#10 Prof Bruce Mountain and Marinus

Professor Bruce Mountain, an energy policy expert, discusses the proposed Maranus link between Tasmania and Victoria. He criticizes the project, stating that it is not necessary and will be paid for by average electricity customers for many years. He also questions the environmental impacts and value for money of the project. The conversation touches on the agreed assumption of transitioning to renewable energy and the potential increase in electricity demand due to electrification. Professor Mountain highlights the lessons learned from the BassLink project, emphasizing its high cost and limited value in terms of energy trade. He also mentions how joining the national electricity market through BassLink resulted in higher electricity prices for Tasmania and increased wealth transfer to the government. The discussion concludes with skepticism about the modeling used to justify the Maranus link and the belief that the Tasmanian government is aware that the project's cost outweighs its be Welcome to the Voices of Franklin podcast, I'm your host Steve Williams. Today I'm talking to energy policy expert Professor Bruce Mountain from Victoria University about the proposed Maranus link between Tasmania and Victoria. Bruce is a strong critic of the proposed link. He says it's simply not needed. So this very expensive piece of infrastructure will have to be paid for by average electricity customers for decades to come. And the case for building this expensive boondoggle, to use one of Bruce's phrases, just doesn't stack up. So over to you, Bruce Mountain. Thank you for inviting me, Stephen, to speak on your podcast. My name is Bruce Mountain, I'm the head of the Energy Policy Centre at Victoria University. I'm a energy economist by profession, but my original degrees were in electrical engineering and I qualified as a chartered management accountant, although I've never practised as an accountant. And I did a PhD focusing on the regulatory economics issues in Australia somewhat later in my career. But my working life has been energy economics over the last 30 and a bit years. Thanks for that, Bruce. Yeah, we're here today talking about the proposed Maranus link between Tasmania and Victoria, similar in some ways to the present Bass Link, which of course has been quite controversial in itself, as is Maranus link. I'm going to presume, Bruce, that there's basically a case for and a case against Maranus link. Can we start off by talking about any agreed assumptions between these two camps? For instance, one agreed assumption might be that we're moving to a non-fossil fuel economy eventually, although you wouldn't necessarily know it from what the federal government's doing, but we are moving off oil and gas in particular, and that will have repercussions for the electricity sector. Yes, I'm not sure that those for and against have different views on the necessity of a transition to a renewable resource or at least a clean energy resource. So I don't think there's any difference there. I think the difference lies in whether interconnection to Victoria is beneficial in reducing emissions, either in Tasmania or Victoria, and whether it's value for money and the environmental impacts, most particularly in Tasmania, associated with the plan to build the interconnector and consequently considerable wind farm development in Tasmania. Right, so another agreed assumption might be that transport is going to be electrified around Australia, therefore, whether we like it or not, there's going to be more demand for electricity simply through that electrification process. Yes, I think it's fair to imagine that electrification of households, and that's a bigger issue in Victoria than it is in Tasmania, where electrical consumption in Tasmania per household is considerably higher because there's much less use of gas as a heating fuel, or either for space conditioning heating spaces or heating water, whereas Victoria gas is still a pretty major source of heat, and moving to battery cars, essentially. So those two things will increase demand. On the other hand, there are reasons why demand might decrease. We might use electricity more efficiently, appliances become ever more efficient, and there's still substantial scope to expand distributed production. And so the net increase in the demand of electricity on the grid is an issue on which there are plausibly quite different views. Yes, I'm a great believer in energy efficiency being the cheapest form of generation you'll ever have. And I think we're probably still a long way from having energy efficient dwellings like we should have, and appliances and so on. I don't think Australia policymakers, not talking about yourself here, but in general terms, we've not been very good at pursuing energy efficiency for whatever reason. Yes, I think that's right. I think that's right. So the present situation in Tasmania-Victoria is we have something called BassLink, which is a high voltage direct current link. I think it's 500 megawatts between Tasmania and Victoria. It started operating in 2005 and, of course, famously had disruption to it. It had a big fault in, when was it? 2015, somewhere about there? It was