Coolibah Commentary

Issue 196, August 2021

With just on 90 days to go to CoP26 – the UN climate change talkfest in Glasgow – there has been a predictable surge in local and international chatter about the urgency of net-zero policies, coinciding with continuing vague language on future directions from Australia’s main political parties and florid media coverage. “World gallops to Glasgow while Australia trundles the other way” is perhaps the pick of local newspaper headlines in July. What? Inevitably, there is much talk about Glasgow having to be a “global turning point” – like Paris? – the “last, best chance to limit global warming to the Paris target,” being the recurrent activist theme. The challenge to any form of coherent action has been made clear by the UK floating the idea of creating a club of nations using carbon border taxes to protect their industries against imports from countries deemed to be not doing enough to cut emissions. Faced with warnings that it risked “blowing up” the Glasgow talks, the British government seems to have gone cold on pressing the idea (at least for the time being). Leaving aside what other nations might or might not do individually or collectively, is there any prospect that Australia’s federal and State governments could agree a 10-year plan to address the issue here? Is this worth a serious debate among leaders in the very near future, bearing in mind the pressure on them from the Covid emergency? Nothing happening at present suggests this will happen, much as energy suppliers and business generally wish for it to be pursued. The local climate policy focus remains on headline chasing by a wide range of players and media pursuit of clickbait. Before you know it, we will be having all the same to-do over CoP 27, apparently to be in Africa.

Quotes

“The last thing the world needs now is extra protectionist policies being put in place” – Trade Minister Dan Tehan reacting to proposals by the EU to tax energy-intensive imports from countries without a carbon price.

“The European carbon tariff is as much an opportunity as a threat” – Innes Willox, CEO, Australian Industry Group.

“Australia’s energy market operator has set an ambitious target for the country to surge ahead of the rest if the world with an electrical grid ready to handle 100 per cent energy by 2025” – Sydney Morning Herald.

“I am not saying the whole grid will operate at 100 per cent renewables for the year. That is not going to happen. I am absolutely not saying that by 2025 we won’t need coal plants” – Daniel Westerman, new CEO of the Australian Energy Market Operator, on ABC Radio in the wake of a small media frenzy about his first speech.

“Nearly 30 per cent of Australia’s power is renewable and soon it will be 50 per cent” – the Clean Energy Council promoting an advertising campaign highlighting the values of wind, solar and storage.

“In the June quarter, the peak one-off share of renewables in the grid climbed to a record 57 per cent across the NEM although coal power retained a dominant 68.2 per cent share” – the Australian Financial Review in an interview with Westerman.

“We’ve got some hypotheses about how we would get there but do we have a clear roadmap? No we don’t” – Westerman in the Financial Review interview.

“Reform isn’t optional. It’s not something we can choose to do. It’s something we have to do confidently” – Energy Security Board’s Kerry Schott.

Legal nightmare

The Energy Policy Institute of Australia is flagging that the recent Dutch court decision against Royal Dutch Shell has created a “legal nightmare” for investors in carbon-intensive industries around the world, “effectively intervening in the way other countries govern themselves environmentally.”

In a commentary published at the end of July, EPIA says it may be unavoidable for Australia to consider a legislative decision in response to the court action.

The institute suggests one local option may be the introduction of a licensing system legally authorizing the discharge of emissions and allowing “qualifying investments” to continue while emissions are reduced in an orderly and affordable.

EPIA executive director Robert Pritchard adds: “The introduction of a domestic licensing system would raise the question of whether a government might impose a licensing fee and what the government might do with the revenue.”

He asks: “Could any revenues be paid to a Future Energy Fund dedicated to the development of low-emissions technologies?”

He says that a Future Energy Fund could also align Australia to the global “net-zero by 2050” target, an ongoing issue of political controversy ahead of the next federal election.

Winter’s impact

“The start to winter (on the east coast) tested power system resilience resilience with generator outages contributing to tightening supply conditions and significant electricity price volatility,” says the Australian Energy Market Operator.

AEMO reports that NEM mainland wholesale prices rose from an average of $37 per megawatt hour in the first quarter of 2021 to $95 in the second quarter.

The market operator says that, after outages at Callide power station in Queensland and Yallourn in Victoria, gas plant and hydro power increased output “significantly” in May and June. Despite this, AEMO adds, coal-based generation accounted for 68.2 per cent of total NEM supply (including estimated use of rooftop solar power in the mix) compared with just over 70 per cent in the second quarter 2020. All renewables contributed 23.9 per cent and gas-fired power 7.9 per cent.

