It should first be noted that, despite the many headlines citing his involvement, Australia’s Chief Scientist Alan Finkel did not actually write the report. The report is by the Australian Council of Learned Academies (ACOLA), an independent, not-for-profit organisation that brings together Australian academics to provide evidence-based solutions to national and global policy problems. Yes, funding was provided by the Office of the Chief Scientist, and yes, Finkel himself has been supportive of the report, but describing it as a “new Finkel report” is stretching things a little.
The report explores how much energy storage – whether in batteries, pumped hydro or solar thermal – we will need as we increasingly rely on renewable, and therefore intermittent, electricity generation. As more renewable generation enters the system, there needs to be alternative sources of generation, such as storage, that can meet demand when the sun isn’t shining or the wind isn’t blowing.
The ACOLA report finds that only a small amount of storage would be required to balance a system with 50% renewables. Cue the political debate about the quality of the electricity market modelling that ACOLA relied on to make this finding.
There is far too much focus on electricity market modelling in Australia these days – particularly regarding renewable energy. Finkel’s policies are distrusted and dismissed by people on one side of the debate because they believe his modelling shows too high a level of renewables. And the Coalition’s National Energy Guarantee (NEG) is distrusted and dismissed by people on the other side of the debate because they say it shows too low a level of renewables.
This debate rages on even though no modelling has been revealed; the federal government has promised to unveil the modelling behind the NEG at a meeting of the COAG Energy Council this Friday.
The truth is, modelling is an inexact science. The outcomes depend on the assumptions you use and the data you shove in. This is why the results for Finkel and the NEG will differ so much, despite them using the same emissions reduction targets and using emissions reduction mechanisms that impact the market in very similar ways.
As it happens, I have limited confidence that you need only a little storage with 50% renewables but a lot of storage at 75% renewables, as ACOLA’s report claims. But the specifics are not important. What is important is that Australia will need something to balance intermittent renewables – and at some point, we will need quite a lot of balancing.
The most important aspect of the ACOLA report is that it brings into focus an unavoidable fact: Australia has serious problems with its electricity system. System security – making sure that the system doesn’t break – is an immediate concern. Reliability – ensuring the system has enough power to meet demand – is a growing problem. And energy storage is a potential solution to both.
Without the right policy settings to address reliability and security concerns, storage will have no chance of helping to fix our energy mess, regardless of the quality of ALOCA’s modelling.
Our politicians need to focus on the substance of this debate, rather than the headlines. Hitting each other over the head because there are too many – or too few – renewables in the policy basket is pointless and will ultimately prove self-defeating. Instead, how about finding an actual policy solution? Starting at this Friday’s COAG Energy Council meeting. Please?
The big questions about Malcolm Turnbull’s energy policy will be, for consumers, what it would mean for their bills and, for business, how confident it can be that the approach would hold if Bill Shorten were elected.
The government needs to convince people they’ll get some price relief, but even as Turnbull unveiled the policy the rubbery nature of the household savings became apparent.
Crucially, the policy aims to give investors the certainty they have demanded. But the risk is this could be undermined if Labor, which is well ahead in the polls, indicated an ALP government would go off in yet another direction.
And most immediately, there is also the issue of states’ attitudes, because their co-operation is needed for the policy’s implementation. Turnbull talked to premiers after the announcement, and the plan goes to the Council of Australian Governments (COAG) next month.
Turnbull describes the policy as “a game-changer” that would deliver “affordability, reliability and responsibility [on emissions reduction]”.
Unsurprisingly – given it would end the subsidy for renewables, rejecting Chief Scientist Alan Finkel’s recommendation for a clean energy target – the policy sailed through the Coalition partyroom with overwhelming support.
Finkel later chose to go along with it rather than be offended by the discarding of his proposal. The important thing, he said, was that “they’re effectively adopting an orderly transition” for the energy sector, which was what he had urged.
In the partyroom Tony Abbott was very much a minority voice when he criticised the plan; his desire for a discussion of the politics was effectively put down by a prime minister who had his predecessor’s measure on the day.
The policy – recommended by the Energy Security Board, which includes representatives of the bodies operating and regulating the national energy market – is based on a new “national energy guarantee”, with two components.
Energy retailers across the National Electricity Market, which covers the eastern states, would have to “deliver reliable and lower emissions generation each year”.
A “reliability guarantee” would be set to deliver the level of dispatchable energy – from coal, gas, pumped hydro, batteries – needed in each state. An “emissions guarantee” would also be set, to contribute to Australia’s Paris commitments.
According to the Energy Security Board’s analysis, “it is expected that following the guarantee could lead to a reduction in residential bills in the order of A$100-115 per annum over the 2020-2030 period”. The savings would phase up during the period.
When probed, that estimate came to look pretty rough and ready. More modelling has to be done. In Question Time, Turnbull could give no additional information about the numbers, saying he only had what was in the board’s letter to the government.
So people shouldn’t be hanging out for the financial relief this policy would bring. Although to be fair, Turnbull points to the fact it is part of a suite of measures the government is undertaking.
