Categories
Podcast episode

The Aussie electricity market malfunction of June 2022 – EP156

Australia’s National Electricity Market was suspended by the market operator for nine days in June 2022. For a brief period, authorities were worried there would have to be widespread blackouts to balance supply and demand. In this episode, Andrew Murdoch, Managing Director of Arche Energy, explains what went wrong in June, and he talks to show host Gene Tunny about whether it could happen again. Are renewables coming into the system too quickly? What’s happening with batteries? Will Australia be able to cope with the retirement of coal-fired power stations? And what about all the EVs that will need charging? These and other questions are tackled in a frank and fearless conversation.  

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About this episode’s guest: Andrew Murdoch

Andrew Murdoch is Managing Director of Arche Energy, a Brisbane-based consulting firm specialising in energy projects.. He is an experienced general manager, project director and engineer operating in renewable power, power generation, energy, ports and heavy infrastructure. For more on Andrew’s experience, check out the Arche Energy website.

Links relevant to the conversation

Australian Energy Market Operator (AEMO) report into market suspension in June 2022

AEMO’s Integrated System Plan

NEM suspensions costs lower than expected – NB when they were directed to supply gas to the market at an uneconomic price for them at the market price cap of $300/MWh, the generators became eligible for compensation

AEMO’s Electrical Statement of Opportunity

Some large-scale Australian renewable and battery projects: 

Lockyer Energy, Supernode

Global coal demand as high as it has ever been (IEA report)

Transcript: The Aussie electricity market malfunction of June 2022 – EP156

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny

Coming up on economics explored…

Andrew Murdoch  00:01

Reflecting on the events of June, more energy would have been handy. So it was the cost of energy issue that created these extreme prices. So whether that energy came from renewables or from gas or from coal, any additional gigajoules or megawatt hours generated onto the system would have had downward pressure on prices and certainly would have helped.

Gene Tunny  00:26

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 156 on Australia’s national electricity market, the NEM. In June 2022, the NEM was suspended by the market operator for nine days. For a brief period, authorities were worried there would have to be widespread blackouts to balance supply and demand. My guest this episode explains what went wrong in June, and we talk about whether it could happen again. My guest is Andrew Murdock, Managing Director of RK energy, a Brisbane based consulting firm specialising in energy projects. Andrew has a background in engineering, and he really knows what he’s talking about when it comes to electricity. So standby for a deep dive into Australia’s NEM. Please check out the show notes relevant links Information and for details of how you can get in touch. Please let me know what you think about what either Andrew or I have to say. I’d love to hear from you right now for my conversation with Andrew Murdock on the NEM. And we also chat briefly about electric vehicles toward the end of the conversation. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Andrew Murdoch for a market energy. Thanks for coming on to the programme. Thanks, Jane.

Andrew Murdoch  01:55

Good to be here.

Gene Tunny  01:56

Yes. Great to have you on. So you got in touch after a recent episode where I was talking about EVs and I mentioned that you really love to talk to someone who’s familiar with energy with electricity. And you got in touch and yeah, it seems like you’ve got a great track record. Great experience. Could you tell us about what Arche Energy does and your experience, please?

Andrew Murdoch  02:22

Yeah, sure. So Arche Energy is an energy advisory firm. We’re a small firm based here in Brisbane, Australia. We help people develop energy projects, we help people solve strategic energy related problems. We help people with decarbonisation and developing strategies to meet their netzero goals or other other related goals. We do project management, project development, strategic engineering, owners engineering, etc, in the energy and infrastructure industry.

Gene Tunny  02:54

Right. So in terms of meeting their decarbonisation goals, are you advising them about what renewable energy options they’ve got? I mean, what sort of things would you be advising them?

Andrew Murdoch  03:06

Yeah, absolutely. So I guess a typical decarbonisation job will be a for us will be an industrial mining facility with a significant energy consumption need. And we will look at what what their energy consumptions is, what their, what their physical processes are, and look for opportunities to either make better use of the resources that they’re using, whether that’s gas, coal, heat, power, etc. And then also look at opportunities for integrating renewables and other low carbon sources of energy into their into their processes.

Gene Tunny  03:45

Right. Okay. Are there any examples of clients you can talk about or jobs you’ve done?

Andrew Murdoch  03:51

Yeah, so one particular job was a mining clients, they they developing a greenfield mine, lithium mine over in Western Australia, they guessed the way that you would power a mine 20 years ago was when you would just get a half a dozen big diesel generators, truck diesel, the site and the way you go. These days, you look at some more complicated, complicated processes. So you might integrate some solar into the into the system, you might, you might also integrate some wind into the system and certainly batteries are very valuable for mine supplies. Mine power supply systems now because it allows you to if it allows you to run your engines more efficiently, allows you to have less engines and allows you to deal with shocks to the energy system when a cloud goes over your solar farm or the wind stops blowing etc. So those technologies that are available now are we’re seeing those in most mine supply power jobs that we’re doing these days, right

Gene Tunny  04:56

but would you typically have some diesel generators, they’re just in case.

Andrew Murdoch  05:02

Yes. So system has to be robust enough to deal with a wet week or a week without rain, when the batteries can’t recharge, nighttime evening peaks, etc. So, but we’re seeing, you know, we’re seeing in the studies we’re doing these days, we’re seeing renewable energy fractions going up to sort of the 60s and 70 percents, which is, which is fantastic and wouldn’t have been achievable 20 years ago on mine sites.

Gene Tunny  05:27

Wow, that’s incredible. Okay, that’s, that’s good to know. We want to want to chat about as this whole issue of integrating renewables into the system. And, look, there’s a lot of debate about this. And there are people who are very pro renewable. And I mean, I understand that we have to get there eventually we need to decarbonize. I mean, I’m not arguing against that. But one thing I’ve been concerned about is just just how not, are we doing it too quickly? I think that’s still that’s a legitimate question. What are the risks to the system? We had this situation earlier this year, when the Australian energy market operator had to intervene in the national electricity market? It because it looked like there were concerns about the reliability of supply. Could you tell us about that? What’s your take on what happened there, Andrew?

Andrew Murdoch  06:19

Sure, we might just rewind a little bit and start with a little bit about how the market works. And the physics involved. It’s an incredibly complex system, both physically and commercially. So what we have essentially is a market that needs to match supply and demand almost instantaneously. We have very, ah, it’s not possible to store electricity as electricity. So even batteries are chemical storage, not not, not electrical storage. And so there’s a constant need to match supply and demand as accurately as we can. When demand exceeds supply frequency goes down, everything starts spinning a little bit slower. And when supply exceeds demand, the opposite happens. Everything speeds up a little bit. So there’s a constant need to match supply and demand.

Gene Tunny  07:09

Right? So I mean, what does this mean? Could this mean that it could damage some of our equipment, our appliances connected to the grid,

Andrew Murdoch  07:17

The system in Australia is very, it’s very geographically dispersed. We have power stations that are in the regions. And we have centralised demand in the major cities, capital cities, and also industrial cities like Gladstone, Newcastle, Illawarra, for example. And we need to manage the flows between the generation sources and the loads without overloading a particular network elements. So if we get too much power trying to flow through a particular part of the network, then we start to melt things. And so the market has to manage that. The national electricity market, the NEM, was established just over 20 years ago. And so, it, it has the objective of supplying power in the most economically efficient way to the consumer. Yeah, without breaching any of the technical constraints that it has to work with. So NEMO, the Australian electricity market operator operates a dispatch engine and the name dispatch engine. And that dispatch engine takes bids from each of the generators, builds a bid stack for each of them, and each of the each of the NEM zones, and the NEM zones roughly correlate to each of the states. And then that dispatching engine matches supply and demand and sets a marginal price based upon where the supply demand curve crosses,

Gene Tunny  08:45

Right. So this bid stack, your ranking the bids that come in, so see us energy or whatever, or the other generators say we will supply, what is the bid in terms of is it megawatts? Yeah, megawatts over whatever, particular period?

Andrew Murdoch  09:01

Yeah. So the unit of sale is megawatt hour, so that megawatt hour, one megawatt for an hour. But the bids are done on the bids are done every five minutes on a megawatt basis.

Gene Tunny  09:13

We will supply this much electricity at this price, correct? Gotcha.

Andrew Murdoch  09:19

And then the price is then set at the marginal, the marginal, the marginal bidders price, and everyone, everyone who gets everyone who bids below the marginal bidders price gets dispatched, and they and they they receive that price modified by their loss factor. And then anyone who bids over that price, then doesn’t get dispatched.

Gene Tunny  09:37

Okay, so it’s the marginal bidders price. So that’s the price that was offered by the bidder that they need the last bidder, the marginal bidder, to make sure that the supply of energy matches the demand. Correct? Yeah. Okay. Gotcha. And so everyone, all of the energy supplied, up to there that all gets the market price.

Andrew Murdoch  10:06

Correct. Now the bidders can bid anywhere between negative $1,000 and $15,100 per megawatt hour. So there’s quite a large range of permissible bids. Yeah, the reason for the negative bids is so that if you’re a thermal unit, a coal plant, you have a large cost associated with coming offline. And coming back online, so you will accept for short periods, you’ll accept the cost of having to stay on and receive negative prices for your power. The purpose for the extremely high prices are there to provide an economic incentive to construct peaking plants. So, peaking plant might be something like a gas turbine that only runs maybe 2% of the Year, 3% of the year. So it needs those extreme prices to be able to cover its costs for the rest of the year when it’s simply on standby. In parallel with the physical market, there’s also a contracting market, which is essentially an over the counter market where a generator and a retailer will enter into an agreement to swap exposure to the pool price. So essentially, they that’s what agreements that synthetically generates a fixed price netting out the generators exposure with the with the buyers, the buyers exposure. The larger gen-tailers also tend to vertically integrate as well to manage their risk.

Gene Tunny  11:28

So gen-tailers their generators and their retailers as well, because we’ve got this. Yeah, we’ve broken up the market in Australia, haven’t we? We’ve got we’ve split generators from distribution and from retailers. And once upon a time they were all integrated, weren’t they? We had these electricity boards. We had southeast Queensland electricity board, and yeah,

Andrew Murdoch  11:52

Yeah. So back in the 90s. Yeah, the, the industry deregulated and competition was introduced at a wholesale level. And now we have retailers competing for our, our, our, our retail contracts. And then we have the wholesalers competing to supply to the, to the retailers.

Gene Tunny  12:12

So Andrew, this is fascinating. We’ve got this complicated market, where there’s generators bidding into supply electricity at particular prices, and we’ve got these, this wide band over which they can bid and there’s a negative. There’s a possibility of negative bids. So that’s something we’re seeing more of lately, we’re seeing these negative prices. And that might strike people as very strange, why we see negative prices. So we’re going to just sort of chat about that in a minute. But also, you mentioned that it could go up to what was it $15,000 a megawatt hour. But what happened recently was that they said no bids over what was it? $300 a megawatt hour?

Andrew Murdoch  12:52

Yeah, that’s That’s correct. That’s correct. So I might I might go through what happened in early June. Yeah, fascinating. It’s a fascinating story. So so it all, it all began when Russia was demanding payment for their gas in rubles, and that shell and Orsted and others refused to comply and Russia then made significant cuts to gas supply into Europe, which then obviously had an impact on the the global LNG prices. And because most of these cases of this gas is is connected to the LNG market through the the LNG plants in Gladstone. And we’ve seen netback prices on the East Coast go up as well. So if I reflect back to sort of 2011 2012, we had a spot price of gas that was largely following the cost of supply around $5, $6, $7 dollars a gigajoule. In in March, sorry, in June, we saw prices ranging from between $15 and $43. A Giga Joule for gas, so quite a significant increase over the over the cost of supply for for gas on the East Coast. Right. So

Gene Tunny  13:59

we’re talking many multiples of cost of supply and multiples of many multiples of what it was trading at previously.

Andrew Murdoch  14:06

Correct. Yeah, right. Meanwhile, we had a very wet summer, and that wet summer had the impact of restricting coal supply. So for example, Millmerran wasn’t able to mined coal for a significant period, period of time. And global coal prices also followed energy prices upwards which coal difficult to get and expensive. So last time I checked, thermal coal was trading at around $400 a tonne, which is which is incredible. Now concurrent with that, we had a third factor which was that a large number of plant was out of service throughout, throughout the country. So we had outages that are raring Bayswater, Loyang Liddell and keloid Sea. See, I believe there’s also an outage, just one vacay at the same time as well. So that was about 30% of the call fleet was out of service in in in June. So we do have significant capacity be taken out of the market.

Gene Tunny  15:01

So one thing that’s brought up and I don’t know, I should be careful not to necessarily attribute this to Matt Canavan because I’ve had Matt on the show before Matt, someone I chat with from time to time about these issues. And I’m hoping to get him on the programme again. But it may have been Matt that said that, look, they’re just not investing in this old coal fired power generation, because there’s a push to decarbonize. There’s all of this excitement about renewables, and they’re not doing the maintenance, so they’re not refurbishing the old coal fired power generation capacity. Is that do you know if that’s true, or do you have any views on that?