actually from June to the end of the year in 2016. Yes, so for about six months it was out of action, just reminding us that these highly expensive, complicated bits of infrastructure can fail. And whether there's a warranty that comes with this technology, I don't know. I'm assuming it doesn't, and the cost is borne by whoever. But BassLink teaches us some valuable lessons, presumably, Bruce Mountain. Can you tell us what you think those lessons are from BassLink, and have we learned them? I think the lessons from BassLink are pretty clear, and I don't think Tasmania has learned them. The lessons are that interconnection is extraordinarily expensive, and the value of the interconnection in terms of energy trade does not exceed its cost. That's the long and the short of BassLink. When it was built and made operational in 2005, it was claimed to be the world's longest subsea cable, and one of the largest by virtue of the transfer capability, or certainly the longest. And it was built by National Grid for 500-odd million, and sold to the Singaporean investment firm for roughly twice that. National Grid made decent money out of it. But even at its costs, at $500 million, you could not generate trade over the interconnector that could have justified the cost of the interconnection. That cost has since escalated greatly for the same capacity. Now you'd, in current days' money, probably pay about six times more. And the value of the interconnection has gone down as alternatives to hydro storage are increasingly possible through chemical batteries. The advantage that Tasmania has long had in its hydro storage is becoming increasingly less valuable as it's possible to store wind and solar production in chemical batteries. And so the fundamental economics has been pointing in the wrong direction ever since. Wisely, in a sense for Tasmanian consumers, at least in some sense for Tassie consumers, there was no attempt to put Brasslink on as a regulated interconnector. So the risk on the trade was taken by the government through Hydro Tasmania. It turned out to be a very poor risk, and the people of Tasmania are worse off as a consequence of the investment. It's made Tasmanians poorer through the value of the interconnection, the money derived from the trade of the interconnector being less than the cost of the interconnector, which has been paid for by Hydro Tasmania and hence all Tasmanians through a series of annual payments to the owner of the cable. In addition, it had another major consequence for Tasmania, and that was to drag Tasmanian prices up to Victorian prices as a consequence of joining the national electricity market. In electrical terms and market terms, Tasmania is about a quarter of Victoria in energy and peak demand terms or at least average demand terms. It's even less in peak demand terms. And so it is relatively small. And the consequence of joining a small market to a bigger one is the small market gets to take the bigger markets' prices. And at least in average, that's the way things have worked. Sometimes in Tasmania, it's been slightly more on annual average than Victoria. Sometimes it's slightly less. There are seasonal transfers across Baslink, and there is a different hourly profile of prices. But the average of the wholesale over time in Tasmania and Victoria is pretty similar. And so there was essentially a large transfer of wealth from electricity consumers in Tasmania to the Tasmanian government as a consequence of joining the national electricity market, higher electricity prices, which translated into higher dividends to the Tasmanian government. So consumers effectively paid taxpayers. I think the one fantastic advantage that Tasmania has always had a hydro power system in power system terms, a relatively smaller system than on the mainland. It's thrown that away by virtue of joining the national electricity markets. And building Baslink. And now it's seeking simply to make the error even worse by substantially expanding the capability of interconnection through the Mariner's Link. Baslink is still operating. What's its expected lifespan, Gina? I don't know. These transmission cables are a bit like the old man's axe. You can replace the various components at either end to turn DC into AC and vice versa. And elements of the cable can be replaced. So these things can go on for a long period of time. But of course, rather large licks of money often goes into keeping them going. Yeah. So the Mariner's Link, if it goes ahead at 750 megawatts, it would add to the existing Baslink cable. So they're meant to perform side by side. I suppose if I was the energy minister of Tasmania, I'd be wanting to see a lot of modelling with or without Mariner's Link and a whole bunch of other assumptions as well in different scenarios. For example, a higher uptake of wind in Tasmania, one of the cheapest forms of electricity generation, a higher uptake of electric vehicles with potentially battery storage for the grid. There's a whole bunch of variables for this mountain that a policymaker would have to be across to make an informed decision. Yes. And with this sort of modelling, you can get whatever number you want. So there's a public process that is gone