Business welcomed the policy, but made it clear it wanted more detail and – crucially – that it is looking for bipartisanship.
The Australian Chamber of Commerce and Industry said the policy’s detail “and its ability to win bipartisan and COAG support will be critical”. Andy Vesey, chief executive of AGL, tweeted that “with bipartisan support” the policy would provide investment certainty.
The Australian Industry Group said it was “a plausible new direction for energy policy” but “only bipartisanship on energy policy will create the conditions for long-term investment in energy generation and by big energy users”.
It’s not entirely clear whether the government would prefer a settlement or a stoush with the opposition on energy.
Turnbull told parliament it had arranged for the opposition to have a briefing from the Energy Security Board, and urged Labor to “get on board” with the policy.
But Labor homed in on his not giving a “guarantee” on price, as well as the smallness of the projected savings. Climate spokesman Mark Butler said it appeared it would be “just a 50 cent [a week] saving for households in three years’ time, perhaps rising to as much as $2.00 per week in a decade”.
But while the opposition has gone on the attack, it is also hedging its bets, playing for time.
“We’ve got to have … some meat on the bones,” Butler said. “Because all the prime minister really announced today was a bunch of bones.”
“We need detail to be able to sit down with stakeholders, with the energy industry, with big businesses that use lots of energy, with stakeholder groups that represent households, and obviously state and territory governments as well, and start to talk to them about the way forward in light of the announcement the government made today,” he said.
The initial reaction from state Labor is narky. Victorian Premier Daniel Andrews said it seemed Finkel had been replaced by “professor Tony Abbott as the chief scientist”, while South Australia’s Jay Weatherill claimed Turnbull “has now delivered a coal energy target.”
These are early days in this argument. Federal Labor will have to decide how big an issue it wants to make energy and climate at the election. Apart from talking to stakeholders and waiting for more detail, it wants to see whether the plan flies at COAG.
If it does, the federal opposition could say that rather than tear up the scheme in government, it would tweak it and build on it. That way, Labor would avoid criticism it was undermining investment confidence.
But if there is an impasse with the states and the plan is poorly received by the public, the “climate wars” could become hotter.
The new plan, called the National Energy Guarantee, will require electricity retailers to make a certain amount of “dispatchable” power available at all times, and also to reduce the electricity sector’s greenhouse emissions by 26% relative to 2005 levels by 2030.
The government says it will save the average household up to A$115 a year after 2020, while also ensuring reliability. Below, our experts react to the new policy.
“The federal government will be even less important in energy policy”
Alan Pears, Senior Industry Fellow, RMIT University
Business, state governments and the energy industry have been clamouring for more certainty from the federal government. Now they have it: the federal government will be even less important in shaping energy and climate policy than in the past, leaving states and territories, local government, business and households to focus on driving the energy revolution and cutting emissions.
The new policy will impose a reliability obligation on energy retailers, who will presumably have to select an appropriate mix of energy suppliers to meet it, and the devil will be in the detail. If the required proportion of dispatchable electricity is reasonable, and if retailers and new renewable energy generators are free to decide how to deliver it, then the cost and difficulty of compliance may be modest.
For example, retailers and generators could piggyback on the demand response capacity volunteered for the ARENA Demand Response project. This could help accelerate the rollout of a variety of energy storage solutions, in turn reducing the market power of the big generators and driving down energy prices.
On the other hand, if the options are limited, the obligation could increase the market power of the gas industry, meaning no relief from high wholesale prices.
It will also be interesting to see if the obligation is applied across all new generation. If so, it could significantly increase the cost of new coal generation, as retailers would have to cover the risk of failure of a large generation unit, as well as managing its slow response to changing demand.
“Australia’s electricity sector can cut emissions more”
Anna Skarbek, Chief Executive, ClimateWorks Australia, Monash University
The key question is whether the emissions guarantee will be strong enough for Australia to meet its current and future climate obligations under the Paris Agreement.
Electricity creates more than one-third of Australia’s total emissions. If we don’t reduce the emissions in our electricity, then we don’t unlock other emissions reduction opportunities such as electric vehicles.
If the National Energy Guarantee aims at cutting emissions by only 26% by 2030 then other sectors across the economy would have to make greater emissions
But our research shows that Australia’s electricity sector can cut emissions by 60% below 2005 levels by 2030. Harnessing this potential will help us to reach future targets that progressively increase under the Paris Agreement.
If you don’t achieve deep emissions reductions in the electricity sector, a major strengthening of policy will be needed for the other sectors where there is less momentum currently. For example, stronger action would be needed in transport, buildings, industry and land.
Australia’s climate policy, which is being reviewed before the end of the year, will need to cover more than just the electricity sector. Other measures should include the introduction of vehicle emissions standards, a more stringent
national building code, a dramatic improvement in the uptake of energy efficiency measures across industry and stronger incentives for reforestation.