Andrew Murdoch  15:39

I do have a view. And I guess I take the view that we’re currently using a lot of coal in the country. And it’s great to decarbonize, and it’s great to reduce our reliance on coal, but it’s not going to happen immediately. Yeah. And my personal view is that there was a lot of decarbonisation to be gained simply by making coal plant more efficient, and more reliable. So I’m talking about things like, for example, reducing our reliance on Victorian lignite and transforming it that to higher quality Queensland black coal will have a significant impact on carbon emissions, just by the higher quality of the fuel being burned. The other thing we can do that is, in my view, an easy win is to transfer from 1960s 1970s subcritical technology to 2020 Ultra supercritical technology, or even better integrated combined cycle gas turbine technology.

Gene Tunny  16:38

What’s the difference? Is there an easy way to explain what the difference between those two different types of the whatever it is, it depends on its level of criticality or something

Andrew Murdoch  16:49

Subcritical versus super critical. So, So essentially, if you imagine a little paper wind turbine that you’ve made that in primary school, for example, and you blow on it, and it spins, now the harder you blow on it, the faster it will spin and the more energy that it takes. Yes. So essentially, what we’re trying to do in terms of making a steam turbine more efficient is to increase the pressure at the, at the steam turbine inlet. So essentially, the more energy we can put into the steam before it gets into the turbine, the more efficient the turbine will be. Now, the difference between subcritical and supercritical, interesting little point of physics is that subcritical boilers, the pressure is relatively low, and we we heat up and boil water, similar, similar to the way that the kettle works at home. We bought boiled water to make steam, a supercritical plant. So supercritical plants, there’s not a distinct boiling phase, we simply just heat it up, and it gets thinner and thinner. And that steam because it’s such high pressure has the properties of both a gas and a liquid at the same time. So okay, that’s so much. It’s not so much irrelevant to the physics of efficiency. It just has to do with how we designed the boiler and the steam processes.

Gene Tunny  18:09

Okay. So it’s good to know that, that this technology that came out of the 19th century or possibly even before it can be improved and yeah, okay. That’s good.

Andrew Murdoch  18:21

And then the other dimension to, to decarbonisation of coal generation is, is is carbon capture utilisation and, and storage. And my personal view, and I know, people have some very strong views on this, but my personal view is that there’s more to be gained in carbon capture and storage. Okay. Okay, good. Good. Yeah. So back to June. And I guess the next factor that we have to consider was that June was unusually cold. So we had the ninth of June, the low at Archerfield, was 7.9 degrees against the June mean of 11.8 degrees. So it’s not super cold, but just a little bit colder than usual. And that what that led for us all to do was at home turn on your air conditioners. And in Queensland, on the ninth of June, we reached a new record maximum demand for Q2, for quarter two of just over 8000 megawatts, which is 8.2%, higher than the ninth of June of 2021.

Gene Tunny  19:18

And was this the day that they were warning that they might have to restrict supply? They might have to be blackouts in some areas,

Andrew Murdoch  19:26

correct? Yeah. So that was when we got the loss of reserve notices from right. So and So. Yeah. So I guess moving to that. Obviously, as that demand supply balance started to started to move into, the into the zone of scarcity. The prices went up and hit the market cap of $15,100 per megawatt hour on a number of occasions. As I said, you know that that very high market cap isn’t for our current market design and necessary factor to encourage investment in peaking Last. However, there’s a, there’s a safeguard, there’s a bit of a safety valve on the on the on the system so that we’re not exposed to $15,000 a megawatt hour for too long. And that’s the cumulative price cap. So the cumulative price cap is just under $1.4 million. And that’s taken as the sum of the price in each of the five minute periods over the seven days preceding. So essentially what that does is it gives you a maximum exposure that, that, that that for, for energy buyers, and on the rationale that okay, you’ve had $15,000 for a little while, you’ve paid your operating costs for many years to come. That’s enough.

Gene Tunny  20:41

Yeah. So do we know? I mean, I don’t expect you to denote that I’ll be here. But do we know which was the plan? Or the bidder the marginal bidder? Do we know who was the marginal bidder and what they were bidding into? To meet the supply? Yeah, well, that showed to meet the demand to provide the supply.

Andrew Murdoch  20:59

So yeah, that’s publicly available information and can be achieved, can be obtained through an email. Now it changes for every five minute period. Yeah. Maybe a different person to tomorrow. So there is a lot of data to get through to to identify that. And yeah.

Gene Tunny  21:17

So sometimes, so sometimes it’ll be renewables will let in the during the day, and sometimes it’s coal, and sometimes it’s gas. Do we know?

Andrew Murdoch  21:23

Yeah, so typical, a typical day. So back when when energy prices were normal. Yeah, the marginal the marginal operator during the middle of the day would be either coal or renewables, depending upon depending upon how sunny it is or how windy it is. So on a, on a sunny, moderate day, in April or September, you might find that that solar is is is the marginal bidder, and they may be solar has a negative short run marginal cost, because every month for every megawatt hour of renewable energy that you produce, you also produce a large scale renewable energy generation certificate, which you can then sell for $30, $40, $50 a megawatt hour to to your retailer so that your retailer can meet their renewable energy target obligations. Or you might sell it to a customer who would like 100% Green Power, okay, so so they have a negative a negative short run marginal costs and can afford to operate with a negative spot price.

Gene Tunny  22:28

So they can bid into the NEM at a negative price so that they can sell that power, and then they get this certificate, which meant, so this is a subsidy from the government. Is this right?

Andrew Murdoch  22:41

It’s a subsidy from the energy consumer. So yeah, okay. So so our retailers are obligated to, to surrender a certain number of renewable energy certificates based upon our consumption. Yeah. And we obviously pay for that through, our through our electricity bills.

Gene Tunny  22:56

Gotcha. Yeah. Okay, that makes sense. Okay. Yep. Yep.

Andrew Murdoch  23:00

Then on a more moderate day, the coal plant will be the marginal, the marginal, bidder. Yeah. And they typically have a short run marginal cost in the order of anywhere between $15 and $30 per megawatt hour when the price is normal. Yeah, maybe not today. So then in the evening, you might see some of the gas plant come on. And again, sort of back to normal energy prices, they might have a short run marginal cost somewhere in the order of 80 to $100 a megawatt hour.

Gene Tunny  23:28

So we’ve got, we’ve got solar potentially bidding in negative, you’ve got coal coming in sort of at a you’re at a positive level, and then gas at a higher rate they’d be bidding in during the evening. Yep?

Andrew Murdoch  23:43

Correct. Yeah. So you’ve sort of got those natural price bands that fit around short run marginal costs. Now, then you can sort of add to that and elements of profit maximisation. So. So to actually obtain those high prices, you might not be all of your volume at your short run marginal cost, you might reserve some of that to try and encourage the price up a little bit higher. So yeah, so, essentially, yeah, your goal is profit maximisation. And if you’re, if you’re a gas plant, and you’ve got so many territories of gas to burn every evening, you’re going to try and bid them into the network at at at a at a price where essentially you, you’re going to use up all your gas for the maximum amount of revenue that you can possibly obtain in that evening.

Gene Tunny  24:33

Yeah, yeah. Okay. So they’re being strategic about when they bid into the market to maximise their profits and Okay, so if we go back to June so there was you talked about this cumulative price cap and did that kick in in June did it Yeah, correct.

Andrew Murdoch  24:49

So, yeah the cumulative price cap kicked in. And, and what what that did was forced amo to, to cap the spot price to $300 a megawatt hour. So, so we ended up going from a market operating as it normally would to a strict $300 cap. So which which sounds okay, however, the price of gas was $40 a megawatt hour, I beg your pardon, the price of gas was $40 a giga joule. Yeah, now, the short run marginal cost of a gas turbine is approximately 10 times its gas price. Okay, so, so essentially a megawatt hour of for gas turbine to produce a megawatt hour of electricity, it will it will consume, it will consume 10 Giga joules of gas. So, so 40 times 10 is obviously $400. So, if you’re a rational operator of gas turbines, you’re not going to be dispatching at a cost of $400 to to only receive $300 in revenue. So, so the gas turbine operators, rationally withdrew capacity, which was, which was not in itself sounds like a selfish thing to do, they needed to do that to allow a new AEMO to issue a lack of reserve notice, which then allowed AEMO to force the gas turbines back online. So, without that lack of reserve notice, they wouldn’t have been able to, to order the gas turbines back online, which is, which is what they do.

Gene Tunny  26:18

So they essentially they intervened in the market, they said you, you’ve got to supply this, we will direct you to supply this into the market. Correct. So the market and this is why people at the time were saying the market is essentially failed. And I mean, is that a fair thing to say that, look, the national electricity market, as it was originally designed, is no longer fit for purpose. I mean, if if you’ve got a situation where the the operator has to intervene and essentially take over and go into command and control, central planning style, is that, does that mean that whole system has failed? And we need to start it again?

Andrew Murdoch  26:55

Look I think I think, I think it’s a bit harsh to say that the market has failed, the market has operated extremely well for for over 20 years. And, and has has done an excellent job of balancing supply demand and, and facilitating private investment into the, into the market. And, and I guess modernising beyond state controlled power systems. It’s not perfect, though. And we have this situation, this extreme situation of four unusual events that happened that that was not foreseen. What was the scene was that these types of events will happen. And therefore we give, we have the cumulative price cap to act there is a safety valve to to allow a AEMO to intervene and suspend the market when when it’s appropriate. So yeah, so after a week, of, of regulated $300 A megawatt hour cap, then at most suspended the market and then set the price based upon previous bidding behaviour. But yeah, and that was essentially, essentially just to give time for people to go and have a few deep breaths and, and, and Reset, reset themselves and reset, how they were going to bid. In same way that, you know, in the share market, for example, a company might say, Okay, we need to have a market, we need to suspend trading of our shares, because we’re dealing with this issue, or we’re dealing with that issue. And every system has crisises, from time to time, and it is appropriate to suspend markets from time to time.

Gene Tunny  28:36

Yeah, I think that’s a that’s a fair point. Now, it looks like there was a close run thing, we didn’t end up having blackouts, which was good. I think they had some big industrial users reduce their demand quite substantially, didn’t they? But yeah, we did avoid blackouts of residential areas. I mean, I was concerned and I thought, what a terrible night because it was very cold at the time. Like, what if you couldn’t run your heater? That would be awful. So do you think could this happen again? I mean, how concerned should we be about this? Or do you think that the people running in the people in AEMO the people in the other agencies are overseen energy policy? Do they have this under control? How concerned should we be Andrew?

Andrew Murdoch  29:23

Well, I think look, I think it’s important to note that we didn’t have load shedding Yeah, and and you know, aside from some, some negotiated reduction of industrial load, AEMO were able to keep the lights on and the market participants were able to keep the lights on so. So that in itself is is a tribute to the to the people involved that hey, we we can as a as an industry collaboratively, do our job during, during these extreme extreme periods. Now, I guess, could the factors happen again, could the, could we find ourselves into in a situation where AEMO has to has to suspend them again? Well, the answer is yes. Because if you look at the four, the four factors, could we have very high gas prices? Again? Well, well, yes, they haven’t gone down, prices are still still expensive and Nord streams would drop to drop two to two, no deliveries into Europe. And the headlines coming out of Europe are more and more exciting. From day to day, and particularly as we move into the European into the European winter and into our, our summer, which is our our peak peak demand, very concerning. I feel that we’re globally under invested in gas exploration. We have very long lead times for project development from exploration all the way through to production is many, many years. There’s a reluctance by governments, policymakers, insurances, insurers and banks to support hydrocarbon projects. And so yes, I think gas, high gas prices will happen again.

Gene Tunny  30:55

Where would that be that exploration? Is Australia, one of the prime places you’d be exploring for for gas?

Andrew Murdoch  31:02

Oh, absolutely. Yeah. So so as I think, you know, we’ve seen We’ve seen Moratorium on on gas exploration in Victoria and New South Wales, which is reduced supply into, into into the Australian East Coast grid. There’s certainly a lot more gas in Queensland that that can be developed over, over time. So, so yeah, there’s there’s there’s, there’s a lot there that we have, we can we can contribute there. Yeah. Likewise, with coal. I don’t see. I don’t see global coal prices restoring to levels that we’ve seen in the past. I don’t think they’re going to take $400 a tonne forever. But like gas, you know, there’s reluctance in an even greater reluctance to develop and approve coal projects. Notwithstanding that, globally, we’ve consumed as much coal in the last 12 months as we’ve ever consumed. And that’s a reflection of increasing energy demand from developing economies, who are building coal fired power stations.

