Issue 207, July 2022
The financial year just ended delivered a jolt to the east coast energy markets that should not have come as a surprise — and policymakers, regulators and the market operator will have their work cut out to ward off further shocks in 2022-23, both in summer and winter, for electricity and gas supply. For consumers, whether households, smaller businesses or large industrial and commercial companies, the problem of unwelcome prices is real and now — and there is no guarantee that things will get better any time soon, regardless of political rhetoric. For the community, and especially households, the energy price pains are just part of a larger economic picture — and it is hard to see these concerns not playing in to community political attitudes. With State elections coming up in Victoria, New South Wales and Queensland, this could have an impact on the political landscape well before the 2025 federal election. In short, there is no way that energy issues will move from the front line of the Australian debate any time soon and they may well be an enduring challenge for all governments.
“On 21 May a gale blew away nine years of climate denial, delay and disfunction” – federal Climate Change & Energy Minister Chris Bowen
“Supply was tight” – Bowen answering National Press Club questions on how close the east coast came to blackouts in June. “Load shedding was a possibility we were preparing for.”
“Australia’s suspension of its electricity market shows how volatile the country’s transition from fossil fuels to clean energy will be” – Bloomberg news agency.
“There are warnings Australia could slide into a UK-style energy crisis where retailers go broke and energy poverty soars” – ABC News.
“One of the remarkable things is that you need gas backup for unreliable coal – the problem is that the size of coal (generation) is much bigger than the size of gas, so you need a huge amount of gas to back up coal” – Graeme Bethune, CEO, analysts EnergyQuest.
“Technically, it’s a treading on eggshells sort of thing” – Paul McArdle, CEO, consultancy Global-Roam, adding “the system’s running more at the limit than you would like it to be.”
“The transformation of the NEM’s generation fleet is fast in both historical and global terms, making it very challenging to achieve from each of a technical, economic and social perspective” – the Australian Energy Market Operator.
“We need to plan and execute a very fast pace of change” – AEMO chief executive Daniel Westerman.
“It is a great mistake to judge programs and policies by their intentions rather than by their results” – the late Milton Friedman.
“To maintain a secure, reliable and affordable electricity supply for consumers through this transition to 2050, investment is required for a nine-fold increase in grid-scale wind and solar capacity, triple the firming capacity (dispatchable storage, hydro and gas-fired generation) and a near five-fold increase in distributed solar.”
This is the core message from the Australian Energy Market Operator in delivering its “integrated system plan” for the east coast’s NEM.
CEO Daniel Westerman says the 30-year roadmap for the market reflects a “complex, rapid and irreversible energy transformation.”
Westerman adds: “I think recent events in Australia and overseas have really just underscored the need for urgent investment in renewables, firming and transmission so that we can de-link ourselves from these international factors and provide Australian homes and businesses with the most affordable, secure and reliable energy.”
The market operator’s transition scenario report places special urgency on current transmission projects in eastern Australian that are budgeted to cost $12.7 billion as it envisages 14,000 megawatts of NEM coal-fired generation being shuttered by 2030 – compared with 8,300 MW of closures that have so far been flagged by power station owners.
“If there is one message out of this ISP,” says Westerman, “it is reinforcement of how urgent it is to act on investment in transmission, in renewables and on firming and infrastructure.”
The shock June suspension of the market by NEM underlines the need for reform and investment, he declares. “These events highlight the urgency with which we need to invest in firmed investment and renewables to create the lowest-cost and most secure and reliable sources of energy for consumers.”
In particular, AEMO wants the five transmission projects currently being planned – including the $3.8 billion HumeLink connecting Snowy Hydro to southern New South Wales and the $3 billion VNI West interconnector between NSW and Victoria – to be built “as urgently as possible.”
The Energy Security Board, in a discussion paper on a proposed capacity mechanism for the NEM published in June, has warned that, for the current market framework to deliver the investment required for the “transition,” policymakers need to be confident that the private sector “can and is willing to finance the vast amounts of necessary generation in a timely way that is co-ordinated with generation exit decisions.”
The ESB adds: “Market participants, on the other hand, will need to be confident that governments will allow wholesale prices to stay very high for a sufficient length of time to enable investment decisions to be made without intervening as they have in the past.”
Federal Energy Minister Chris Bowen says the NEM is “way underdone on transmission,” arguing that current supply problems are the result of “not having the investment we need in renewables, transmission and storage over the past few years.”
In a radio interview, Bowen said there had been a 17 per cent reduction in renewables investment.
He asserted that the power system “is unstable” and the NEM “ill-prepared” for the crisis that struck in June.