How the reliability guarantee will work
Dylan McConnell, Researcher at the Australian German Climate and Energy College, University of Melbourne
Under the NEG retailers are responsible for ensuring continuous supply of energy. But retailers don’t always generate the energy they sell. In order to meet the NEG’s reliability obligation retailers will most likely enter into cap contracts with generators.
Unlike other kinds of contracts, which impose a fixed price, cap contracts only come into play when high demand pushes energy prices over a certain pre-agreed level. At that point, generators with flexible dispatchable power guarantee that they will provide extra energy.
The extreme peaks, where the price heads to A$14,000 per megawatt hour – only come a couple of times a year, if at all. To compensate generators for building all that extra capacity, retailers pay a daily premium. Cap contracts essentially act as insurance: they protect retailers from extremely high prices during intense demand, and they offer generators the chance of steep profits.
Cap contracts are a standard part of the market, and retailers already used them to manage their risk exposure. The Energy Security Board has said:
This reliability guarantee would require retailers to hold forward contracts with dispatchable resources that cover a predetermined percentage of their forecast peak load.
If the new reliability standards are in line with retailers own internal guidelines, the impact on the market should be minimal. But if the government imposes higher standards, retailers will have to purchase more cap contracts (or build their own dispatchable power plants).
If demand for cap contracts increase, it would most likely encourage investment in gas and hydro power plants.
The most important thing to understand about the federal government’s new National Energy Guarantee is that it is designed not to produce a sustainable and reliable electricity supply system for the future, but to meet purely political objectives for the current term of parliament.
Those political objectives are: to provide a point of policy difference with the Labor Party; to meet the demands of the government’s backbench to provide support for coal-fired electricity; and to be seen to be acting to hold power prices down.
Meeting these objectives solves Prime Minister Malcolm Turnbull’s immediate political problems. But it comes at the cost of producing a policy that can only produce further confusion and delay.
The government’s central problem is that, as well as being polluting, coal-fired power is not well suited to the problem of increasingly high peaks in power demand, combined with slow growth in total demand.
Coal-fired power plants are expensive to start up and shut down, and are therefore best suited to meeting “baseload demand” – that is, the base level of electricity demand that never goes away. Until recently, this characteristic of coal was pushed by the government as the main reason we needed to maintain coal-fired power.
The opposite of baseload power is “dispatchable” power, which can be turned on and off as needed.
Coal-fired plants can be adapted to be “load-following” which gives them some flexibility in their output. But this requires expensive investment and reduces the plants’ operating life. The process is particularly ill-suited to the so-called High Efficiency, Low Emissions (HELE) plants being pushed as a solution to the other half of the policy problem, reducing carbon dioxide emissions.
Given that there is only limited capacity to expand hydro (Turnbull’s Snowy 2.0 is years away, if it ever happens) and that successive governments have made a mess of gas policy, any serious expansion of dispatchable power would realistically need to focus on batteries. The South Australian government reached this conclusion some time ago, making a decision to invest in its own battery storage. That move was roundly condemned by the federal government, which at the time was still focused on baseload.
The government’s emphasis on baseload was always mistaken, but the confusion and noise surrounding energy policy meant that few people understood this. That changed in September when the Australian Energy Market Operator (AEMO) reported that Australia’s National Electricity Market faced a capacity shortfall of up to 1,000 megawatts for the coming summer, and that older baseload power stations will struggle to cope.
Clearly this situation called for more flexibility in dispatchable sources in the short term, and widespread investment in dispatchables for the long term.
A question of definition
Obviously, this presented Turnbull with a dilemma. The policy advice clearly favoured dispatchables, but vocal members of his backbench wanted a policy to subsidise coal.
This is not an entirely new approach. Before the government decided to abandon the proposed Clean Energy Target it put a lot of effort into redefining coal as “clean”. The approach here involved creating confusion between carbon capture and storage (CCS) and HELE power stations. CCS involves capturing carbon dioxide from power station smokestacks and pumping it underground, thereby avoiding emissions. This would be a great solution to the problems of carbon pollution if it worked, but unfortunately it’s hopelessly uneconomic
By contrast, HELE is just a fancy name for the marginal improvements made to coal-fired technology over the 30-50 years since most of our existing coal-fired plants were designed and built. The “low” emissions are far higher than those for gas-fired power, let alone renewables or, for that matter, nuclear energy (another uneconomic option).
The core of the government’s plan is a requirement that all electricity retailers should provide a certain proportion of dispatchable electricity – a term that has now been arbitrarily defined to include coal. By creating a demand for this supposedly dispatchable power, the policy discourages the retirement of the very coal units that AEMO has identified as ill-suited to our needs.
Given that the policy is unlikely to survive beyond the next election, it’s unlikely that it will prompt anyone to build a new gas-fired power station, let alone a coal-fired plant. So the only real effect will be to discourage investment in renewables and create yet further policy uncertainty.
This undermines the basis for the (unreleased) modelling supposedly showing that household electricity costs will fall. These savings are supposed to arise from the investment certainty resulting from bipartisan agreement. But the political imperative for the government is to put forward a policy Labor can’t support, to provide leverage in an election campaign. If the government had wanted policy certainty it could have accepted Labor’s offer to support the Clean Energy Target.