Gene Tunny  32:09

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  32:14

If you need to crunch the numbers, then get in touch with adept economics. We offer you frank and fearless economic analysis and advice, we can help you with funding submissions, cost benefit analysis studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world, you can get in touch via our website, http://www.adapteconomics.com.au. We’d love to hear from you.

Gene Tunny  32:43

Now back to the show. Right, so what about this concern about renewables? Is there a big challenge integrating them into the grid? Does that make the grid more unreliable? If we don’t have the backup the storage capacity, and it looks like we don’t at the moment, we’ve got coal fired power stations, they’re going to be progressively shutting down over the next couple of decades? How confident are you arecan manage that transition? And if you know, what are the what are the things we need to do to make sure it goes well, and we don’t end up with with loadshedding with blackouts from time to time.

Andrew Murdoch  33:32

Yeah, so renewables are complex. And the obvious thing to say on renewables is that, you know, solar doesn’t work when the sun’s not shining, and wind doesn’t work when the winds not blowing the challenge for us. I guess the the key challenges is number one, accessing the resource number two, matching supply and demand, making sure that we’ve got the transmission infrastructure in place to connect the generation to the to the to the load centre, noting that the generation is going to come from your is coming from different places to where it has come from in the past. And then, you know, dealing with storage, so I guess, to, to develop a system where we have the equivalent of baseload power from renewables, you first got to generate the power. Yeah, then you’ve got to store it, then you’ve got to dispatch it. So you’ve got three elements, where we where we would once have had one so so it is it is quite, quite complex. I guess in terms of accessing the resource and there’s a there’s a lot of really good work being done. If you look at the the growth statistics in solar and wind over the last five years has been fantastic. In terms of the, the the number of megawatts that has been added to the grid. It’s still it’s still not easy to develop these projects. You’ve got landholder interest to deal with. You’ve got the interests of traditional owners, you’ve got community interests and expectations. Some people love wind farms, some people don’t. And we each have a different, different view on that. And competing, competing land use is is another another issue. So moving moving through that, I guess, you know, land land acquisition and development approval environmental approvals is complicated for, for renewables projects are land intensive projects. And so and so therefore, therefore complicated from a renewals perspective in matching supply and demand. We have very limited opportunities for baseload renewable says obviously, hydro, but between snowy and Tassie hydro, pretty much tapped all of the hydro resources that we have in the country, there’s a little bit of biomass, particularly integrated with sugar mills, I think we can make better value out of waste to energy projects. So that is using the energy in waste to generate, to generate power. And we’re going to need to to develop massive, massive amounts of storage to cover an average 24 hour load cycle. So yeah, so pumped hydro, large battery projects, and we’re working on on on a very large pumped hydro project, and two very large battery projects that will contribute to, to contribute to solving some of these problems. Yeah.

Gene Tunny  36:18

Do you have any thoughts on what this bet the future with batteries will look like? Well, well, we all have to have something like the Tesla Powerwall. At home, will there be larger batteries? on street corners? I mean, houses going to? How’s it going to play out? What are your thoughts on where the technology is out at the moment? where it’s going? Yeah, are we actually going to have the, the the improvements, the technological improvements that we need? I mean, I remember reading might have been in Bill Gates his book on on the climate change challenge. And I think you were saying we need some, you know, multiple improvement in the efficiency of batteries. I don’t know if it was 20x was some big number in that we need to improve batteries by

Andrew Murdoch  37:03

Yes, I think I think we’re going to see a mix of projects. And we’re working on some very large projects, gigawatt scale battery projects. And, and these batteries are a two hour duration. So they’ll they’re really they’re these projects are really designed to harvest solar energy generated during the middle of the day, store it and then put it back onto the grid in the evening. And essentially dealing with that dealing with that peak load, I think you’ll see, you’ll see a lot of batteries at at a at an industry level as well, we’ll see projects on the fringe of grid utilise batteries a little bit more. So for example, a mine that is in an Outback community that might be supplied by a long skinny transmission line that doesn’t quite have the capacity to serve the mind. So the mind will put a battery in trickle charge the battery during the day and then use that battery to use that battery to cover the peak demands that the mine might have, they might also integrate their own solar in there as well to to self generate a little bit so so so we are seeing a lot of batteries within industry there for for energy management also helps with things like peak demand tariffs and other related energy costs. We’ll also see batteries at a household level participators as virtual power plants, so essentially what happens there is that you’ll you’ll go and have a battery that that you’ll instal in your house and your retail supply agreement will allow your retailer to control your battery and that will allow your retailer to use your battery capacity to trade a little bit of energy. They’ll they’ll harvest the harvest the solar from your roof and then dispatch, dispatch it to your house and then whatever’s whatever the Enders and overs are they can then trade onto the grid. So I think I think we’ll see them at all all levels are at wholesale level that at large industrial level and also at at the household level.

Gene Tunny  38:59

Right. Can we talk about that gigawatt battery? That sounds fascinating. And it gigawatts obviously, a huge amount of energy. So what would that actually power? Do you know? I mean, that I mean, I guess you you could estimate it based on household electricity use, but are we took like what sort of sized town are we talking about?

Andrew Murdoch  39:22

So to put it into context, the the Peak Peak Demand in in Queensland is somewhere between eight and 10,000 gigawatt hours. So let me start that again. So to put it into context, the peak demand in Queensland is somewhere between eight and 10 gigawatts during during high high demand. So essentially, it could contribute roughly 10% of the peak demand to the state.

Gene Tunny  39:51

Right. So that’s now this is going to be in precise because industrial use is a big part of demand but 10% of Queensland. So we’ve got about 5 million people. So that’s about that’s 500,000. People. So we’re talking. Yeah, I mean, that’s a that’s a city. Right. That’s a reasonable sized city. I mean, yeah. I mean, we don’t have any main gold coasts, for example. 500,000 people. Right. So that’s a big battery, then. That’s impressive. Yeah, it is a big battery. Yes. Okay. And so that’s the sort of thing we’d be, we’d be looking at, we’re looking at large batteries to back up the grid. And so without naming names, it looks like the people who are sort of involved in this, the the companies involved in this are looking at options like this.

Andrew Murdoch  40:43

Yeah, absolutely. Yeah. I mean, investors look for opportunities to solve a problem. And yeah, that’s, that’s, that’s how capitalism works, of course, is that you, you know, you add value to the community, by by solving a problem, and then you get paid for it. So yeah, we have some some very smart clients who, who, who can identify these types of opportunities, and then deploy their capital to solve

Gene Tunny  41:06

them. Okay, because they know they can store the energy in the battery and then sell it into the grid when it’s needed. Correct. Okay. Uh, one thing I forgot to ask was about, if you’ve still got time, I know a token. Yeah, that’s right. Do we need something like a capacity mechanism in the national electricity market to to keep this coal fired power and gas fired power online? Because one of the complaints I hear is that with the way the markets been set up, and these, these certificates that mean that renewables can get beat in at negative prices, This undermines the viability of the coal fired and the gas fired generation, but we actually need them from time to time to be able to provide that was it peaking to do the peaking to provide that, that that energy when we really need it?

Andrew Murdoch  42:02

Yeah, well, I guess, yeah, we don’t specifically need coal or specifically need gas. To provide that firming capacity. We need dispatchable power. And traditionally, we’ve gotten that from from coal sources, and yeah, from gas sources. So so it’s not so much that we we need, we need coal, or we need batteries, are we need gas, or we need pumped hydro, we need something. Yeah, that will provide that, that, that, that peaking capacity, then if you overlay a climate change lens on it progressively over time, we need the carbon intensity of that capacity to reduce. Yeah. So back to your question about, do we need a capacity mechanism? It’s hard to see a market restructure being able to address the combination of geopolitical meteorological and physical issues that were were present in early, early June, those four factors still would have been the irrespective of what the what the the, the, the, what the market structure was, I think there are some tweaks we can make to the, to the system, for example, that market cap of $15,000 a megawatt hour, perhaps that should integrate down once it’s hit the cap a few times as you integrated down over time. So the cumulative price cap is not, is never, is never is never exceeded. And I think if you took a control systems engineering view to to how that price cap operates, you could put a feedback system in there that has integrated control down to a to an equivalent of that, of that price cap, which is averages out at about $800 a megawatt hour. So which is good money, if you’re if you’re

Gene Tunny  43:49

I think I understand what you’re saying. So you’re, you’re saying that maybe don’t let it get up as far as 15,000 or maybe once but then start scaling that, like just start reducing that so that they’re still getting the high prices when the market really needs energy, but they don’t get such high enough prices, that it ends up exceeding their cumulative cap, which means that I am asked to intervene and yeah, okay, great. Yeah. Okay.

Andrew Murdoch  44:18

Now, we also have another, a few other, let’s call them quasi capacity mechanisms that are in the system already. And that, as I said that that $1,500.15 $1,000 A megawatt hour is a significant incentive to make sure that you’re well invested in in pacity. And those that weren’t lost a lot of money. So the the other the other thing we have is we do have the contract market on the side. So if you’re an energy retailer, you can go and contract with with the power station to to provide you to provide you with with coverage and essentially they’re providing a physical slot. So every time that the pool price goes up, they will generate on your behalf and you’ll swap that exposure. So so that’s, you know, that’s a A non let’s call it a voluntary capacity market that already exists. And email also has the reliability and emergency reserve trader. And that’s a short term mechanism that whenever a emo feels that the based upon it’s more than just feeling it’s based on some some very sophisticated modelling that the the probability of unserved power exceeds point oh 2%, then they’re able to go and contract with generators to, to provide emergency power during a particular period. And that led to some some temporary generators being being installed in various different locations around the country over the over the past few years.

Gene Tunny  45:42

Temporary generators are they diesel generators? Oh, they

Andrew Murdoch  45:46

could be diesel could be gas. So yeah, so you can you can go to GE and order some trailer mounted 30 megawatt trailer mounted gas turbines. And there’s there’s fleets of these owned by hire companies that that go around the world? And, and, and plug holes in power systems here and there. So

Gene Tunny  46:05

very good. Okay. Yeah. So we were chatting about the capacity mechanism. And I think you’re saying that it’s not going to solve all the problems that that could that could arise, which would, which would cause which would cause issues? So I mean, what, what do we need to do? Do you have any thoughts on what needs to happen with the NEM.

Andrew Murdoch  46:28

So I guess, reflecting on the events of June, more energy would have been handy. So it was a cost of energy issue that that created these extreme prices. So whether that energy came from renewables or from gas or from coal, any additional gigajoules or megawatt hours generated onto the system would have had downward pressure on prices, and certainly would have helped. So there’s a couple of tweaks you can do to the you can do to the to the to the rules to perhaps prevent the accumulated price stress on ever been ever been breached? And that’s just, that’s just a function of mathematics.

Gene Tunny  47:07

That was what we were talking about before. Yeah, yeah, yeah,

Andrew Murdoch  47:10

looking forwards. We’ve got 8.3 gigawatts of coal plant sheduled to be taken out of the market between now and 2029. It’s like 2022. Now. So that’s a lot of a lot of firming capacity needs to be developed in that timeframe. If I look at the various different committed projects that are that are in the system, at present, I only get that only adds to 1.32 gigawatts of dispatchable generation required to cover that 8.3 gigawatts of retiring capacity. So so there is a bit of a deficit there in terms of project firming projects that are available. Now more projects will be be committed between now and then. And those projects I mentioned before, aren’t included in that 1.3 gigawatts. But yeah, these these projects we’re working on are in the development phase development phase for projects is, is very long takes many years. There’s a there’s a lot of hoops to jump through. Some of them necessary, some of them not so necessary. So it’s a bit like the argument in house prices and housing demand is, you know, is extreme high house pricing being caused by the the complexity and speed of approvals, or are there other factors that played personally my my view in power is that we could, we could certainly work a lot faster in terms of bringing these projects onto the onto the grid. If the approvals process wasn’t so bureaucratic and slow. Now, I think it should still be thorough. We certainly, we certainly want to have a thorough EIS process and a thorough technical review of of the contribution that these plants have on the grid. But I think there’s a lot we can do to make it a lot more efficient and perhaps remove duplication. And yeah, and and yeah, I guess add a little bit of I want to say common sense, but that’s not quite the right word for it, but

Gene Tunny  49:23

we do maybe a sense of urgency among some of these regulatory agencies. So you mentioned the EIS environmental impact statement. And I guess, yeah, trying to respond to the environmental issues that that’s obviously a major part of the whole process. Trying to satisfy the environmental regulator that you’re not going to damage the environment. You’ve got a plan, like if there’s a particular there’s foreigner that’s threatened, you’ve got a plan to manage that. So yeah, yes,

Andrew Murdoch  49:53

essentially. Yeah. And I guess, you know, to be fair to this is not just one one agency that the could improve. We see it across all all, all agencies. The the, I guess is there’s a desire for perfection, that that whether whether it’s whether it’s a technical approval or or a planning approval or a or traffic or whatnot, every, each of the departments come wanting to see a level of perfection in every every area, and sometimes it’s just not practical.