Market analyst David Leitch declares the price rises “reflect a cold and wet winter driving up demand and driving down solar production along with much higher coal and gas prices and the Callide C accident.”

Leitch’s ITK consultancy estimates that, in the 12 months to the first week of July, NEM generation consisted of 138 terawatt hours of coal-fired generation, 22 TWh from gas plants, 21 TWh hydro power, 20 TWh wind power, 5 TWh from solar farms and 9 TWh of estimated use of rooftop solar.

Federal Energy Minister Angus Taylor said the second quarter 2021 surge in NEM wholesale prices showed why the Morrison government is “focused on ensuring adequate supply of dispatchable power in the market.”

‘Uncharted territory’

The Australian Energy Council, representing large gentailers, has emphasized that achieving 100 per cent capability for renewables in the NEM by 2025 is “uncharted territory.”

In a commentary, the AEC adds that is “unfortunate” that Daniel Westerman’s views were misreported in the media as targeting 100 per cent renewables in the market by 2025 as a goal. “After all,” it says, “AEMO does not determine investment in the market. However, its intentions do send signals to investors about what opportunities (and challenges) may lie ahead.”

The association declares that “sensible policy” requires balancing the community’s expectation of climate change action “with its equally-important expectation of not paying excessive amounts for electricity.”

AEC adds that Westerman’s speech was “an acceleration” of a scenario in the market operator’s renewables integration study published in April last year and foreseeing the “potential” need to accommodate 75 per cent instantaneous renewable supply in the NEM at times. That report said the market would only be able to handle maximum instantaneous penetration of wind and solar by 2025 of between 50 and 60 per cent if recommended reforms were not pursued.

The association notes that the 2020 report “did not seek to investigate the costs of proposed actions or mechanisms.” It warns that “uncoordinated investment risks an overbuilt and very fragile system which must be paid for, with consumers and/or taxpayers footing the bill.”

Big reform fuss

As the long-awaited Energy Security Board report on NEM reform went to ministers, parts of the renewables sector jumped in fast at the end of July to attack proposals for a capacity market and other steps to address congestion and security, including establishing a strategic reserve of generation capacity.

As demonstrated in the ensuing media coverage, the sector’s grievances are in the main that the proposals are a “win” for coal-fired generation and a “big blow” to more construction of alternative renewable technologies.

The sector’s PR plunge appears to be spurred by belief that the ESB’s proposals have support from the Victorian, New South Wales and Queensland governments as well as being acceptable to federal Energy Minister Angus Taylor.

ESB chair Kerry Schott has said in a statement that the final decision will be made by “national cabinet,” the entity created to deal with the pandemic that has taken over the work of the Council of Australian Governments, and would be considered first by a sub-committee of energy ministers.

The draft board advice says detailed design of the changes will take 12 to 18 months.

Schott declared: “Reform isn’t optional. This isn’t just a tweak around the edges. It’s about the whole redesign of the NEM to confidently embrace Australia’s energy future while reducing the risk of price shocks and blackouts. It’s not something we can choose to do, it’s something we have to do.”

She added: “The clearer and more coordinated the path, and the smoother the transition, the more confidence consumers, industry, investors and governments will have.”

In another statement, Taylor said the reforms proposed by the ESB “would be crucial to ensuring we can absorb renewables in to the grid without threatening reliability and affordability.” He added that the “pace and scale of change in the electricity system is unprecedented and it is essential the NEM remains fit for purpose.”

Among those attacking the proposals, the Smart Energy Council asserted that the measures are “the last gasp of keeping coal-fired power stations open by giving them payments for just being there.”

Schott warns

Energy Security Board chair Kerry Schott’s comments on the NEM reform proposals include a warning about complacency after last summer saw the east coast grid avoid the alarms of previous years.

“We have had a very mild summer and everyone has got very complacent,” Schott says. “But we only need one hot summer in three jurisdictions together or a major unexpected outage at a big coal plant and we have got a real resource adequacy issue right on top of us.”

Offshore wind

A report produced by a collective of researchers at CSIRO, academic institutions, manufacturing industry and trade unions, under the aegis of the Blue Economy co-operative research centre and supported by federal government funding, argues that large-scale offshore wind farms deserve serious consideration in Australia. It calls for the technology to be incorporated in to national and State energy planning.

