Snowy 2.0 will not produce nearly as much electricity as claimed. We must hit the pause button



Prime Minister Scott Morrison in front of the Tumut 3 power station at the Snowy Hydro Scheme. New analysis suggests the benefits of Snowy 2.0 have been overstated.
AAP

Bruce Mountain, Victoria University

The federal government’s much-vaunted Snowy Hydro expansion is supposed to smooth out the bumps in electricity supply as Australia transitions to renewables. But not only is the project a bad deal for taxpayers, our analysis suggests it will deliver a fraction of the energy benefits promised.

Fossil-fuel power generators store coal or gas at the point of production. This means electricity can mostly be created on demand when homes and businesses need it. Renewable energy cannot do this. If wind or sun is not abundant, solar panels and wind turbines may not produce enough electricity to meet demand. At other times they might produce more than required.

The Snowy 2.0 project is supposed to provide a solution to this problem – storing renewable energy for when it is needed.

The project’s cost and time estimates have blown out massively. It would now be surprising if Snowy 2.0, including the transmission upgrades it relies on, comes in at less than A$10 billion or is finished before 2027.

But there is another serious problem. Our analysis has revealed that of the extra pumped hydro capacity promised by the project, less than half can be delivered. There is now overwhelming evidence the project should be put on hold.

The Tumut 3 scheme, with which Snowy 2.0 will share a dam.
Snowy Hydro Ltd

The problems we know about: cost and time blowouts

The list of possible alternatives to Snowy 2.0 is long. Aside from other pumped hydro projects, it includes chemical batteries, encouraging demand to follow supply, gas or diesel generators, and re-orienting renewable generators to capture the wind or sun when it is less plentiful.

But despite this plethora of options, the federal government announced the Snowy 2.0 project without a market assessment, cost-benefit analysis or indeed even a feasibility study.




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When former Prime Minister Malcolm Turnbull announced the expansion project in March 2017 he said it would cost A$2 billion and be commissioned by 2021. This was revised upwards several times and in April this year, a A$5.1 billion contract for partial construction was awarded. This excludes the costs of transmission and other considerable expenses.

The main contractor says the project will take eight years to build – bringing us to 2027 before the full scheme is completed. We will happily wager that more delays and cost increases will be announced.

Then prime minister Malcolm Turnbull during a tour of Tumut 3 power station when announcing the expansion in 2017.
Lucas Cochairs/AAP

Snowy Hydro has not costed the transmission upgrades upon which the project depends. TransGrid, owner of the grid in New South Wales, has identified options including extensions to Sydney with indicative costs up to A$1.9 billion. Massive extensions south to Melbourne will also be required.

Snowy Hydro contends it should not pay for the new transmission lines because the benefits would flow to the entire grid, not just its venture. In other words Snowy Hydro argues, conveniently, that we should count the benefits but ignore the costs when thinking about their project.

The numbers simply do not add up

The Snowy 2.0 project grandly claims it could generate at its full 2,000 megawatt capacity for 175 hours – or about a week. This capacity can also be expressed as 350 gigawatt hours (GWh).

Energy Minister Angus Taylor has talked up the project’s superiority to smaller-capacity alternatives such as batteries.

But the maximum additional pumped hydro capacity Snowy 2.0 can create, in theory, is less than half this. The reasons are technical, but worth taking the time to understand.

The figure below outlines the main physical features that define Snowy 2.0. It includes four dams: Tantangara, Talbingo, Jounama and Blowering. For simplicity, we have numbered these from 1-4 in the following explanation.



The Conversation, CC BY-ND

When Snowy 2.0 generates electricity, water will be released from Dam 1 at the top of the system. It will flow through a long tunnel to the smaller Dam 2. The flow of water drives turbines which generate energy. When the turbines are reversed, the water is pumped back to the top to continue the cycle.

