Australia’s energy woes will not be solved by reinforcing a monopoly

Australia’s energy market has a logjam,
Sean Davis/Flickr, CC BY-NC-SA

Bruce Mountain, Victoria University

The possibility of blackouts affecting half of Victoria has attracted plenty of attention to a document once read only by industry insiders and policy wonks: the Electricity Statement of Opportunities.

The Statement, updated every year by the Australian Energy Market Operator (AEMO), forecasts 10-year supply and demand in the main grids that serve the Australia’s south and eastern states.

But the chance of huge blackouts is just part of the Statement – and in fact it reveals a growing tension between the market operator and the bodies that oversee electricity regulations.

Read more:
Explainer: power station ‘trips’ are normal, but blackouts are not

Blackouts unlikely

So, what does the latest Statement say? The good news is AEMO calculates the expected level of “unserved energy” – that is, demand that cannot be met by supply – is likely to be fairly low, which makes blackouts unlikely.

The bad news is AEMO thinks a standard based on “expected unserved energy” is a poor way to forecast keeping the lights on.

Instead, AEMO points to the unlikely events that nonetheless could have a significant impact on consumers and says we should frame reliability obligations around those.

Read more:
A high price for policy failure: the ten-year story of spiralling electricity bills

In its analysis of these, AEMO finds it is possible (albeit unlikely) about half of Victoria’s households could lose supply in a single event in the coming year.

So, on the one hand AEMO expects the system will basically meet the current obligations for unserved energy, but it also says there is nonetheless the possibility half of Victoria’s homes could suffer outages because of shortfalls on the main power system.

Importantly, as AEMO’s obligation is to hit the expected unserved energy standard, not beat it, it is not authorised to take actions to mitigate these outside possibilities.

Market vs regulators

To really understand the issues here, we need to look back to last year. In 2018, AEMO sought to change Australia’s energy regulations so AEMO could buy as much reserve capacity as it decided was needed to reliably manage unlikely but possible severe failures.

It also asked for the authority to buy reserves for longer periods so that it could source reserves more cheaply.

The Australian Energy Market Commission (AEMC) that sets the rules rejected this application on the basis that the standards were already high enough – maybe even too high – and AEMO was unduly risk-averse (the political risk associated with power failures made it so). By implication, left to its own devices AEMO would look after itself, at customers’ expense.

Whatever the stated rationale, underlying AEMC’s rejection of AEMO’s application is the philosophy of the sanctity of the market: wherever possible, the market is to be protected from intervention.

From the regulator’s perspective, were it to have acceded to AEMO’s request to expand the volume of reserves AEMO bought outside the market, it would be buying reserves it did not need and allowing the price signals in the market to be further undermined.

But I would argue the regulator’s decision is better characterised as protecting the National Electricity Market’s monopoly for the exchange of wholesale electricity.

It may be acceptable to force transactions through a market if there is confidence in that market. But the evidence of market failure is abundant: wholesale prices in Victoria at record highs, rampant exercise of market power, reliability concerns that often make the front page, and in certain cases shortfalls in dispatchable capacity, storage and price-responsive demand.

Read more:
New demand-response energy rules sound good, but the devil is in the (hugely complicated) details

In its Statement, AEMO signalled it will work with Victoria’s state government to explore ways they can work together to meet Victoria’s reliability needs, in spite of the AEMC’s decision.

This is a very significant development and I envisage it will presage similar bilateral arrangements between AEMO and other states.

Read more:
35 degree days make blackouts more likely, but new power stations won’t help

Should we be worried about this? Not in the least. Electricity markets do not spontaneously arise; they are administrative constructions. For too long the National Electricity Market has had a monopoly on the exchange of wholesale electricity and the AEMC has had a monopoly on its oversight. Monopolies and markets ossify when they get stuck in their originating orthodoxy and ideology.

AEMO is beginning to clear a log jam. There is a spirit of innovation and discovery in the air. This is something to welcome and it is not a moment too soon.The Conversation

Bruce Mountain, Director, Victoria Energy Policy Centre, Victoria University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

AEMO’s ‘cohesive’ energy plan falls short because it omits two key economic facts

File 20180719 142408 1v5uuv5.jpg?ixlib=rb 1.1
Is the sun setting fast enough on coal-fired power?
Gerry Machen/Flickr, CC BY-ND

Martina Linnenluecke, Macquarie University

The Integrated System Plan, unveiled this week by the Australian Energy Market Operator (AEMO), has been billed as a cohesive energy plan for Australia. In reality, it falls seriously short.

Australia needs to accelerate its energy transition and give businesses and investors the support they need to seize economic opportunities from clean energy.

Instead, AEMO’s analysis calls to exploit the economic life of high-polluting infrastructure such as the Eraring and Bayswater coal-fired power stations.