Gene Tunny  50:29

Yeah. Okay, I’ll, I’ll put something to you. And I’d be interested in your reaction. I’m looking at what’s happening with energy in Australia at the moment. And I see, we need all of this firming capacity, or we need to be able to back up the grid because we’re bringing in all these renewables. We’re coal fired power, leaving the system. And I mean, I look at this, and I’m very worried about whether we’re actually going to have sufficient power in five or 10 years time, I’m really worried about the reliability of the system. And partly, that’s because I’m concerned that we’ve promoted renewables into the system at a very high rate, but faster than the system can can handle it and not in conjunction with the storage. And we’ve done that for Well, we, I mean, I think, you know, the people are doing it for reasons that, you know, I think they, they think they’re doing the right thing, because it’s for the environment, it’s to tackle climate change. But I’m worried about what that means reliability of power in five or 10 years. And what that will mean for prices, How worried should I be? Am I just am I overly concerned? Am I too concerned? Or is that there might be an irrational, am I being biassed myself in analysing this issue? yet? So

Andrew Murdoch  51:51

I think we can’t oversimplify, or we shouldn’t be oversimplifying the debate. We are talking about complex physics and complex economics. And whether it’s in the media or in politics, there’s these oversimplifications of the answer is x. And depending upon what your political view or your commercial view is your put whatever noun you’re after the answer is to to suit your needs. I try and take a balanced view. Now, in terms of, Should we be worried at a technical level? So I’ll get back to those numbers. Again, there’s 8.3 gigawatts being retired from the fleet between now and 2029. So we’ve been through an incident where, essentially, yeah, it was more of an energy related issue than a capacity related issue, but capacity wasn’t far behind. So we, we have kind of almost just enough right now. Okay. So when we retire 8.3 gigawatts, and we increase peak demand, because peak demand continues to grow, you’re on. And we want to we want to continue to to industrialise and we want to continue to grow the population and grow the economy. And there’s a strong correlation between energy consumption and GDP. So that, you know that that margin is probably going to go negative. And so we should, yeah, we should certainly be prioritising firming capacity. And as I said, previously, whether that firming capacity comes from batteries from gas turbines, from pumped hydro is somewhat somewhat irrelevant. There’s probably still a role for coal to play, but it gets a little bit harder for for, for coal plant to, to provide, provide firming, in terms of, you know, should we be worried about capacity in the future? That’s, the answer is yes. And or just scroll down here to have a look, I was reading over the weekend, the HMOs. Electrical statement of opportunities, which essentially is a forecast of off demand that they use to inform the market. So they’re forecasting that the reliability standard will be breached. If there’s no further investment, that the reliability standards will be breached in New South Wales in 2025, and then Victoria in 2027, and Queensland and South Australia shortly thereafter. How web are if the FA Mo’s recommendations in the integrated system plan, which is a Mo’s map of the projects that they feel should be progressed, then that situation improves a little bit we don’t see the reliability standard being breached in in Victoria until 2027 28. And then, New South wails 2029 2030 But again linked to coal plant retirements,

Gene Tunny  55:05

I have to look at this integrated system plan, what are they? What are they saying in that are they saying, you know, these are these are the investments that are needed in what capacity and in storage and distribution. So,

Andrew Murdoch  55:17

so it deals, the integrated system plan deals with the transmission network more so, than the generation network, they do look at where they believe the, the more, the better renewable energy zones are on the grid and, and that informs a lot of the infrastructure. So that allows them to forecast where the energy is going to be coming from in future years. So it’s essentially feed into the regulated process. So once I emo identify a project that then allows the network service providers, so the power links the trans grids, to start the regulatory investment process, which then allows them to invest in these in these upgrades. But yeah, the timeframe between amo raising a project in the in the ISP and then a network service provider to actually construct and commission a plant is many 510 years in the making. So So these these are big infrastructure projects that take a long time to develop and construct

Gene Tunny  56:21

good one, I’ll check that out. I’ll check out this ISP and put a link in the show notes. One thing that one thing that’s occurred to me is that I mean, one, one possible way to avoid this, this deficit that you’ve you’ve described is, well, we just don’t retire these coal fired power stations, we keep some of them open or longer than is intended or was initial longer than amo thinks that other companies themselves think they will be currently be kept open for. But what that might mean is that’s where that capacity mechanism could could be useful, possibly, but then that means that we’d be paying then just to have the generation available if it’s needed. And that’s why there are accusations that our capacity mechanism would be coal keeper. Have you heard that? Yeah. So

Andrew Murdoch  57:06

I’ve certainly heard the call keeper fever slogan. Yeah, look, it’s it’s interesting. I’d have to think about that a little bit more as to what would a capacity credit encourage a coal plant to stay open more so than the current market structure? I guess the economics of ongoing operation of coal plants on one hand, you’ve got back to a world where energy prices are, quote, unquote, normal. On one hand, you’ve got a very low cost of operation, then you’ve got four, seven production. So you’re you’re it’s true baseload and the volumes are higher. On the other hand, you’ve got ongoing refurbishment costs. So I think callide spent $130 million or so on the refurbishment of one of the B units recently. Yeah, that’s a lot of money. And so you know that that’s an that will keep that that plant operating for another five years for argument’s sake. So it’s always it’s always that economics of, you know, when you’re between major overhaul cycles, and you keep going until the until you hit the next major maintenance. And then and then you make a decision. Do I spend $100 million? Upgrading? Yeah. refurbishing, economy or economy economizer tubes or whatnot? Or do you or do you at that stage retire the plant?

Gene Tunny  58:29

Okay. Okay. Look, I better I only ask one more question, because I’m so long, because this is fascinating. And I really liked the point you made about how, look, let’s not look at this, simplistically, it’s too easy just to come up with some simple diagnosis of what’s going on. And as economists we like to do that, because we like to cut through the complexity. We like to have a simple, elegant model of what’s going on. But I understand Yep, you’ve got to think about the physics and all of this as well as the economics that makes perfect sense. My final question is about EVs. Are we ready for EVs in the network? Will we be able to provide the power? Will we be able to provide the necessary charging infrastructure? And one thing I should I’m interested if you’ve got any thoughts on it is how can EVs help us have a smarter grid? Because I’ve seen that in I think it’s in California? Is there a company that lets people who have EVs they can have that use them as a bit of a mini as battery? And then they can they can even start selling power to other people? I don’t know if you’ve seen that sort of thing. So if you could just talk about EVs?

Andrew Murdoch  59:38

Sure, certainly certainly. Great. I just want to go back to the Nikah the the complex physics and complex economics. I just want to make one other point. There’s also an ecological impact as well as your Yeah, is it every choice we make, it has an impact on cost. It has an impact on reliability, but it also has an impact on carbon emissions. So truth is balancing the three and three issues are all common. looks. So back to EVs. Yeah. So, so So yeah, fascinating stuff. And, and obviously, you’ve had a couple of guests over the last couple of weeks who have had some some interesting things to say on EVs. But yes, so there are there are companies who are planning on using the battery capacity in your Eevee, as part of that virtual power plant mechanism that I was talking about, yeah, with a battery on the wall, that you can also extend that by plugging in your Eevee and allowing them to use that charge. So maybe you’ll come home from from from work, you’ll drive into your garage and about this time of evening, that’s, it’s 6pm, here and in. So you might come home and plug in in the evening, and you might still have 80% of your battery charges there. So the the your retailer might use that to cover peak demand during the evening, rather than drawing from the grid. And then later in the night, when peak demand goes off, and power prices get a little bit cheaper, maybe the wind starts blowing a little bit, then your your retailer will then fully charge your car. So the next morning, you get up and unplug and away you go to work, and you don’t even know that it’s happened. So So yeah, so these kinds of things can be can be done, I noticed, I was reading on LinkedIn, I think this morning, the the Tesla’s in in California, over the last couple of days have been setting you people will go home and the Tesla comes up on the on the Tesla display. You know, the California grid is about to experience peak demand, you might like to charge your car later in the later in the evening. And the Tesla system has an ability for you to time to essentially tell it when you want to leave and it will optimise the charging process a to maximise battery life and also to minimise power costs and impact on the grid. But I guess in terms of physical impacts, look, if we all go home in the evening and plug in our EVs in the evening, then that’s going to contribute to peak demand. And that’s not going to be particularly helpful when it comes to reliability of supply. Yeah. But if we time the charging of the car to be a little bit later in the evening to in the morning, three in the morning, and as I say the Tesla’s can do it. And I’m sure the other EVs can do it as well, with smart charging, then, then the impact on the grid will be will be minimal, because we’re making better use of matching, we’re using the cars to to maximise supply and demand.

Gene Tunny  1:02:31

Right, based on so how does it work? So the you mentioned Tesla, so they’re looking at what the the power prices are, they’re getting a signal from the market. And they’re saying, Oh, look, you might you might want to charge later. Because there’s a lot of demand for power at the moment. And prices are high.

Andrew Murdoch  1:02:53

Yeah, so in the case of the California one it was it was more around reliability. So okay, as I understand it, California is going through a situation that was similar to what we went through June, where they’re, they’re issuing lack of reserve notices, or whatever the California for the lack of reserve notices. And so it’s more so more related around around system system reliability, rather than rather than price. Okay, but there’s no reason why it couldn’t also respond to price if it’s integrated with the with your retailers.

Gene Tunny  1:03:23

Okay. That’s, that’s cool. And just finally, so yeah, so I guess you answered the question. You’re saying that, if we do it intelligently, if there’s some if there’s some way with a possibly buy it, that, I guess it would be via it that these things are charging at the right time? During the night? They’re not all charging when we get home? That they’re delayed, then yeah, it’s possible we we should be able to handle it in your view.

Andrew Murdoch  1:03:54

Yeah, yeah. Yeah. So that’s not to say that won’t have any impact that will have an impact, because there’s more energy that the power grid needs to provide. So if it is all coming from from renewables, and that’s more solar farms and more wind farms, because we still have to produce more megawatt hours of energy and transmit them. Yeah, so it all contributes to load growth. And there will be there will be EVs that do have to be charged during the peak because I’ve just come home or maybe I’ve driven home from a couple 100 kilometres away. Yeah, 2% left in my battery. And in an hour’s time, I’ve got to pick the kids up from school. So I’ve got a charge now. So there will be a contribute contribution, but it won’t be won’t be everyone most of the time for most of your daily cycling will be able to charge during during periods. When when it’s not peak demand. And do

Gene Tunny  1:04:39

You think this will be done automatically? Will there be the computer the in on the in the car or and it connects to the grid and then this will all be managed and coordinated across all of the EVS out there and yeah,

Andrew Murdoch  1:04:51

Yeah, so So Rena did a study. And they found that when people were just left to their own devices, people would come home and plug in Yeah, 30% of all charging happens during peak periods. Yes. Because that’s when you come home. If they, if they then get gave a 10 cent per kilowatt hour incentive, this dropped 10%. So people started thinking about it, I want to save some money or save some money on my power bill. So I’m not going to I’m going to programme car did not start charging into after peak period. And then if they handed over control of the charging to the retailer, then that peak demand use dropped to 6%. Yeah, so Gotcha. So automation is definitely the way and who wants to come home and think about oh, what time should I charge the car? Yeah, I can just plug it in and have have the AI work it out for me. And as long as I don’t know, if I don’t have to think about it, it’s easy.

Gene Tunny  1:05:44

Yeah. Extraordinary. Okay. We’ve, I think we’ve probably come to time because yeah, we’ve had a great chat, Andrew. And, yeah, I’ve really enjoyed this conversation and learned an incredible amount. So it’s been incredibly valuable for me. Any final words before we wrap up? Oh, no. Look,

Andrew Murdoch  1:06:04

thank you for the opportunity to talk. As I say it’s a complex system. We’re balanced. We’re balancing our contribution to climate change. We’re balancing economic development. We’re balancing physics, we’re balancing reliability, and we’re balancing affordability. So it is it is, it can’t be over simplified.

Gene Tunny  1:06:20

So I think that’s a really good way to to put it. Andrew Murdock, Managing Director of RK energy. Thanks so much for your time. I really enjoyed that conversation. Thanks,

Andrew Murdoch  1:06:29

Joan. I appreciate the opportunity.

Gene Tunny  1:06:31

Okay, that’s the end of this episode of economics explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact at economics explored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

Credits

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Categories
Podcast episode

Fuel prices & electric vehicles (EVs) – EP154

A wide-ranging conversation on petrol/gasoline prices and electric vehicles (EVs). The conversation explores the peculiar economic phenomenon that is Australia’s petrol price cycle. What drives it and how can consumers make it work for them? Show host Gene Tunny and his guest Tim Hughes then discuss the big issues around replacing petrol-powered vehicles with EVs. What does it mean for total electricity demand and what challenges do we face in adopting EVs?

