Wednesday, March 17, 2021

Electricity is a jigsaw. Coal can't provide the missing pieces

There’s something the energy minister said when they announced the early closure of Victoria’s second-biggest coal-fired power station last week that was less than complete.

Yallourn, in the Latrobe Valley, provides up to 20% of Victoria’s power. It has been operating for 47 years. Since late 2017 at least one of its four units has broken down 50 times. Its workforce doubles for three to four months most years to deal with the breakdowns. It pumps out 3% of Australia’s carbon emissions.

On Wednesday Energy Australia gave seven years notice of its intention to close it in mid-2028, four years earlier than previously announced, a possibility for which regulators had been preparing.

In what might have been a rhetorical flourish, Energy Minister Angus Taylor warned of “price spikes every night when the sun goes down”.

Then he drew attention to what had happened when two other coal-fired power stations closed down — Victoria’s Hazelwood and South Australia’s Northern (South Australia’s last-remaining coal-fired generator).

He said “wholesale prices skyrocketed by 85%”.

And there he finished, without going on to detail what really mattered. South Australia and Victoria now have the lowest wholesale power prices in the National Electricity Market — that’s right, the lowest.

Coal-fired plants close, then prices fall

Before Northern closed, South Australia had Australia’s highest price.

Five years after the closure of Northern in 2016, and four years after the closure of Hazelwood in 2017, South Australia and Victorian have wholesale prices one-third lower than those in NSW and two-fifths lower than those in Queensland.

Something happened after the closure (largely as a result of the closure) that forced prices down.

South Australia became a renewables powerhouse.

The Australian National University’s

Hugh Saddler points out that renewable-sourced power — wind and grid solar — now accounts for 62% of power supplied to the South Australian grid, and at times for all of it.

Much of it is produced near Port Augusta, where the Northern and Playford coal-fired power stations used to be, because that’s where the transmission lines begin.

Being even cheaper than the power produced by the old brown-coal-fired power stations, there is at times so much it that it sends prices negative, meaning generators get paid to turn off in order to avoid putting more power into the system than users can take out.

It’s one of the reasons coal-fired plants are closing: they are hard to turn off. They are just as hard to turn on, and pretty hard to turn up.

Coal can’t respond quickly

There are times (when the wind doesn’t blow and there’s not much sun, such as last Friday in South Australia) when prices can get extraordinarily high.

But coal-fired plants, especially brown-coal-fired plants such as Victoria’s Hazelwood and Yallourn and Victoria’s two remaining big plants, Loy Yang A and B, are unable to quickly ramp up to take advantage of them.

Although “dispatchable” in the technical meaning of the term used by the minister, coal-fired stations can’t fill gaps quickly.

Read more: The death of coal-fired power is inevitable — yet the government still has no plan to help its workforce

Batteries can respond instantly to a loss of power from other sources (although not for very long), hydro can respond in 30 to 70 seconds, gas peaking plants can respond within minutes.

But coal can barely move. As with nuclear power, coal-fired power needs to be either on (in which case it can only slowly ramp up) or off, in which case turning it on from a standing start would be way too slow.

What was a feature is now a bug

That’s why coal-fired generators operate 24-7, to provide so-called base-load, because they can’t really do anything else.

Brown coal generators are the least dispatchable. Brown coal is about 60% water. To make it ignite and keep boiling off the water takes sustained ultra-high temperatures. Units at Yallourn have to keep burning coal at high output (however low or negative the prices) or turn off.

In the days when the other sources of power could be turned on and off at will, this wasn’t so much of a problem.

Hydro or gas could be turned on in the morning when we turned on our lights and heaters and factories got down to business, and coal-fired power could be slowly ramped up.

At night, when there was less demand for coal-fired power, some could be created by offering cheap off-peak water heating.

But those days are gone. Nationwide, wind and solar including rooftop solar supplies 20% of our needs. It turns on and off at will.