It remains to be seen whether this scheme will achieve the government’s political objectives. It is already evident, however, that it does not represent a long-term solution to our problems in energy and climate policy.
The Turnbull government has announced its new energy policy, called the National Energy Guarantee (NEG). The NEG contains two new obligations on electricity retailers. The first is to ensure we have enough electricity generation available to meet our needs (the Reliability Guarantee). The second is to drive down the sector’s greenhouse emissions (the Emissions Guarantee).
No, it’s not Chief Scientist Alan Finkel’s Clean Energy Target. But it is a policy that will drive down emissions in the electricity sector after 2020 and can be adapted by the Labor Party to hit the emissions-reduction target of any future Labor government.
In other words, the NEG can offer the previously elusive prospect of a bipartisan and credible emissions reduction policy, of the kind that industry has been crying out for.
What is the Emissions Guarantee?
Under the Emissions Guarantee, retailers will be required to buy or generate electricity with a set level of emissions intensity – the tonnes of carbon dioxide emitted per megawatt hour – each year. The allowable level of emissions intensity will be reduced each year, to stay in line with Australia’s Paris climate target.
To meet this obligation, retailers will probably build or purchase their own generation assets, or sign contracts with other generators. Over time, retailers’ portfolios will become cleaner and cleaner, as new low-emission generators are built and more high-emission generators are shut off.
There are several benefits to this scheme. Australia’s emissions targets for the electricity sector should be met. And the scheme can theoretically be ramped up to meet more challenging targets over time, simply by lowering the emissions intensity limit for retailers.
It should also be reasonably cost-effective. Rather than the government imposing quotas or limits for various types of technology, retailers will be given a free hand to pick the cheapest mix of generation that will meet their emissions obligations. It is genuinely technology-neutral.
This makes the Emissions Guarantee superior to Finkel’s Clean Energy Target. The CET would have acted as a mechanism to push clean energy technologies into the system, but it would not have cared which generators left the market as a consequence.
Under a CET, a black coal generator could leave the market instead of a higher-emitting brown coal generator, if the black coal generator produced more expensive electricity. Then even more low-emission generation would have to be built to meet the target.
The Emissions Guarantee overcomes this problem. The important outcome is that the mix of generation meets a level of emissions intensity. This can be achieved by pushing in low-emissions generation and/or by pushing out high-emissions generation. The outcome will be similar to that of an emissions intensity scheme: lower levels of renewables than under other schemes, but a cheaper way to reduce emissions.
There are downsides to this approach. First, like an emissions intensity scheme and the CET, the Emissions Guarantee is not linked directly to the absolute emissions that need to be abated if Australia is to meet its Paris targets. But this problem can be overcome if the mechanism allows some flexibility around the setting of the emissions intensity target – which it appears to do.
Nor is the scheme integrated fully with the wholesale energy market – the National Electricity Market (NEM). As a result, it could produce some perverse outcomes in the NEM, where some regions have too much of particular types of generation.
What is the Reliability Guarantee?
This is where the other part of the policy comes in. Under the Reliability Guarantee, retailers will be required to contract (or own) a certain amount of “dispatchable” generation – electricity that can be switched on at will – to meet demand in each state.
The Reliability Guarantee appears to be a type of “capacity mechanism”, aimed at ensuring that generation can always meet demand. It appears to be consistent with the “retailer capacity obligation” proposed in a Grattan Institute report last month.
Many of the precise policy details are yet to be worked out – not least the precise definition of “dispatchable generation” under this scheme. But the hope is that it will ensure all NEM states have sufficient electricity supply. Avoiding any repeat of last summer’s blackouts and shortages has become a political imperative.
While reliability might be guaranteed under the new policy, it should be remembered that capacity mechanisms tend to be both complex and costly. The devil will of course be in the detail. But the fact the government has chosen to impose the obligation on retailers suggests the market will be given the opportunity to find the least-cost solutions to our reliability needs.
A way forward?
So the retailers will now be responsible both for delivering our emissions reductions and for making sure that the lights stay on. These obligations will strengthen the incentives for retailers to own their own generation assets, rather than being hostage to wholesale prices. The issues raised by ACCC boss Rod Sims relating to the power of the big gentailers now have increased importance.
The National Energy Guarantee is not the best policy solution. A carbon price imposed on electricity generators may have avoided the need for either of the two “guarantees” contained in the NEG. But the political reality is that a carbon price of any sort is not going to be adopted in Australia any time soon.
So this is not a perfect solution, but it is better than what we have now. And importantly, it is supported by all members of the newly formed Energy Security Board. Opportunity knocks for this nation’s politicians.
The federal government today announced its long-awaited energy policy. As expected it has scrapped the Clean Energy Target proposed by Chief Scientist Alan Finkel, and has instead adopted a National Energy Guarantee, which focuses on ensuring electricity supply and putting downward pressure on energy prices.
