In the early days of the Australian Federation they used a simple easily implemented and sound economic approach to build infrastructure.
To see the effect of using interest free credit on the development of renewable energy consider the following.
Assume the Capital Cost of a continuous kw is $6,000 (this is about the figure for most large scale developments such as geothermal, solar thermal, or wind farms. A continuous kw takes out the peaks and troughs and averages the output.)
At 7% interest the interest cost is 4.8 cents per kwh
The cost of repayments over 40 years is 1.7 cents per kwh
The operating and maintenance costs are about 1 cents per kwh
The fuel costs are zero
Total cost is 7.5 cents
The Capital Cost of a modern coal fired power station is about $1,500 per continuous kw
At 7% interest the cost is 1.2 cents per kwh
Repayments are 0.42 cents per kwh
Fuel costs are about 1.5 cents per kwh
Total cost is 4.1 cents per kwh
The price at the power station gate in NSW is currently 6 cents per kwh.
However, investors require more than a 7% return on investment and typically in the mining and energy sector are looking at 20 to 40%. At 20% the price needed to encourage investment in the absence of any other incentive is 16.4 cents per kwh or a price increase of 4.
Using a carbon price to encourage investment is likely to be a long painful road and it will not happen. The European experience has been that only way to get investment is to direct the money from the carbon tax to renewables.
However, as shown above, we can make investments in renewables profitable at today’s prices by eliminating interest on credit used to fund investments.
One way to encourage investment is to increase the price of the output of the investment and the other is to reduce the cost of the investment. Eliminating interest is a much simpler economically responsible approach and was used successfully in the early days of the Australian Federation to help build the national infrastructure.
We can do the same a century later.