The tantalising promise of ultra-cheap power

The pandemic and the prospect of zero interest present a massive opportunity for clean energy development.

The story of 2020 has really been two stories, deeply interwoven, in which what happens in one keeps playing on the other and causing general mayhem. One is about the virus; the other the economy.

The virus I understand because the rules are simple: stay clean and away from sick people. But I have never really understood the economy – at least, not whatever it was that experts used to talk about every day. It seemed to be whatever you wanted it to be.

But COVID-19 did what those earlier drought and fire disasters didn’t manage to do. It transformed the perpetual economic chatter into a genuinely interesting conversation, stirring up some serious questioning of actions and directions previously treated as sacrosanct.

Queensland University economics professor John Quiggin has built a career on questioning accepted wisdom. He is a prolific and globally-cited author in academic journals. As a long-standing member of the Climate Change Authority he was known for challenging government claims about climate policies.

In the Melbourne-based online journal Inside Story last week he discussed the growing take-up of solar power in Australia and globally, citing the International Energy Agency’s projection that solar was headed for market leadership and, with wind and other renewables, enough capacity to meet all new demand. Australia, he says, should be acting now to take advantage of this.

Solar panels are getting steadily more efficient and cheaper to make, but Quiggin sees their greatest potential in the fact that they last three or more decades and cost virtually nothing to operate. The cost of a solar project today arises almost entirely from the need of investors to get a return on the capital they put into the project’s construction and grid connection.

The IEA has acknowledged that the cost of capital for new energy projects is dramatically less since the global financial crisis in 2008. Now, with the coming of the pandemic, it is widely accepted that ultra-low interest rates will probably be the norm for many years to come.

Should interest rates fall to zero, says Quiggin, “the notion of a payback period ceases to be relevant. All that is required for an investment to be justified is that its lifetime returns should exceed the cost of construction.”

Solar’s low capital cost is stretching the “payback period” of projects – the time available for investors to be repaid in full – so far into the future that the power generated is virtually free. Quiggin calculates that over a module’s lifetime the cost could drop as low as 2c per kilowatt-hour.

Yields from current Australian government bonds are lower than likely inflation. European countries are offering bonds maturing after 50 or 100 years, and the US government is selling similar bonds at negative interest rates.

Given all this, Quiggin believes that governments should issue perpetual bonds yielding inflation-adjusted returns of zero. “In the world of zero real interest rates that now appears to be upon us… governments can, and should, invest in projects whenever the total benefits exceed the costs, regardless of how those benefits are spread over time.”

If there is a powerful case for public investment in renewable energy, the case for doing the same for transmission, says Quiggin, is even stronger. “Electricity transmission lines have the same cost structure as renewables (low operational cost and long lives), if anything more so, meaning that the cost of transmission depends primarily on the need to secure a return to the capital invested.”

This is where Quiggin’s interesting idea really starts to sing. A modern, smart, efficient electricity grid over a wide area like eastern Australia can make intermittent solar and wind power work well for us, rapidly switching demand to where the sun shines and the wind blows and minimising calls on alternative generators or energy stored in batteries or hydro schemes.

Opposition leader Anthony Albanese proposes to spend $20 billion on transmission infrastructure to allow the national grid to fully integrate new renewable sources. The government could go one further by investing in both transmission and renewable generation. But it is still in pre-pandemic mode, offering just low cost finance for private transmission investment.

The pandemic has disrupted everything we knew, killing the old economy and its ideological stereotypes. In these times of upheaval and flux, as John Quiggin says, there are huge opportunities for large-scale public investment in a new, cleaner economy.

Our recovering economy will need a lot of public investment. All we ask of the Morrison government is the vision to see what’s possible and the courage to act.

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