Renewables drag down productivity

Australia’s falling productivity levels have been driven down by the replacement of coal-fired power plants with billions of dollars in renewable energy projects, the Productivity Commission has declared, as it warns governments should to make only the most efficient, cost-effective investments.

After Energy Minister Chris Bowen made a push alongside the UN’s top climate official this week for further investment in renewable energy, Productivity Commission deputy chair Alex Robson released a study showing that such investment had “contributed to a productivity decline” and Australians were working harder for less.

“There has been significant ­investment over the past 20 years to replace coal assets reaching end of life,’’ Dr Robson said.

“While this investment was clearly necessary, it has seen measured productivity fall significantly as there is a lag between when new energy assets are built and when they start producing at full capacity. Despite a 126 per cent ­increase in the capital stock since 2001-02, output has only ­increased 14 per cent over the same period.”

The warnings follow Jim Chalmers and Anthony Albanese nominating improved productivity as a cornerstone of the Labor government’s second term, and Mr Bowen in his role as COP31 president of negotiations encouraging a push for a new global electrification target.

While noting that renewable energy investments had helped improve network quality and safety, as well as lower emissions, Dr Robson said such improvements were not picked up in ­conventional measures of productivity and “renewable energy is even more capital intensive than the assets being replaced”.

He called on governments to be careful about how they allocated spending on renewables.

“Governments can still do more to help ensure we continue this transformation as productively as possible,” Dr Robson said.

“A disciplined policy focus will help to ensure investment flows to the least-cost energy systems and most efficient means of reducing emissions.”

This week Mr Bowen told a climate summit in Bonn, Germany, that there was a need for new global electrification targets and further investment.

“We have to send a message to investors, to corporate boards, to economies that we are collectively committed to the task of ­decarbonising, building renewable energy and reducing fossil fuel reliance,” Mr Bowen said.

Estimates have placed the government’s annual spending commitments to climate and renewable energy at more than $9bn a year.

The Treasurer on Thursday noted that 43 per cent of Australia’s electricity was from renewable energy and the government’s spending on this area had helped with the price of electricity.

“Energy markets are a very ­important focus of our government … the progress we have made on renewables helps to ­explain why electricity and gas prices have had a more muted ­reaction to the current conflict compared to Ukraine shock,” Dr Chalmers said at investment bank Morgan Stanley’s annual conference .

The Australian Bureau of ­Statistics said in its most recent inflation reading that electricity prices were up by 22.5 per cent on the previous year. National accounts released last week showed that overall household spending on electricity had jumped 11.5 per cent in the first three months of this year alone as rebates from government rolled off.

The spending on electricity was the biggest contribution to the growth in household consumption, “raising out‑of‑pocket expenditure for households”.

Dr Robson said Australians were working more for less.

“The value of goods and services we produce is increasing, but not by as much as hours worked. In aggregate, we are working harder and longer, but we are not working smarter,” Dr Robson said. “Our capacity to produce electricity efficiently is critical to our overall productivity. A productive economy needs reliable and affordable energy.”

Australia’s productivity rate – the level of output per hour worked – fell by -0.6 per cent in the March quarter, leaving the annual rate at 0.3 per cent, well below the government’s already downgraded long-run assumption of 1.2 per cent.

Dr Robson said some electricity sector investments had focused on quality improvements and when they were taken into consideration the decline in productivity was not as bad as first ­appeared. He noted that from 2006-07 to 2023-24, quality adjusted productivity fell 8 per cent for the distribution element of the electricity sector and 15 per cent for the transmission element.

When the quality improvements were not incorporated then the measures declined by 24 per cent and 26 per cent respectively.

Dr Robson said governments should do more to help ensure this transformation evolved in the “most productive way possible”.

“Australia should continue to identify and act on opportunities to improve productivity through the most efficient and cost-­effective investments,” he said.

Assistant Technology Minister Andrew Charlton this week said energy-­hungry data centres could be used to “accelerate our energy transition rather than threaten it” by lifting the level of investment in renewable energy. “But large new (data centre) loads arriving faster than generation and transmission can expand could push up prices for everyone if not carefully managed,” Dr Charlton said at the Sydney Institute.

“We expect data centres to underwrite new renewable power supply. That means they must bring their own generation, not draw down everyone else’s. We expect them to pay their full share of grid connection, so those costs are never passed to households and businesses. We expect them to support the system through demand flexibility, to be a grid asset rather than a grid burden.”