Issue 193, May 2021
Let the games resume. After relative quiet for some months, not least because of the focus on the pandemic, the energy melee is back in full swing on the national stage – fed by the refuelled international hype on climate policy, revival of the domestic debate over NEM resilience and costs, the transition challenges of major supply companies and the efforts after two years’ work by the Energy Security Board to bring remodeling of the market system to a head in 2021. The current market problem is encapsulated by an industry view that, under its present settings, the NEM does not support the economics of keeping fossil fuelled plants running. A significant issue, but generally ignored in the local public debate except for political and vested interest assertions, is what the real costs of the power market transition will be. The need for genuinely-informed analysis grows ever greater while the prospects for it occurring appear to be constantly shrinking. How this situation can end well is a big question for a majority of Australians.
“Change is happening for a range of reasons, all interconnected in quite complex ways, and they are pushing the NEM system to its technical limits” – Energy Security Board chair Kerry Schott.
“We can’t keep kicking these challenges further down the road” – Schott.
“Governments are always tempted to mandate more reliability than energy users are actually willing to pay for” – Australian Industry Group CEO Innes Willox.
“The ESB paper shows the huge task needed to shift Australia to a renewable economy with reliable electricity” – ALP federal energy spokesman Chris Bowen.
“I wonder about the extent to which what is in the (impending ESB final report) will provide a market design fit for purpose out of 2040 and beyond, given the many different challenges the NEM is increasingly grappling with” – Global-Roam CEO Paul McArdle.
“You need to be very sure what problem you are solving at the policy level so that the transition to zero net emissions is value for money” – Jim Snow, Oakley Greenwood executive director.
A new research paper published by Gamma Energy Technology warns that far-reaching and expensive decisions on transforming electricity markets like the NEM are being made on incorrect or misleading information flowing from conventional modelling approaches.
Gamma director Geoff Bongers says the paper urges the use of total system cost metrics to determine least-expensive pathways for generation investments and operations.
As an example, he says, it must be recognized that simulations for outputs from variable energy technologies will be compromised unless actual weather data for a market region is taken in to account.
“A fundamental flaw in existing modelling,” Bongers argues, “ is the mindset that assesses costs to consumers of deployment of a particular technology independently of the grid in which it must be integrated and assesses the only useful output as electricity.”
This is important, he adds, as “the currently dominant approach to the NEM transition involves adding technologies such as synchronous condensers and battery storage that cannot cannot be measured via the levelized cost of energy metric.” Using LCOE for planning the NEM transition, he says, has “significant shortcomings.”
The TSC approach Gamma and its research associates advocate, Bongers says, takes in to account the positive and negative effects of adding new technology to the grid to determine the overall net cost or benefit.
The Gamma analysis, he says, shows that decarbonizing the NEM beyond 85 per cent would require capacity beyond 280,000 megawatts – five times the system’s current capacity.
The vital market reform process launched by the now-defunct CoAG Energy Council three years ago as the then-Turnbull government sought to pursue its (now-abandoned) “national energy guarantee” scheme is reaching its critical stage – with the Energy Security Board publishing a shortlist of options for east coast market reform.
ESB chair Kerry Schott says it is “impossible to overstate the scale and pace of change” in the electricity sector and four “critical areas” need to be addressed: preparing for coal generation retirement, backing up system security, opening the market to cheaper, large-scale renewables and unlocking the benefits of new technology for consumers.
The board, in addressing the retirement of ageing thermal generation in the NEM, is considering proposing a new operating reserve system – and “other new procurement mechanisms” – to ensure adequate supply security is available “to keep the technical requirements of the power system within safe limits.”
Schott says this is “the most urgent issue in the NEM” and declares it “an eye-glazing, highly technical area of reform absolutely fundamental to the building of sustainable, increasingly renewable power supply without imposing unnecessary costs on consumers.”
The options paper the ESB now has in circulation for stakeholder comment says that a key question is whether, given the existence of go-it-alone State schemes and “an uncertain investment climate,” the current market design can deliver the necessary signals to drive contracting for dispatchable resources and efficient decisions on coal plant closure.
The paper points to “a large proportion” of existing synchronous thermal generation retiring over the next 10-15 years and the prospect that, because of falling wholesale prices, these retirement decisions “are likely to be brought forward.”
It adds that many investors have “made it very clear” to the ESB that “expectations of forward (wholesale) prices are not at levels or durations that would support significant investments.”
It says: “There is also uncertainty around technology costs for renewable and storage resources, demand risk and the impacts of jurisdictional investment schemes.”
The centre of attention for stakeholders has quickly become the prospect that electricity retailers could be required to undertake supply contracts to cover their maximum load, using a system of contracts with generators able to produce power on demand.