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

Links relevant to the conversation

Australian Financial Review article (paywalled) quoting Ampol CEO saying EVs have to be 50% cheaper before widespread take up

Recent oil price news

Brent crude oil price (ABC news)

Australian Competition and Consumer Commissions (ACCC) monitoring of Australia’s petrol price cycle

Information on Queensland’s electric superhighway

Queensland Government website on environmental benefits of EVs

The Grattan Car Plan which includes lots of useful data on EVs

John Freebairn on fuel excise in Australia

Drive magazine article on impact of EVs on electricity use

Australian Energy Market Commission (AEMC) paper on integrating EVs in the power grid

Economics Explored EP113 – Lithium and the new energy revolution with Lukasz Bednarski

ABC News report As EVs drive a mining revolution, will Australia become a battery minerals superpower?

Transcript: Fuel prices & electric vehicles (EVs) – EP154

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored,

Tim Hughes  00:04

But you can maximize your chances. And you can sort of, play the game over that four-week cycle to keep your fuel costs down.

Gene Tunny  00:13

Welcome to the Economics Explored podcast. A frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. 

This is episode 154, on fuel prices and electric vehicles. I’m joined this episode by Tim Hughes. Tim has been doing some business development work in my business, Adept Economics. Tim’s not an economist, but he’s very interested in economic issues. And in my opinion, he asked very good questions, so I thought it’d be good to have him on the show again to chat about some big issues regarding fuel prices and electric vehicles.

On fuel prices, Tim and I have a close look at a regular cycle and fuel prices that we see in Australia. On EVs, one of the important takeaways from the discussion, is the big challenge we face in replacing petrol powered vehicles with EVs. It’s not impossible, but we’ll need to generate much more electricity and spend a lot of money getting the necessary infrastructure for EV charging in place. 

Please, check out the show notes for relevant links and clarifications and for details of how you can get in touch. If you’re outside Australia, please let me know if there are any patterns and how fuel prices behave where you live. Also, please let me know your views on EVs and any useful info you may have. I’d love to hear from you. 

l’ll come back to EVs in a future episode for sure. I know that I need to look more closely at all the resources needed to build EVs such as lithium, nickel, cobalt, and copper. Australia looks well positioned to supply many of these minerals. But will there be sufficient supplies worldwide to meet the growing EV demand? We’ll aim to cover that issue in a future episode. 

Right oh, now for my conversation with my colleague, Tim Hughes on fuel prices and EVs. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode, I hope you enjoy it. 

Tim Hughes, welcome back onto the show. 

Tim Hughes  02:16

Gene Tunny, good to be back.

Gene Tunny  02:17

Excellent, Tim. Now, Tim, you actually suggested the topic of today’s conversation. So, could you just tell us please, what are these issues that are turning over in your mind at the moment? What are you interested in speaking about today?

Tim Hughes  02:33

So many things Gene, but we’ll settle with; for today, we’ll talk briefly about the price cycle. We’re in Brisbane, in Australia, we have this price cycle of roughly month fuel prices, yes. So, it was in relation to that when we got chatting. There’s a lot around this that we did discuss that we won’t go into today around, you know, the future with electric vehicles and that kind of thing. I don’t know if we’re going to talk about that too much. 

Gene Tunny  03:05

I’d like to chat about that, because I’ve done some research on that.

Tim Hughes  03:09

So, it did set us off around fuel prices. And then, we did talk in broader sort of, ways about the future of what that fuel cycle might look like with the rise of electric vehicles, and then how they’re going to be paired. So, we’ll talk about that in a bit shortly, I guess. But fuel prices otherwise, yeah.

Gene Tunny  03:31

Exactly. I mean, there is a logical connection there isn’t there. Because with the higher fuel prices that’s making more people think about electric vehicles. The problem is electric vehicles are still so expensive. And the Chief Executive, I think, was Ampol. The other day, I saw it in the financial review, I’ll put a link in the show notes. He came out and said, look, basically they have to half in price, you need to get those EVs prices, which I think start in the 40,000s and if you want a Tesla, it’s above 50,000. You need to get them into the 200 to 300 range for there to be widespread take up of EVs in Australia. And I suspect I mean, there’s going to be a similar issue in the States as well and in other countries. 

Although Scandinavian countries, they seem to have higher rates of take up and yeah, but here, I think the price is a barrier and also the so-called range anxiety. We can talk about that a bit later.

Tim Hughes  04:28

There are so many things that would be interesting to talk about with that. And of course, there’s a cost, an ongoing cost to me, the amount that for instance, you might pay, on petrol or diesel now, over a year compared to what your costs might be to charge an electric vehicle and the running costs of any vehicle, which seems to be at the moment far less if you have an EV.

Gene Tunny  04:56

Exactly. Well, you’re not paying for the petrol.

Tim Hughes  05:00

You’re paying for the power, I mean, at the moment, you charge these not from home, it like, there are certain stations that you charge the EVs at. Is there a cost to those? I haven’t actually checked that. I understood that Tesla didn’t charge for recharging the car. I don’t know if that’s correct or not.

Gene Tunny  05:18

That’s a good question. I’m not sure if it’s made it or not. I’ll have to look into that. I know that the Queensland Government has; it’s built this EVs super-highway across Queensland. So, it’s set up charging stations in different cities, I think there must be over 20 of them. I’ve got a link somewhere I can put it in the show notes. They’ve got them in places like Port Douglas and there’d be some places in Brisbane and Cairns Townsville.

Tim Hughes  05:45

I mean, this is an area, because I know that we were speaking broadly today. So, we’ll go into a deeper dive into that part of the infrastructure and the costs. Because I can only imagine that if it’s free at the moment, that it won’t stay that way. I mean, it doesn’t seem to be tenable to not charge people. And also, it’s not the way that it normally works. Obviously, if there’s energy being used, somebody’s got to pay for it somewhere. 

Gene Tunny  06:11

Well, I think there’s a big issue with apartment blocks. So, if you, if you’re doing it at home, then you’re paying for it. The question is, what happens with apartment blocks and some of the evidence I’ve seen, and I’ve got, when I was doing the research, I found these experts talking about the challenges in some apartment blocks of getting the right infrastructure in there, and making sure that the apartment block can support the EVs that are drawing all that power, given they’ve already got lifts and things that are also drawing on power. So, that’s a big issue there. So, there’ll be cost associated with that that’ll have to be met by the body corporate.

Tim Hughes  06:50

Well, we might as well dive as deep as we can on this now, because that is such a big part of what that future of EVs will look like, I mean, obvious time for people to charge their vehicles is overnight, most people, you know, working sort of, during the day. So, to charge overnight, you’d want to be able to charge from home, if you’ve got a house, that’s going to be more likely. Clearly, you’re going to be using power. If you’re in an apartment, like you’re saying there’s going to be an infrastructure challenge there to make that available to the cost basis. And if you’ve got street parking, you know that’s going to give you another challenge, as well. But all of that energy as well, it’s got to come from somewhere. So, we’re going to have to produce more energy than we currently do for electricity to basically replace what we use fuel for, petrol and diesel to have electricity. And then the conversation around the likelihood of where that energy is going to come from, again, infrastructure would be something to consider. But clearly, at the moment, we can’t do that through clean energy. So, the drive towards clean energy is also then part of that question. I don’t know, we’ve talked about the importance of coal, in a transition phase from current coal supply or coal supply power to clean energy.

Gene Tunny  08:20

Well, at the moment, we really don’t have much of an alternative, because we’re still generating the bulk of our electricity from fossil fuels, than coal and gas. Now, the idea was that gas would be the transitional fuel that we would move out away from coal fired power much quicker than we have. But I think we’re discovering now just how hard that is and what that means for the reliability of the network. A lot of the problems we’ve had in the electricity market here in Australia this year, have been because we’ve had some coal fired generators offline, the Callide generator up in Queensland, part of that which was shut down for they had some incident there last year, if I remember correctly, and there are other coal fired power stations that have; there was a big one that closed down in Victoria. And that means that there’s not as much capacity as there once was. So, that’s a big issue. 

And when you have a winter, that was unexpectedly cold, there’s a big demand. There’s not enough supply, the renewables are intermittent. We don’t have enough battery technology to store the power. We don’t have enough pumped hydro. Yeah, this is it’s a big problem.

Tim Hughes  09:35

Well, I mean, the thing is, like, it clearly seems to be moving that way. Personally I’m fully supportive of. I think the drive for clean energy, and electric vehicles is good. One of the things I wanted to talk about was, from your perspective as an economist, you know, to look at just how clean the making and running of electric vehicle is because obviously, there’s an environmental cost to anything that gets produced, and then whatever waste products come from that. But the move towards that seems to be, it’s quick. And so, in some ways, I guess it’s not a problem unless we’re just trying to move too fast. You know, like, clearly there’s a transition period that’s needed with the available infrastructure and fuel supply that we have currently. But that’s going to change significantly over the next 5-10 years. 

So, as that move towards electric vehicles, as the infrastructure does catch up, and as the cost of the vehicles comes down becomes more attractive. I can only imagine then that, we can only move as fast as we can move. So, if there’s a holdup with the infrastructure, or the power supply of electricity for EVs, that’s going to just slow down the rollout of EVs and lengthen the period of time that we might have fuel powered cars. 

Gene Tunny  11:03

Yeah, I think maybe we’ll save this discussion for later on in the program, because you’ll get on to the fuel prices. I think that’s a very good introduction. I agree with you regarding those challenges that we face, I think you’ve actually captured that or presented that quite well. That’s good. Very good, Tim. 

So, you got me thinking about these issues myself. 

Tim Hughes  11:31

Yeah. And there are big areas as well. And we will have like, a lot of this, obviously, like I said, we can dive as deep as we can. We have got some guests and friends and colleagues that we’ve been talking to about coming on here who can dive far deeper than us on these individual issues. But this is more of an overview. I guess, at the moment. 

Gene Tunny  11:53

I had Lukas Bednarski from, well, he’s over in London, he’s wrote a book on lithium. He came on the show last year, and just talking about all the opportunities with electrification and making use of, of lithium batteries. So, we had that conversation. So, I’ll put a link in the show notes. So, that was good. 

So, there’s a lot of potential there. It’s just a matter of, you know, how’s all this going to come together and play out? And if you’re an optimist, you think, oh, yeah, we’ll solve it all with technology. And we’ll, get the policy settings right. But then if you’re an economist who has been around a while, you might be thinking, no, it looks pretty risky. And, I’m not sure we will get those policy settings right. We will eventually, but there’ll be a lot of messiness in the meantime. And that could last decades. 

Tim Hughes  12:49

It’s really interesting, because we’ve obviously headed in this direction of electric vehicles, because hydrogen powered vehicles are still in the conversation and all sorts of other options, I guess. And it’s going relatively fast in the EV direction, and where it had been talked about for decades prior to it really happening. So, this is really quite fast. And I guess technology is just driving that little bit further ahead, of course. And so, we’re just following the available technology. And as they get better, the rollout of EVs is getting quicker. So, it’s that, I guess, we have all of these industries, working like crazy to get ahead of the demand to try and make it possible. So, it’s an interesting time. It’s a fascinating time to see all of this change happening globally, extremely fast. It’s very quick.

Gene Tunny  13:45

Talk about how fast it’s going. It’s going faster in other parts of the world than it is in Australia.

Tim Hughes  13:53

Always fastest in Scandinavia. They always seem to be ahead of the curve over there.

Gene Tunny  13:58

Yes, yes. Yeah. That’s a whole different; that’s another podcast episode, possibly. What is it about Scandinavia? What is it about Sweden? I mean, from the outside, it looks like they’ve got a lot of things right. And we look at it from our Anglo-Saxon perspective and we think oh, well, we really wouldn’t do things like that but it seems to work for them and they seem to be very happy.

Tim Hughes  14:27

The Viking mentality tribes.

Gene Tunny  14:33

We’re gonna chat about that in another episode. Let’s begin with fuel prices. So, everyone’s noticed petrol prices are so high. I mean, what are we paying? Is it nearly $2 a liter or something? 

Tim Hughes  14:47

Well, so we’re in August 2022 in Australia, so this is going to be not an evergreen episode for this part of it. Currently, the cycles just finished in the last week or so. So, it went up to $1.95. So, I’m going to come clean here, I’m a complete fuel nerd. Like when it comes to prices, I’ve sort of, tried to maximize everything, which is I think, where this conversation started with us. The previous peak of the cycle went to around $2.25. So, which is about as expensive as it has ever been? I think it was hitting new heights that was just a couple of months ago.

Gene Tunny  15:23

Was that before they cut the fuel excise?

Tim Hughes  15:27

That was after. So, we were still with the fuel excise in place, which I think is 22 cents a liter. Is that right?

