Coolibah Commentary

Issue 173, September 2019

By the end of November it will be 1,000 days since Prime Minister Turnbull declared Australia to be in an “energy crisis” – and few could argue that the solution is even close at hand. Eastern Australia is heading in to spring 2019 with a rising concern about the risks of power supply failures in the next summer, leading the energy market operator to expand it plans to attempt to sustain system reliability and security. Victoria is now seen at the potential epi-centre of the “crisis” and the federal Energy Minister is continuing to niggle the State’s leaders over the perceived hazards presented by their ongoing charge towards greater use of wind and solar generation. He isn’t alone in arguing that the Victorian Labor government is painting its State in to a seriously tight corner on energy supply. Just ahead lies the first CoAG Energy Council meeting of the year with no clarity available on what progress can be made as opposed to political rhetoric about solutions, At least the ACCC feels that the feared problems with southern States gas supply in 2020 may be alleviated by extra petajoules coming available – although the large consumers are still deeply fretful about prices. On the other hand, the investment case for new high voltage interconnection, deemed critical to the NEM “transition,” is now being questioned by the private sector, which is challenging the allowable network rate of return.

 

Quotes

“We can’t have a Victorian government forcing record levels of renewables in to the system, prematurely closing down coal-fired power stations and imposing a moratorium on onshore exploration and development of gas; that is a cocktail of policies headed for disaster and it is why Victoria is now our biggest problem” – Angus Taylor, federal Minister for Energy.

“The Commonwealth has not had stable policy and the States, and Victoria in particular, have pursued an aggressive renewable energy target without appropriate consideration of the impact on reliability” – Grattan Institute’s Tony Wood.

“Beyond 2020 AEMO forecasts only slight improvements in reliability for peak summer periods until new transmission and dispatchable supply and demand resources become available” – Audrey Zibelman, CEO, Australian Energy Market Operator.

“At present, AEMO does not have the tools or mechanisms to enable cost-effective access to sufficient resources for all hours of the year, so we are forced to use more emergency actions that impose unnecessary risks and costs on consumers” – Audrey Zibelman.

“This is a Band-aid on top of another Band-Aid” – Energy Users CEO Andrew Richard reacts to AEMO’s summer emergency plan.

“There’s no doubt that, if it is a very hot summer, things could be quite tight” – Catherine Tanna, managing director, EnergyAustralia.

“Hazelwood was (Victoria’s) spare tyre and now we don’t have one” – Jack Kotlyar, head of strategy, Energy Australia.

“Reliability is an important concern in any market that is relying on old plants” – Brett Redman, chief executive, AGL.

“On our own analysis, there’s a lot to be worried about; New South Wales is usually struggling when Victoria struggles” – Bruce Mountain, director, Victoria Energy Policy Centre.

“How have we allowed the eastern seaboard to get in to the position where there are risks of power shortages and very high energy costs?” – Mike Ferraro, CEO, Alumina

Price question

Journalist at doorstop media interview outside a small business energy conference on 26 August: “When will prices start coming down for consumers.”

Federal Energy Minister Angus Taylor: “They are coming down. We’ve seen the CPI of the past two quarters, we’ve seen reductions in electricity prices. We’ve seen from 1 July the imposition of price caps. Forward prices for wholesale electricity are coming off. The crucial thing here is this – we need to ensure our existing coal- and gas-fired generators are not closed prematurely. We need to make sure that there there’s more dispatchable supply, 24/7, coming in to the market. That’s why were are underwriting new generation. We need to make sure power is reliable – which is why from 2 July we brought in the retailer reliability obligation. The policy is clear: we want lower prices.”

SEQ boast

Queensland’s Energy Minister, Anthony Lynham, is celebrating Australian Bureau of Statistics analysis showing that the State’s

south-east region achieved by far the biggest fall in small user power bills in the June quarter.

Lynham says that the 5.1 per cent fall in bills for Brisbane and the SEQ is well above 1.3 per cent in Sydney, 1.5 per cent in Adelaide and 1.8 per cent in Melbourne – and is directly attributable to the government’s “affordable energy plan.”

Lynham adds that SEQ households can do even better, saving up to $417 a year, from shopping around among 24 energy retailers active in the region. Small businesses can save $545 a year.

The government, he says, is delivering on a pledge to cap State electricity price rises to average inflation, boasting that this can only be achieved by keeping power assets in public ownership. “Imagine how much higher our power bills would be if our poles and wires and generators had been sold to the highest bidder.”

