Coolibah Commentary

Issue 201, January 2022

What lies ahead? This ever-present question has special significance as we go in to the third year of the Covid pandemic, also a federal election year, and take more steps on the slippery net-zero path for the electricity sector even as the Australian economy draws benefit from continuing to be a major seller of coal and natural gas in to international markets battered by supply and cost crises as well as the vagaries of geopolitics. There is no reason to assume that ’22 will be any less tumultuous than 2021 nationally and on the global scene – and looming over the domestic energy supply scene is modelling, published by the Energy Market Operator in December, that canvasses a significant reduction in coal-fired generation in eastern Australia over the decade ahead.

Quotes

“All brown coal generation and over two-thirds of black coal generation could withdraw (from the NEM) by 2032” – the Australian Energy Market Operator in its draft “integrated systems plan.”

“By the mid-2040s, electricity supply is expected to be generated almost exclusively from renewable resources, with energy storages helping manage their seasonality and intermittency and peaking gas generation providing firming support” – AEMO.

“AEMO’s scenarios show profound disruption occurring in our grid as it transitions to a lower emissions profile” – Australian Energy Council CEO Sarah McNamara.

“AEMO has found that 10,000 kilometres of new transmission us needed to connect renewable generation to consumers” – Clean Energy Council CEO Kane Thornton.

“The Morrison government is funding new large-scale batteries to deliver Australian households and industry reliable and affordable electricity” – federal Industry Minister Angus Taylor.

“Continued rapid development of new large-scale and distributed renewable resources has helped improve the (NEM) reliability

outlook for summer 2021-22; however, very high demand concurrent with low variable energy generation may present a risk of insufficient supply meeting demand” – AEMO in its new “summer readiness plan.”

Summer lottery

The impact of weather variability on eastern Australia’s challenging summer power supply situation is highlighted in the Energy Market Operator’s seasonal “readiness plan” published in December.

The event of La Nina has reduced the risk of high temperatures, says the plan, but “extreme hot days, particularly if coupled with high humidity, create the highest stress on the electricity grid.”

The operator adds: “Continued rapid development of new large-scale and distributed renewable resources has helped improve the reliability outlook for summer 2021-22. However, very high demand concurrent with low variable energy generation may present a risk of insufficient supply.”

AEMO says that NEM households have installed another 2,600 megawatts of rooftop solar capacity in the past year despite the pandemic disruptions while there has also been 2,200 MW of wind and solar power added to the grid system.

Debt burden

Energy Consumers Australia says power and gas bills are a key pressure point for households suffering hardship during the Covid pandemic.

Reacting to the latest review of the retail market by the Australian Energy Regulator, the council’s CEO, Lynne Gallagher, says “We are seeing larger energy debts and more people owing money to their retailers – but the number of people placed on hardship support programs is falling.”

Gallagher declares that the way the supply system treats financially vulnerable people was a problem before the pandemic “and will remain a much larger problem after it unless we do something differently.” She is calling on retailers for “a mindset change” to help customers falling in to growing debt spirals.

Meanwhile, the Australian Competition & Consumer Commission published a new report in December showing that household electricity prices in the east coast market have fallen to the lowest level in eight years. The ACCC said it expected prices would continue to drop over the next 12 months as the impact of falling wholesale generations in the NEM over the past two years continues to flow through to consumers.

Who pays?

In a pointer to political argument when the 2022 federal election comes round, the Labor Party’s cost promises in the “Powering Australia” policy it will be taking to the polls came under questioning in December.

In response, the ALP’s Chris Bowen says “forecasts” by the Energy Market Operator “make a vast renewable expansion inevitable” and that low-cost loans (funded by the taxpayers) will reduce the impact of large-scale transmission development on user power bills. This, he asserts, will change the current regulatory rate-of-return situation factoring in high borrowing costs “and profits for network companies.”

Labor says it will have a $20 billion “rewiring the nation” fund to support an estimated $58 billion private sector investment in transmission.

The backdrop to the political debate is scenario modelling by the Energy Market Operator – which many persist in calling “forecasts” – canvassing an east coast market supplying some 330 terawatt hours by the middle of the century (up from 180 TWh now) almost solely from renewable energy. Included in the four scenarios considered in AEMO’s latest commentary is a further sharp rise in rooftop solar installations by the end of this decade continuing to 2050 – where the operator models almost a fifth of NEM supply coming from this source.

‘No regrets’

The Energy Users Association of Australia, which says its commercial and industrial member companies are “desperate” to see a national energy and climate change plan that puts downward pressure on electricity and gas costs, declares that the end result of current NEM activities “must not be too much investment too soon.”

Reacting to the latest AEMO market modelling, the EUAA says large integrated system investment proposals must be on a “no regrets” basis.

In a statement, the association adds: “It will require greater collaboration between industry, governments and regulators than we have ever seen before to navigate a least-cost pathway to net zero.”