through to tell the public that it's all worthwhile. That modelling is not worth the paper that it's written on. You can get whatever number you like. I think what really counts is what the Tasmanian government will have been informed behind closed doors and what it knows. And you can assess that by looking at how they are handling this. Essentially, they know that there's absolutely no ways that the economic or financial value of Mariner's exceeds its cost, which is why they're doing their level best to impose the cost on the Commonwealth and onto Victoria. They've managed to whittle down their own equity stake in it to 17 percent, Victoria twice that in the Commonwealth, the balance, which is about half, which is the Tasmanian minister's way of attempting to get out of bearing the cost and with not bearing the cost, not gaining the benefits. But they know that the benefits are tiny. So essentially, or not tiny, are small and much smaller than the cost. So essentially, the Tasmanian pitch here, if there is an economic pitch, is to the extent that you can impose the costs of these things on others and obtain jobs in Tasmania from a political point of view, cut the ribbon on a major bit of infrastructure, make claims about infrastructure development. That's your dividend. And that's about it. And so far, the Commonwealth and Victoria have been sucked into that, the Commonwealth even more so than Victoria. But we can see essentially what the Tasmanian government really believes by looking at how they are arranging the finances on this or seeking to arrange the finances on it. In this sense, they've learned from Baslink, where Tasmania Inc. owned it and took the benefits with it and realized very quickly that the benefits were much less than the costs. So at least Tasmania Inc. has learned from that. I don't think the Commonwealth and Victoria have learned from that. I don't quite know what Vic will do. Ultimately, it's got an equity holding in it that doesn't oblige it to invest capital into it. And none of these equity holdings determine the relative distribution of the charges for the use of the cable as between Tassie and Vic. So all of that is still to be worked out. And pending that, we will see a further assessment of the distribution of costs and benefits as between Victoria and Tasmania. Then there, certainly, there'll be other costs for Tasmania besides the cable itself. I understand that there'll have to be various infrastructure upgrades in Tasmania simply to allow the undersea transmission cable to work. I believe that's quite a bit of money involved there. It's separate to Maranus Link, but enables Maranus Link to work in Tasmania. Yeah, there's two big buckets of money that go with making Maranus useful to Victoria, essentially, and potentially useful to Tasmania. The first is what's called the Northwest Transmission Project, which is what they say is $1.5 billion, in actual fact, is almost certainly likely to be very much more. That's the nature of these costings, which is essentially to double the regulatory asset value of transmission in Tasmania. So if Tasmanians get to bear this charge, the transmission element of their bill will double. And since very large power users dominate a large part of the consumption profile in Tasmania and have sweetheart electricity deals, they don't bear their fair share of that transmission cost now. And unless they come to bear their fair share of the augmentation, which may well not be the case, then an even bigger proportion will need to be borne by Tasmania, either consumer and or taxpayer. That's the one bucket. The second big bucket is essentially a large re-engineering of the Tasmanian power system to change the relative amount of energy and power that it can provide so that it becomes a more useful device in Victoria in being able to shift energy from seasons and hour across the hours of the day. And the main expenditure envisaged there, other than upgrading of particular hydro power stations, is a pumped hydro project. And that will be phenomenally expensive, a good deal more expensive even, I suspect, than the cable itself. And again, unless the Commonwealth bears that, it will be unaffordable for Tassie. Those two additional transmission and pumped hydro things in round numbers will more than double the circa four billion or three billion rather for the cable itself that has been mooted so far. Yes, and all that stuff that you're just explaining, then that encapsulates the sort of battery of the nation concept that politicians try and sell this project as. So really, in a nutshell, Bruce, you think Tasmania, at least, would be far better off by not having any interconnector whatsoever, or certainly not the Maranus connector. We would still have Baslink. And we would pursue a more self-sufficient electricity system, probably more wind, more solar, more energy efficiency. But when you run the numbers, that's the result you get. Yeah, Tassie has long had a clever electrical system. It was well engineered. Tasmania needed to work within the fiscal constraints in building up its electrical system. And it's a hydro system, which is always quite difficult and complex. And the geography of the Tasmanian