The political implications of the ESB’s potential recommendations have become immediately apparent, with environmental activists attacking any move to “effectively tax consumers to prop up unprofitable coal power stations.”
Meanwhile, users, led by the Australian Industry Group, are arguing some of the proposals are “overkill” and could lead to significant increases in consumer costs.
Federal Energy Minister Angus Taylor appears to be backing the contract concept, telling Sky News in an early reaction that “the majority of electricity markets in the world now have this” and pointing to its use in Western Australia. “We need an electricity grid we can rely on,” he said.
The new CEO of Australia’s largest gentailer, AGL, has told analysts that the company’s thermal power stations in the NEM often lose money during daytime hours because of the availability of variable renewable supplies.
Greg Hunt says that, under current settings, the NEM does not support the economics of keeping coal and gas plants running. In an interview after the briefing, he told the Australian Financial Review’s Chanticleer columnist that, if a solution is not soon found, the entire system could have a “crash landing.”
He points out that the structural issues are long-standing and have not been successfully addressed over a decade. “We really need to try to find a pathway that gives some certainty so corporates can make investment decisions.”
Australia’s energy networks sector says the current east coast arrangements for power transmission are “clearly not delivering.”
Reacting to the Energy Security Board paper, Energy Networks Australia says new transmission is “sorely needed to allow for the timely and stable delivery of renewable power.” It welcomes the ESB’s consideration of “a more appropriate cost-benefit test that can work for customers.”
ENA chief executive Andrew Dillon adds that, while the market transition is posing immediate challenges that must be addressed, “it is important not to act recklessly.” He says: “It is important we don’t over-engineer a one-size-fits-all system design but adopt a balanced approach that unlocks investment as it is needed.”
The Australia Institute, in a new commentary, declares the resilience of electricity network infrastructure is being undermined by “a chronic pattern of under-investment in maintenance and upkeep,” the result it claims of “rent-seeking by private producers and a deeply-flawed regulatory system.”
Its study asserts that maintenance and operating costs should be increased by “at least $1 billion a year.”
The Australian Energy Regulator has reduced the revenue four out of five Victorian electricity network businesses can accrue over the 2021-26 financial years compared with the past five.
Determinations by the regulator will see the businesses collectively collect just over $11.7 billion from 2.9 million customers between mid-2021 and mid-2026. The decisions also allow the companies to spend almost $5.4 billion on capital outlays in the period.
The sole exception to the revenue reductions will be AusNet Services, which has been granted a 1.6 per cent increase, a reflection in part of the “significant investment” it has made in reducing bushfire risks in its franchise area.
The AER says the decisions will see average household bills in the State fall by up to $60 a year and average small business bills by up to $267.
A big question, says the Australian Industry Group, reacting to the new NEM renovation proposals, is who will run whatever processes governments adopt because the Energy Security Board is set to vanish on 1 July?
In a statement, AiG chief executive Innes Willox says the ESB has “played a unique and constructive role in drawing together the threads of Australia’s energy reform debate following the Finkel review.”
He adds that the renovations developed by the ESB “include many strong ideas that will deliver better results for energy users as the system rapidly transitions” but warns that “there are risks from some over-ambitious extensions” as well as “the looming disappearance of the architect and the lack of co-ordination from the governments who will decide on final plans.”
The association believes coal generation in Australia is going to retire much faster than once expected thanks to unfavorable economics and ageing equipment more than emissions goals.
Willox says: “Managing this exit without disaster and redesigning the (NEM) system to function well with the very high levels of renewables that are bound to follow are essential if industry and households are to prosper.”
Startling events in Queensland in April have underlined the political sensitivity of the energy transition games.
First, Stanwell CEO Richard van Breda took on a seemingly innocuous chore of speaking at a university forum in Central Queensland – where he flagged possible early retirement of some of the government-owned company’s coal-burning plants. Within days he had quit his job from the end of May without much public explanation, attracting national media attention and speculation.
Then State Energy Minister Mick de Brenni emphatically denied any units would be retired before the end of their technical lives in 2037 and 2045.
“In fact,” he told media, “Queensland needs more generation to meet aspirations for growth in the manufacturing and resources sectors.”
Now the company’s board has rejected market rumors that it is about to mothball some units in the face of very low wholesale energy prices.
The gulf between transition mindsets – between those wanting to pursue decarbonization with care and those throwing themselves in to the future because of a perceived emergency – was well illustrated in April by publication of a new Grattan Institute commentary and the way in which it was jumped on by the radical environmental movement.
The tenor of the Grattan paper “Go for Net Zero” is that Australia can pursue 70 per cent use of renewable energy in the major grid by 2030 without threatening affordability or reliability of supply but that a “rush to 100 per cent” should be avoided because of its cost.