The report is being supported by the Australian Council of Trade Unions, which says offshore wind represents “a great opportunity” for job creation.

The study says there are at least 10 projects with a combined capacity of 25,000 megawatts under various forms of consideration for offshore Australia, most prominently the 2,200 MW Star of the South development off Gippsland.

It says: “Many excellent locations are close to areas of large industrial loads, including Port Kembla, Newcastle, Gladstone and south of Perth.”

It adds that more than 20,000 MW of offshore capacity could be installed within 100 kilometres of existing power networks, including generation hubs such as the Hunter and Latrobe valleys.

The Maritime Services Union says the development of offshore wind farms would enable highly-skilled seafarers and marine oil and gas workers to transition in to clean energy.

Protagonists of the technology want the federal government to lift regulatory constraints to offshore developments, complaining that promised legislative steps have been stalled for 18 months. Labor energy spokesman Chris Bowen accuses the government of being “asleep at the wheel” on the issue.

Boosting batteries

The Australian Energy Market Commission says it has taken two steps in July to “help batteries play a more critical role in our energy future.”

One is a draft plan to integrate energy storage systems in to the NEM, cutting red tape, the AEMC says, so small batteries can earn extra income and larger batteries have fewer costs and logistics hurdles for entering the market. 

The other is a ruling on new arrangements to financially reward “ultra-fast energy providers” for reacting at short notice when parts of the NEM need frequency controls to avert blackouts.

Commission chair Anna Collyer says the steps “recognize that energy is no longer a one-way transaction.”

She cites an AEMO outlook that anticipates growth in installed storage is expected to rise from around 2,000 MW in 2021-22 to 16,000 MW by 2041-42. “Within two decades,” she says, “installed storage is expected to increase by 800 per cent and to be central to energy flowing two ways.”

Collyer adds that the decision to create a new fast frequency response market is “a major step forward on power system security,” saying it is “the first of the new system services markets we are designing to deliver essential security the system needs as the energy sector decarbonizes.” Ultra-fast options are “like an insurance policy for keeping the energy system in balance and avoiding blackouts,” she says.

Carbon tariff

The Australian Industry Group says the European Union’s moves towards introducing a carbon tariff on imports should be seen as much as an opportunity as a threat.

CEO Innes Willox urges Australian engagement with the EU on the issue to avoid “ending up with a noodle bowl of unilateral decisions and systems in multiple countries that would be a nightmare for our exporters.”

He says the EU’s “carbon border adjustment mechanism” is best understood here as “a new alternative to existing approaches,” adding that “the glass half full view is that this carbon tariff could have been much worse.” He adds that AiG research suggests Australian exports to Europe will be about as profitable after the CBAM is introduced as they are at present.  “The carbon tariff genie is out of the bottle and not engaging isn’t the answer.”

The federal government’s initial reaction has been to claim the EU move may contradict World Trade Organization rules but this is disputed by the Grattan Institute. Energy policy director Tony Wood, who says that, designed properly, the step “should in no way” breach WTO requirements.

Wood adds that “the writing is on the wall for coal-dependent communities.” He says, however, it is difficult to predict how such moves will play out.

Callide

The Queensland government says the fourth unit at its Callide power station near Biloela is now scheduled to return to service in December next year after the disastrous explosions and fires in late May with knock-on effects triggering blackouts for 470,000 homes in the State and impacting wholesale electricity prices. The original claim was that the unit would be back in operation next May.

A forensic engineering investigation of the incident involving the Callide D unit is still underway but the adjacent Callide C unit has been returned to service after a seven weeks outage.

Meanwhile the government has decided to spend $14 million on its Wivenhoe hydro power station which State Energy Minister Mick de Brennie says was “incredibly valuable” in the hours after the Callide disaster in meeting demand and supporting network stabilization. The incident, he says, highlighted the importance of fast-ramping and flexible generation.

On track

TransGrid says work on upgrading its VNI link between Victoria and New South Wales is more than half completed and on track for completion by the end of 2021.

The work is identified by the energy market operator as a priority project and will increase transfers from Victoria in to NSW by 170 MW at times of high demand. The company says the enhanced link will help reduce power bills through more efficient sharing of resources between the States and will enable more wind and solar power to enter the grid.