Gene Tunny  15:33

Yeah, it’s normally 44 cents a liter. And they halved it temporarily and

Tim Hughes  15:37

So, the Morison government put that in place. We had an election over here, of course, and new government, but that is still in place, and has been extended until the end of September, I believe.

Gene Tunny  15:49

Yes. So, finishes in late September, September 29, or something like that, and it’s going to be a big deal when the cut is unwound, and there’s another 22 cents a liter added to your fuel bill.

Tim Hughes  16:04

From the consumer’s perspective, we can only imagine that when we were paying $2.25, we should have been at the top of the, you know, the most expensive part of the cycle, effectively, we would have been paying $2.47. Without that fuel excise cut, you know, an extra 22 cents. So, in the cycle, it’s just been, we’ve dropped down to as far as a dollar 53 was about as low as it went. Which was great, you know, so for the consumer, it’s really good. It’s just going up to $1.95. So, it’s about a 40-cent jump whenever it seems to jump. The cycle seems to be around a 40-cent cycle. So, we’ve gone a lot deeper than before, without any real understanding of why there’s still a war in Ukraine, which apparently has an influence on fuel prices here.

Gene Tunny  16:55

Yeah, because Russia was producing oil and also, the gas supplies have been compromised. And so, there’s some substitution between gas and oil in our generation. And so like, everything’s connected, and so when Russia gets taken out of the market, and there’s still the demand for it, because the global economy has been recovering from the COVID recession, prices really,

Tim Hughes  17:24

Which made sense. I’m saying, like, it supposedly affects us over here, because it doesn’t explain why we got so low at the bottom of our last cycle, which was down to like $1.53.

Gene Tunny  17:38

Okay, so the global oil price was coming down, it’s going back up now. So, if you look at the Brent crude oil spot price, and I’ll put a chart in the show notes, it got up to about $125 a barrel earlier in the year, it fell back down to maybe about 95, or something it’s been at, and it’s going back up now. 

So, there’s a report from Reuters. So, this is a 23rd of August report, 2022. Oil prices surged by nearly 4% on Tuesday, after Saudi Arabia floated the idea of OPEC plus output cuts to support prices in the case of returning Iranian crude and with the prospect of a drop in US inventories. Okay, so prices are starting to go back up. Yeah, they reached almost $130 A barrel in the US earlier in the year. So, they’ve been down a bit since then. But they’re much higher than they were a few years ago. 

Tim Hughes  18:45

Yeah. So, the thing being is like, I find it really interesting as to why there’s such volatility in these little four-to-five-week cycles that we have here. So, for instance, we’re up at 2.25 just a few weeks ago, with the 22 cents cut. So, that’s dropped 30 cents, if we’re talking the peak of the cycle. So, we’ve just gone back to the start a new cycle, and it went up to $1.95. So, that’s still 30 cents less than what it was. As a consumer, it’s great, you know, like, obviously, we love the low prices, but that volatility in the local cycle doesn’t seem to match other cycles. That’s not linked, that kind of volatility that doesn’t seem to be linked to the price of crude oil.

Gene Tunny  19:33

Okay, so what’s interesting I think about the Australian market and we’ve studied this extensively in Australia, the ACCC, the Australian Competition and Consumer Commission keeps an eye on it. I think I’ll have to look more closely at other markets but I think this really isn’t Australia phenomenon that we’ve got this price cycle. I don’t know if you noticed it when you’re in England.

Tim Hughes  19:54

They’re pretty stable over there. Like it doesn’t seem to move around very much. I mean, I have to say it’s actually a bit of a game. It is a game over here, which kind of you know, like putting fuel in the car is pretty dull. So, it’s a little bit more spice to doing that, because you can, which we’ll talk about at some point. I know, this is one of the things we talked about, which got us on to this conversation, but you can maximize your chances. And you can sort of, play the game over that four-week cycle to keep your fuel costs down.

Gene Tunny  20:24

So, we can talk about how it is a game and one way that economists have analyzed fuel prices is as a game. So, there’s a field of study called game theory. So, you’ve seen A Beautiful Mind, haven’t you, John Nash, the great mathematician who, you know, had a few issues, but was, obviously a genius. He made major contributions to game theory. So, game theory is a theory of how do people interact? What’s their best strategy, and you can apply that to businesses. And you can apply that to say, fuel retailers, I mean, what’s turned out to be the optimal strategy that they’ve all figured out works for them, and no one really deviates from it. Because it’s just going to make life worse for everyone. If they get into some fuel price war, that is figure out, let’s not do that, let’s not rock the boat, let’s just go along, and we’ll will benefit from this cycle. And they’re making this cycle work for them. So, there’s no real collusion, they’re not ringing up each other. They just sort of, all know how the games play; this has developed over the years. 

Tim Hughes  21:30

They’ve got a mode of behavior that they all follow. They just have to do the same thing at the same time.

Gene Tunny  21:40

Yeah, it’s, it’s funny, isn’t it? You can explain that with Game Theory. So, there have been various different models of this proposed over the years with fuel prices. I’ll have to revisit it, I remember learning about it in the 90s. This was a topic of conversation in one of our micro economics lectures, I remember Harry Campbell is a professor at UQ. He would often talk about fuel prices. 

Now, the way I think about it is how this benefits the petrol retailers is that they’re able to segment the market, they’re able to divide the market into different segments and charge different prices to both segments, and this is going to maximize their profit. Now, one of the challenges that firms have when they’re selling to the public is that they can’t distinguish between different customers in terms of their willingness to pay, how much were they actually willing to pay for this their product. And so, what they end up doing is, well, if you can’t really discriminate, every customer has to pay the same amount, then the price you charge is just enough to cover the costs of production of the last unit, the last sale that you’ll make to the last consumer that is profitable to sell to. But what that means is that you’re missing out on a lot of the upside from customers who would have paid more. And, well, what you can do is have a strategy of price discrimination, if you can separately identify different groups of customers, you can discriminate amongst them charged at different prices, depending on their willingness to pay. So, that’s why for years I mean, well, look, that could be another explanation. But one explanation for why nightclubs used to charge lower cover charges for females, relative to males is that males typically had more money, they made more money on average, higher income, higher willingness to pay to get into the nightclub. 

Tim Hughes  23:41

I thought that was to encourage, because it was better to have women in the nightclub.

Gene Tunny  23:46

I think so, that’s part of it. But it could also be because men have a higher willingness to pay to get into the nightclub than women. So, yeah, it’s in the interests of the nightclub to attract the women in;

Tim Hughes  23:59

And to get the men in who want to pay more to get in.

Gene Tunny  24:03

Yes. To the attract the right ratio, or the right numbers of women, and they have to lower the price for females. And then they charge the males more. Males have a higher willingness to pay to get into the nightclub.

Tim Hughes  24:17

And then we’re known as meat markets, which sort of, explains that approach, I guess, because that was part of that scene, I guess.

Gene Tunny  24:29

Yeah. Don’t think as many places have covered charges now.

Tim Hughes  24:35

They do apparently, someone also tells me

Gene Tunny  24:38

I guess I’m not going to;

Tim Hughes  24:41

You can get in free before 10 o’clock at certain clubs. But back in the day.

Gene Tunny  24:48

I’ve just noticed that there seem to be fewer places with cover charges. I think maybe it’s more competitive now, who knows. Anyway.

Tim Hughes  24:54

We should do some research on that.

Gene Tunny  24:59

So, how I think this plays out in the fuel market with the fuel cycle that goes over several weeks is that they figure out there’s a group of customers who are really price conscious, they’ll buy when the fuel price is cheap, we’ll get them in. So, they’re a group that we can’t really get out. Or we can’t charge the high price to. They are the savvy consumers, they’re like you, Tim. They’re monitoring the, what are you doing? Are you monitoring or not?

Tim Hughes  25:45

Yeah, we’ll go into that in a bit. I’ll let you finish what you were saying. I’ll go into that.

Gene Tunny  25:49

Okay, you’re the savvy consumer. They know that there are some consumers they have to charge this lower price, too. But then there are the less savvy consumers or the consumers with deep pockets who don’t really watch the fuel tank, who aren’t thinking about when should I fill up what’s the optimal time, they just don’t care, there’s a high opportunity cost of their time. And the fuel retailers know that it’s sometimes, we can really charge them the maximum that we can get away with.

Tim Hughes  26:18

So, they are the only ones who are going to be filling up.

Gene Tunny  26:21

So, what they’ve done with this fuel price cycle, it allows them to segment the market into the high opportunity cost people who don’t care, people with deep pockets, let’s charge them as much as we can get away with. And then another market segment; that’s the savvy consumer, the cost-conscious consumer, the consumers who are paying attention to this price cycle, the fuel nerds, they might be monitoring the ACCC website, and the ACCC website is amazing. It has buying tips. I’m going to have to follow this now. Buying Tips, prices are decreasing, but they are likely to decrease further. So, this is what you were saying before, we were at the peak of the most recent cycle, is that right? And so they’re coming down now.

Tim Hughes  27:08

So, it went up to $1.95, which is a peak, is lower than it has been. It was going up to 2.25. That was the peak just a few weeks ago, maybe, one or two cycles ago; the top of it was 2.25. And that’s with the 22 cents cut in in the excise.

Gene Tunny  27:26

Yeah. Okay. And they recommend, if possible, motorists should delay by and petrol until later. I wonder if anyone’s ever complained to the ACCC about their advice. But I guess their advice is based on the cycle, and the cycle is just built in now. Because everyone’s playing the game; all the fuel retailers know that this is in their best interest, all the customers come to expect it.

Tim Hughes  27:48

There’s very little said about it, because it’s just accepted. That’s just how it is, but you can see, when the when the cycle does change. Because it happens gradually, it’ll happen over a seven to 10 day period from the first one you see, changing all of a sudden, that’s 40 cents difference, no one’s going there, it’s empty. So, very few people are going to be at that first one. And then it trickles down over the next seven to 10 days, until the last ones there. And when you get to that pointy end, those last ones normally have quite a few cars in there filling up. So, you can maximize your chances obviously, by keeping topping up or go through.

Gene Tunny  28:29

Yeah, you know, you go through it, but just tell me, did my explanation makes sense?

Tim Hughes  28:37

It did, because it was one of the questions why did they do that? But that made sense as to why they do it because they’re looking to charge as much as they can for those who don’t care as much.

Gene Tunny  28:50

That’s my as to why they’re doing it. It makes sense in terms of price discrimination, which is something you learn about in first year economics or micro economics. It’s a strategy that a firm will employ if it can distinguish different market segments and charge different prices to different market segments.

Tim Hughes  29:12

I guess it’s interesting. I’d like to say I don’t mind it, it’s a bit of a game and you play the game, or you don’t care. And it’s it doesn’t really matter. But I wouldn’t be interested; like my other experience really is in the UK, where I’ve been for longer periods and not noticed the cycles. And I would imagine with anything like this, if there’s a benefit that that will catch on and get done around the world. So, it’s kind of like side thought, but it’s it would be interesting to see if it’s unique to Australia to have this kind of volatility in a four-week cycle, or if that’s common in other parts of the world.

Gene Tunny  29:47

Yeah, I’ll have to look more into it. But it’s my understanding that it is. This is an Australian phenomenon. We’re examining that there might be elements of it in different countries, but for some reason it is baked in here. Our retailers have figured out, this is in our best interests.

Tim Hughes  30:04

Because it’s a big step, I mean, 40 cents out of it. Like, even if we average $2 at the top of the range at the moment, you know, that’s a 20% difference, which is big.

Gene Tunny  30:19

Anyway, okay. I want to hear about how you’re playing the game, Tim. Could you tell us how you’re playing the fuel price game?

Tim Hughes  30:26

It’s great, because technology really helps with this. There are several apps out there, for instance, again, this is Australia. So, for other countries, it’s going to be different. But there are; RACQ have one, there’s another one called fuel track, I think it is. And if you just look up fuel app, you’ll come up with all these different ones. And they will tell you, or you can search your local area to find out what’s the cheapest and you get a good idea as to, once you hook into the cycle, you can start to see when they’re starting to go up. There’s normally a couple of, for instance, here in Brisbane, around Kenmore, there’s a couple of servos there that are like the first to adopt; but that changes around too, you know. So, you can find that where it used to be the first place to go up isn’t always the case, I don’t know how that works. And again, that’s going to be stuff that we may never know about. But it doesn’t seem to be absolutely predictable. 