landscape meant that there was a great need to be clever about the way the power system was developed, the way the transmission system was built. And I've always thought of Hydro Tasmania as a corporation that was very innovative and smart and could have taught the mainlanders a thing or two about clever engineering. And that's what Tasmania had. And it was an advantage to Tasmania, which having a clean power system, a hydro-dominated power system, has been a great advantage to Tassie. They've since largely, as I said, chucked that away by joining the NEM and revaluing a whole lot of the assets, losing that fiscal and budgetary constraint that made them clever, moving into swanky offices, tripling their salaries, spending a great deal of marketing money and logos and imagining that they can become electricity retailers on the mainland. Often subsidised by Tasmanian taxpayers. So the whole corporate direction has been haywire, frankly. Tassie now has a great advantage in combining its hydro with solar, particularly rooftop solar. It has seasonal solar and it has seasonal water, decent water in the winter, decent sun in the summer. And the variable nature of the solar doesn't need much in a hydropower system where you can store your energy. So there's a perfect pairing of solar and hydro in Tasmania. And it's been blindingly obvious to me for ages that the correct energy strategy for Tasmania would have been to develop rooftop solar, ensure that the consumers on whose homes it's placed gain a benefit by virtue of the self-consumption of the portion and bringing benefit to all other consumers by decreasing demand in the middle of the day and allowing much higher value through storage of Tasmanian water. Sadly, that hasn't happened, I think, because Hydro Tasmania has managed to convince the government that they shouldn't have anything that will undermine their own electricity, but failing to realise that hydro makes their own storage more valuable as a peaking resource and would allow Tasmania to electrify transport more quickly than the rest of Australia from a completely clean resource. Instead, successive ministers in Tasmania have gone for the glory things, the big wind farms, the big transmission connection, the big projects and this nonsense of a battery of the nation. It's all in the jargon and the titles that ministers give these things. Snowy 2.0 is cut from the same cloth. These grand infrastructure ideas that just ignore the fundamental economics of the power system and frankly, don't put either consumers or taxpayers first. It's something about a hell of a lot of politicians where they love the big engineering projects. Snowy 2.0 is a great example. It's as if they've fallen for this notion building concept where if you're not spending a lot of money on big infrastructure, then you're not really doing your job. But of course, that whole nation building thing, it's really turned into a satirical meme and that's where that concept does work well as a spoof on hubris and stupidity. So where does that leave us, Bruce? Isn't Mariner's Link, isn't it? It's not quite locked in yet as I understand it, but it's sort of well on the way to being locked in. They've certainly spent a great deal of money promoting it at every opportunity and this government as well as the opposition seems to have shown fealty to the idea and they're keen to keep moving it on. It still has the fundamental problem as to who's going to pay for its usage. The intention is to make it a regulated asset and once it's a regulated asset, you get to impose charges for its use onto consumers and just who pays for that. Is it Victorian consumers? Is it Tasmanian users? If it's Tasmanian-Victorian users, it will roughly double or more the transmission usage system charge. If it's Victorians, sorry, not double, triple. If it's Victorians, it will roughly double. So I think Tasmania and Victoria are hoping that the Commonwealth grants substantially all the capital involved in building Marinus and essentially gives it to Tasmania as a gift. And so the underlying regulatory value of it will therefore be much lower because it'll have been financed by all taxpayers and I think they're all hoping for that madly and unless they get that or a large amount of that, the use of system charges will be huge. There'll be big blowback in Victoria because Victorians will obviously ask, so we're paying this for this new transmission line. What are we getting for it and how do you know we can't get it more cheaply by building storage in Victoria? And I think the Victorian government will be under a great deal of pressure to answer those questions. Victoria was once a rich and mighty state. Its budget is now in a dire position. I think the government is becoming increasingly aware of the impacts of these decisions on both taxpayers and electricity consumers. So I think the time of easy imposition of major new costs has passed and I think the government will have to account for it. So I don't think there'll be an easy ride in Victoria. I don't think there'll be an easy ride in Tasmania. As I say, the distribution of sales in Tasmania is highly concentrated. Just a few customers make up half of sales and they have no