The constant refrain from the Commonwealth of reliable, secure and affordable power appears to dismiss the other objective of clean energy. This is reinforced by the failure to endorse the Clean Energy Target recommendation of the Finkel report. However, clean energy is feasible, affordable and can be made secure and reliable and certainly is good for the environment and long-term health of people and the economy.
The terms of reference for the Finkel review refers to “security, reliability and affordability” of electricity supply. Despite this, recognizing the critical importance of having a clear blue print for moving to a low emissions electricity system, the Finkel report expanded the objectives to be addressed to security, reliability, affordability and lower emissions. Yet in the frequent statements issuing from the Commonwealth government clean energy, to the degree it is referred to, is portrayed as a problem adversely affecting the other three objectives and hence requiring extreme actions such as keeping open the Liddell power station even with government funding.
This blog provides a brief overview of relevant background and then seeks to address four issues:
- What is the case for a substantial reduction in emissions in the electricity sector?
- What level of emissions reduction is required for the electricity sector consistent with achieving our international obligations?
- What is required to achieve the reduction in emissions in the electricity sector?
- What will be the role of fossil fuels in the electricity sector in the transition phase and in the longer term and is it possible to have reliable and secure supply in a renewable energy system?
As this blog is relatively long and touches on technical issues (but in hopefully a non- technical way), I will summarise up front the key conclusions:
- Significant action is required to reduce emissions, particularly in the electricity sector which is the largest source of emissions and has the largest opportunity to reduce emissions in a cost- effective way. The target for the percentage reduction in emissions in the electricity sector should be two to three times the percentage reduction target for Australia as a whole.
- Renewable energy is now cost competitive with fossil fuel generation, even without allowing for a price for emissions and will become increasingly cost competitive in the future.
- While the third best option, Finkel’s Clean Energy Target is an effective mechanism to reduce emissions, its effectiveness can be improved by adopting a lower energy intensity threshold to incentivise emission reductions across a wide band of generation
- There are viable, effective mechanisms to ensure the reliability and security of the electricity system as renewable energy increases in importance and even with a 100% renewable system. While there will be a need to maintain some level of fossil fuel generation for a transition period, there is no long term need or future for coal based generation
- There may be a need to modify the National Energy Market (NEM) to provide for a market based contracting for reserve capacity. This should be assessed by the Energy Security Board and not imposed in an ad hoc and political way by governments.
Th Finkel report made three recommendations in respect to emissions reductions:
- By 2020 Australia has in place a whole of economy emissions reduction strategy for the period to 2050
- Adoption by all Australian governments of an emissions reduction trajectory for the NEM
- Adoption of the Clean Energy Target mechanism to effect a reduction in emissions for the electricity sector
To date the Commonwealth has shown no appetite for any of these recommendations, in contrast to adopting all the other Finkel recommendations. However, the reality is that progressing effective actions on emissions reductions must not only be a fundamental priority but doing so can assist with the security, reliability and affordability of electricity. Before establishing the case for this proposition, it is helpful to review some of the key relevant background.
Total Australian emissions from all sources, after declining significantly in the period 2010 to 2014, which included the period when a carbon price was in operation, has since resumed an upward trajectory as can be seen from the figure from the Quarterly Update of Australia’s National Greenhouse Gas Inventory.
Under the Paris Accord Australia has committed to a reduction in emissions by 2030 of between 26% to 28% relative to emissions in 2005. Moreover, Australia committed itself to doing its fair share in a global effort to hold human-induced temperature increases to below 2 degrees Celsius and as close as possible to 1.5 degrees. All parties are to meet periodically to review the commitments and assess whether they are adequate to achieve the objective, with the first review occurring in 2018.
In Australia, electricity generation accounts for 35% of total emissions, the largest share of any sector. The other sector contributions are 18% in direct combustion (other than in electricity production); 18% in transport; 13% in agriculture; 5% in fugitive emissions; and 9% in industrial processes and other sectors. Hence to make any progress in emissions reductions there needs to be a particular focus on electricity generation.
The average emissions intensity of the Australian electricity system, at 0.8 tonnes of emissions per MWH, is about 60% above the global average for developed countries. This reflects the importance of brown coal and black coal generation plants which are relatively old and inefficient plants. For 2014-15 generation was sourced by fuel types as follows: black coal 43%, natural gas 21%, brown coal 20% and renewables 14%, though these proportions differ across regions of the NEM.