But what is predictable is once you see one go up. And so, if you can search an area around you and you see the first one go up, then you know you’ve got maybe a week before that disappears out of the realms of being able to get that lowest price. And so, when you know you’re at the bottom of the cycle will you fill up, you know, you fill your car up, and you keep topping it up until the cycle is completely gone. There’s a further thing you can do, which I’ve got, which is from the 7-11 app, it’s called My 7-11. And so, 7-11 and Mobil have joined forces. So, it’s basically a Mobil servo with the 7-11 shop attached to it. And the My 7-11 app allows you to do a fuel lock, which is fantastic. So  So, when you when you know you the end of that, and again, this is a real game, because when you do your fuel lock, it’s locked in for seven days. So, you can do it, but effectively, you’ve got seven days before you can then put another fuel lock in. I did a fuel lock, and it was a long time before it all disappeared. So, I filled up on my sixth day, and it reset. So, it looks like if you do your fuel lock, I might be hard to follow with this. I’ve realized but, if you do a fuel lock and then you buy some petrol. What happens is you show your app and the little barcode of when you did the fuel lock and it’ll lock in the price that you locked in. Then it starts again. So, that seven-day cycle does actually start again. So, you don’t have to wait seven days until you can do your fuel lock again.

Gene Tunny  33:05

Is there a transaction fee if you’re locked? Do you have to pay for fuel lock?

Tim Hughes  33:09

No, nothing. So, it’s really good. So, obviously, if you don’t use a full tank in those seven days, you stretch out until the seventh day, you’ve got a time on your fuel lock, which says it’s only up until this point. And then you can go to a 7-11 or Mobil station, fill it up and show them that fuel lock barcode on your app, and it’ll charge you, so for instance, instead of paying $1.95, I paid $1.55 for the tank full I got yesterday. There’s one little tip there, which I got wrong. The first time I used it is you have to specify what kind of fuel you’re going to use. So, I just had unleaded and I filled up with the 10 and they wouldn’t honor it because you can only do it for the fuel lock of the fuel that you’ve locked in anyway. Nerdy stuff but you can get you can get another week’s worth or another full tank of discount fuel once everyone else is paying top dollar.

Gene Tunny  34:12

Yeah, so tell me about that. I mean, you’re not going to get from trough to trough of the cycle with one tank of fuel, are you?

Tim Hughes  34:21

It depends what you do, what car you’ve got. And for me, I use about a tank full of fuel every week. I do a lot of running around. Like for you, you’d be okay.

Gene Tunny  34:32

I Hardly use any;

Tim Hughes  34:36

But you don’t do a lot of driving with it. So, you probably fall in the category where you don’t really care because you don’t use much anyways. You just get fuel when you need it. Yeah, but using a tank a week with a lot of running around, it makes a big difference. So, I never pay top price. And so, the rest of my strategy, I’ll just finish my thing there. So, I’ll do that, I’ve filled up at the cheapest, I’ve put my fuel lock on, or go for another week, and then fill up again at the last opportunity, either the weeks running out, or I’m running out of fuel, fill up again. And then you run that all the way down. So, you basically run that extra tank out, by which time, more than halfway through the next cycle. So, you should be heading towards a reasonable price anyway. And at that point, you just put in 20 bucks, $30 at the most to top up until it gets to the bottom of the cycle, then you fill up and go through it all again.

Gene Tunny  35:30

Yeah, I find it interesting that they don’t charge you for that privilege of having fewer lock, because if you think about it, there’s a correspondence to something in financial markets called a call option. Okay, so this is the Investopedia definition, a call option is a contract that gives the option buyer the right to buy an underlying asset at a specified price within a specific time period. So, you might have a call option on a share. Now they’re giving you something of value and you’re not paying for it because you got the right to buy that; maybe they figure out some people are going to make the wrong call. Or it’s a way of them segmenting the market even further, because they realize it’s the real savvy, the super savvy customers who are going to fuel lock, that will do enough research to figure this out. And yet we know we can’t rip these guys off.

Tim Hughes  36:35

Well, it’s an interesting point and they’ve obviously got reasons for that one of it. One of the reasons with 7-11 is that you have to go in their store, which is effectively a 7-11 shop, to pay for your fuel, and they have all these other rewards and incentives for you to buy stuff in there. So, the more often they can get you into that shop, the more often they can get you to buy things from them.

Gene Tunny  37:00

So, they’re hoping you get the connoisseur cookies and cream ice cream?

Tim Hughes  37:04

That’s just a rumor, Gene. That wasn’t real.

Gene Tunny  37:06

that was stuck. At 7-11.

Tim Hughes  37:12

They had this brilliant thing with a $2 Pies sometimes ago, which were okay. But yes, so there’s other incentives and other marketing schemes for doing that. And I think 7-11 is one of those that doesn’t take part; my understanding is they don’t take part in an ongoing rewards offering. So, for instance, part of my strategy is using Puma for that interim time. So, once I’ve used my fuel lock, when I get my fuel from that point onwards, I go to Puma, because I can use my RACQ card and I get four cents off a liter, so that drops it down again. This is another retailer, so, my understanding is I don’t think there’s one out there for Mobil. And so maybe they just sort of, like balance that out with being able to offer fuel lock, but they don’t do the four cents off. Because that’s another point worth making in my world of fuel nerdery that there are certain ones; the Woolworths one I think is one, I haven’t checked that, but you get four cents off for having rewards card. I think it’s Caltex that are linked with Woolworths, and you get a further four cents off if you spend $5 or more in store. But normally, that sort of, doesn’t pay out whenever you have to buy something in store, the elevated prices of whatever you’re getting in store normally, cancel out any kind of financial advantage of having that four cents off a liter. So, the little things like that play into it and it was funny. 

One of the things we did mention so through all those cycles, occasionally you get somebody who sticks out as not playing the game. And here in Brisbane, there’s one that I know of, which I have used if I’ve run out of fuel. And if the false sense of Puma is still higher than Keith Mackay at Red Hill, who does his flat, he has a flat level price that he tries to change very infrequently. And so sometimes, he’s for instance, is $1.79 At the moment, so he’s a good 16 cents less than most. And so that’s the place to go for fuel if you feel conscious and having to fill up at this time. So, I want to give a shout out to Keith Mackay for sort of, being an independent out there. 

Gene Tunny  39:36

What’s the problem? I mean, because it’s on a busy road and not everyone’s going on Waterworks road, you sort of, have to be going past Keith’s place for it to work for you to get there. Is that right for it to be economic for you or optimal? No, for anyone else?

Tim Hughes  39:52

For anyone, you have to go in person. You have to be going the right direction for that particular, I guess is the same for a lot of all analysts shorter corner. That’s pretty much the same for anybody getting fuel. If you’re on the wrong side of the road, you’re not going to go there.

Gene Tunny  40:06

But there are fewer servos here in Australia than there were 20 or 30 years ago. That’s a fact. I mean, I remember seeing a chart and in an ACCC report years ago when I was in Treasury, and I think, I don’t know the exact numbers, but at one time, there would have been 15,000, maybe, and then it’s well below 10,000 now, in terms of retail outlets in Australia.

Tim Hughes  40:29

Well, we can get onto that in a sec, because I imagine will change with part of the landscape, moving towards EVs that’s going to be impacted, massively. 

Gene Tunny  40:41

Oh, yeah, well. That’s right, all of that space that’s currently devoted to petrol stations to their forecourts, we may not need that anymore but let’s see. We should move on to that. Because we’ve had a good 41 minutes or so, so far of chat. So, we’re going to get on to EVs, which was one of the key things you’re interested in. But that fuel price cycle stuff, that’s fascinating, isn’t it?

Tim Hughes  41:09

Yeah. I just want to add with Keith Mackay, his main gig is tyres, which I think, he’s not there as a fuel guy. But it’s interesting and nice to see that somebody isn’t affected by the, the cycle as much or as standing up to the cycle and just sort of, leveling out.

Gene Tunny  41:27

Yeah, so it sounds like he’s willing to; he wants to offer a service to people in local area. He’s not as motivated by profit as a lot of the other retailers, or maybe he’s trying to profit in another way.

Tim Hughes  41:44

I think it’s his main gig. So, it’s just part of what he does, but like, it’s not a main one. But we’ll have to get Keith on here one day to explain.

Gene Tunny  41:53

I’d be interested in his logic and also, what does he think of this whole fuel price cycle? How does it work? Does he have any insight? We’d like to know. 

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  42:09

If you need to crunch the numbers, then get in touch with Adept Economics. We offer you frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis, studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.

Gene Tunny  42:38

Now back to the show. 

We better move on to EVs, Tim. Okay, so you had some questions about EVs. So, do they reduce greenhouse gas emissions? I mean, it’s a key one. 

Tim Hughes  42:53

I think what it was is like, looking at the whole process, from the making of the EV, to any waste products to them, the end life of an EV. So, the amount of, lithium being one, there’s a lot of resources needed; a lot of resources that go into making an electric vehicle. Yeah, they still have to be dug out of the ground, like, you know, 200 kilos of

Gene Tunny  43:19

Copper too, it’s got copper in there?

Tim Hughes  43:23

Yeah, I’ve only seen this from one source. So, this is unverified and people will know far more about it than I. But clearly, there’s an environmental cost of building an electric vehicle. There’s an environmental cost of running an electric vehicle; obviously we’ve discussed, you know, the fuel source of producing that energy, and in this transition phase, and that’s going to be coal or gas, or whatever, it may be some, you know, part of it would be solar or clean, but certainly not all of it. We’re not there yet with that capability. 

I imagined that the future, ideally, would be a point in the future where we can do all of our electricity needs, and including the ability to power electric vehicles from clean energy. So, that I imagine is, you know, that’s a worthy place to head towards. And that transition phase is going to be a certain period of time where we do need fossil fuels of some sort, like coal and gas or whatever to get us to that point. And that infrastructure is going to change massively in that period of time.

Gene Tunny  44:26

Yeah, okay. So, just on EVs, I think it’s difficult to say but all of the credible studies I’ve seen suggests that they do result in lower emissions and then, they’re better for the environment than petrol driven vehicles. I think we can confidently say that. 

There’s a Queensland Government website shifting to zero emissions vehicles. I’ll put a link in the show notes and it says across Australia, battery electric vehicles, so, your Tesla’s, emit on average, 29 to 41% less lifecycle emissions than a typical fossil fueled vehicle for every kilometer driven in Australia. And then the extent to which electric vehicles can lower emissions varies depending on which state and territory you live in, much depends on how much electricity is generated from renewable sources, such as solar, wind, and hydro. So, my interpretation of less lifecycle emissions means that they should have taken into account the manufacturing process, but look, that’s not guaranteed. So, I’d have to dig more into their sources. But I’d be fairly confident in saying that they’re better for the environment than petrol powered vehicles, I think that’s pretty clear. The problem is that they’re still so costly, and they’re just not economic for most consumers yet.

Tim Hughes  45:45

Yeah. And the thing is also that we would hopefully become more efficient in the manufacturing of electric vehicles, you know, in the manufacturing of batteries, and the disposal of batteries and other parts of that whole process when it comes to it.

Gene Tunny  46:03

I think all those costs are coming down. Before battery technology, I don’t think it’s improving fast enough. Maybe it is for cars. But one of the issues with batteries is that we really need them to back up the electricity grid, we really need them to be able to absorb the solar energy that comes during the day, and then allow us to power the country during the peak periods. That’s one of the big challenges we’ve got at the moment. I mean, we need more Tesla power walls, and we need big sort of, batteries across the suburbs. Really, we need big Tesla Powerwall type batteries in local areas.

Tim Hughes  46:50

And the charging time as well. Obviously, when you fill up with fuel, it’s relatively quick, five minutes and you normally done; 10 minutes tops, if you’re getting a cookies and cream connoisseur from the freezer. But I know I’m fully behind this move towards greener energy. And I think it’s really exciting to see how quickly it’s moving. But it’s that transition phase we’ve mentioned, which seems to be happening organically anyway, because it appears that people are able to charge EVs at the moment and that sort of, they’re selling more EVs. So, it seems to be the way this is happening, you know, appears to be working, but for everyone to be expected to have an EV or the majority of people. Clearly the infrastructure is a long way from being what it needs to be.

Gene Tunny  47:43

Yeah, we could talk about that in a minute. So, just on this is happening quickly. Look, the growth rate is, is high. I think they’re growing; I don’t know 200%. EV sales have grown by some really high rate over the last few years in Australia. But, so in the first half of 2021, there were 8,698 EVs sold in Australia. That compares with 6900 EVs sold in 2020. I think a stat I saw was that there’s been 40,000 electric vehicles sold in Australia since over the last 10 years or whatever the period was. But look, we have to compare that with 20 million registered motor vehicles in Australia, right? So, it’s really small relative to the total stock. It’s going to take a long time, decades for EVs to become the predominant vehicle type in Australia. And we’re actually a global Lagarde. This is according to a Grattan Institute report. The Grattan car plan Australia is a global laggard on electric vehicles. So, electric vehicle sales as a proportion of new vehicle sales in 2020. Australia was 0.78%, United States, 2.3%, global average 4.2% China 6.2%, Sweden 32.2%, Iceland 45%, Norway 74.8%.

