MICHAEL LAMBERT. Australia’s electricity markets policy: The shambles continues.

Sep 11, 2017

Over the last week we have been treated to the depressing spectacle of the Prime Minister and his government reacting in a knee jerk, wrong-headed manner to two sensible and useful reports that have been released by the Australian Energy Market Operator (AEMO).  This highlights the folly of not having a national plan for transitioning the National Electricity Market towards an increasingly renewable energy system.

AEMO has released two reports in September on the issue of the challenges of electricity market security:

  • 2017 Electricity Statement of Opportunities (https://www.aemo.com.au/-media/Files/Electricity/NEM Planning and Forecasting/NEM ESOO/2017/2017-Electricity-Statement-of-Opportunities.pdf), which provides a projected outlook under various scenarios for the next ten years to 2026-27 on electricity supply and demand
  • Advice to the Commonwealth Government on Dispatchable Capability (https://www.aemo.com.au/-media/Files/Media Centre /2017/Advice-To-Commonwealth-Government-On-Dispatchable-Capability.pdf), which draws on the projections of the first report to assess the implications for electricity market security and identify what policy and market actions are required. The release of this report was accompanied by a letter to the Federal Minister for Energy and a copy of a report by the energy consulting firm, the Brattle Group, on international experience with managing the transition to a renewable energy market

Giles Parkinson has posted on the first report and the Commonwealth’s efforts to have Liddell power station continue operations beyond 2022, which is a misguided response to the two reports. In this post I will seek to place these developments in the broader context of what is wrong with electricity market policy and what needs to be done to address the problem.

The broad environment for the electricity market can be characterised as follows:

  • Progressive retirement of base load fossil fuelled generators, with the most recent being Hazelwood in Victoria and the next planned closure being Liddell in NSW in 2022
  • Flattening in the demand for electricity transported by the grid, reflecting both energy efficiency and growth in roof top PV, the latter supplying power off grid
  • Strong growth in large scale renewable wind and solar energy as well as increased use of rooftop PV
  • Increased domestic gas prices which, in combination with withdrawal of base load capacity, has produced a substantial increase in wholesale electricity prices
  • Advances in energy storage capability and reduced costs
  • Declining costs of renewable electricity which have declined by about 80% over the last decade and will continue to decline into the future

It must be stressed that Australia is not alone in addressing these changes. All power systems in the developed world and many in the developing world are responding to these changes, most much more sensibly than is the case in Australia.

Over the last 10 years 5200MW of base load generation has been retired in the National Electricity Market (NEM), replaced by 2900MW of gas powered generation, 2965 MW of wind power, 273MW of hydro, 265 MW of grid scale solar (plus off the grid rooftop PV) and 277MW of other energy sources, including bio mass. This is all in accord with the policy objective of shifting towards greater use of renewable electricity production as part of Australia’s commitment to addressing climate change, an objective shared by the Commonwealth Government and the Opposition.  Despite the view of the so-called conservative wing of the coalition, this objective is not the problem. The problem is the lack of a national transition plan to take Australia forward to a substantially renewable NEM combined with a lack of an emissions reduction target and a mechanism to deliver on that target for the NEM.

AEMO has identified both a short term and a longer term problem in the NEM, which are both essentially transition problems in moving towards the goal of a renewable electricity market. The short term problem relates to the summer of FY 2018 and, to a lesser extent the three subsequent summer periods where it is assessed that there is the possibility, on the base projections of AEMO, that the reliability standard will be breached in Victoria and South Australia. The reliability standard is set to allow a very low level of tolerance of outages, with unserved energy (USE) not to exceed 0.002% of consumption for any region in any year. This is quite a stringent standard based on standards in other countries.   Both Victoria and South Australia are close to breaching that standard on projections for the summer of 2017-18 and to a lesser extent in the following three years. As a result AEMO has concluded that there is a need to put in place arrangements for a strategic reserve of 1000MW of flexible dispatchable energy resource.

The risk of summer outages in that period has been flagged for some time and hence this assessment and the proposed response is not really a surprise. However, the second and longer term problem has created the recent  political drama. AEMO has concluded that “the current market design is unlikely to provide adequate and sustained signals to the market to incentivise development of new, flexible dispatchable resources at the level required to maintain system reliability over the medium and longer term”.  The report goes on to note that with the planned closure in 2022 of Liddell, there will be a need for an additional 1000MW of flexible dispatchable generation capacity. Without such additional capacity NSW, Victoria and South Australia will all approach or exceed the reliability standard trigger over the next ten years. In order to respond to this risk AEMO recommends that it proceed to consult widely to develop “a longer term approach to retain existing investment and incentivise new investment in flexible dispatchable capability in the NEM”.  The careful crafting of the words should be noted, with the actual mechanism to effect the policy response kept deliberatively vague. This recommendation is the apparent trigger for the Prime Minister to make his appeal to AGL to maintain Liddell power station beyond 2022 and to subsequently talk about exploring other options to maintain Liddell in operation. It is hardly a coincidence that the Minerals Council called for such an action on that same day.

This raises two questions:

  • What is the cause or causes of the longer term problem of maintaining system reliability and the need for a partial redesign of the NEM to address this problem?
  • Is the solution proposed by the Prime Minister viable and appropriate and if not, why not?

There are a number of elements  to the problem which is inherent in transitioning from a centralised, large scale fossil fuel generated electricity system to one with a mix of renewable and non-renewable generators, including off the grid roof top PV.

