MICHAEL LAMBERT. Revisiting the South Australian Electricity Market.

In the context of the current South Australian election campaign, it is opportune to revisit the state of play with the South Australian electricity market which in 2016 and 2017 was used at the national level as an ill-informed or, perhaps more accurately, a misinformed argument about renewable energy and climate change policy.


In September 2016 the South Australian electricity market experienced a blackout and then in the first half of 2017 South Australia, along with most other regions of the National Electricity Market (NEM- the NEM covers NSW, Victoria, Queensland South Australia, Tasmania and the ACT) experienced a large spike in wholesale electricity prices which flowed into retail prices. The blackout was caused by severe weather conditions, principally high winds, which damaged the high voltage transmission system. As part of that event, the high wind led to a programmed shutdown of various wind farms as a precautionary measure. Both the Prime Minister and Minister Freudenberg seized the opportunity to state that the blackout was the result of South Australian energy policy and in particular the push to increase the level of renewable energy in the market which had made the market less secure and reliable.

While it is correct that there needs to be careful consideration to the issues of security (defined in this context as the ability of a power system to recover quickly to disruptive events causing changes in voltage frequency) and reliability (defined in this context as having enough capacity to meet demand) when transitioning from a fossil-fuelled system to a substantially renewable energy system, the blackout was not the product of reliance on renewable energy. The trigger for the blackout was the extreme weather event which knocked out parts of the transmission grid.  While it is true that the high wind also triggered a precautionary shutdown of some of the wind farms this did not cause the blackout.

There were other failures which exacerbated the blackout and subsequent spikes in wholesale prices in the South Australian market in the first half of 2017 which in fact reflected poorly on the Commonwealth:

  • The standby quickly dispatchable supply reserve in the form of gas-fired power did not operate due to a lack of gas supply. This was a contractual failure of the national operator, AEMO
  • The black start facility which was also contracted by AEMO also did not perform to requirements.  
  • Failure by the Commonwealth to reserve suitable levels of gas for domestic use with the domestic production being exported, leading to the spike in electricity prices and problems of gas availability in the domestic market.  The spike in electricity prices in 2017 was not just a South Australian phenomenon but occurred across the NEM.

The Commonwealth also made a big thing about what was described as the irresponsibly high level of renewable energy in South Australia which was said to make the system “fragile”. This conveniently ignored the fact that renewable energy was driven by a Commonwealth policy instrument put in place by the Abbott Government and maintained under Turnbull, the Renewable Energy Target(NET) which provided financial incentives for new renewable energy up to 2020. Given the attractions of South Australia, namely ample solar and wind resources, a higher than average wholesale price due to larger than average reliance on gas and a supportive State Government, it is hardly surprising that South Australia attracted a substantial proportion of renewable energy investment driven by the RET.  In any case, it is the role of AEMO to ensure security and reliability for the NEM and each of its parts and to take account of such matters as higher reliance on renewable energy in particular submarkets.

Finally, as clearly the set out in the Finkel report, the Commonwealth was responsible for a policy vacuum in both the energy and emissions policy areas. There was not a national energy policy that addressed the three issues of security, reliability and affordability; there was not a longer-term emissions reduction target either for the economy or the electricity sector as the major contributor to emission; there was a policy vacuum which did not provide any certainty for generators in planning investments; and there was a failure to integrate energy and emissions policies.

Current Situation and Recent Developments

The South Australian electricity supply breakdown as at 2016-2017 is as follows:

Local generation Generation in GWh Share of total local supply %
Gas 5596 50.5
Wind 4343 39.2
Coal 0 0.0
Solar 1016 9.2
Diesel and other 122 1.1
Total SA production 6352 100.0
Net interconnector imports

Source: AEMO, South Australian Electricity Report, November 2017

There are a number of noticeable features of the South Australian electricity market:

  • There is no coal-fired power and this has been the case since 2016
  • As a consequence of no coal-fired power there is a substantial reliance on gas which fuels about 50% of domestic supply
  • Renewables account for 48.4% which is the highest penetration of any NEM region
  • More than 30% of dwellings in South Australia have rooftop PV systems installed. Australia is a world leader in this aspect of renewables and South Australia leads Australia.
  • A relatively high reliance on the interconnector to obtain power from other parts of the NEM

In regard to wholesale electricity prices, South Australia has traditionally had a higher price on average than other parts of the NEM due to the higher reliance on gas as a fuel for generating energy which has a higher cost than other fossil fuels. South Australia has not used coal as a fuel since May 2016. Wholesale prices in each of the NEM regions spiked in November 2016 and remained high before moderating somewhat, though higher than the historic trend. The spike and continued higher wholesale prices reflected the substantial increase in gas prices as domestic gas was increasingly exported. Since September 2017 the wholesale prices in South Australia are broadly in line with NSW and Victoria, eliminating the historic price premium payable in South Australia. This reflects the lower cost of renewable energy relative to thermal power which will lead to prices in South Australia falling below those in other regions of the NEM, reflecting the relatively higher reliance on renewables and the increased use going forward, though other jurisdictions will increase their reliance over time.