The government is set to unveil its long-awaited energy plan that would scrap subsidies for renewables and impose obligations on power companies to source a certain proportion of “reliable” supply.
While the plan emphasises reliability and reducing power prices, the government is also confident it would allow Australia to meet its commitments under the Paris climate change agreement.
Cabinet considered the scheme on Monday night. It goes to the Coalition partyroom on Tuesday morning, before being announced later in the day.
It follows months of uncertainty and internal pressures within the Coalition over the future of energy policy, as the government battles to head off the risk of blackouts as well as to quell mounting voter anger at soaring bills.
In a report released on Monday the Australian Competition and Consumer Commission said residential electricity prices have increased by 63% on top of inflation in the last decade, with network costs being the major contributor.
As the government has flagged for a week, its plan rejects the clean energy target recommended in June by Chief Scientist Alan Finkel, to which Malcolm Turnbull initially appeared favourably disposed.
Ironically, the alternative scheme has been worked up by the Energy Security Board, a new body that was established on a recommendation from the Finkel inquiry.
Under the scheme, power companies would have twin obligations imposed on them by the government.
They would be required to get a certain amount of power from “reliable” sources – whether coal, gas, hydro, or batteries.
They would also have to source another amount that was consistent with lowering emissions in line with Australia’s international commitments. Australia has signed up to reducing greenhouse gas emissions to 26–28% below 2005 levels by 2030.
It would be up to the companies as to how they met the obligations put on them.
The plan assumes that prices would be driven down because the scheme would give the certainty that investors have been looking for, so supply would increase.
The Coalition party meeting will be given an estimate of the expected savings on power bills, which would be more than the A$90 annual household saving estimated under the Finkel target.
The scheme is expected to appeal to the right in the Coalition because there are no subsidies for renewables, making for a level playing field – coal is treated the same as wind and solar.
The present renewable energy target would continue until its expiry in 2020, after which there would be no new certificates issued under it.
The Energy Security Board has on it an independent chair, Kerry Schott, and deputy chair, Clare Savage, as well as the heads of the Australian Energy Market Operator (AEMO), the Australian Energy Regulator, and the Australian Energy Market Commission.
The ABC reported that Drew Clarke, a former chief-of-staff to Turnbull and former head of the communications department, will become AEMO’s chair. This would be an appointment by the Council of Australian Governments.
In Question Time, Opposition Leader Bill Shorten accused Turnbull of “caving in” to Tony Abbott by rejecting a clean energy target.
Turnbull said the government “will deliver a careful energy plan based on engineering and economics, designed to deliver the triple bottom line of affordability, reliability and meeting our international commitments. And that is in stark contrast to the ideology and the idiocy that have been inflicted on us for years by the Australian Labor Party.”
Abbott, speaking on 2GB, said that “we’ve got a big policy problem” that needed to be addressed. This included “continued heavy subsidies for unreliable power”, lack of new coal-fired baseload power, bans on gas and a lack of incentives for farmers to go along with gas development, and bans on nuclear power.
Abbott said the problem over the last few years was that “we haven’t been running a system for affordability and reliability, we’ve been running a system to reduce emissions. It’s given us some of the most expensive power in the world and this is literally insane, given that we are the country with the largest readily available reserves of coal, gas and uranium.”
Monday’s Newspoll found that 63% thought taxpayer-funded subsidies for investment in renewables should be continued; only 23% thought they should be removed. But 58% said they would not be prepared to pay any more for electricity in order to implement a clean energy target to foster more renewable energy sources.
Disclaimer: This article does not reflect my views about effective energy policy, which would ideally be comprehensive and deliver deep emissions reductions. Rather, this column explores what options might be attractive to our present prime minister and energy minister.
The energy melodrama continues to escalate. According to some interpretations, renewables are now so cheap that they don’t need any subsidy. Meanwhile, business concerns about energy policy uncertainty are reaching a crescendo, while voters see a government bumbling in the opposite direction to what much of the public actually wants.
Nevertheless, the existing Renewable Energy Target (RET) needs replacement, not least because it only runs until 2020 anyway. It is also too simple: it does not incentivise “dispatchable” renewable energy – that is, technologies that include energy storage to stabilise a grid that depends on intermittent renewables. To be fair, we need to remember that the current RET model was first proposed in 1997 and introduced by the Howard government, in a very different situation.
So we do need a new energy target in some form. A well-designed target will decline in cost as competition and innovation do their work; it would be an effective policy tool to support emerging activities. We might think of it as a government endorsement that helps to focus both industry and consumers. Some degree of certainty is needed to underpin investment. And, as I explain later, a well-designed approach improves system reliability and stability.
So how does the government encourage reliable, affordable, cleanish electricity supply while also meeting its other apparent criteria of supporting coal and not boosting renewable energy “too much”? On top of that, how does it deal with high gas prices, which increase the cost of gas-fired generation? And support Snowy 2.0? It’s a wicked problem.
A dispatchable reliable energy target – a DRET – could be an attractive solution to a government in trouble. Superficially, it sounds like just a tweak of the popular RET. It mentions the right buzzwords. It could include incentives for “baseload coal”. It might even pass through the Senate.