For Snowy 2.0 to produce the 350 GWh of electricity claimed, the top dam must be full and all that water released through the system. But replenishing the top dam after this event would take many months of pumping water from elsewhere in the system, and use up 40% more electricity than was originally generated. So the 350 GWh would never be achieved because it is extremely inefficient and inflexible.

In reality, the pumped hydro capacity of Snowy 2.0 is defined by the amount of water that the smaller Dam 2 can hold. If the scheme was a closed system, with no other water flowing in or out, it could produce around 230 gigawatt hours (GWh) of electricity.

But the system does not exist in isolation. Part of the existing Snowy Hydro scheme, known as Tumut 3, also uses Dam 2. It creates pumped hydro electricity by cycling water between that dam and the even smaller Dam 3 below it.

For Snowy 2.0 to operate at full cyclical capacity, Dam 2 must be empty to receive the water. That would entail emptying Dam 2 into the smaller Dam 3 and from there to Dam 4 at the bottom of the system. This water could not be used again to generate electricity. This “lost” water would have generated 60 GWh worth of electricity in the Tumut 3 scheme.

Khancoban Dam, part of the soon-to-be expanded Snowy Hydro scheme.
Snowy Hydro Ltd

This means that as a cyclical pumped hydro system, Snowy 2.0 does not add 230 GWh of capacity. When you subtract the 60 GWh from the 230 GWh, Snowy 2.0 adds just 170 GWh of recyclable pumped hydro. This is less than half the claimed storage capacity.

And this is the maximum cyclical capacity in theory only. Snowy 2.0 would never produce continuously for the time needed to generate and then pump 230 GWh because it would never be economically viable to run it this way.

In practice if Snowy 2.0’s lower dam is operated in future as it is now – almost always close to full – the cycling capacity of Snowy 2.0 may be as low as 40 GWh – around one tenth of the promised number.

What does all this mean?

These facts put Snowy 2.0 in a completely different light. There are many competing alternatives that can provide storage far more flexibly for a fraction of Snowy 2.0’s price tag. These alternatives would also have far fewer environmental impacts or development risks, in most cases none of the transmission costs and could be built much more quickly.

It is always difficult to press the pause button on a major project once it has begun. But the evidence for doing this is overwhelming. In pursuit of the public interest, the federal government should put the project on hold and ask a reputable investment bank to publicly advise, perhaps through the Productivity Commission, what Snowy 2.0 would be worth if built.

A credible independent valuation would establish with some confidence how deeply Snowy Hydro will have its hands in the public’s pockets. A panel of independent experts should then be asked to publicly advise whether taxpayer money is needed to meet the demands of a renewables-dominated power system, and if so, the best way it should be spent.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.

View from The Hill: Malcolm Turnbull delivers the unpalatable truth to Scott Morrison on climate and energy


Michelle Grattan, University of Canberra

Sometimes birthdays are best let pass quietly. The Liberals are finding the 75th anniversary of their founding another occasion for the blood sport they thought they’d put behind them.

Tony Abbott and Malcolm Turnbull are out of parliament – for which Scott Morrison is much thankful – but their passions are unabated. Each has let fly in interviews with The Australian’s Troy Bramston to mark the anniversary.

Abbott repeated that it was Turnbull’s undermining which did him in (only the partial truth) and indicated he wouldn’t mind returning to parliament but didn’t think the Liberal party would ask him (absolutely true).

Turnbull’s was the more pertinent and, from where the government stands, pointed interview because it fed very directly into central issues of the moment, climate change and energy policy.

“The Liberal Party has just proved itself incapable of dealing with the reduction of greenhouse gas emissions in any sort of systematic way,” Turnbull said.

“The consequence … is without question that we are paying higher prices for electricity and having higher emissions.”




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He knows what he’s talking about. These issues were critical (though not the only factor) in Turnbull losing the leadership twice – first in opposition and then in government. And that was despite doing deals and trade offs to try to satisfy the right in his party.

He still frets about the battles which cost him so much for so little gain. He told the Australian, amid boasts about what his government had done, that his biggest regret as PM was not settling a new energy policy.