In March 2017 the South Australian Government launched its Energy Plan which is very much focussed on ensuring security and reliability in the transition period to a high reliance on renewable energy.  The key measures included in the plan are as follows:

  • The installation of the world’s largest lithium-ion battery, with a capacity of 100MW, to act as a rapid response backup supply and more critically to provide digital inertia to enhance system security
  • The building of a State-owned gas power plant which will have purely a standby role
  • Use the State’s bulk buying of power to attract new electricity generation and hence increase competition
  • Incentives to source and use more South Australian gas to generate electricity

Since that announcement, the battery has been installed and is fully operational and has to be very useful in improving system security. A new 150MW solar thermal power plant is being constructed at Port Augusta which can store between 8 and 10 hours of energy, with the output to be paid for by the State Government. In addition, the Heywood interconnector between South Australia and Victoria is being increased in capacity from 460MW to 650MW.

While it could be argued that the State-owned battery and gas-powered power station could discourage private sector investment in the market, it needs to be noted that these are purely standby emergency facilities and are not in competition with private sector generators.

A notable development being undertaken in Adelaide by AGL is what is termed a virtual home-based power plant. It is a centrally managed, cloud-based control system, managing a network of installing “behind the meter” in an initial 1000 residential and business premise.  It is a cost-effective way to smooth out intermittent renewable energy generation and avoids expensive upgrades of the network. Once the trial is tested the intention is to roll out the concept more generally, taking advantage of the high level of PV penetration in South Australia.

At present plans are progressing for large-scale solar and wind farm investments with 1500MW of solar generation and 3200 MY of wind projects committed or proposed.

The AEMO South Australian Electricity Report provides forecasts of annual grid electricity consumption for the ten year period to 2026-27 which projects a decline of 3.6% over the period due to households and businesses making increasing use of  “behind the meter” rooftop PV, increased energy use efficiency and the impact of the closure of the automobile industry. Maximum demand will be in summer but will shift from afternoon to evening when PV is no longer generating. Minimum demand is forecast to decline rapidly, reflecting the increased use of rooftop PV, and is the first region in the NEM in which high rooftop PV has caused minimum demand to shift from overnight to near midday.

The doubters at this point would point to the high and increasing use of renewable energy and predict that the intermittency of renewables will create system insecurity and unreliability. Insecurity is due to the absence of frequency control provided by the inertia of good old-fashioned fossil-fuelled power plants.

Consider first the issue of system security. By way of a brief explanatory side note, frequency control is the instantaneous balance between supply and demand of electricity. If supply exceeds demand frequency increases and if demand exceeds supply, frequency declines. The system needs to be kept within a very tight range of frequency or else it can cease to function. What are termed synchronous generators, which include fossil fuelled generators but not solar and wind generation, have a property of inertia which instantaneously slows the rate of frequency change and hence stabilises the system. This is due to the spinning turbines in synchronous generators that provide the inertia or stabilising property. However, system security is also provided by gas-fired generators, hydropower, solar thermal generators, synchronous condensers which can be attached to the system purely for security and batteries. South Australia has in place batteries, including a large-scale standby battery, a substantial level of gas-fired power and is committed to developing hydropower and a standby gas-fuelled power station.  A recent report on the Irish electricity system found that batteries can provide the same level of system inertia as ten times the capacity of synchronous generators. Thus, the 100MW battery installed in South Australia can provide the same level of security as 1000MY of synchronous generation. In addition, the Finkel report recommended that all new generators connected to the grid, including large-scale wind and solar, provide frequency control services. The technology exists for this to occur and the recommendation has been endorsed by the Council of Australian Governments (COAG).

The second concern raised by sceptics of renewable energy is that of unreliability in that the supply is intermittent and does not occur when the sun does not shine or the wind does not blow. This is in fact not an argument against renewable energy but an argument for a suitably structured portfolio of energy sources and back up. Once again there is suitably types and levels of back up to account for situations when solar and wind may not be available including the batteries, the committed State-owned gas-fired power station, the additional generation capacity to be secured by the State including the solar thermal plant and the backup capacity and demand management capacity being secured by AEMO.  