Federal Energy Minister Angus Taylor declares that energy-intensive businesses are struggling under the weight of prices in Central and North Queensland, blaming the cost of wholesale electricity and saying that his government is targetting a fall in NEM wholesale prices of 25 per cent by the end of 2021.

Fit for the fight?

The Australian Chamber of Commerce & Industry says that, because of international trade tensions, this is a crucial time to boost the competitiveness of business – and points to reducing power prices among a suite of reforms including more skills investment, cutting regulatory red tape and improving workplace regulation.

ACCI says the vast scale of internal markets means the US and China are more resilient to the effects of the current trade conflict – “but Australia does not enjoy the same buffer of internal scale and we rely on trade to grow and prosper.”

The chamber says Australia’s best defence is “to make sure our economy is fit for the fight – and we can start bulking up our competitive muscle by getting power prices down.” It lists energy costs as one of three top issues confronting Australian business.

ACCI adds that measures to increase east coast electricity reliability next summer are welcome “but paying extra to get through without loss of supply shouldn’t be happening.”

Flirting with disaster

The Energy Users Association, some of whose members spend $1 million a day on buying electricity and gas, has declared that the Victorian government’s plan to push the level of renewable power in the State to 50 per cent by 2030 is “a disaster waiting to happen” in the absence of “a well-considered transition plan, including all the elements of the system.”

EUAA chief executive Andrew Richards says his members’ concern is that “we will not enjoy lower energy bills at all; rather, we are likely to face higher bills and lower system strength” because of “billions of dollars of grid updates and firming requirements.”

The association was reacting to the NEM operator calling for the third year in a row for bids under the market’s “reliability and reserve trader” mechanism. Richards says: “The RERT is supposed to be an emergency measure, a last resort, but in the past two years it has been needed several times at a cost of $80 million.”

He adds: “We have an ageing fleet of coal-fired power stations that will progressively retire, an unprecedented uptake of renewable energy and stubbornly high gas prices. Clearly, we need all governments to begin a positive conversation on how we can better manage this fundamental shift in the energy system.”

EUAA warns that large energy users, producing essential goods and services, including food, building materials, paper, plastics and raw materials, are “under increasing pressure from energy bills.”

Also, the Australian Competition & Consumer Commission, in a new report on the state of gas supply on the east coast, says that, while it sees an extra 113 petajoules (above 2019 levels) being delivered to the market in 2020, many C&I users will be paying at least $10 per gigajoule next year. The commission says a number of C&I companies have told it the situation makes their operations “unsustainable in the long term.”

The ACCC says it expects to see lower use of gas for power generation in 2020.

The Australian Petroleum Production & Exploration Association says users in the southern States continue to face higher gas prices because of the lack of local supply as a result of Victorian and NSW government restrictions on the development of new resources.

The Victorian Labor government retorts that criticism of its moratorium on onshore gas development “ignores the real cause” of higher prices – which it claims is a federal government failure to limit LNG exports.

Barely begun

The Energy Efficiency Council, marking 10 years in August since its establishment, says Australia has barely begun to tap the potential of what is seen elsewhere internationally as “the world’s first fuel.”

CEO Luke Manzel points to an international scorecard that in 2018 listed Australia as the worst developed country for energy efficiency policy and performance. “There is a huge opportunity for Australia to improve energy efficiency, picking up policies that are in place in the UK, Germany and California.”

The council argues that pursuing international standards could result in a $7.7 billion annual reduction in energy outlays in Australia and that the services involved could boost employment by 120,000 people.

Current Australian policy, established in 2015 to pursue a 40 per cent improvement in national energy productivity by 2030, was “a major step,” EEC declares, “but this target is significantly less than Australia’s potential.”

Menzel says that pursuit of energy productivity to cut bills “and effectively reduce carbon emissions” should be a first order of business for governments.

He adds: “We don’t want to turn everyone in to an energy expert (but), for example, if there are restrictions placed on crappy appliances that have a low upfront cost and end up costing a fortune to run and place a ridiculous load on the grid, that’s a good thing for everybody.”

Nuclear debate

Queensland University economist John Quiggin has told a House of Representatives inquiry in to nuclear energy that lifting the current prohibition on the technology will be “pointless” in the absence of a policy framework to make it economically feasible.

In a submission, Quiggin says: “Nuclear generation will be economically feasible in competition with existing coal and gas generation only in the presence of a carbon price of at least $50 per tonne of carbon dioxide.”