Meanwhile, the new leader of the National Party, David Littleproud, is challenging the speed of change in the NEM, saying shifting to 82 per cent renewable energy in the market mix by 2030 is “a huge leap with great risks.”
The Energy Policy Institute of Australia, in a new discussion paper, warns that east coast power system reliability is being “diminished” by the increasing entry of variable renewables in the NEM.
EPIA executive director Robert Pritchard writes that “many politicians and climate activists cling to the hope that increasing renewables, accompanied by firming technologies and additional transmission will bring a high level of reliable, affordable and clean energy to the power system.”
This hope, he says, is “largely misplaced – without maintaining a high level of dispatchable generation from coal, gas, hydropower or nuclear the system will be increasingly unbalanced.
“Put another way, the higher we go with renewables, the more unreliable our system may become.”
The EPIA paper argues that diversity and vertical integration remain effective strategies for underpinning the delivery of energy. “All energy forms, including renewables, fossil fuels and nuclear power, have contributions to make towards the goal of net zero by 2050. Host governments just need to provide a safe place to invest.”
Is the east coast electricity market – the NEM – broken?
The short answer is “no,” says Sarah McNamara, CEO of the Australian Energy Council.
The long answer, she asserts, is that “recent events have revealed the need for some simple but important repairs,” citing as an example the fact that the NEM’s automatic price cap “hasn’t changed for 20-odd years.”
McNamara says there is currently “profound disruption” in the market as the transition towards lower emissions, with the exit of coal-fired plants, proceeds.
She acknowledges that transmission investment is “critical” to the transition but argues new developments “need to be planned carefully” and be subjected to individual detailed cost-benefit analysis.”
She adds: “To provide investment confidence, consistency of approach is essential and we encourage all jurisdictions to get behind AEMO’s guidance to deliver for consumers rather than developing their own unique planning approaches.”
The Australian Petroleum Production & Exploration Association says the east coast gas price pressures that alarmed manufacturers at the start of winter and contributed to the electricity market operator’s unprecedented intervention in the NEM “are not the fault of gas exports.”
Damian Dwyer, acting chief executive of APPEA, argues that high wholesale power costs in the eastern States resulted from “a 50 per cent increase in gas use due to coal-fired power plant outages and the inability of renewable generators to increase supply when it was needed.”
Dwyer urged governments and large users to “look at the long-term bigger picture” and accept that the solution to gas shortages is to bring on more supply, not to pursue more regulation.
He pointed out that the petroleum industry had invested more than $70 billion to date in developing the Queensland onshore gas sector. And that the heads of agreement between the federal government and LNG exporters in Queensland when development was being planned “contained commitments to advocate for the removal of State and Territory gas exploration and development bans and moratoria.”
He also cited a recent study showing that the nationwide upstream petroleum sector directly employed more than 165,000 workers and supported another 90,000 jobs indirectly as evidence of the industry’s economic value.
Graeme Bethune, CEO of analysts EnergyQuest, says eastern Australia probably needs two gas importing terminals, one each in Victoria and New South Wales.
In a newspaper interview when the NEM and gas crises were hitting the headlines daily in June, Bethune added that the federal government should consider underwriting the developments as it does with other critical infrastructure. “You would have thought some kind of insurance policy was a decent idea.”
The Australian Energy Regulator says that electricity and gas supply disconnections are on the rise again after it stopped them during the Covid pandemic lockdowns. Now there are more consumers in retailer hardship programs and with higher levels of debt.
The regulator is calling on retailers to take action earlier to assist stressed customers.
The AER’s latest market quarterly report shows that 1.1 per cent of NEM residential customers are on hardship programs, owing an average $1,734.
The Australian Council of Social Services is calling on the federal government to intervene to alleviate the problems of customers in hardship, including supporting energy efficiency and rooftop solar retrofits for low-income homes. It has also proposed a federal $1,000 emergency energy debt relief payment for affected customers.
Power bills on the east coast are expected to rise sharply from this month after the regulator lifted its standing electricity price, citing the increase in wholesale electricity prices.
Innes Willox, chief executive of the Australian Industry Group, says high energy costs are now “a particularly intense part of the inflationary pressures impacting households and businesses.”
Willox says the AEMO decision in late June to “reboot the market” signalled an easing of acute electricity sector chaos but was “far from a return to normal conditions.” He adds; “It was the first step on the road out of energy hell – but only in to purgatory, and we could be there for a very long time.”
Willox says “the reality is that, on the other side of chaos, lies a chronic crisis of energy affordability.”