Wind often blows strongly at night. What was a feature of coal — its ability to provide steady power rather than fill gaps - has become a bug.

Gas and batteries can fill gaps coal can’t

It’s as if our power system has become a jigsaw with the immovable pieces provided by the wind and the sun. It’s our job to fill in the gaps.

To some extent, as the prime minister says, gas will be a transition fuel, able to fill gaps in a way that coal cannot. But gas has become expensive, and batteries are being installed everywhere.

Energy Australia plans to replace its Yallourn power station with Australia’s first four-hour utility-scale battery with a capacity of 350 megawatts, more than any battery operating in the world today. South Australia is planning an even bigger one, up to 900 megawatts.

Read more: Huge 'battery warehouses' could be the energy stores of the future

Australia’s Future Fund and AGL Energy are investing $2.7 billion in wind farms in NSW and Queensland which will fill gaps in a different way — their output peaks at different times to wind farms in South Australia and Victoria.

Filling the gaps won’t be easy, and had we not gone down this road there might still have been a role for coal, but the further we go down it the less coal can help.

As cheap as coal-fired power is, it is being forced out of the system by sources of power that are cheaper and more dispatchable. We can’t turn back.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, March 10, 2021

How the ABS became our secret weapon

If we survive this economic crisis (and it is looking increasingly like we will, although the end of JobKeeper at the end of the month will be a setback) it will in large measure be because this time we’ve had a real-time picture on what’s been going on.

Last time, we were flying blind.

In what must have been one of the worst-timed decisions of an incoming government ever, in 2008 the newly-installed Rudd government slashed the budget of the Australian Bureau of Statistics ahead of the global financial crisis.

In its first budget it hacked A$28 million off ABS budget, and told it to work out what to cut.

The ABS lopped off its job vacancies survey, closing it down in May, just months before the collapse of Lehman Brothers in September.

Then in July it cut the size of its employment survey from 54,400 people to 41,100, making the results less accurate just as accuracy began to really matter.

Rudd and his staff had to navigate partially blindfolded.

It was, as the then head of the treasury’s macroeconomic group David Gruen said at the time, as if the Titanic was sailing into iceberg-infested waters while those with the requisite skills were hard at work “in a windowless cabin”.

Twelve years on — astoundingly — David Gruen has found himself on the other side of the cabin wall as head of the ABS.

He took up the job on December 11, 2019, just days after the first Wuhan resident fell sick with what turned out to be coronavirus.

By the end of February he had “this feeling I last had in the middle of 2008”.

Not much coronavirus had spread to Australia by that point, but as Gruen recounted to the Canberra branch of the Economic Society, it felt like “something big was coming”.

Something big was coming

Gruen called a brainstorming session and asked senior staff what data they could produce quickly — far more quickly than usual — that would tell people what was happening in near real-time.

The business conditions unit said it could run a survey of 1,200 businesses, but that it would cost money — $20,000. Gruen told them to spend it. The survey began on March 16, ran for three days and was published on March 26, a record-quick ten days after the first questions were asked.

That initial survey asked how COVID was hurting each business, what it expected. Then requests started coming in for further questions about cash on hand, revenue and employees. Month by month the survey evolved as the crisis evolved.

Read more: Australia's first service-sector recession unlike those that went before it

Then the household survey unit realised it could do one. It repurposed a panel it had assembled for a different survey and went back to the same households month after month for real-time insights into things such as the changing precautions they were taking, their changing comfort with social gatherings, their use of stimulus payments and the state of their finances.

Spending in shops was convulsing, literally down 17.7% one month (on lockdowns), then up 17% the next (on panic buying).

Delays unacceptable

Yet the retail figures had always been presented with a delay — four to five weeks after the month to which they referred — while the bureau waited for all of the retailers it was surveying to report, making the insights anything but current.

Gruen got the bureau to release “preliminary” numbers two or three weeks earlier than usual, as soon as 80% of the businesses surveyed had responded.

Information about deaths (rather useful in a health crisis) was even worse.