In seeking to prolong coal-fired power for as long as feasible in the name of cheap energy, AEMO’s supposedly comprehensive plan overlooks two crucial facts: first, there is serious money to be made from clean energy; and second, coal is not as cheap as it sounds when we factor in the indirect social costs.

Read more:
AEMO’s new electricity plan is neither a death knell nor a shot in the arm for coal

AEMO’s report confirms that the electricity sector is in the midst of an unprecedented transformation. As existing generation infrastructure grows older, we are witnessing a shift to renewables, battery storage and lower demand growth.

On top of that, Australia needs to consider how to meet its internationally agreed climate targets.

Disappointingly, the AEMO report shows no understanding of how to successfully retire unsustainable infrastructure early and move rapidly to adopt cleaner technology. Quite the contrary, in fact.

It is promising to see that the report assumes that the ageing Liddell power plant will be retired by 2023, after surprisingly strong political pressure by the Turnbull government on operator AGL to prolong its life until at least 2027.

Yet AEMO’s overall plan is still to retain existing coal-fired stations for as long as they can be economically relied on. AEMO assumes a strong role for coal up to 2030 and beyond, and forecasts that many large power stations (Vales Point, Gladstone, Yallourn, Eraring, Bayswater) will retire between 2030 and 2040.

Goals, not coals

Coal power is not the solution to guarantee power supply in this country. We need to look at more viable, cleaner transition energy options.

First, Australia should consider a rapid implementation of less-polluting “transition technologies”, such as gas. In overseas markets such as the United States and Europe, natural gas has played a major role in the ongoing energy transition.

When energy company AGL released its plan to retire Liddell early, it proposed a transition to gas, alongside a mix of renewables, battery storage and demand response. AGL’s plan shows that transition technologies are economically feasible in Australia, just as they are overseas.

Second, the Australian government and bodies such as AEMO need to recognise the changes in underlying market forces that are driving investments in clean technology. Whereas clean technology development has previously been heavily reliant on federal government funding, analysis by my research centre shows that strong market forces are now driving the clean-tech revolution.

According to our estimate, the total global wealth creation through the development of clean technology patents will range from US$10.16 trillion to US$15.49 trillion (A$13.69 trillion to A$20.87 trillion) by 2050. Included in this estimate are patents in areas such as bio-fuels, fuel cells, hydro energy, wind energy, solar energy, and geothermal energy. This is 13% to 20% of total global GDP in 2017.

During that time we predict that investment growth in green technologies will be between US$2.93 trillion and US$3.71 trillion (A$3.95 trillion to A$5 trillion), or 3.7% to 4.7% of world 2017 GDP.

Australia should not miss out on this enormous potential by clinging on to old technologies.

Third, the AEMO report does not factor in the huge costs of fossil fuels to the community. My research, carried out with colleagues at Macquarie and Vanderbilt universities, shows that society fails to charge fossil fuel firms for the damage that their activities cause in terms of environmental pollution.

This failure to pay the significant external social costs means that coal power is effectively getting a huge subsidy. In our research paper we describe this as “legal looting” of public funds by the fossil fuel industry.

Using Australia’s erstwhile carbon price as an example, if emitters worldwide had been charged the Australian carbon price (A$24.15) for emissions from coal, oil, gas and flaring, they would have had to pay a total of A$12.67 billion over the period 1995-2013.

This amount is a low estimate given that some other countries have much higher taxes in place.

Sweden, for example, introduced a carbon tax in 1991. It began at a rate equivalent to A$38.50 per tonne of carbon dioxide emitted and has since increased to the equivalent of A$177 in 2018. If all global emitters were required to pay this price, they would have been liable for A$91.94 billion over the period 1995-2013.

Clearly, the fossil fuel industry would would be far less lucrative if it were made to pay its debt to society in full.

Read more:
The Carmichael mine lease shows that decisions on coal need a much wider perspective

The example of Europe’s energy supply deregulation during the 1980s and ’90s shows that a transition to renewable energy is not at odds with a secure and reliable electricity generation system.

Any use of coal-fired plants in Australia must only be short-term, and at a drastically reduced level.

The ConversationGas-fired stations serve as a less-polluting interim measure for Australia’s transition to renewable energy. They can fill the electricity gap between consumption and renewable electricity to avoid any outages. Of course it has to be acknowledged that changing gas prices can be a factor in price rises, and cheaper gas supplies would need to be secured in order to make this transition work smoothly.

Martina Linnenluecke, Professor of Environmental Finance; Director of the Centre for Corporate Sustainability and Environmental Finance, Macquarie University

This article was originally published on The Conversation. Read the original article.

We don’t have a gas shortfall worth worrying about

Dylan McConnell, University of Melbourne

Australia was warned earlier this year that a shortage of gas could create an energy crisis. A report from the Australian Energy Market Operator (AEMO) suggested a shortfall could occur in 3 of the next 13 years. The Conversation

This report was widely reported in the national media, with sensational headlines like “AEMO warns of blackouts as gas runs out”.