It’s worth noting that the present RET certificate price was trending down nicely towards zero – until the Abbott government tried to kill it off and investment collapsed. Renewable certificate prices (actually Large Generation Certificates, or LGCs) had fallen below A$30 due to competition. The Abbott government’s own review found that renewable energy was pushing down wholesale electricity prices by about as much as the cost of the certificates. The scheme was functioning effectively as a cheap net incentive for large-scale renewable energy.
Meanwhile, the price for Small Technology Certificates (STCs) that subsidise rooftop solar on voters’ homes has remained high, but has been politically untouchable.
DRET design options
Under a DRET, variable renewable energy projects would need to incorporate or partner with facilities that could store energy, stabilise voltage and frequency, and help restart after a blackout. As the present energy market provides weak signals for these, and they would cost extra, the rationale for a subsidy exists, even for coal-supporting MPs who want to be re-elected. So the subsidy would shift from the energy source, to the delivery of reliable supply.
Another important question is how incentives can be delivered in ways that support efficient market operation. The present RET certificate approach sends a price signal, but leaves qualifying generators exposed to risk from varying wholesale electricity and certificate prices.
Alternatives such as reverse auctions linked to long-term contracts focus on competitive bidding as the “market” dimension of the subsidies. The successful bidders would also face market forces as they bid their output into the competitive wholesale market.
Reverse auctions potentially provide long term stability for service providers and consumers. These could be traditional Power Purchase Agreements, or the ACT government’s “contract for difference” approach. These approaches could be applied to energy efficiency measures and demand-side options.
Extra features, such as local job creation and grid stabilisation, can be included in long-term contracts, as we have seen in state government programs in the ACT and, recently, Victoria.
An advantage of the reverse auction approach for a government is that it can be tweaked in response to changes in technologies, cost trends, demand and market rules, as we have seen with the Emission Reduction Fund.
Where to for coal?
As I look at the future of coal, I can’t help but be reminded of the famous comment by a Saudi sheikh in the 1970s: the stone age didn’t end because we ran out of stones.
In a DRET model, new coal plant proposals could bid like other generators. But they would confront their own challenges to provide comprehensive services and meet potential extra requirements built into auctions, such as employment in a wide range of sectors and across broad geographical areas.
Coal plant is not “fast response”, so it may also need storage to meet response requirements. Also, each coal generation unit is large, so a failure at a critical time might not meet dispatchability and reliability criteria without support from other generators, demand response, storage or other solutions.
The climate elephant
A DRET would not actively address climate policy: this exclusion seems to be necessary for any energy policy to survive the Coalition party room. However, it is still likely to help to cut emissions. Future auctions could incorporate a carbon intensity or other climate dimension. And it would provide some certainty for investors in energy solutions.
A DRET would operate in a complex environment, where state and local governments, businesses, communities and individuals, and even the Commonwealth government, will continue to act to achieve their own objectives, including climate response.
Australia’s energy market is a prominent fixture in our daily news cycle. Amid the endless ideology and politics swirling around the sector, technical terms such as “baseload power” and “dispatchable generation” are thrown around so often that there is a danger the meaning of these terms can get lost in the public debate.
The term “energy crisis” is bandied around quite loosely with some confusion around whether the crisis is about prices or security of supply. The politics of this are infernal and largely avoidable if all sides of politics had paid consistent and principled attention to energy policy over the 20 years since the formation of the National Energy Market.
It’s worth setting the record straight on the meaning of some of these terms and how they relate to climate policies, new technologies and the progression of market reform and regulation in Australia.
This glossary, which is by no means exhaustive, is a first step.
Baseload power refers to generation resources that generally run continuously throughout the year and operate at stable output levels. The continuous operation of baseload resources makes economic sense because they have low running costs relative to other sources of power. The value of baseload plants is mostly economic, and not related to their ability to follow the constantly varying system demand.
Baseload plants include coal-fired and gas-fired combined-cycle power plants. However, Australia’s international commitment to reduce carbon emissions is curtailing the economic viability of traditional baseload sources.
Wholesale market (the “National Energy Market”)
The term National Energy Market is confusing because it refers to a competitive market for wholesale energy mostly on the east cost of Australia. It doesn’t include Western Australia or the Northern Territory and also includes the gas system. The National Energy Market allows all kinds of utility-scale power resources to connect to transmission system to meet large-scale power requirements.
However, industry talk about the “energy market” or even the “NEM” can also refer to the entire supply chain that includes the networks for voltage transmission, and medium- and low-voltage distribution as well as the retailing to the end consumer. The prices consumers see include all these aspects of the supply chain. This can add significantly to confusion.
The wholesale market is referred to as a “market” because there is competition between generators. Each generator places daily price “bids” to sell power and adjusts quantities in up to 10 price bands every five minutes. In this way, the sale of power is matched to the available energy and performance of the generating unit.