Not information about COVID deaths, which heath authorities were totting up daily, but deaths from all causes, which the bureau traditionally released once a year once all the reports from coroners had come in, every September, almost an entire year after the year in which the deaths took place. Some of the deaths were the best part of two years old.

Provisional now, final later

Gruen suggested that rather than wait until every coroner’s report was finalised, the bureau release “provisional mortality statistics” based on only doctor-certified deaths (80-85% of all deaths) monthly.

What it showed was startling. Rather than having more deaths than normal from non-COVID causes, as had much of the world, Australia had fewer.

Read more: Up to 204,691 extra deaths in the US so far in this pandemic year

The excess deaths in other countries might have been either COVID deaths not classified as COVID deaths, or deaths inadvertently caused by measures designed to fight COVID.

In net terms Australia has had neither. The bureau’s figures show we’ve been less likely than normal to die of heart disease and strokes, and far less likely to die from flu, probably because social distancing has made it harder to catch.

ABS Provisional Mortality Statistics

As incredibly useful as these innovations have been, none has been as valuable as the bureau’s inspired decision to obtain and publish near real-time payroll data.

What took months is now near-instant

The Tax Office is phasing in a requirement for businesses to report where they send their payroll instantly using a system it calls single-touch payroll. 99% of big and medium firms (20 or more employees) are doing it, and 75% of small firms.

It is data on 10 million jobs updated weekly, broken down by gender, age, industry and location — near-instant data of the kind Australia has never seen.

The treasury has been able to use it to fine tune (and change) its programs as the crisis was unfolding.

Detail like never before

And there’s more. The bureau is going to use single-touch payroll to come up with a near-instant monthly measure of earnings. It is going to use business activity statements provide an near-instant measure of business turnover.

And it has got the big four banks to hand over aggregated consumer spending data far more comprehensive than the subset that finds its way into the retail trade survey.

It is also experimenting with using anonymised electricity smart meter data to work out the extent to which people are staying at home, and using deidentified data from mobile devices to work out the extent to which we are moving about.

Read more: GDP is V-shaped, but not yet good. These three graphs tell the story

If the government has got most things right in the economic management of the crisis, it is largely because it has known more about the granular detail of what’s been happening than any government before it.

With one forecast suggesting hundred of thousands of Australians could lose their jobs when JobKeeper ends on March 28, and the impact of the extra measures the government will unveil this week uncertain, it’ll keep needing to know.

Australian Statistician David Gruen at Economic Society of Australia annual dinner Canberra Octoer 28 2020

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, March 03, 2021

GDP is V-shaped, but not yet good. These three graphs tell the story

There’s one graph that sums up both the good and not-yet-as-good detailed by Treasurer Josh Frydenberg at Wednesday’s national accounts press conference.

It’s a graph of the level of Australia’s gross domestic product – how much is produced and earned each three months in Australia – adjusted for inflation.

Australian quarterly gross domestic product

Chain volume measures, seasonally adjusted. ABS

It shows Australia’s economy getting bigger and bigger over almost all the past 80 years with only two readily-apparent slowdowns; one in the early 1980s recession, and one in the early 1990s recession.

Until COVID. Last year’s recession wasn’t a slowdown like the other two – it was a collapse, so big you could see it on any scale, even one that went back to when modern records began.

And it was V-shaped.

As soon as the economy collapsed – by 7% in the three months to June, the most since the Great Depression - it bounced back 3.4% in the three months that followed and (we now know) a further 3.1% in the three months that followed that.

It’s actually more like the beginning of a V

But, as I suggested last time (and as the graph shows) the gain of 3.1% and the gain of 3.4% don’t anything like offset the dive of 7% because a percentage increase in a small number does less than a percentage dive in a bigger number.

It’s reasonable to think that population-fuelled GDP is irrelevant to our lives, that what matters is GDP per head - the amount earned per person.