He adds: “Optimally, a lower (carbon) price should be introduced immediately, rising in real terms over time as the date for nuclear deployment approaches.”

Quiggin also argues that the “only possible path” to a national consensus on use of nuclear energy in Australia will be “the unequivocal acceptance of mainstream climate science” along with “the adoption of radically more ambitious goals for reductions in carbon emissions.”

Ted O’Brien, the Liberal MP chairing the House standing committee on environment and energy, says the inquiry will not be considering large-scale nuclear power plants but “smaller, safer modular reactor units and their potential to support reliable and affordable electricity.”

Meanwhile Tony Irwin, technical director of SMR Nuclear Technology, says Australia does not need to develop a new nuclear regulatory system to accommodate the technology. “Australia already has a world-class nuclear regulator. It will require more resources to regulate a nuclear power program, but the organization is already in place.”

In addition to the federal inquiry, there are now also committee investigations of the nuclear issue taking place in the Victorian and New South Wales legislative councils.

Future imperfect

Looking beyond 2020 towards 2030, the Australian Energy Market Operator can see more than a few reasons to be concerned about the security of the NEM.

Much has been made in some quarters about 5,000 megawatts of new generation capacity being committed for development in the near future in addition to the Snowy 2.0 project (another 2,040MW) notionally aimed to be completed by 2025.

However, in its new and heavily publicized report on the state of the eastern market, AEMO highlights that most of the new generation projects involve variable renewables “which often do not generate at full capacity during peak times or may be positioned in a congested part of the NEM system.”

As a result, the market operator warns, “while providing significant additional capacity during many hours of the year, these projects are forecast to make only a limited contribution to meeting demand during peak hours.”

The current analysis excludes augmentation of the transmission line between New South Wales and Queensland as well as a mooted new Victoria to NSW line because neither has received necessary regulatory approval.

And it adds that, as things stand, as NSW’s Liddell coal plant shuts down, a combination of high summer demand and unplanned generation outages will leave the State exposed to significant supply gaps and load shedding without adequate mitigation action.

AEMO stresses the importance of the new “VNI” and augmented “QNI” grid works being completed ahead of the Liddell closure. The operator argues a new mechanism will be needed to fast-track delivery of “no regrets” transmission developments to “deliver important reliability and resilience benefits.”

The operator adds that it is also “imperative” to implement NEM reforms for short-term forward markets, firming and security service markets and support for investments “at the right time and in the right location.”

AEMO says it, the Energy Security Board, other market bodies and governments need to work together over the next six months to refine NEM rules to create more certainty about generation exit dates.

Looking at the situation overall, the operator warns of “an elevated risk of expected unserved energy over the next 10 years,” including greater risks of loadshedding than it foresaw a year ago.

Simple answer

The answer to keeping the lights on in Victoria is simple, according to Snowy Hydro CEO Paul Broad. “Invest in transmission.”

Broad told the Australian Financial Review in an interview at the end of August that it is taking too long to augment electricity transfer capacity between Victoria, NSW and Queensland. He said his company, now wholly-owned by the federal government, has been raising its transmission concerns with the Victorian government and regulators for two years “without much action resulting,” adding that “transmission investment is needed yesterday, especially in Victoria, given the lines will take some years to build.”

Broad added that, instead of acting on transmission, the Victorian government is “happy to rely on AEMO significantly expanding its reliability and emergency reserve trader role – which is meant to be the option of last resort.”

He said: “The RERT is very costly for consumers and deters investment in new entrant peaking plants – which makes the system even less secure in the long run.”

Media reports suggest there is pressure on the Victorian government to spend part of the $2.1 billion it received for its share of the sale of Snowy Hydro to the federal government on expediting development of the State’s transmission system.

The State government is telling journalists the problem is “outdated market rules” and seeking to blame the federal government for failing to oversee change.

Meanwhile Spark Infrastructure CEO Rick Francis, whose company is a substantial shareholder in TransGrid, is reported as saying the regulated rate of return available to high voltage networks is “unviable,” too low to justify the investment risk in new interconnectors for the private sector.

Francis argues there is a “pressing need” for the regulatory approach to be revisited because the “mechanisms to allow us to get on and build in the time frame required are not there.”

Francis says “greenfields projects like an interconnector inherently come with a whole lot of risk” but the process being followed by the regulator “spits out an equity return of four to 4.5 per cent – and that just doesn’t compute with investors’ expectations.”

