may be cheaper to generate than power from coal, gas or uranium. The sun shines for free. The wind blows at no cost.  

But it’s a different equation for an electricity grid required to operate 24/7 across eastern and central Australia, including when the sun doesn’t shine and the wind doesn’t blow.  

As the paper’s lead author, Zoe Hilton, points out, solar and wind are intermittent; so the energy they supply comes in bursts. Sometimes this supply is too much, other times too little.  

Hence, solar and wind energy has to be shifted across time (by being stored) and across space (through transmission lines). Significant amounts of energy are wasted along the way.  

And as renewables’ share of the energy generation grows, those storage and grid costs rise steeply, because as the easier options are used up, storing and moving energy becomes more difficult.  

More storage means holding power for longer periods, and real weather patterns eventually require multi-day or seasonal storage. This reduces how often storage is used and makes each unit of energy more expensive. 

The same is true for transmission: once nearby demand is met, electricity must travel further, which increases the need for costly new infrastructure. 

Further, since 2019–2020, oversupply has cut renewable revenues, leaving new projects dependent on subsidies. Government schemes mask this pressure, but the fundamentals remain: the more renewables added, the less each contributes and the more it costs. 

The costs involved turn out to be massive, and get passed on to end users or taxpayers. A similar pattern shows up around the world when you plot wind and solar generation on the horizontal axis and the price of power on the vertical axis. The trend line rises upward to the right at about 45 degrees.  

Countries with 20% or so penetration tend to have moderate power prices. Those with between 20–33% wind and solar penetration, such as Australia, have higher prices.  

And the prices are higher still for countries where solar and wind exceeds a third of electricity generation, such as Spain, Portugal, Germany and Denmark.  Germany is now pulling back from its renewables ambitions as higher energy prices undermine its industrial base.  

But the Climate Change Authority projects that renewable energy will account for more than 90% of Australia’s electricity supply by 2030. That suggests the end of the renewables honeymoon could be headed for the divorce courts. It will get harder, not easier, from here.  

Labor has covered up the problem of higher energy prices with household power bill handouts, secretive taxpayer underwriting of new solar and wind projects and subsidies to stop energy-hungry old steel works and smelters from closing.  

We’re heading back to subsidising industries because Labor won’t want high power prices to be blamed for shutting down these factories and losing jobs. Remember, the clean energy transition was supposed to result in less emissions, lower prices and more jobs. 

Most Australians support net zero by 2050. But the hidden cost of this will start to bite as the renewables honeymoon ends.  The clash between the strong public support for net zero and the rising costs of energy shows up in Australia’s scrappy climate wars.  

The Liberal and National parties are going through a civil war over whether to keep supporting net zero by 2050. Labor is content to allow the Coalition to tear itself apart over net zero while cloaking the problem with more borrowed money. 

The clash will require a new political bargain that discards the conceit of the ‘renewables free lunch’.  This could include not ruling out zero-emissions nuclear power to supply reliable zero-emissions energy.  

A new political bargain would end the passive-aggressive bans and restrictions on supplying lower-emissions gas that is needed to help firm up renewables.  

And it could extend to relying more on a revenue-neutral carbon price that could tax the so-called negative externality of carbon emissions while cutting other taxes to incentivise economic growth.  

Or, as Hayek would say, let’s rely more on the market, rather than the conceit of politicians and planners, if we want to discover the least-cost path to a lower-emissions world.   

Michael Stutchbury is Executive Director at the Centre for Independent Studies.