A lot of hot air has been expelled about new technologies available for coal which have lower emissions and are described as “clean” coal. These are supercritical technologies which while producing lower emissions than old coal plants nevertheless produce relatively high levels of emissions. The only coal based technology that could be fairly described as clean is carbon capture and storage. There is no carbon capture and storage plant operating in the world today, the only such plant was built in the USA and was closed without operating. Set out below are the estimated operating emissions for new power stations.
Table 1: Estimated Operating Emissions for New Power Stations
|Generation Type||Estimated operating emissions
|Supercritical brown coal||960|
|Ultra supercritical brown coal||845|
|Supercritical black coal||860|
|Ultra supercritical black coal||700|
|Open cycle gas turbine||620|
|Combined cycle gas turbine||370|
|Wind, hydro, solar PV||0|
|Average NEM electricity grid emission intensity||820|
Source: Appendix B of Finkel report
While wind and solar used to be significantly more expensive than coal generation that is no longer the case if the comparison is made on a like for like basis; that is comparing the latest technology for a new plant in each case. This cost comparison should be based on the average cost of producing electricity from each generating technology, covering both the operating costs and the capital costs, of breaking even over the assumed economic life of the plant. This is shown in the table below.
Table 2: Estimated Average Cost of Electricity Produced on a Levelised Basis
|Generation Technology||Cost per MWh ($)|
|Large scale solar PV||91||61||49|
|Large scale solar PV with storage||138||87||69|
|Solar thermal with storage||172||109||87|
|Ultra supercritical coal||81||81||80|
Source: Appendix A, Finkel Report
Renewables are competitive with coal and gas on a total average cost basis and over time their cost competitiveness will increase, bearing in mind that the above table does not incorporate a cost of carbon which would add a minimum of $40 per MWh to fossil fuel generation cost. The declining trend in the cost of renewables is not surprising given the scale of production and innovation involved relative to the small- scale production and uncertain future of coal generation. Moreover, once renewable plants are built they have virtually zero marginal cost of operation thus driving down over time the wholesale price of electricity.
The case for a substantial reduction in emissions in the electricity sector
There is a compelling case for continuing and accelerating the move to a low emissions electricity sector.
First, Australia is committed to an overall reduction in emissions commencing with its 2030 target and more particularly it is committed to action to limit global warming to not greater than 2 degrees Celsius. To date emissions in Australia are increasing not decreasing and hence action is required. It should also be noted that it was Tony Abbott and his fellow conservatives who supported signing up to the Paris accord.
Even if a Trumpian view is taken that global interests are irrelevant and it is only national interests that count, the evidence is very clear that Australia is the developed country most exposed to the damage caused by global warming. The large majority of the population lies on the coastal fringe, exposed to rises in sea levels; much of its agricultural activities are located in zones that are likely to become unviable or at best marginal; and it has a fragile and exposed ecosystem and biodiversity. This is well documented in the 2008 Climate Change Report.
Another frequently expressed view, associated with team Abbott and increasingly with the Coalition government, is seeing the environment and the economy as conflicting ends and of placing the economy first in any such conflict. The reality is that economies operate within the broader environment and matters that are injurious to the health of the environment are equally injurious to the economy. The only trade- off is in the very short term in deferring environmental action to obtain a short term economic gain which in the medium and longer term would impose additional costs for future generations and for the economy.
Second, international targets to reduce emissions by country are based on production not consumption. Unlike most developed countries Australia’s production of emissions is significantly higher than its consumption of emissions and hence requires our efforts to be focussed on reducing emissions intensity in the production process.
Third, renewable energy is the key to achieving meaningful emission reductions in Australia. The electricity sector is by far the largest emitting sector. Even more importantly there are significant relatively low-cost abatement opportunities, more so than in other sectors. Lower electricity emissions can also have significant beneficial flow through impacts to other sectors such as electric cars in the transport sector.
Finally, progressing with a well- designed and communicated emissions reduction approach in the electricity sector addresses the current policy uncertainty which can and has had a negative impact in the sector on forward planning and investment. This issue was highlighted in the Finkel report.
The emission reduction target and mechanism for the electricity sector
The Paris accord target of reducing emissions by 26-28% by 2030 is very much an initial target. The fact that the Finkel Report applied that emission reduction as an assumption for modelling purpose in the NEM should not be seen as a policy recommendation. Finkel was clear that the appropriate emission reduction target was beyond its terms of reference.