The market works to efficiently dispatch all variable and “dispatchable” resources to minimise the cost of electricity. The Australian Energy Market Operator (AEMO) co-ordinates the National Energy Market.
The wholesale “spot” price at which power is traded in the NEM is based on the highest accepted generator offers to balance supply and demand in each region. This is intended to encourage efficient behaviour by generators, as well as to co-ordinate efficient directing of resources.
Storage refers to energy captured for later use, typically in a battery. Electricity has been expensive to store in the past, but the cost of storage is expected to continue to fall with the improvement of battery technologies. For example, lithium-ion batteries were developed for mobile communications and laptops but now are being upscaled for electric vehicles and utility-scale energy storage.
Due to traditionally low storage levels in the system, electricity has to be mostly generated within seconds of when it is needed, otherwise the stability of the system can be put at risk. Storage technology will become more valuable as the market penetration of wind and solar power increases. With declining costs of various battery technologies, this will become easier to deliver.
Demand (and peak demand)
Demand refers to the amount of electricity required to meet consumption levels at any given moment. Power refers to the rate of energy consumption in megawatts (millions of Watts, or MW), whereas energy in megawatt-hours (MWh) refers to the total consumption over a period, such as a day, month or year.
Peak demand is the highest rate of energy consumption required in a particular season, such as heating in winter or cooling in summer. It is a vital measure because it determines how much generation equipment is needed to cover for unexpected outages and maintain reliable supply.
Dispatchable generation refers to a type of generation based on fossil fuels or hydro power that can be controlled to balance electricity supply and demand. More flexible power plants based on natural gas firing (such as open-cycle gas turbines or hydro power plants) can operate at partial loading and respond to short-term changes in supply and demand.
Flexibility is the key here. Storage can provide flexibility as well, either from batteries or pumped-hydro storage. The need for such resources is becoming more urgent due to retirement of the older baseload plants and the growing amount of less emissions-intensive energy sources.
Synchronous generators in power stations spin at around 50 cycles per second. This speed is referred to as “frequency” (denoted Hertz, symbol Hz). Controlling this constant frequency is essential for maintaining reliability.
If there is loss of generation somewhere, extra power is drawn through the electricity network from other plants. This causes these generators’ rotors to slow down and the system frequency to fall. A key parameter is the so-called “maximum rate of change of frequency”. The faster the frequency changes, the less time is available to take corrective action.
Inertia refers to the ability of a system to maintain a steady frequency after a significant imbalance between generation and load. The higher the inertia, the slower the rate of change of frequency after a disturbance.
One critical concern is that inertia must almost always be sufficient to enable stable power. Given many coal-fired power plants are being retired, the amount of inertia is falling markedly.
Eventually power systems will need to provide inertia explicitly by adding synchronous rotors (operating independently of power generation) or by providing other power system controls that are able to respond very quickly to deviations in power system frequency. These can be based on a combination
of storage and advanced power electronics already available today.
Regional markets within the National Energy Market
The National Energy Market operates as five interconnected regional markets in the eastern states: Queensland, New South Wales, Victoria, South Australia and Tasmania. This reflects the way the power systems were originally set up under state authorities.
The National Energy Market cannot operate as a single market with a single price due to two important factors. It is not cost-effective to completely remove power transmission constraints between the state regions, and electrical losses in power transmission mean that each location requires a different price to efficiently reflect the impact of these losses.
When there are large power flows between regions, the prices can vary by up to 30% between regions due to losses. High prices occur when there is a power shortage relative to demand. Negative prices occur when load is less than the minimum stable generation committed. During periods of high prices (usually due to high demand or, less frequently, due to lower capacity) greater price differences can occur when the interconnectors reach their limits, causing very high-priced generation in the importing region to be dispatched.
In view of the long distances in the National Energy Market (4000km from end to end, the longest synchronous power system in the world), there are significant constraints in transmission capacity between the state-based regions. These constraints are given special treatment called “interconnectors”.
The marginal power losses across these interconnectors are calculated every five minutes to support efficient dispatch of resources and to ensure that the spot prices in each region are efficient and consistent with prevailing supply and demand. These interconnectors have limited capacity (due to overheating and other factors), however, and AEMO carefully manages their use to ensure balancing and inertia can be provided across regions.
Ancillary services and spinning reserve
Ancillary services refer to a variety of methods the market requires for consistent frequency and voltage control. They maintain the quality of supply and support the stability of the power system against disturbances. This frequency control is required during normal operation to maintain the continuous balance of energy supply and demand. For this purpose some generation capacity is held in reserve in order to vary its output up and down to adjust the total system generation level.
This difference between the maximum power output and the lower operating level is called “spinning reserve”. Spinning reserve is also required for output reduction to cover sudden disconnection of load or sudden increase in solar or wind power.
The upgrading of the transmission system, including the interconnectors, is a complex regulatory process. Transmission has a significant value across the whole electricity supply chain from producers to consumers.
This value is easy to measure given electricity market conditions at any given moment. But it’s difficult to predict when these interconnectors need to be built or replaced because some transmission assets can operate for up to 80 years. Significant co-ordination is required in planning new investments as the location and deployment timing of new renewable generation capacity is uncertain and variable.