It shows much the same pattern: a V so clear you can see it on the widest possible scale, which is the one I have presented:

Per capita quarterly GDP

Chain volume measures, seasonally adjusted. ABS

The economy is 1.1% smaller than it was at the start of last year and 3.3% smaller than it would have been had economic growth continued, an extraordinarily good outcome given what Frydenberg described as the “economic abyss” forecast just five months ago in the October 2020 budget.

Government support has turned into private spending

Driving the recovery has been a continuing rebound in consumer spending. It dived 12.3% in the June quarter, climbed 7.9% in the September quarter and in the three months to December when Victorians became freer to spend, a further 4.3%.

We’ve funded it in part by cutting what had been an extraordinarily high household saving ratio.

Household saving has slid from a record high 20% of net-of-tax income in the June quarter to a more welcome 12% in the December quarter.

Household saving ratio

Ratio of saving to net-of-tax income, seasonally adjusted. ABS

Unable to spend much on travel, we are spending on the things we can. In the three months to December our spending on motor vehicles jumped a dizzying 31.8%, putting it up 22.2% over the year.

Our spending in hotels, cafes and restaurants rebounded 17.5% in the months to December, although with overseas and much interstate travel restricted, it was still down 29.8% over the year.

With the help of low interest rates and incentives, housing investment climbed 4.1% in the quarter (Homebuilder) and business investment in plant and equipment climbed 8.9% (instant asset write-off).

There are no guarantees

Farm production soared an astounding 26.8% in the quarter – the biggest jump since 2008 – on the back of the second-best winter crop on record.

If the economy continues to recover at this pace and the “V” turns into an upward tick we will make big inroads into unemployment and the coronavirus recession will look like a blip, an aberration.

But there are no guarantees. The JobKeeper employment subsidy ends on March 28 and the sharp upticks in business investment and farm production are unlikely to continue.

Read more: Josh Frydenberg has the opportunity to transform Australia, permanently lowering unemployment

Much will depend on the May budget, which comes out before the next update.

Among the budget decisions that will matter are how it will deal with the funding requirements of the aged care royal commission, whether and how it proceeds with the legislated increases in compulsory superannuation, and how quickly and to what extent it withdraws support from the economy.

There’s a case for keeping support high in order to extend the rebound in GDP and make big inroads into unemployment right up until the point we return to meaningful inflation. There’s a case for going for growth.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Josh Frydenberg has the opportunity to transform Australia, permanently lowering unemployment

Josh Frydenberg has the opportunity to become a transformational Australian treasurer. He has been bequeathed a set of circumstances that comes along rarely.

He has already shown himself able to shift the debate on important topics in order to achieve the previously unthinkable.

Most recently he did it with Google and Facebook, getting them to pay news providers for content using legislation that led the world in its breadth and force.

It’s actually the second time Frydenberg has taken on big tech. As assistant treasurer in 2015 he championed a “Netflix tax” on overseas-based suppliers of online services. They would be required to collect and pass on goods and services tax, just like Australian retailers.

It was a tax experts told him big tech might never pay.

Frydenberg has shown boldness before

Opportunities like the much bigger one in front of him now don’t come along often because Australia isn’t in recession often. Three decades ago in the early 1990s Australia’s then Reserve Bank governor Bernie Fraser seized its mirror side.

In the wake of an appalling recession that had destroyed both jobs and inflation, Fraser opted to finish the job and drive a stake through the heart of inflation.

A biography of then treasurer Paul Keating quotes Fraser as saying “we’ve got the inflation rate down and we are damn-well going to keep it down”.

At the first hint of a resurgence in inflation as the economy got back on its feet Fraser rammed up interest rates an extraordinary 0.75 percentage points in August 1994, then another 1.00 percentage points in October, and a further dizzying 1.00 percentage points in December.

Job finished, inflation has remained tamed ever since, never again returning to the 8% and 10% common in the 1980s.

Recessions create opportunities

Frydenberg’s opportunity is to drive a stake through the heart of unemployment.