This, he declares, is why all levels of government need to remain focussed on a strategy to help energy users in the near term through financial assistance for the most vulnerable and to “accelerate supply-side and demand-side transitions to reduce exposure to high-cost fuels.”
The ALP government in Western Australia has announced that it aims to have all the coal-fired generation it owns in the State’s south-west system shut down by the end of the decade.
Premier Mark McGowan says one unit of the government-owned 854 megawatt Muja power station south of Perth will close later this year, a second will close in 2024 and the whole operation will cease by 2029.
The government’s nearby 340 MW Collie plant is scheduled to exit in 2027, leaving only the privately-owned 416 MW Bluewaters plant on line.
“Our current electricity system is becoming increasingly unsustainable due to the uptake of rooftop solar and growing demand for renewable options for generation,” McGowan says. “Western Australia will implement a sensible, managed transition to a greater use of renewables for electricity generation, while ensuring we maintain electricity reliability as a priority.”
State-owned Synergy, which runs the Muja and Collie power stations, will “oversee” investment of $3.8 billion on “new green power infrastructure around WA.”
The government is also committing to not commissioning any new natural gas-fired generation in the south-west system after 2030.
At present the wholesale south-west market relies on 44.7 per cent coal for supply, with gas generation providing 33.5 per cent, wind 19.2 per cent and large-scale solar 2.1 per cent. About 20 terawatt hours of electricity is traded annually through the system.
The Australian Energy Market Operator certainly knows how to talk the talk, as witness its new “integrated system plan” report declaring the urgency of work required to deliver a “once-in-a-century transformation” of the east coast electricity system away from fossil fuels “without shortages and energy cost blowouts.”
The mainstream media naturally lapped this up, but there was not much said about whether the NEM and the governments presiding over it can walk the walk in pursuing this “transition” to a large extent by 2030 and in total by 2050.
The newly-elected federal government led by Anthony Albanese, with Chris Bowen responsible for climate and energy policies, is hanging on all the AEMO words and will ride them to Egypt in November when the 27th CoP is scheduled to be held.
The market operator’s ISP is, of course, not a plan or a policy – it is a set of four scenarios modelling what the “transition” could look like. As the events of last month demonstrated, there are more than a few twists and turns on this path, few of them expected (at least not by politicians).
Not the least of these is whether the transmission augmentation essential to delivering the much-changed NEM in 2030 can be delivered on time and on budget. The regulatory hoops through which these projects must – repeat, must – pass are a major factor and the “can’t be allowed to fail” aspect suggests to me that the ultimate costs may be rather more than current rhetoric allows. If so, it’s consumers who will be on the pointy end of the outcome.
“Total system costs” is the jargon that needs attention for the AEMO scenarios.
Meanwhile, AEMO regards the scenario it labels “Step Change” as the most likely to eventuate from a present perspective, seeing off 14,000 megawatts of today’s NEM’s 23,000 MW of coal-burning capacity by 2030. (Coal generation owners in eastern Australia have so far announced plans to close 8,300 MW this decade.)
To the deep unhappiness of green activists, “Step Change” also sees the NEM still using 10,000 MW of gas-fired generation way out there in 2050 (it’s 11,000 MW today). The great (light) green hope is that at least they will be burning hydrogen at that stage.
There are two generation elements missing from the ISP – offshore wind power, about which there is now a certain amount of hope (even expectation in some quarters), and new nuclear technology (because the outdated ban legislation is still in place).
In the case of the latter, Bowen has made it pugnaciously clear that he is not a fan, although he is likely to regret some of his florid language as the decade progresses and small modular reactors come in to use in other parts of the world.
AEMO’s articulate chief executive, Daniel Westerman, had a very busy end to the financial year, having to oversee the rescue operation that came quite close to NEM load-shedding if not actual blackouts and also to dance the ISP through the eager media pack. On the latter, his comments to journalists included the thoughts that “Step Change” is “terribly exciting” and “very do-able, even if challenging.”
According to the market operator, half the 1,500 stakeholders it consulted in crafting the ISP believe the “Step Change” scenario is “most likely” to happen while another 17 per cent think a much more ambitious scenario is the best bet.
Well, 2050 is a very long way away – trying scrying the first years of this decade from the vantage point of the middle-1990s………
The immediate task for policymakers and their multitude of advisors is to get through the rest of this decade or, in the case of Bowen and the Albanese government, through to 2025 (the next federal election), without having one or more Oops moments and/or the kind of power price blowout that bedevilled the Gillard government.
Place your bets.
Keith Orchison
1 July 2022