What Scott Morrison really thinks on the climate challenge, or what he would do if he were just driven by policy concerns without regard to party considerations or electoral judgements are in that category of known unknowns.

In few areas can Morrison’s beliefs be divined free of political context.

But we do know two things.

Firstly, we don’t have a satisfactory energy policy: emissions are rising; power prices are too high; investment is being discouraged. An analysis released by the Grattan Institute this week was damning about how federal government policies were discouraging investment including by “bashing big companies” (the so-called “big stick” legislation, allowing for divestment when an energy company is recalcitrant, is still before parliament).

Secondly, climate change is again resonating strongly in the community.




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Critics dismiss the attention young activist Greta Thunberg has received internationally, and this week’s “Extinction Rebellion” demonstrations, and many in the government would point to the election result to note that climate change did not carry the day with the “quiet Australians”.

The Morrison win, however, doesn’t mean the issue lacks cut through, or won’t have potency in the future. And although the Liberals like to talk about the miracle victory, it should be remembered the win was by a sliver, not by 30 seats. What made it so notable was that it defied expectations.

Turnbull said in his interview the Liberal party had been influenced by a group that was denialist and reactionary on climate change.

It still is, but this group is not giving trouble at the moment because Morrison, unlike his predecessor, is not provoking them.

The problem for Morrison is that keeping his party calm doesn’t solve the policy problem. Unless that is more effectively tackled, it could come back to bite him, regardless of the positive tale he tries to spin, such as in his United Nations speech.

Turnbull also said in his interview that, among much else, in government he had been “very focused on innovation” which, as we remember, was his catch cry in his early days as PM.

And, if we take information from the Harvard Kennedy School’s Center for International Development, reported in Tuesday’s Australian Financial Review, Australia needs innovation to be a much higher priority.

Australia fell from 57th to 93rd between 1995 and 2017 on the index of economic complexity, which measures the diversity and sophistication of countries’ exports. Our wealth comes from the minerals and energy that form the bulk of our exports but “Australia⁩ is ⁨less complex than expected⁩ for its income level. As a result, its economy is projected to grow ⁨slowly.⁩ The Growth Lab’s ⁨2027⁩ Growth Projections foresee growth in ⁨Australia⁩ of ⁨2.2%⁩ annually over the coming decade, ranking in the ⁨bottom half⁩ of countries globally,” the data says.

“Economic growth is driven by diversification into new products that are incrementally more complex. … ⁨⁨Australia⁩ has diversified into too few products to contribute to substantial income growth.⁩”




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Turnbull’s talk of innovation, agility, and the like was seen by many in his ranks, particularly in hindsight, as too high falutin’. It certainly went down badly in regional areas, which is why in 2016 the Nationals sharply differentiated themselves in the election campaign.

The Harvard work suggests Turnbull’s innovation ambition was on the right track. But the political evidence showed he was a bad salesman for this (and a lot else).

Morrison is a good marketing man. But the test of his prime ministership will be whether he can use his marketing skills to sell policies that the country needs, rather just what he thinks will go over easily with his constituency.

The most effective leaders (and that excludes both Abbott and Turnbull) can both identify what the nation requires and persuade enough of the voters to embrace it, even when it’s difficult. They operate not on the principle of the lowest common electoral denominator, or simplistic descriptions of their supporters – rather they pursue the highest achievable goals.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

Governments took the hard road on clean energy – and consumers are feeling the bumps



Prime Minister Scott Morrison (right) and Energy Minister Angus Taylor at Snowy Hydro Scheme. The Grattan Institute says the government should better encourage investment rather than build electricity infrastructure.
LUKAS COCH/AAP

Guy Dundas, Grattan Institute

More than two years on from the sudden closure of Victoria’s Hazelwood coal power station, quite a mess remains. It is clear the federal government’s market interventions have not worked. Electricity prices are higher and supply is tight. Consumers are not happy.