From the end of the second world war right through to the mid 1970s Australia’s unemployment rate averaged just 2%. From then onwards until today it has averaged 6.8%, an embarrassment in a country capable of much, much better.

How much better?

The Reserve Bank’s pre-COVID estimate of Australia’s so-called non-accelerating inflation rate of unemployment (NAIRU) was 4.5%. NAIRU is the rate below which it is thought inflation and wage growth might start to climb.

Read more: Why the unemployment rate will never get to zero percent – but it could still go a lot lower

If correct, the estimate means there is no danger whatsoever in pushing Australia’s unemployment rate down from its present 6.4% to 4.5%, or lower. We won’t know how much lower until we try. Pre-COVID, US unemployment got to 3.5%.

Far from danger, there would be a huge payoff in permanently lowering the rate of unemployment Australia regarded as acceptable.

At an unemployment rate of 4.5%, an extra 255,800 Australians would be in work and earning money, providing services and paying tax. The government could save $4 billion per year in JobSeeker payments.

We could go for broke

Frydenberg should actually aim for a much-lower unemployment rate than 4.5%.

Reserve Bank Governor Philip Lowe does not say 4.5% would accelerate inflation, he says he doubts whether anything above 4.5% would accelerate inflation.

And Lowe says this notwithstanding the view of the secretary to the treasury that the recession has pushed up NAIRU to around 4.75% to 5% as people who have lost their jobs have become less employable.

But here’s the thing. NAIRU is the non-accelerating inflation rate of unemployment — the rate that keeps inflation and wage growth constant.

Wage growth, at 1.4% and inflation, at 0.9% are too low. We need them to accelerate. Frydenberg and the Reserve Bank have agreed to target inflation of 2-3%. It’s a target that would normally mean wage growth of 3-4%, where wage growth hasn’t been for the best part of a decade.

Wage growth below par for years

Wage price index, total hourly rates of pay excluding bonuses, private and public, annual. ABS

To get inflation and wage growth back up to where we want them we are going to need an unemployment rate well below the oddly-named NAIRU — well below 4.5% — for quite some time.

In his new book Reset, economist Ross Garnaut says we should be aiming for an unemployment rate of 3.5%.

He says on the way down there would be time to adjust the target “up when high and accelerating inflation becomes a matter of concern, or down (further) if we approach 3.5% without inflation accelerating dangerously”.

As in the US, we don’t yet know how low we can safely push unemployment, but it might turn out to be very low indeed.

Read more: The reset to lift us out of the COVID recession has to be bold: returning to where we were is nowhere near good enough

To get there Australia’s government will have to keep spending, and learn to live with big budget deficits and big debt.

Garnaut says to not do so would be a false economy, condemning us to “endless increases in our public debt-to-GDP ratio because we wouldn’t be producing the GDP we were capable of”.

The government would fund the crushing of unemployment by selling bonds to the Reserve Bank directly, bypassing financial markets in order to avoid putting further upward pressure on the dollar.

Low risk, long payoff

To the extent that the continuing flood of bonds further eased mortgage interest rates (which it mightn’t much, because the bonds would be long-term) the Prudential Regulation Authority would have to crack down on investor and interest-only loans as it did successfully before the COVID crisis in order to restrain house prices.

Garnaut believes there will also be a need for less-pleasant reforms to restore the prosperity Australia is capable of, but he says they will only gain widespread acceptance if it is known that anyone who wants a job can get a job — whether that’s at an unemployment rate of 3.5%, the 2% Australia once had or the 1% New Zealand had.

The COVID recession and rapid recovery from it have handed Frydenberg an opportunity to relentlessly drive down and crush unemployment — to finish the job.

If he grabs it he will be remembered as the treasurer who changed Australia, perhaps forever.

Reducing unemployment for good with Peter Martin. Democracy Sausage with Mark Kenny, March 4, 2021 107 MB (download)

This article is republished from The Conversation under a Creative Commons license. Read the original article.