interest in bearing huge new transmission charges. And so if Tasmania gets to bear half or even a quarter of this, it's going to have a very large impact in Tassie. And that's adding, as I said, the northwest transmission development, which will double Tassie prices for the usage of the high voltage system. And then that's leaving aside, as I say, also the pumped hydro, which will be double what the transmission costs. So I think it's all resting on the Tasmanians and to some degree the Victorians managing to convince the federal government to give Tasmania and Victoria implicitly the money for this to be built. OK. It would be incredibly interesting to see alternative use of the money that's going into Mariner's Link to see what else, even though, as you say, Tasmania is reducing its equity stake in the whole thing. It would still be incredibly interesting to see what else could be done with that money instead, whether it be particularly with solar and EV infrastructure, which of course is going to be fairly costly, one would presume. I see great potential for vehicle-to-grid and vehicle-to-home battery storage from EVs. Is that something you've looked at closely, Bruce Mountain? Not closely. I watch it. There's certainly convenience in vehicle-to-load, and many common EVs have two kilowatts or more, five kilowatts in some cases, of load-specific demand that they can meet, which is very useful for appliances and tradies and camping and what have you. But vehicle-to-grid is somewhat difficult in the sense that you need to have an inverter and you need to synchronise your AC signal to the grid. And until these things are integrated into the motor vehicle, the incremental cost of that infrastructure is likely to be such that it's not going to be economically attractive to EV owners to make their vehicle available to the grid, but that might change. But Tassie doesn't need to worry about that now. It's got plenty of storage capacity to meet its own needs. It's really an advantage that it doesn't need to wait on transferring electricity from vehicles-to-grid to have the transition. It can do it all now. Even though our reliance on hydro is vulnerable to some extent by unusual droughts or mega droughts, the future of precipitation is uncertain, same with any aspect of the climate. Do you think policy makers have that at the back of their mind? They just want that insurance of more transmission from the mainland in case of those scenarios? Well, that's what they say. But they can get it much more cheaply in Tassie from the existing wind. Tassie now on annual electricity production is balanced with the wind that it's developed along with the hydro it has. Unless there's an extraordinarily dry year, it can make enough. With the existing interconnector, it can trade between the two, and it won't take much rooftop solar to expand that electricity production. It's got the hydro capacity already. I don't think Tassie has an energy or power constraint. I think it has good fortune to be in the position that it's in. So although governments and ministers might talk about interconnection for the value it has in strengthening supply, I don't believe that that's a relevant argument now. It perhaps was relevant a decade ago before they'd built the large amount of wind that they have already and even more coming. And it was relevant prior to solar being a proposition. But solar is now so eminently obviously a proposition and can be built up quickly. But Tassie has the electricity that it needs to meet its demands or can easily have them. So Bruce Mountain, the energy policy area that you work in, it must be a relatively small club. You all know each other. Are your opinions echoed by the other energy experts that you know, or are there strong differences of opinion within that club? So on Marinus, every energy economist I know who's not working for the Tasmanian government or the Victorian government or the energy market operator doesn't disagree with the analysis that we've presented. I can't think of anyone who would put their hand up and say they think it's a good idea. Not many are willing to do so publicly, at least state their view publicly, as in they think it's a daft idea because you're going against governments. And that's something that not everyone feels they have the freedom to do. No, I think there's a high level of consensus on this. The parties who believe in it are getting a pecuniary benefit from their belief, working either for the network service provider, working for the energy market operator or the department in either Tasmania or Victoria. So I don't know anyone who is not getting a pecuniary benefit or who is getting a benefit from it who thinks it's a good idea genuinely. I think they're doing what they're told. OK, Bruce Mountain, we'll have to leave it there. I've really enjoyed talking to you and would love to have you back sometime to talk about energy policy in more general terms, because we've only just scratched the surface. We'll put some of your writing in the show notes so people who are interested can get more detail. But for today, Bruce Mountain from Victoria, thank you so much for joining the Voices of Franklin podcast. Thank you, Stephen.