70 gigawatts

Alex Wonhas, AEMO’s chief system and design officer, says 70,000 megawatts of capacity involving utility-scale solar, rooftop PVs, wind power and energy storage can be expected to be added to the east coast electricity market over the next two decades.

Wonhas told an energy conference in Melbourne in mid-August that the market operator foresees half of existing generation capacity in the NEM to be shuttered by 2040.

“We are going to build the NEM one and a half times over in the next 20 years to serve our energy needs,” he said, emphasizing that large storage systems are becoming the most critical issue for the market to ensure its stability.

Earlier in the month Wonhas told another conference that connecting the large amount of renewable energy proposed to the east coast grid is “a challenge” because of the physical constraints of the network. “We are struggling to connect new renewables to the system.”

Record

The east coast wind industry is claiming a record for the NEM in July, supplying 4,586 megawatts of traded capacity and 18 per cent of market generation on the night of 14 July.

Role of coal

In the 12 months to the end of August, black and brown coal generation contributed just over 140 terawatt hours of power to the east coast grid.

Analysis on the OpenNEM widget shows that this amounted to 73.5 per cent of electricity sent to the grid is this period. In addition, estimated use of rooftop solar was 9.3 TWh.

The largest supply of black coal-fuelled power was in New South Wales (58.5 TWh) while the currently depleted brown coal units in Victoria provided 33.4 TWh.

The balance of supply to the grid was made up of gas-fired production (17.2 TWh), wind (15.7 TWh), hydro (14.4 TWh) and utility-scale solar (3.7 TWh).

During the period NSW imported 4.5 TWh and Victoria a net 420 GWh. Queensland exported 4.7 TWh and South Australia a net 540 GWh.

In the pipeline

AGL Energy says that it has $1.9 billion worth of new energy supply projects completed or in construction and another $2 billion worth “in the pipeline.”

This, it adds, includes close to 1,000 megawatts of capacity “that will provide some of the firming support the market needs.”

The developments include the $295 million peaking gas plant at Barker Inlet in South Australia, capable of being activated to full capacity in five minutes, and a proposed 252 MW plant at Newcastle aiming to deliver supply by the end of 2022 as well as a 100 MW upgrade to Bayswater power station aiming for completion in 2023.

The portfolio includes other NSW projects: the 198 MW Silverton wind farm due to be available before the end of 2019 and a 300 MW solar farm at Wellington targeting 2023. Together, they represent $900 million in renewables outlays.

At present AGL operates Australia’s largest generation portfolio with 10,413 MW in the NEM.

Basslink

The transmission line across Bass Strait, whose operators are in a $100 million legal dispute with the Tasmanian government and Hydro Tasmania over a six-month outage in 2015, was out of service again in the last week of August, initially kept off-line as a precaution after the direct current protection system caused a trip.

The interconnector operator has advised AEMO that the outage is likely to last until mid-October. It says the problem is in an above-ground segment of the cable in Victoria.

The State government says that, unlike 2015, the latest glitch poses no power supply problem in Tasmania because the hydro company’s dams are 45 per cent full.

In the 12 months to June this year Basslink had four unplanned outages as well as two planned shutdowns for maintenance.

Three lessons

Professor Dieter Helm of Oxford University has offered three lessons to be learned from the major blackout that struck England and Wales in August:

First, what happened reveals a central truth about the economy, and that is that security of supply is much more valuable now than even a couple of years ago. The economy is digitalizing and almost everything digital is electric. We need a higher level of security of supply than ever before.

Second, the power cut revealed just how fragile the system is becoming as it relies on more and more intermittent renewables generation. It is just a fact that a system with lots of intermittent renewables is harder to manage and needs a lot more extra capacity to absorb and manage both anticipated and unanticipated events.

Third, the power cuts also revealed the exposure of the networks themselves and their resilience. More reliance means more investment and capital maintenance cost.

(Helm’s full commentary is published on his website: www.dieterhelm.com.au.)

Tight balance

The Australian Competition & Consumer Commission is warning that the gas supply outlook for the southern States for next year is in “tight balance” and exposed to uncertainty.

In its seventh report on the east coast situation, the ACCC notes that the actual outcome in 2020 will depend on how much gas flows from the Cooper basin in particular to Queensland and how much fuel is required by gas-fired generators.

Despite this, the commission says the 2020 outlook is better than what it foresaw for 2019 when it reported at the end of last year. This reflects a rise in gas production for domestic use from an estimated 1,875 petajoules for this year to 1,988 PJ for 2020, AEMO’s view that there will be a 16 PJ fall in what gas generators require and eastern LNG businesses expecting to more than double the volumes they have available (to 168 PJ) from lower overseas contract demands.