30-minute price settlement windows (and five-minute ones)
Generators are paid the spot price for all their output, and consumers (via retailers) are charged at the spot price for their consumption by AEMO. This “trading” price is calculated every 30 minutes for the purpose of transacting the cash flows (as an average of the five-minute dispatch price). This process is called “settlement”.
There is a plan in place to move to five-minute settlement over the next three years. This would help reward more flexible resources (including batteries) as they respond more efficiently to the impact of sudden changes in output.
Solar photovoltaics (PV) and wind are now the leading two generation technologies in terms of new capacity installed worldwide each year, with coal in third spot (see below). PV and wind are likely to accelerate away from other generation technologies because of their lower cost, large economies of scale, low greenhouse emissions, and the vast availability of sunshine and wind.
Although PV and wind are variable energy resources, the approaches to support them to achieve a reliable 100% renewable electricity grid are straightforward:
Energy storage in the form of pumped hydro energy storage (PHES) and batteries, coupled with demand management; and
Strong interconnection of the electricity grid between states using high-voltage power lines spanning long distances (in the case of the National Electricity Market, from North Queensland to South Australia). This allows wind and PV generation to access a wide range of weather, climate and demand patterns, greatly reducing the amount of storage needed.
PHES accounts for 97% of energy storage worldwide because it is the cheapest form of large-scale energy storage, with an operational lifetime of 50 years or more. Most existing PHES systems require dams located in river valleys. However, off-river PHES has vast potential.
Off-river PHES requires pairs of modestly sized reservoirs at different altitudes, typically with an area of 10 to 100 hectares. The reservoirs are joined by a pipe with a pump and turbine. Water is pumped uphill when electricity generation is plentiful; then, when generation tails off, electricity can be dispatched on demand by releasing the stored water downhill through the turbine. Off-river PHES typically delivers maximum power for between five and 25 hours, depending on the size of the reservoirs.
Most of the potential PHES sites we have identified in Australia are off-river. All 22,000 of them are outside national parks and urban areas.
The locations of these sites are shown below. Each site has between 1 gigawatt-hour (GWh) and 300GWh of storage potential. To put this in perspective, our earlier research showed that Australia needs just 450GWh of storage capacity (and 20GW of generation power) spread across a few dozen sites to support a 100% renewable electricity system.
In other words, Australia has so many good sites for PHES that only the best 0.1% of them will be needed. Developers can afford to be choosy with this significant oversupply of sites.
Here is a state-by-state breakdown of sites (detailed maps of sites, images and information can be found here):
NSW/ACT: Thousands of sites scattered over the eastern third of the state
Victoria: Thousands of sites scattered over the eastern half of the state
Tasmania: Thousands of sites scattered throughout the state outside national parks
Queensland: Thousands of sites along the Great Dividing Range within 200km of the coast, including hundreds in the vicinity of the many wind and PV farms currently being constructed in the state
South Australia: Moderate number of sites, mostly in the hills east of Port Pirie and Port Augusta
Western Australia: Concentrations of sites in the east Kimberley (around Lake Argyle), the Pilbara and the Southwest; some are near mining sites including Kalgoorlie. Fewer large hills than other states, and so the minimum height difference has been set at 200m rather than 300m.
Northern Territory: Many sites about 300km south-southwest of Darwin; a few sites within 200km of Darwin; many good sites in the vicinity of Alice Springs. Minimum height difference also set at 200m.
The maps below show synthetic Google Earth images for potential upper reservoirs in two site-rich regions (more details on the site search are available here). There are many similarly site-rich regions across Australia. The larger reservoirs shown in each image are of such a scale that only about a dozen of similar size distributed across the populated regions of Australia would be required to stabilise a 100% renewable electricity system.
The chart below shows the largest identified off-river PHES site in each state in terms of energy storage potential. Also shown for comparison are the Tesla battery and the solar thermal systems to be installed in South Australia, and the proposed Snowy 2.0 system.
The map below shows the location of PHES sites in Queensland together with PV and wind farms currently in an advanced stage of development, as well as the location of the Galilee coal prospect. It is clear that developers of PV and wind farms will be able to find a PHES site close by if needed for grid balancing.
Annual water requirements of a PHES-supported 100% renewable electricity grid would be less than one-third that of the current fossil fuel system, because wind and PV do not require cooling water. About 3,600ha of PHES reservoir is required to support a 100% renewable electricity grid for Australia, which is 0.0005% of Australia’s land area, and far smaller than the area of existing water storages.
PHES, batteries and demand management are all likely to have prominent roles as the grid transitions to 50-100% renewable energy. Currently, about 3GW per year of wind and PV are being installed. If this continued until 2030 it would be enough to supply half of Australia’s electricity consumption. If this rate is doubled then Australia will reach 100% renewable electricity in about 2033.
Fast-track development of a few excellent PHES sites can be completed in 2022 to balance the grid when Liddell and other coal-fired power stations close.