Tim Hughes  49:15

Iceland makes sense. So, because small place, they can be far more agile with this kind of infrastructure and technology. And the energy that they have at their disposal with geothermal energy is just enormous. I mean, that just drill down and away you go.

Gene Tunny  49:31

Well, that’s better as a renewable, is it renewable, or whatever it is. I mean, it’s greenhouse friendly. It’s better for the environment than fossil fuels. But that’s a more constant source of energy, isn’t it? than say, wind or solar, the problem we’ve got is, the renewable energy sources, we’ve got are intermittent

Tim Hughes  49:52

Yeah, and the geothermal, from what my understanding is very stable and it’s 24/7.

Gene Tunny  50:00

Yeah, I need to get an engineer on here to explain it all. But this is a challenge with trying to understand what’s going on and this whole debate. There are all these engineering issues and scientific issues that it’s challenging for any economist to comment on.

Tim Hughes  50:17

And also, after so with Iceland, they do have the possibility of something cataclysmic happening as well over there. I think anywhere where you’ve got geothermal availability, you’ve got the possibility of something crazy happening.

Gene Tunny  50:30

And I think the fact that it’s a small place to means they don’t have that range anxiety, which is a big issue in Australia, where you could be driving hundreds of kilometers to your next destination, particularly if you’re in the outback. Or if you’re in regional Queensland and New South Wales, you might have to travel 200-300 kilometers to the next town. And you’d probably rather have a petrol driven vehicle with a big tank than an EV which, I mean, what’s the range? Is it 300 kilometers maybe? I’m trying to remember; I hope to look it up. But I know that’s an issue here in Australia. I know that EVs are getting better at that. But there are some people still are concerned about whether they can go the distance, so to speak. But then look, Norway is a big place and they seem perfectly comfortable. So, they’ve obviously set themselves up well, with the necessary infrastructure.

Now there are two more issues I want to chat about, because we’re sort of, approaching the time limit. You want to talk about how much more energy is required? There is just quite a bit more. There was a report in Drive Magazine that suggested that it could be equivalent to 12 million more houses. So, like one new electric vehicle is equivalent to a house. And I was struggling to find a good figure for the proportion of electricity that’s consumed by households compared with business and industry. But it’s going to be a fraction of the title. So, it’s not as if we’re going to double the amount of electricity needed. But it could be 50% or something. Yeah, I think it’s probably Yeah, maybe 30 to 40%, I think I saw an estimate. So, we’ll need 40% More energy, electricity. And yeah, the challenge is that at the moment where we’ve got all of this coal fired power stations that are retiring or projected to retire over the next two decades, and we’ve got a challenge, just replacing that capacity with renewables. And doing that in a way that we don’t screw up the liability of the energy system, where we’d end up having blackouts and all that; we need to avoid that with the firming with the battery power. If battery technology gets cheap enough that everyone can have a Tesla Powerwall, or whatever the competitor’s product is, if we can have grid level storage, big batteries dotted around the suburbs, or if we have more pumped hydro, that’s a challenge because environmental considerations, raising dam walls building new dams, I mean, that’s, that’s not going to be popular.

Tim Hughes  53:16

All comes back to energy at that every point really, isn’t it? We’re going to get our energy from and what’s the most efficient and clean way of getting that energy? And to be able to increase the capacity.

Gene Tunny  53:28

But we do need more, we’re going to need more energy for EVs. The authorities are aware of this. So, the Australian energy market commission published a paper in 2020, that dealt with this issue. And I’ll put a link in the show notes. They had a paper integrating electric vehicles into the power system. And its press release to the AMC says Australia needs a forward-thinking plan to get the energy system market ready for an electric vehicle future. Now, are we going to get that forward thinking plan? I don’t know. We’ve had a lot of problems in Australia getting an energy policy that makes sense; that sensible that everyone agrees on. I mean, we’ve had the climate wars, the big debates over climate change policy. This is going to be a big challenge. But look, people are aware of it. They know it’s an issue. There’s an issue with apartment buildings for sure. So, in that drive magazine article I mentioned, electric cars could have big impact on Australia’s energy supply. They quote this Mark Hartje, who’s CEO of charging installation company, Harman electric. His business regularly encountered developers who are unaware of the demands electric car charging good place on energy supply. One of the issues in this building we’re working on is the amount of power they have available. It sounds like a lot, but it’s running lifts, a lot in aircon, so the building doesn’t have the capacity to provide any more energy and we could burn the substation down. So, not good. 

So, he claimed the risks are high developers and body corporates were dealing with don’t really realize it’s an issue until we tell them. It will be like the pink bats cladding issue, once a couple of buildings go up in flames, they’ll do something. And then what he’s saying is that as a result, our chargers have automatic load management. So, if demand gets too high, like when all the air cons on the Chargers will throttle back, how we notify owners, we’re still not entirely sure about I think what he’s saying is that, yeah, basically what’ll happen is if there’s always EVs getting charged the system, there’s some intelligent system that is, an IT there that will just throttle, that turn the power down. So, it’ll shut down some of the EVS or the charging or shut down some air cons, or they’ll have to manage that it’ll cause all sorts of problems.

Tim Hughes  55:55

And, of course, this is a problem that’s not currently there. So, it’s, like, you know, the general population, we’re not great at dealing with new problems, like we, you know, like things to get easier and better. So, it is, I mean, I can only feel that whatever these issues are, that they will get sorted out, you know, it seems to be that we’re on this path towards electric vehicles. And, you know, we’re moving fairly quickly in that way, even though those percentages that you talked about are really very small. Well, percentages of how many electric vehicles we have actually have here. It’s not a lot. So, like, we’re massively predominantly having fuel driven cars. But the changes that we’ll need to make, I mean, of course, all of this stuff doesn’t happen with everything in place, you know, like it evolves and the challenges get met along the way. So, clearly, there are some big challenges here. And I’ve got no doubt that they’ll get met, which will be really interesting to sort of, see, because there will be some challenges, as we’ve outlined, with getting these EVs powered for everybody.

Gene Tunny  57:04

Yeah, and bringing them down. So, they’re cost effective, and people can purchase them. One of the challenges, or one of the reasons that they’re so expensive, is that these companies are making the EVs are trying to recover all of the R&D that they’ve spent developing the EV.

Tim Hughes  57:22

The last two years have been felt, of course, with supply of any new vehicles. That is still getting caught up with that.

Gene Tunny  57:30

Title mess, supply chain problem;

Tim Hughes  57:33

It will be really interesting to see how this changes and just want to briefly mention on that, like, we’re talking about the infrastructure changing. And the amount of fuel stations that there are here at some point, those fuel stations just become charging stations, then that infrastructure doesn’t necessarily change too much, but they’re just going to be selling, because they’ll have to sell it at that point to recharge, you’re not going to get free electricity to charge your EV as an ongoing basis. I think that’s just a bit of a perk to get people. Right. So, Tesla are doing it’ll happen at some point. That’s not going to continue. 

Gene Tunny  58:10

Well, if you’re offering that if you’ve got your recharging station, then that’s taking up land. And yeah, you’ll need to;

Tim Hughes  58:16

Somebody’s got to pay for that, no matter how its generated. But I’m sure it’ll get worked out. But it’ll be interesting to see how all of all of this unfolds.

Gene Tunny  58:25

Exactly. Okay. Just one more thing. One of the issues that economists are thinking about at the moment is, as we move away from petrol driven vehicles, we’re going to get less revenue from fuel excise here in Australia. So, that’s currently bringing in, well, before we cut the rate temporarily, I think it was running at about 10 billion per annum or something like that. I mean, it’s, it’s a big amount of money. I’ll put the exact figure in the show notes; might be 11 billion, there was a great article by John Freebairn an economist at University of Melbourne. What is petrol excise? And why does Australia have it, anyway? I’ll link to that in the show notes. 

So, there’s a big debate about well, how do we make up for that revenue? Should we have an electric vehicle tax, as Victoria has implemented? There’s currently a high court case on that. I think the Commonwealth is taking them to court and say no, we don’t want you to have that. That’s not the right way to go about it. And where economists are going is that, that’s probably not a good idea. Because at the moment, we want to encourage people to take up EVs. So, you don’t want to go and tax them. But there is a legitimate debate about how we charge for the use of roads and the damage that’s done for roads and the fact that roads can be congested at times. So, there’s a big debate about road user charging. And so there’s a lot of thinking going on about that. And that’s something I’ll try and cover with Marian Terrell from Grattan Institute in a future episode. She’s written a great piece in the financial review this week on that. She’s opposed to that EV tax in Victoria as I am, I think we should take the opportunity to think, more laterally; think about what’s the appropriate way to pay for the roads. And so, what John Freebairn writes in his article is that in an ideal world, we would charge explicitly for road use pollution and congestion in the cities during peak hours. Fuel excise is an increasingly inappropriate way of charging for road use. Because more and more cars, including hybrids are using less fuel per kilometer, and some, including all electric vehicles are using none. So, look, I don’t know how we do this, we probably need some sort of, chip or tag to keep track of you. 

And then the one of the ideas is that on a really congested road, you could charge people if they’re driving on that road. You know how there’s the congestion charge in London? I think we were probably talking about that before you got standby. 

Consider a London and getting the thing. Yeah. So, yeah. So, there’s a lot of thinking going on about what’s the right way to charge for roads. So, I’ll cover that in a future episode. Does that makes sense because we are losing fuel excise and a lot of people will point to the fact, that’s partly paying for the roads well sort of, I mean, it goes into the big pot of money. That is a whole bunch of things. Money is fungible that. Okay, it’s a legitimate thing to be to think about that. Yeah, we’re going to be getting less revenue to pay for services, including roads, goods and services.

Tim Hughes  1:01:53

Because it gets complex, doesn’t it? Like HGVs and obviously, you know, different size vehicles and heavy vehicles, potentially do more damage to the road. 

Gene Tunny  1:02:07

There’s a system for charging heavy vehicles. We’ve got that. Yeah. 

Tim Hughes  1:02:11

So, it makes sense that it would be done on a per kilometer basis. I don’t know. I mean, I’m also in favor of less, certainly personal tracking, you know, over the last two years, the whole of the pandemic and throw no liberalism and freedoms. That’s another conversation as well. I think it’s really hard to give up ground on personal movement and you know with your vehicle, although that would be the fairest way. If you travel a kilometer, you pay X amount per kilometer.

Gene Tunny  1:02:43

Very good, Tim, I should have thought about myself. As someone who just went to the Friedman conference, in July in Sydney, as someone who’s had a long-term association with center for Independent Studies, which is a great proponent of liberty in Australia. I think I should have thought of that point myself. It’s a very good point. I mean, it’s tracking to be able to implement this road user charging system, you need to have some way of tracking people as they drive. 

Tim Hughes, we better wrap up. Any final words before we close?

Tim Hughes  1:03:12

No. Just that it’s a fascinating subject that I know a lot of people talk about, it comes up in conversations everywhere. We’ve done just a broad overview of this, to the best of our knowledge at the time, but these are individually little areas that we’ve talked about, that will dive deeper with industry representatives, or colleagues or people.

Gene Tunny  1:03:35

And experts, yeah. I’ll try and get some EV experts on charging the energy network. Because, there’s so much complexity here, you almost have to be an engineer, an economist, a philosopher in a way as well, to try and grapple with these issues.

Tim Hughes  1:03:51

And as a consumer, you sort of, like, see this unfolding. And it is really interesting. And my driving principle, for me, personally, is about, you know, the environment and what’s best for the environment. So, I’m interested to see that discussion further, with the greenest possible solution to how we move from A to B and back to A again.

Gene Tunny  1:04:13

Okay, so long as it doesn’t cost us too much. We want it cost effective, but, we want to look after the environment, that’s right. We want to make sure it’s done in the most cost-effective way. We want to minimize the pain going forward. 

Tim Hughes  1:04:28

It’s got to be practical, you got to be able to do it, you know, like the green options now, which is to walk or cycle, you know, but that’s not practical for me to by the time we get to work, I’d have to turn around and go back again. 

Gene Tunny  1:04:41

All the way was set up as cities. We’re all living in these big cities, and we’re all time constrained. Yeah. 

Tim Hughes  1:04:48

So, the overriding principle for me anyway, like is, what’s going to be best for the planet in our hippie at heart, and, but you got to be realistic as well. But I’m excited because that’s the way that EVs seem to be heading. And that can obviously be tweaked and fine-tuned to be better and better and more efficient and less impact on the environment as we move ahead.

Gene Tunny  1:05:13

Okay. Tim Hughes, is it’s been great chatting with you. We always enjoy our conversations. I think you’ve raised some really important issues here. And yeah, really enjoyed our conversation. And we’ll try and get some experts and other industry people on in the future and we can have a further chat with them. So, thank you. 

Tim Hughes

Thanks, Gene.

Gene Tunny

Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.auPlease consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.