EUAA’s comments are similar to those coming from the Australian Industry Group. CEO Innes Willox, responding to the ALP’s climate plan announcement, says “bending the arc of emissions reduction will require working both harder and smarter” in a call for better government co-ordination in this policy area.

Willox adds that “building a new energy advantage for Australia will be much harder if the NEM continues to fragment.”

Generation costs

CSIRO, in collaboration with AEMO, published its fourth “GenCost” draft report in December and is planning to issue a final edition in mid-2022.

Persisting in relying on levelized cost estimates (rather than total system costs), CSIRO says the latest modelling confirms its view that large-scale solar and wind farms are the cheapest sources of generation in Australia. And it claims: “This is true even when considering their additional integration costs such as energy storage and more transmission lines.”

CSIRO adds: “Without transmission or storage costs, variable renewables are the lowest-cost generation technology by a significant margin.”

The modelling estimates LCOE for solar PV at between $44 to $65 per megawatt hour – and between $45 and $57 for wind farms. By comparison, the report asserts, new gas-fired generation lies between $65 and $111 per megawatt hour.

CSIRO says that cost reductions for technologies such as solar thermal, plants using carbon capture and storage, small modular nuclear reactors and ocean energy “would require stronger domestic and global investment to realize their full potential.” It adds that the economics of offshore wind generation, while having great potential due to resource quality in Australia, are “not yet proven.”

Energy Connect

After three years of regulatory assessments, the high voltage project to link the South Australian and New South Wales grids – dubbed Energy Connect – has been sanctioned by the State government in Adelaide and now needs only federal approval.

The late-December decision is another key step towards allowing the $2.3 billion, 900 kilometres long line to be build by a joint venture of ElectraNet and Transgrid, who are hoping to be able to begin work on it early in 2022.

Think again

The Energy Security Board has resurrected the debate on a capacity mechanism for the eastern electricity market after the initial proposals ran in to opposition, including from State government, in 2021.

The ESB says “market arrangements that explicitly value capacity” are needed in an environment where earlier closure of older coal-burning power stations are being mooted and larger investment in intermittent power sources is being promoted.

The mechanism, it adds in a new discussion paper, is needed to “support existing plants where efficient” as well as to “encourage building new plants to deliver the least-cost transition.” It aims to finalize its capacity proposal by the end of 2022.

The ESB says that most of the existing coal generation will be replaced “during the next two decades” and between 26,000 and 50,000 megawatts of large-scale renewable power will be added to supply. It points to Energy Market Operator modelling that sees up to 19,000 MW of fast, dispatchable generation being needed in the NEM by 2040 for “firming” purposes.

Meanwhile, the NSW government has given planning approval to a $600 million gas-fired plant at Kurri Kurri in the Hunter Valley which the State Department of Planning, Industry & Environment says “will provide on-demand energy when the grid needs it and will operate on average two per cent over a year.”

The Kurri Kurri plant will be built and operated by Snowy Hydro, now wholly owned by the federal government. Construction is to start in 2022, with the plant in operation by mid-2023 ahead of the closure of the Liddell coal generator. It will be built on the site of a former aluminium smelter, now demolished.

Pushing Marinus

The Tasmanian government has sprung on the latest AEMO modelling of the eastern Australian market transition to promote its “Battery of the Nation” and Marinus Link proposals.

Energy Minister Guy Barnett points to the operator’s latest “integrated system planning” report featuring the 1,500 MW capacity Marinus interconnector across Bass Strait as “a key part of ensuring the lowest-cost transition to renewable energy.”

AEMO says the interconnector should be built “as soon as possible.” The current proposal is for the first of two undersea lines to be commissioned by 2029. The overall current capital outlay on the development is currently estimated at $3.5 billion.

Barnett says Tasmania is “perfectly placed” to deliver low cost, reliable clean energy to the mainland and the project will provide a “much-needed economic stimulus” for the State.

Nuclear option

If 2022-23 turns out to be the time Australia’s body politic started taking a role for nuclear power seriously, a small publication from the University of Queensland may be an important influencing factor.

The 44-page report – “What would be required for nuclear energy plants to be operating in Australia in the 2030s?” – is the outcome of a study by seven researchers led by professor Stephen Wilson, head of the university’s Centre for Energy Futures.

It proposes that the federal government sponsor a scoping study to evaluate the range of choices for Australia to prepare to be in a position to adopt nuclear energy.

In a foreword, UQ chancellor Peter Varghese comments that there is no single correct answer to the question of what is the best combination of technologies to provide for reliable emissions-free electricity generation for Australia at affordable cost. “But,” he says, “if we are to have any chance of arriving at workable answers we must be prepared to examine critically the various options.”

The Australian prohibition of nuclear energy reflects the concerns of a past time, he adds, “but does it still make sense for our times when climate change is a more urgent issue and where today’s modern, more compact engineering designs, especially small modular reactors, have reframed safety and security concerns?”