In February 2018 the Premier announced a target of achieving 75% renewable energy by 2025. Noting the planned and committed renewable projects that would appear to be a realistic target. By way of comparison consider the level of reliance on renewables of leading countries committed to addressing climate change.

Country Current reliance on renewables % Target for renewables
Iceland 88 100% by 2020
Sweden 52.6 100% by 2040
South Australia 48.4 75% by 2025
Norway 45 67.5% by 2020
New Zealand 40 100% by 2035
Finland 32 38% by 2020
Germany 30 65% by 2030
Austria 29 34% by 2020
Denmark 28 50% by 2020 and 100% by 2050
Chile 27 70% by 2050
China 25 30% by 2030
Australia 14 none

South Australia is at the higher end of reliance on renewables, though below Sweden and Iceland and only moderately above New Zealand. Its target of 75% by 2025 is on the aggressive side but achievable. Unlike the other jurisdictions which are nations, South Australia is a region, part of the NEM and hence can rely on the interconnector for back up.

At the national level, the AEMO has been putting in place demand and supply responses to improve the system security and reliability for the NEM and its regions. This is part of its role as the Reliability and Emergency Trader. The supply-side response is providing at short notice additional supply that can address a shortfall while the demand side response is contracting with energy customers to allow for interpretability at short or limited notice.

In addition, AEMO has undertaken a forecast of demand and supply in the NEM and its submarkets with the results set out in the September 2017 Electricity Statement of Opportunities for the National Electricity Market.  The AEMO modelling shows that reserves have declined in the NEM and hence there is an increased risk of what is termed Unserved Energy(USE), which is the risk of supply not being sufficient to meet demand and hence of load shedding, over the next 10 years. The highest risk is for 2017-18 for Victoria and South Australia. The report acknowledges that South Australia has put in place measures to increase reserves such as the batteries and additional generating capacity and hence mitigate risk. From 2018-19 to 2021-22 the risk progressively declines due to increased renewables.  The potential for USE is then projected to increase for NSW and to a lesser extent, Victoria as the Liddell Power Station is retired in 2022.

In July 2017 the Commonwealth implemented the Australian Domestic Gas Security Mechanism which provides for restrictions on LNG exports if there is a shortfall in domestic gas supply. This is supplemented by the Gas Supply Guarantee mechanism developed by the gas industry which seeks to avoid any domestic supply shortfall.

Finally, the recommendations of the Finkel report to improve security and reliability of the NEM have been endorsed though with the recommended Clean Energy Target being replaced by the National Energy Guarantee which has the virtue of integrating the emissions target with the security and reliability target. The challenges will be to avoid an increase in market concentration, given that the mechanism encourages vertical integration and to set an emissions target both for the medium and long term that truly encourage and facilitate the transition to a renewable energy market.


Australia’s NEM is moving through the transition period from 100% reliance on thermal power towards a fully renewable energy market.  South Australia is leading the way and has in place or is developing a suitable portfolio of measures to trend to a fully renewable energy system with robust security and reliability. The remaining challenges to a successful transition are at the national level and include:

  • creating energy and emissions policy certainty
  • establishing ambitious longer term and medium-term targets for emissions reductions in the energy sector, in line with most developed and developing countries
  • putting in place the National Energy Guarantee mechanism for achieving emissions reductions and appropriate levels of security and reliability.

The continued reference by the Commonwealth to its 26-28% Paris accord target as being the target for the energy sector is most discouraging and indicates that either the Commonwealth does not understand the requirements for addressing climate change, wants to be a free rider or is in denial. The 26-28% target is a medium-term target for the whole economy. Modelling by Commonwealth Treasury, the Climate Change Authority and by Ross Garnaut all indicate that the heavy lifting for emissions reduction needs to be undertaken by the electricity sector which accounts for about 35% of emissions and which has the most cost-effective opportunities for reductions. This would indicate that the target for the electricity sector in terms of emissions reductions should be 2 to 3 times that of the national target. Furthermore, the target must extend beyond 2030 to give the energy sector a longer-term target and policy certainty.

Michael Lambert is a former Secretary of NSW Treasury, was involved in the development of the National Electricity Market, former non-executive director of Energy Australia and is a director and senior adviser on health economics at the Sax Institute.


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One Response to MICHAEL LAMBERT. Revisiting the South Australian Electricity Market.

  1. Rodney Edwin Lever says:

    Global warming is not just something to talk about. It is a reality that exists! In my town in the highlands of southern Queensland we have seen a serious of seven violent storms that began at Christmas. The latest is tearing itself apart just outside my window in early March. I have seen nothing like it since I was born in 1932. One day our national government will wake up to the truth, perhaps, and learn the lesson of South Australia.

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