However, the market operator is hedging its bets: it says there could be more gas needed for electricity production if wind farm and solar output falls next year or development of renewable projects seen as committed are delayed.

The Australian Petroleum Production & Exploration Association has seized on the ACCC report to emphasize that its members are increasing the flow of gas to the eastern market but the southern States continue to face higher prices because of political barriers to greater supply from exploration and new development.

Meanwhile the Australian Industry Group has welcomed the federal government announcement in early August that it will launch an inquiry in to east coast gas reservation, saying industrial gas users are in a “dire situation” because of energy costs and arguing that more urgent action is needed because it may take years to implement the outcomes of the review.

 

Last word

Even as kerfuffles continue about the prospects for NEM blackouts in the summer that lies ahead, the impact of the big September 2016 South Australian failure continues to resonate through the system and the public debate.

Two developments in August have underlined this.

First came a fuss about the Australian Energy Regulator deciding to sue four SA wind farm businesses in the Federal Court in order, says outgoing chair Paula Conboy, to “send a strong signal” to power suppliers about the importance of performance standards in maintaining NEM system security and reliability.

The move got a cross reaction from the Clean Energy Council, which declared it “disappointing and distracting” – a curious turn of phrase – and fretted about the “creation of unnecessary tension” between overseers of the system and “those who are acting in good faith to ensure its integrity.”

As one deep green newsletter pointed out, a big part of the wind sector’s reaction relates to fears that, if the court decides for the AER, there could be ensuing class actions against the wind businesses by companies affected by that blackout (who the State business lobby claimed at the time sustained $367 million in losses, a third of this by just four large users).

The second development in August was the publication by the Australian Energy Market Commission of a staff paper suggesting, against the backdrop of the SA event, that there should be a mechanism to deal with response of wind farms to storm winds.

This step, too, got an unhappy reaction from the wind lobby and its fellow travellers, including a declaration that it is “bizarre.”

In a commentary on the AER action, Deakin University professor Samantha Hepburn suggests the key question for the Federal Court is whether there was any action the SA wind farms could have taken in September 2016 – as violent wind tore across the State – to stay online, thus preventing the interconnector with Victoria from overloading.

As she notes, all NEM generators are legally required to meet specific performance standards with strict requirements to keep the market operator informed when they encounter problems. The Federal Court, she says, is being asked to rule on whether the wind farms complied with their performance standards and, if they didn’t, whether this breach had “a material adverse effect” on supply security.

The AEMC says in its discussion paper that the east coast power system risk profile is changing as new forms of generation and other technologies create new kinds of variability and, therefore, new risks to be managed. The system is changing from one dominated by a relatively small numbers of large power production units to one with an increasingly large number of variable units dispersed over a wide geographical area. The events creating issues now are more often not internal to a unit but involve weather conditions – and the changes can “affect a significant number of units and systems in a surrounding area.”

The commission adds “under certain circumstances the variability may be large and fast enough to create (supply) security risks.”

It suggests that criteria for maintaining the power system in a secure state need to be augmented (and it spends 59 pages in the report canvassing the issues).

Across the world another August event – a blackout in England Wales that crashed the rail system amongst much else and involved a failure at the world’s largest offshore wind farm near Grimsby – has critics of renewables there and more widely leaping to negative conclusions about wind generation variability, but UK National Grid is declaring a lightning strike was the culprit. AER’s UK equivalent, Ofgem, is now investigating whether emergency procedures were followed correctly.

Nothing will stop the protagonists from either wing of this polarized debate from leading with their jaws whenever there is a new development in the “energy wars” but those charged with holding the middle ground on policy, technology and regulation must press on addressing the inevitable issues arising from the “transition.”

One lesson from the “9/16” SA blackout and its aftermath is that the change under way inevitably throws up complex challenges that need to be addressed and resolved outside the “religiously ferocious” debate (to quote Catherine Tanna) -- and that underestimating the difficulties of decarbonizing a system like the NEM is a fool’s errand.

As I reported in a recent This is Power post, Tanna declares that “if you fight fire with fire, everything ends up in flames.”

The risk of both consumers and the economy being burned by the current state of affairs is real – and, to harp on a familiar refrain, the need for real leadership by collective governments grows greater by the day.

Keith Orchison
30 August 2019