This drew a response from activists WWF that the institute’s attitude “lacks ambition” and is “very short-sighted.”
“We have a target of 700 per cent renewables by 2050 and think we should be aiming at 150 per cent across the country by 2030,” the campaign organization declared, arguing that this ambition embraces areas like transport and manufacturing industry.
Grattan Institute energy program director Tony Wood told journalists that 70 per cent electricity decarbonization is “do-able” but moving beyond 90 per cent is “problematic.” He added: “As you get to 70 or 80 per cent (in the NEM) you have issues across the entire market with the need for transmission and batteries.”
Wood argues that a national commitment to net-zero by 2050 will see the market issues “become real” in the 2040s “and would mean we can spend 20 years to really understand how we can balance the (power) system.”
Consumer voices struggle to get heard in this debate. The Energy Users Association of Australia, for example, gets media mention but hardly headlines in arguing that even pursuit of 70 per cent renewables in the NEM will create costs that will “hit” industrial consumers – but that pushing to 90 per cent and beyond is “a bridge too far.”
Energy Consumers Australia CEO Lynne Gallagher claims that household power bills are now back to where they were in the 1950s – in “real” or economically-adjusted terms – after falling to 2007. “Consumers,” she declares, “are totally at their limit. Are we seriously saying they should pay more?”
Federal Energy Minister Angus Taylor says those arguing Australia is not seeing enough investment in renewable energy are “out of touch with reality.”
In a newspaper op-ed, Taylor says more than $15 billion has been spent on new renewables capacity in the past two calendar years, with 13,300 megawatts installed.
He declares: “We are winning the trifecta – affordable, reliable and sustainable electricity.”
The Grattan Institute’s latest report on the NEM records that, having peaked in 2009 at 28,000 megawatts, coal-firing generation has fallen to 23,000 MW today – “and most of that is scheduled to be retired by 2040.”
The institute notes that the decline in coal-based capacity has occurred as large-scale variable energy capacity has risen to 13,000 MW – 8,000 MW wind power and 5,000 MW solar farms.
These developments, it adds, are the major reason that carbon emissions in the market have fallen from a peak of 187 million tonnes annually in 2009 to 142 million tonnes last year.
Institute energy director Tony Wood says “the good news of the past five years” is that emissions from electricity generation have been consistently falling “and the sector is on track to over-deliver its proportionate share of the 2030 target.” The bad news, he adds, is emissions from other sectors, such as transport, agriculture and industry, are “either close to flat or growing.”
Meanwhile, the Energy Security Board’s new paper says that between 26,000 and 50,000 megawatts of additional large-scale renewable capacity is expected to be brought in to the market over the next 20 years – in addition to between 13,000 and 24,000 MW of distributed solar installations.
The Australian Energy Market Operator’s latest report declares NEM wholesale prices for the first quarter of 2021 to be the lowest since 2012.
AEMO also says carbon emissions in the market were nine per cent lower than in the first quarter of 2020.
The biggest wholesale price falls were in Victoria (down 68 per cent on the same period last year) and New South Wales – down to $38 per megawatt hour from $86 (versus $43 in Queensland).
The low prices are attributed to mild summer weather lessening daytime demand – with peak capacity needs impacted by the lowest maximum temperatures in a decade – and to greater use of renewable energy, including rooftop solar power.
Federal Energy Minister Angus Taylor points out that wholesale prices fell 19 months in a row up to March.
As April ended the federal government’s willingness to build a gas generation plant in the Hunter Valley if the private sector fails to fill the post-Liddell 1,000 MW capacity gap remained a matter of speculation.
Prime Minister Scott Morrison gave the sector until the end of April to make a decision – and his government was apparently not ready on 30 April to step in.
A spokesman for federal Energy Minister Angus Taylor is quoted as saying that assessments of the economic viability of a 750 MW plant at Kurri Kurri in the Hunter Valley – to be built by the government’s wholly-owned Snowy Hydro – are “very strong.”
However, The Guardian newspaper quotes Energy Security Board chair Kerry Schott as saying the proposal “makes very little commercial sense.”
Meanwhile, in the early days of May, EnergyAustralia has announced that it plans to go ahead with its plan to develop the Tallawarra B project, a 316 MW peaking plant on the Illawarra coast. The unit will be the first in the world to use a new General Electric turbine blending natural gas with up to five per cent hydrogen.
As well, the fate of the proposed Squadron Energy gas power plant at Port Kembla, fuelled by imported LNG, remains unresolved, awaiting environmental planning approval from the NSW government.
Overall, there is an additional political twist to the NSW saga because an important State parliament by-election will be held for the seat of Upper Hunter on 22 May with the future of the valley’s electricity industry workers a prominent factor in the poll.