The first element of the problem is the inability to reliably dispatch at given times certain forms of renewable energy, namely wind and solar though not hydro, given that they rely on intermittent energy sources, namely wind and the sun.

The second, related element to the problem is that certain forms of renewable energy, once again solar and wind but not hydro, are what is termed asynchronous, in contrast to gas, coal and hydro powered electricity generation, which is synchronous generation .  Without venturing into the technical details, synchronous generation keeps the frequency of the system stable as a by-product of generation, while asynchronous generation does not have this property. This means that in the transition phase there is a need to carefully plan the mix of synchronous and asynchronous electricity generation and to develop alternative ways to maintain system frequency and hence security. This was a key aspect of the Finkel report.

These two elements of the problem explain why there is a need to have a balanced electricity system in the transition phase. These two aspects of solar and wind energy are not fatal to the objective of moving towards an electricity system based on renewable energy, even of achieving the objective of having a fully renewable energy system. The challenge of having sufficient dispatchable electricity can in principle be achieved by electricity storage, both through hydro electricity and the use of large scale battery storage, as well as by having a strategic reserve of flexible dispatchable generation or demand management arrangements that can be quickly switched on. The second challenge of maintaining system frequency and hence security can be achieved through contracting what are termed auxiliary services which provide the ability to stabilise frequency. This does not need to involve fossil fuel generation but can instead involve synchronous condensers, synchronous renewable energy sources such as hydro, biomass and solar thermal generators and, as proposed in the Finkel report, requiring all new generators connected to the grid to provide frequency control services. In fact AEMO has developed revised technical standards that if endorsed will require all new generators to provide system security services.

The third element to the problem is purely transitional and that is the lack of incentives at present to invest in or maintain non-renewable dispatchable and synchronous generation. Declining demand from the grid for electricity due to energy efficiency and rooftop PV plus competition from low cost renewable energy is eroding the business viability of traditional base load generators. Further, the shutdown of a number of these generators has reduced liquidity in the derivatives market and hence made it risky for new entry non-vertically integrated base load generators. These pressures do not apply to renewable energy which is incentivised by the Renewable Energy Target (RET). The challenge is to move from the RET to an approach that is neutral to technology and fuel source and rewards emissions reductions, whether achieved by switching an old coal plant to super critical coal plant, by energy efficiency or by use of renewable energy.

Turning to the second question, how to address the problem of inadequate incentives for flexible dispatchable generation, one thing is clear and that is that the Prime Minister’s proposal to have Liddell extend its operations beyond 2022 is not a solution for a number of reasons. First and most fundamentally, Liddell operates as a base load generator whereas what AEMO is seeking is additional generation capacity that is flexible dispatchable. Readers will have noted that I have bolded these words throughout this post as they are critical to determining the appropriate policy response. This can be provided by hydro or gas fired generation and not by a base load plant like Liddell, which cannot provide fast responding dispatchable capacity. It can also be provided by large scale demand management, which is clearly understood by AEMO but does not appear to have occurred to the Prime Minister.  Second, Liddell is at or near the end of its economic life and is unreliable, having lost half of its capacity last summer.   Third, it would take considerable investment to get Liddell into a position to continue to operate beyond its 50 year time period. By that time the much heralded Snowy Hydro 2 could be in place and make the investment in Liddell redundant.

Sensibly AEMO has not adopted a knee jerk response to the issue. Rather it recognises that the solution may require a partial change in the design of the NEM. At present the NEM is what is termed an energy only market in which energy is traded in the wholesale market place. What AEMO is now contemplating, both for the short term problem and the longer term problem, is augmenting the market for energy with a market for capacity whereby certain generators will be contracted to be on standby to provide energy at short notice. In effect this is an insurance policy and like any insurance policy it involves a cost for the protection afforded.  Beyond a period into the future, it in principle should be possible to address the problem with Snowy Hydro 2, if that were to proceed. Alternatively or complementary, AEMO could work with the industry to develop a comprehensive demand management approach.

At a fundamental level, the underlying problem is the lack of a plan for transitioning the NEM to being a viable 21st century electricity system with substantial renewable energy, both on the grid and off the grid, combined with a failure to put in place a target for reducing emissions and a mechanism to achieve those reductions. This lack of a transition plan and emissions target and mechanism has created the uncertainty which has resulted in a lack of investment and maintenance by the non-renewable generators. This was the very clear message of the Finkel report which the Commonwealth continues to ignore.

Despite Australia signing up to the Paris Accord, there is no emissions reductions target for the electricity sector, even though this is the key area where emissions can be reduced in a cost effective manner and facilitate reductions elsewhere in the economy. Furthermore, the Renewable Energy Target only goes to 2020 and does not provide incentives for non-renewable energy to reduce emissions, only providing incentives for new renewable energy.   Either a Clean Energy Target or an Emissions Intensity Scheme can provide these incentives, an idea not able to be comprehended by the climate change- denying conservatives in the coalition.

When we see the Prime Minister not engaging in stunts such as posing in the Snowy in a hard hat, beating up electricity retail executives or gas company executives or putting pressure on a publicly listed company to jettison its long term strategy, but instead allowing AEMO to get on with its job and putting in place a national transition scheme and announcing a emissions reduction target for the NEM and a Clean Energy Target or Emissions Intensity scheme, we will know that the Commonwealth is serious about electricity markets policy. In the meantime it is vital that the Commonwealth stop confusing the issue by implying that the problem is renewable energy. The problem is a lack of a national plan and emissions reduction approach.

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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