TLDR:

• Current estimate of the cost of firmed renewables are likely to be too low, given that we don't see entities trading firmed renewables at those prices
• For industrial users, the relevant cost of energy, is the firm energy (i.e. the cost of a flat swap contract)
• As renewable energy penetration increases, the economics of nuclear go up because the cost of firming renewables goes up.

The immediate update

Last week I posted:

If that turns out to be less competitive than globally competitive nuclear, then an array of smelters in Australia will turn into permanent subsidy magnets (if they haven't already). A new generation of car manufacturing plants awaits.

Right on cue, the AFR has the following article:

The country’s biggest aluminium smelter says green target unreachable

Rio Tinto-backed Tomago, which uses more power than any other industrial operation in Australia, says renewable energy is too expensive and in short supply.

Australian Financial ReviewAngela Macdonald-Smith

The key things to call out:

The new chief executive of Tomago Aluminium, the country’s biggest electricity user, says the smelter’s goal of switching to a predominantly clean power later this decade is not achievable, derailing its emissions reduction targets for 2030 and putting the plant’s future at risk.
...
“The price of electricity on offer is too expensive for us to keep operating without government intervention,” said French-born Mr Dozol, who joined Tomago after 18 years with Rio Tinto, the majority owner of the smelter.

Firming Renewables vs nuclear - Look at traded prices

A lot is made of the apparent "low cost" of firming renewables with gas or batteries, with commentators claiming that firmed renewables represent the lowest cost method of procuring new zero-carbon supply.

I am quite skeptical of these claims. Most of these claims are based on calculated cost of supply vs an actually traded price. In other words, they assume that someone ought to be able to sell firmed low/no carbon energy for a given price, even though no firms are actually capable of selling firmed low-carbon energy for that price.

I will believe it when I see someone sell a flat swap backed by renewables + batteries + gas, with commitments on the carbon intensity of the energy.

(By flat swap I mean something like the ASX traded - Base Load Calendar Quarter Futures Contract)

Starting from the (industrial) consumer

An alternative way of trying to forecast the cost of energy is to start with industrial users of energy, who make products that compete in a global market. Industrial users, as far as I can tell, still use the cost of a flat swap when comparing the cost of electricity (as an input) for the purposes of making investment decisions.

As a result, the relevant price for industrial users is the firmed cost of energy that can be backed by an actual contract (i.e. a flat swap), and not a calculated price of firmed energy backed by a theoretically sufficient quantity of renewables, batteries and gas.

The gap between calculated prices and real prices implies that nuclear gets better as you have more renewables

This poses an interesting question, "What makes up the difference between the calculated prices for firmed renewables vs the actual contract price for a low/zero-carbon flat swap?".

The major sources of the difference would be an estimate of the financial risk being borne by the seller of swap that backed it with firmed renewables. This implies that the higher the market price cap for electricity, the more expensive it is to firm renewables, because the financial risk from selling a swap goes up in proportion to the market price cap.

The current modelling (out of UNSW) of a 100% renewables electricity market implies that to support a high penetration of renewable energy, the market price cap in the NEM will have to go up. From Riesz, J. and MacGill, I. :

This analysis suggests that existing energy-only market mechanisms in the NEM have the potential to operate effectively in a 100% renewables scenario, but success will rely upon two critical factors: (1) further increase to the already high Market Price Cap (MPC) of $12,900/MWh. Initial analysis suggests this may need to increase by a factor of six to eight.

Therefore the hypothesized flow is therefore:

• Market Price Cap increases to incentivise additional renewables
• The (risk and therefore) cost of firming renewables goes up
• By comparison the economic value of nuclear (a source of zero-carbon energy that can physically hedge a flat swap contract) goes up

A weird thought: In a world with a sufficiently high market price cap (certainly 8 times the current MPC is very high), nuclear may actually become economic just on the hedging value alone.