A couple of weeks ago, in a dramatic intervention, Prime Minister Malcolm Turnbull declared that there was a shortage of gas supplies for eastern Australia and that certain restrictions may be placed on gas exports.

But do we really need “more gas supply and more gas suppliers”? In a report published today, my colleague Tim Forcey and I review AEMO’s initial report and its results and recommendations. Our work finds there is a shortage of “cheap” gas, but not a gas supply “shortfall”. Moreover, high gas prices combined with falling renewable and storage costs mean that there are cheaper options than developing new gas resources.

What gas shortfall?

AEMO forecast of electricity generated by fuel source, showing AEMO’s forecast supply gap as a thin red line at the top of the stack.

The AEMO report suggests that eastern Australia face a shortfall in 3 of the next 13 financial years – 2018-19, 2020-21 and 2021-22. The largest gap modelled by AEMO is equal to only 0.19% of the annual electricity supply, or 363 gigawatt hours.

In gas supply terms, this is equivalent to only 0.2% of the annual gas supply. But AEMO’s modelling considers a range of possible scenarios, with a variation of roughly plus or minus 5%, far larger than the possible shortfall.

Just 11 days after the report warning of a supply gap, AEMO published updated electricity demand forecasts. In this update, AEMO reduced its forecast electricity demand by roughly 1%. This reduction in demand is more than four times greater than the largest forecast shortfall.

A day later, Shell announced it would proceed with Project Ruby, a gas field with 161 new wells. This was not included in the AEMO modelling process.

Alternatives to gas

Gas has historically been characterised as a transition fuel on the pathway to a zero-emissions power system. The falling costs of renewable energy and storage technologies combined with rising gas costs means this pathway and may indeed be a detour, particularly when taking into account Australia’s climate commitments.

This is also a sentiment increasingly reflected by the industry, with gas producer AGL suggesting that:

the National Electricity Market […] here in Australia could transition
directly from being dominated by coal-fired baseload to being dominated by storable renewables.

Gas generation generally falls into two categories: open cycle gas turbines (OCGT) and combined cycle gas turbines (CCGT). These two technologies effectively play different roles in the energy sector. Open cycle turbines are highly flexible, and are used occasionally over the year to provide peak capacity. Combined cycle turbines, on the other hand, operate continuously and provide large amounts of energy over a year.

Each of these technologies is now under competitive threat from renewable generation and storage. Flexible capacity can also be provided by energy storage technologies, while bulk energy can be provided by renewable energy. These are compared below.

Energy: renewables vs gas

The chart below compares the cost of providing bulk energy with gas and renewable technologies. We’ve represented the price of new CCGT, PV (which stands for photovoltic solar) and wind as the cost of providing energy over the lifetime of the plant.

The other two gas generation costs illustrated, CCGT and Steam, represent the cost of energy from existing plants, at their respective thermal efficiencies. The steam thermal efficiency is similar to that of a highly flexible open cycle gas turbine.

Surprisingly – and depending somewhat on gas price and capital cost assumptions – new renewable energy projects provide cheaper energy than existing gas generators.

Comparison of energy cost from new and existing gas with new renewable energy generation. The range of solar (PV) and wind costs reflect different capital cost assumptions, while the range of gas costs reflects gas price assumptions. CCGT refers to Combined Cycle Gas Turbine.

Flexible capacity: storage vs gas

The next chart compares the cost of providing flexible capacity from gas and storage technologies (again, taking the cost over the lifetime of the plant).

In this analysis we compare the cost of capacity from OCGT with that from diesel and various storage technologies, including battery and Pumped Hydro Energy Storage (PHES). As can be seen, storage technologies can compete with OCGT in providing flexible capacity, depending on technology and capital cost.

Comparison of flexible capacity cost from gas (OCGT), diesel and storage technologies generation, including battery and Pumped Hydro Energy Storage (PHES) . The range of costs reflect different capital cost assumptions.

Another option, not shown here, is demand response. This is the strategy of giving consumers incentives to reduce their energy use during critical times, and is cheaper again.

What is clear is AEMO’s forecast gas shortfall is very small, and that it may have already been made up by revised demand forecasts and new gas field developments. But the question of how Australia should deal with any future shortfall invites a larger debate, including the role of gas in our electricity system, and whether the falling costs of renewable energy and storage technology mean we’ve outgrown gas.

The short-lived gas shortfall: A review of AEMOs warning of gas-supply ‘shortfalls’ was prepared by Tim Forcey and Dylan McConnell.

Dylan McConnell, Researcher at the Australian German Climate and Energy College, University of Melbourne

This article was originally published on The Conversation. Read the original article.