Friday, 18 February
Why do we need local manufacturing of renewable power plant equipment?
There is a point that is usually ignored when discussing renewables in Australia.
This is the relation between renewable investment and the current account
deficit of the nation. At a small rate of investment in renewables, the effect
of such investment on the current account deficit is negligible. However, if
come to a point when all or most of the new capacity increases are expected
to come from renewables, then this will have a detrimental effect on the current
account deficit. This will be an effect no government will be able to ignore
at that time. This is true even if the levelised or life-time cost of renewable
electricity becomes the same as the levelised cost of fossil-fuel electricity.
The reason is the difference in the capital investment requirements. In renewable
electricity, the bulk of the levelised cost is due to the cost of the capital.
For gas-fired electricity, only a small part of the levelised cost is due to
the capital investment. In other words, most of the cost electricity from a
gas-fired plant is recovered from the customer at the time when the electricity
is generated. The initial cost fraction is higher for coal, even higher for
brown coal and the highest for renewables. This is seen in the following chart:
Now let us look at a scenario that in the next ten years the concerns on climate
change will be serious enough so that all or at least most of new investment
in the electricity sector after 2020 will start coming from renewables. I do
not think this is an implausible scenario. Let us see what the implications
will be for the national current account deficit.
The annual Australian current acount deficit was $43b in 2009. In the same
year, Australia consumed about 242000 GWh of electricity, 95% of which is produced
by burning coal and gas. The total generating capacity in that year was about
50000 MWe. This generating capacity needs to be increased at a rate of about
2% every year to meet the increasing demand. In 2020s, if the current trends
continue, the country may need to increase the installed generation capacity
by about 1500MWe every year. In this scenario, we are assuming that all of this new increase
will come from renewables. Let us also assume that this is going to be at a
cost of $10m/MWe in 2009 dollars.This means a capital investment of almost $15
billion dollars per year. If all of the capital investment comes from overseas,
this is an addition of $15b to the current account deficit, or an 30% increase.
Moreover, this will not be a one-off component but a structural increase in
the national deficit that will be repeated every year. In other words, all other
things being the same, the current account deficit for the nation will increase
as in the following chart:
I think this is a very strong argument for the country to start planning to
manufacture some of the equipment for future renewable plants domestically.
Otherwise, no future government will easily stomach the national deficit to
increase at this rate.
NOTE 1: When I raised this point in a meeting last week, some people rejected
it and called me an alarmist. Their argument is that we do not manufacture gas turbine plants either so what is
new? The response is obvious but worth spelling out. In gas-fired electricity,
the main part of the levelised cost of electricity is distributed over the life
of the plant and is due to the cost of the fuel. As long as we do not have to
import the fuel, this means the bulk cost of electricity will be coming from
domestic sources.In renewable electricity, almost all of the cost is at the outset.
People aware of this is as a constraing on capital raising but in this blog
entry I wanted to draw attention on its macroeconomic implications.
NOTE 2: In this scenario, I assume only the new investment coming from renewables. The situation
will get increasingly worse when we start replacing the existing fossil-fuel fired capacity.
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