TransGrid is also upgrading the QNI to relieve transmission constraints between Queensland and NSW.

Locked in

The Australian Petroleum Production & Exploration Associated has assailed the New South Wales government over gas policy.

Responding to a 77 per cent cut in acreage available for onshore gas exploration in the State, APPEA declares the decision “a body blow for consumers, jobs, the environment and business.”

The association says that, after a decade of policy uncertainty, the move “effectively limits future gas development to a single project, Narrabri.”

This, it claims, means NSW customers face higher supply prices in the long term. Customers could “well be paying over $20 per gigajoule for delivered gas.”

It adds that, if NSW is to meet its agreement on gas supply with the federal government, an LNG import terminal must be built in the State.

The Berejiklian government, APPEA says, is being shortsighted and is appeasing “vocal and extreme minorities” at the risk of “ongoing economic and energy security risk.”

John Barilaro, Deputy Premier and Minister for Resources, says the decision to rule out exploration in large areas of the State is a response to concerns from regional communities. His announcement adds that, while the Narrabri gas development is “critical” for regional development and supply security, the government will look to interstate imports and LNG imports as well to sustain “flexibility”.

Last word

Is it too late now to have a serious high-level political debate in Australia about including modern nuclear technology in the power supply mix for the last years of this decade and beyond?

Some think so. Even some who see the legislative ban on the technology here as being well past its use-by date also believe that the wind plus solar plus storage momentum is now too great to allow room for anything else, pointing in recent days to the fresh promotion of large-scale offshore wind farms as one more reason why small modular nuclear reactors will be squeezed out for the NEM even as they are developed overseas.

Where this is wrong-headed, I think, is in how it flouts the basic principle of the energy debate: if our focus is on a future power system without carbon emissions reaching the atmosphere, this should embrace all possible technology options (including carbon capture, storage and use) and the decisions on what to build, allowing for good environmental regulation, should be left to investors.

At the top political levels across Australia, the modern discussion on allowing use of nuclear power locally has been mealy-mouthed on the one hand (it has to come from a consensus or it’s not a bad idea but too costly) and rabid on the other (never, never, remember Fukushima and Chernobyl etcetera).

The iron fact of policy change is that it has to be led from the top, as has been demonstrated by both the Liberal/National parties and Labor on numerous occasions across the past 50 years, and from where I am sitting (long out of the lobbying fray) the issue of allowing local use of nuclear, now that technology is emerging that is much more acceptable to communities and now that the concurrent issue of reliability and affordability of power supply in a NEM transition away from coal is so urgent, cries out for such leadership. 

So does the need to develop a strong analysis of total system costs as the backdrop to optimum energy policy direction – something the avid supporters of “renewable energy zones” and “100 per cent renewables” want to avoid out of self-interest and to the undoubted long-term disbenefit of electricity users and taxpayers (ie all Australians).

In passing, I recently saw a great comment, in material that is not at this point publicly available, that “we can never find the right answers unless we ask the right questions.”  I’d like to daub that on the walls of the House of Representatives and the Senate.

In the case of a shift to allowing nuclear to be considered in the mix in Australia, there are two major questions – should it be permissible in today’s environment (which I think is a no-brainer) and the much more complex issue of costs, regulation and human resources to allow such development (which will only be addressed if the ban is consigned to the dustbin of history).

I know I am not alone in holding the view that as we go in to the post-Glasgow climate policy environment – which is likely to impact on national politics here, whatever the outcome – it would be a good idea with respect to our international standing (as well, of course, for our domestic welfare) to take the critical first step of removing the ban to allow in principle use of emissions-free small nuclear technology in Australia.

In some material that was shared with me in the past month I noted this strong point: creating real options is a prudent and well-established response to uncertainty.

Leaving aside the extra-ordinary uncertainties imposed on us by the Covid pandemic, we have on the east coast a major amount of uncertainty over the supply of both electricity and gas, exacerbated in a non-trivial way by politics and emotion running all over good policymaking.
Later in this decade, when we all hope Covid is no longer dominating our lives, we will not be free of NEM uncertainty (in a market with lots of variable renewables, an aged remnant of coal-burning generation and stretched networks) and we will need the best possible slate of infrastructure, regulation and operations management to keep risks to a minimum.

Including at least the option of nuclear on that slate is prudence; allowing it to be excluded because of a lack of political leadership is irresponsible.

Keith Orchison
30 July 2021