The 2008 Climate Change Report assessed that Australia’s fair share of a 2-degree Celsius reduction effort would be 90% reduction emissions from the 2000 level by 2050. The Australian Climate Change Authority, which has statutory responsibility to advise the Australian government on this matter, advised in its 2014 report to target zero emissions by 2046. Modelling by the Commonwealth Treasury and the Department of Industry, as noted in a recent speech by Ross Garnaut , assessed the appropriate rate of reduction of emissions in the electricity sector was about three times the rate for the economy as a whole, reflecting the greater opportunity for cost effective reductions in this sector relative to the rest of the economy.
Not only is there a need for a target but there has to be an effective mechanism to achieve the target. At present Australia has only a limited number and scope of emission reduction mechanisms, namely:
- The Renewable Energy Target which provides revenue to new renewable energy generators which was maintained by Tony Abbott and his fellow “conservatives” when he was PM
- Direct action measures such as the Emissions Reduction Fund which purchases emission reductions by business, together with its Safeguard mechanism, which was introduced in July 2016, and which puts limits on around 140 of Australia’s highest emitting businesses to prevent emissions above the business as usual levels.
- The Clean Energy Fund, which provides loans to renewable energy projects that meet certain criteria, and ARENA which funds energy innovations
These mechanisms are inadequate. The RET, if it meets its own targets, will at best reduce emissions by 5% and there is no target beyond 2030. Furthermore, it distorts the electricity market as it targets only renewables rather than emission reductions in general. Thus, it does not provide any incentive to reduce the emissions of a fossil fuel plant.
The options to replace the RET are, as a first best option, a market based cap and trade scheme which applies across the entire economy; as a second best option an Emissions Intensity Scheme(EIS) applied to the NEM; and as a third best option, Finkel’s Clean Energy Target(CET), also applied to the NEM.
Unfortunately, in the toxic politics of climate change, the first best is not available. The second best option of an EIS was Finkel’s preferred approach, but was described by team Abbott as a carbon tax in disguise, demonstrating a complete lack of logic and comprehension. The third best option is Finkel’s Clean Energy Target(CET) which is in fact not a target but a mechanism for rewarding energy generation below a threshold level of emissions intensity. The two major differences between the CET and the EIS are that, first, the CET would apply to energy retailers while the EIS would apply to generators and second and more substantially, the EIS applies incentives generally for less rather than more emissions while the CET provides no incentives to reduce emissions above the threshold level of emissions intensity.
Given that it is essential to have bipartisan support that allows the mechanism to endure over time the pragmatic choice is the CET but with a higher emissions threshold than proposed by Finkel. This may appear to be encouraging or supporting higher emissions but in fact such a modification simply provides incentives for a broader range of generators to reduce emissions and hence positions it closer to the EIS.
Achieving reliability and security in the electricity system and the place of fossil fuels in the transition and final stages
It is important to distinguish between security and reliability. Security is the ability of the system to withstand or recover quickly from unplanned disruptions; in effect it is resilience of the system. In contrast reliability concerns the ongoing ability of the system to function efficiently and effectively, delivering sufficient supply to meet demand.
The key challenge to maintaining security of the system is to maintain the frequency of electricity generated. Frequency can vary when there are variations in demand without a corresponding variation in generation supply or vice versa. Historically the NEM has achieved frequency control through the inertia provided by using what is termed synchronous generation. A synchronous generator’s voltage is synchronised with the rotation of the generator and as a result the output frequency is relatively easy to maintain at a constant level and accommodates load power variations. Synchronous generators are fossil fuel generators and hydro power. Asynchronous generators, which include solar and wind, do not have this stabilising capability in their normal configuration and hence a significant relative increase in asynchronous generation will reduce the physical inertia or robustness of the system unless compensating actions are taken.
Thus there are two challenges to address in transitioning to a renewable energy system which need to be distinguished:
- Maintaining system security
- Ensuring system reliability and in particular that there is sufficient supply to meet demand at all times
The Melbourne Energy Institute at the University of Melbourne prepared a report for the Finkel review which set out how security could be maintained in a move to a renewable energy system with the assessment backed by extensive modelling. Their assessment was that system security can be maintained by proper planning that both adds sources of synchronous kinetic energy in the form of synchronous condensers which do not produce active power and pumped hydro plants operating in pumping mode and through establishing the ability for very fast injections of power. The latter, termed Fast Frequency Response (FFR) can be achieved with batteries, supercapacitors and flywheels. In addition, there is the opportunity to contract for large scale demand reductions which can be activated when the system is under pressure.