Chemistry Australia, the industry association representing one of the largest manufacturing sectors, has come out strongly in support of Prime Minister Scott Morrison’s view that natural gas can be a key part of economic recovery.
Association CEO Samantha Reed points to analysis by consultants ACIL Allen that assesses the chemical sector’s economic contribution at $38 billion annually to GDP, supporting 212,000 jobs. The sector is “a critical enabler” of almost every industry in the country, she adds, and uses three per cent of annual gas production.
Gas is “a non-substitutable feedstock” for the sector, she says.
The Australian Petroleum Production & Exploration Association has accused what it labels “extreme environmental front groups” of
“ignoring the reality that natural gas will play a key role” in reducing carbon emissions while ensuring reliable energy supply.
In a submission to an inquiry by the joint parliamentary standing committee on trade and investment growth, which is holding inquiry in to the regulation of export industries, APPEA complains of “dodgy tactics” in the targeting of shareholders of banks and superannuation funds to gain opposition to financial support of the fuel.
Association CEO Andrew McConville says activists are getting more sophisticated – “instead of tying themselves to worksites, they are using meetings to wage their ideological war.”
In another submission, the Australian Institute of Mining & Metallurgy points out that in 2019-20 the resources sector generated more than $283 billion in export earnings and accounted for 60 per cent of national export revenue – while the Reserve Bank said national LNG export volumes rose over the second half of 2020 and early 2021, driven by increased energy demand from the northern hemisphere during an unusually cold winter.
In normal times a rural by-election for a State parliament would not cause much national interest, but May’s poll in the NSW Legislative Assembly seat of Upper Hunter is a bit different.
Leaving aside that loss of the seat, long held by the National Party, will throw the Berejiklian administration in to minority government, politicians’ arguments and local voters’ reactions over energy issues will grab national attention up to polling day and beyond – and could ricochet over to the federal election for both the Coalition (having to deal with international and domestic carbon issues, including the UN summit in November) and Labor (whose leader, Anthony Albanese, must be getting saddle sore from trying to ride both sides of the “carbon wars” fence).
The fact that the federal election could be held at any time in the next 12 months makes many things political in the rest of 2021.
While much of the by-election focus is on the future of the coal industry in the Hunter Valley, the broader issues of climate change policy and of the role of gas and renewable energy are in the mix, too. Prominent in the thoughts of the region as well are concerns about the future of power generation as major coal plants head towards eventual closure.
Whatever the poll outcome in Upper Hunter, and the commentariat bunfight that will ensue no matter what the result is, 2021 is shaping up to be a seminal year for energy policy in Australia, both because of the climate-related issues and the sense that the east coast power market is nearing a brink – never forgetting there is also the matter of a looming southern States gas shortage.
One of the important facets of this situation, suddenly highlighted by corporate developments in April, is that the impact of all the change and uncertainty on the health and well-being of market players is coming upfront.
To quote Ted O’Brien, chair of the House of Representatives standing committee on the environment and energy, which is now embarked on a “Keeping the lights on” inquiry with a very short deadline for submissions (7 May): “We are at a turning point in how the electricity market operates.” This ominously reinforced by talk from AGL of the risk of the market “crash landing.”
As ESB chair Kerry Schott put it in a media interview in recent days: “With so much large-scale renewables coming in to the system, and indeed small scale, coal-fired plants are under increasing pressure. Not only are they getting old and less reliable; they are also under increasing commercial pressure. Everyone needs to be really clear that the commercial viability of coal-fired generation is under immense threat. It is going broke.”
This, as an economist of my acquaintance is prone to remark, is a “non-trivial issue.”
Angus Taylor, in his comments after the ESB paper dropped, has declared that “the post-2025 energy market design is the most critical energy reform governments have been tasked to deliver.”
He’s got that right, at least for the modern era; the big, big question is whether, after years of faffing about in the political arena, State and federal, governments have left themselves enough time to deliver an efficient transition?
And that question begs another: what, in this context, does efficient mean – for Australians’ economic and social needs? Which should take us to the issues raised by Gamma Energy Technologies in the total systems cost paper published in April – and canvassed at the top of this newsletter.
The paper (to be found at https://www.powerfactbook.com/downloads/energy-reports) raises a very important point: competing claims about transition costs have created misunderstandings and misconceptions.
The authors assert that “a significant risk of the transformation now being pursued is that far-reaching and potentially expensive decisions are being made, in some cases at least based on incorrect or misleading information flowing from conventional modelling approaches.”
It hardly needs stressing, surely, that accurate cost analysis of what it is being pursued, or proposed for pursuit, is critically important.
How near or far we are from policymakers meeting this need is also not a trivial question, especially when the picture Kerry Schott paints is looked at without prejudice.
Keith Orchison
3 May 2021