The report comments: “A fleet of SMRs of up to 20 GW capacity would provide for a gradual, managed replacement of the retiring 20th Century coal fleet without unwelcome economic shocks or deterioration of reliability standards and eliminate the majority of electricity sector carbon dioxide emissions. In such a scenario, most of the problematic system operation and market design issues that the AEMC, AEMO and the Energy Security Board are struggling to resolve would tend to reconcile with fewer technical challenges.”

Meanwhile The Australian newspaper reports that a new public survey published by Omnipoll has found that 48 per cent of respondents support the use of nuclear power in this country while 33 per cent oppose the idea.

‘Disappointed’

The Australian Petroleum Production & Exploration Association says it is “disappointed” by a federal government decision to ban the search for gas offshore New South Wales.

The government has refused to renew a permit to explore 4,575 square kilometres in an area between Newcastle and Sydney’s northern beaches.

Prime Minister Scott Morrison says the government “has listened to the concerns of local Liberal MPs and candidates and their communities from Newcastle to Wollongong and we’re putting our foot down.”

He says: “Gas is an important part of Australia’s current and future energy mix but this is not the right project for these communities and pristine beaches and waters.”

Meanwhile APPEA is pointing out that its industry has announced $27 billion in oil, gas and LNG projects onshore and offshore Australia in the past 12 months.

Offshore wind

Plans to develop two floating wind farms, with a combined capacity of 3,000 megawatts, off the coast of New South Wales have been unveiled.

A joint venture of Australian and Spanish companies wants to locate a 1,400 MW wind farm off the coast south of Newcastle and is also looking at siting a 1,600 MW farm off the Illawarra coast near Wollongong.

Last word

For the past decade, local activists have been prone to point to Germany as a prime example for pursuit of a decarbonizing transition in electricity supply and the Merkel-led administration got still more plaudits for simultaneously shuttering its nuclear energy operations in the wake of the Fukushima tsunami.

The green chorus are not singing songs of praise now because the German power situation is a rolling mess – even as the post-Merkel government, which includes the Greens, presses on with nuclear shutdowns and simultaneously presses forward with a major gas supply arrangement with Russia.

Ironically, as Merkel was stepping away from the leadership, official data for July to September showed coal, gas and nuclear generation meeting almost 55 per cent of the country’s power needs for the quarter at a time when consumer prices were at one of their highest levels.

The German situation is but part of a series of tales of energy woe around the world in 2021 that will carry on in to 2022 (put “energy crisis in to Google News and you will find more than 89 million current entries). The point, from a local perspective, is that, for consumers, there is a clear indication of an ugly side to the great green crusade.

This is particularly important here because 2021 was also the year in which there was something of a sea change in the “carbon war” – with the Liberal Party, driven by voter sentiment and a big business decision to embrace net zero policies, rather changing its tune. Unlike the Abbott era, the significant policy issue with respect to energy in the upcoming federal election will be which side of politics can better manage the transition.

This is why is it will be unwise to ignore the “energy crunch” lessons from elsewhere.

From Texas, for example, where last February’s cold weather blackout saw the state’s power grid come close to collapse due to both a lack of gas supply and the fact that most of $US66 billion worth of wind and solar projects were unavailable.

Then there is the broad, and ongoing crisis in Europe generally, where sky-rocketing energy prices are flowing from under-investment in fossil fuel production, over-investment in weather-dependent wind and solar power plus rising dependence on imported gas, notably from Russia.

This caused the leading, US-based share analyst website Seeking Alpha to opine that “the crisis risks the permanent shutdown of the EU’s petrochemicals industry – and other industries also suffering, risking a severe deterioration of economic fundamentals (with) economic hardship exacerbating already wide rifts within the EU.”

As another overseas commentator put it, “the commitments to greenifying Germany’s are noble….. unfortunately they also appear ill-timed” in an environment where the EU more broadly faces the threat of rolling power blackouts if the northern winter is especially cold. And Bloomberg news agency summed it up: “Europe’s energy ambitions are clear – to shift to a low-carbon future by remaking its power generation and distribution systems – but the present situation is an expensive mess.”

Now, from an Australian perspective, the point at issue here is not railing against the national policy shift to a lower-carbon economy (which is a darned sight easier to promise than it is to deliver) but to underscore the risks in driving down this road without due care and attention to energy supply reliability and affordability.

Our citizenry (and our political leadership) has a well-entrenched habit of taking electricity and gas supply for granted – until there are sudden nasty problems.

Elsewhere in this newsletter, there are several examples of the real and growing uneasiness among Australian industry consumers about how the local version of the transition is being planned and executed. States going their own way on this route rather than taking a coherent NEM-wide approach are a not insignificant part of the problem.

The huge distraction of the pandemic for governments is a factor, too. There is no argument with the need for this to be the paramount issue for attention here and now, but there will be a tomorrow when the pandemic falls back to a lesser priority – and that, later this decade, is where the insouciance of the energy transition could come back to bite us all.

One of the political wisecracks from the US is the ability (or otherwise) of some in government to walk and simultaneously chew gum; it’s a little thought to bear in mind as we skip forward on the green brick road.

Keith Orchison

2 January 2022

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