The Finkel report had a number of additional proposals that were designed to address the issue: a requirement that all new generators connected to the NEM must contribute to fast frequency response and system strength, including large scale renewable generation; mandating a minimum level of physical inertia in each NEM region; and COAG to develop a strategy to improve the physical integrity of energy infrastructure and the accuracy of demand and supply forecasting.
The second issue is ensuring reliability, that is matching supply and demand at all times. The challenge is that renewable energy is by definition intermittent as it links directly to the state of nature: the sun may not shine or wind blow. This requires careful planning both in the transition period and once the system moves to its final state. In the transition period, which will involve a planned phase out of fossil fuel generators, it is essential to avoid sudden and premature retirement or closure of base load generators. This does not necessarily mean keeping plants like Liddell open when they have clearly come to the end of their economic life and their closure has been foreshadowed well in advance. The semi hysteric tone of the Commonwealth government concerning the closure of Liddell in 2022 either indicates a complete lack of planning, a complete lack of confidence in the market operator, AEMO, or political opportunism or a combination of the above.
What is required to ensure reliability with a renewable energy system is as follows:
- Ensure that there is a well-diversified portfolio of renewable generation, diversified by both technology and geographic location. This means having large scale and roof top solar, wind, bio mass, hydro, tidal and geothermal with an appropriate balance of the different technologies and a level of excess capacity. It also means ensuring that particular technologies are not concentrated in one region. While South Australia is an attractive location for wind generation owing to its levels of wind and higher than average wholesale electricity prices, it is necessary not to have too heavy a concentration of wind in one region. The fact that there is such a heavy concentration of wind in South Australia at present is not a criticism of the South Australia government but a direct consequence of a national RET without suitable planning at the regional level by AEMO.
- Provision of fast dispatchable back up generation in the form of large scale batteries and pumped hydro as well possibly for a period, gas fired gas peaker plants.
In addition, the Finkel report recommended that all large generators be required to provide at least three years notice of intention to close; and an assessment be made by AEMO of the need for a strategic reserve to act as a safety net as well as developing a day ahead market. A strategic reserve would involve the contracting of capacity that is dispatchable upon demand. The day ahead market is common in overseas energy markets whereby one day ahead of when electricity is to be dispatched there is a bidding process which is then confirmed on the day of dispatch. In contrast the NEM operates a bidding process on the day of dispatch.
The Finkel report recommends an assessment being made of whether it is necessary to create a strategic reserve which is a potentially a major change to the way the NEM operates and needs to be carefully assessed and not be simply a political decision.
The NEM is what is termed an energy only market in which generators are only paid for the energy they produce to meet demand. Prices are set daily by a bidding process with the highest price accepted in the bidding being paid to all dispatched generators. If a generator’s bid is not accepted then there is no payment to that generator. In contrast, there has developed in Western Australia, the UK, parts of Europe, parts of the USA, including California, and in South America, what is termed a capacity market which exists alongside the energy market with its daily bidding. In the capacity market, there are occasional auctions for generation capacity with the successful bidders paid for having capacity availability to be dispatched from time to time as a backup when required.
The issue that arises as renewable energy becomes a more important source of supply is that renewable energy has a zero-operating cost and typically bids a zero or negative price to ensure it is dispatched. This reduces the average price set in the wholesale market. In addition, a higher level of renewables reduces the depth of the forward contract market given that most renewables cannot participate in the forward market as there is no certainty that they can supply on a given future day. This means that it is more difficult to rely only on the energy market to ensure future adequate capacity is built.
Tony Woods, in a recent report noted the challenge posed by an energy only market for providing timely market signals for ensuring sufficient capacity and identified two options if it was intended to establish a capacity market:
- A centrally planned model where the market operator contracts from time to time by auction for reserve capacity
- A more market based approach in which the market operator sets reliability requirements and retailers are obliged to procure sufficient capacity to meet those standards.
The first step is, as recommended by Finkel, for the Energy Security Board (composed of the heads of AEMO, AER and AEMC) to assess whether there is a need for the NEM to be modified to allow for the procurement of reserve capacity and second, to determine the most efficient and effective approach if such a capability is determined to be needed. The worst possible approach is for governments to make capacity decisions on an ad hoc politically motivated basis.
In conclusion, a renewable energy system can deliver affordable, reliable, secure and clean electricity and assist in avoiding major adverse environmental and economic damage.
Michael Lambert is a former Secretary of NSW Treasury, involved in the development of the National Electricity Market, former non-executive director of Energy Australia and a director and senior adviser on health economics at the Sax Institute.