In the face of this, federal and state governments have felt pressured to act – especially after several severe blackouts attracted fever-pitch media coverage and prompted a national debate about electricity reliability. But their approach has been ad hoc and has made things worse in the long run.

Australia is in the midst of a great energy transition. The nation’s entire coal fleet will close over the next few decades, and the government must urgently improve its policy response or electricity consumers will continue to suffer. We propose a solution that ensures coal plants close in an orderly way.

A high-voltage electricity transmission tower in Brisbane. A new report says governments are hindering the clean energy transition.
AAP/Darren England

We can’t afford a repeat of the Hazelwood mess

The aftermath of the sudden Hazelwood closure is a good case study in failed government intervention.

Hazelwood closed in March 2017 after supplying Victoria with cheap brown coal-fired electricity for more than half a century. The plant’s owner, French energy company Engie, gave only five months’ notice of the shutdown. This left no time to build replacement electricity generation, so prices rose and supplies became less reliable.

In the years since Hazelwood’s closure, the federal government failed to clear up more than a decade of uncertainty around national climate and energy policy – including last year when it dumped the National Energy Guarantee. This has left investors wondering when a framework to cut emissions in the electricity sector will be imposed.

Instead of creating investor certainty, the federal government has adopted a “picking winners” approach. It plans to build new generation assets such as the Snowy 2.0 pumped hydro project, and subsidise others through a program of underwriting investments. Alongside this, the government’s proposed “big stick” laws would give it vast powers including those to break up big energy companies. Our research has confirmed this has a chilling effect on investment.

The sudden closure of large coal power stations is challenging enough without being made worse by ill-conceived policy responses. Hazelwood will be the first of many closures. Australia’s entire coal fleet is expected to retire over coming decades as it ages and gets displaced by low-cost solar and wind energy.



The Grattan Institute, CC BY-ND

Flogging the life out of coal plants is not the answer

The crucial lesson from Hazelwood is that Australia needs adequate notice of impending coal plant closures. This allows timely replacement investment to occur, minimising the price and reliability impacts on consumers.

New South Wales’ Liddell power station is due to close next and its owner AGL has given plenty of notice. In 2015 it announced a 2022 closure, and this year firmed up its plans for full closure by 2023. One unit of four will close in 2022.




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Federal Energy Minister Angus Taylor is so concerned at Liddell’s closure he set up a taskforce to examine how to manage it, including extending its life or replacing the lost generation like-for-like.

But his concerns are misplaced. The Australian Energy Market Operator’s 2019 reliability projection for New South Wales is that the outlook is improving more rapidly than it was in 2018. About 2.3 gigawatts of solar and wind energy has been committed in NSW since the start of 2017 – and more is planned.

The best way to maintain reliability is through investment – not by trying to keep an ageing power station running on hot summer days.

The now-closed Hazelwood coal-fired power station in the Latrobe Valley, Victoria.
Global Warming Images/Cover Images

Laws on coal plant closures must grow teeth

Liddell’s closure is very likely to prove manageable. But this cannot be taken for granted in all future cases.

A new rule introduced late last year requires generators to give at least three years’ notice of closure. It’s a step in the right direction, but the rule lacks teeth. The penalties for non-compliance are small, and the mechanism could be gamed by generators nominating a closure date and then continuously delaying closure. We need better insurance to avoid future disruptive closures.

Past Australian experience gives some lessons on what not to do. In 2011 the Gillard Labor government proposed paying coal generators to close, on the grounds that otherwise they might continue operating indefinitely. Four of the five short-listed generators have since closed – without being paid a cent of government money. We are now dealing with the opposite problem, but the lesson holds – taxpayers will be taken for a ride if government money is used to delay or otherwise “manage” coal closures.

International experience is not likely to translate well to Australia. Germany’s coal closure commission built on deep cooperation between business, unions and governments that is not present here. The UK and Canada legislated coal phase-outs, but they did so at a time when coal provided only 10% of their power, compared to more than 60% in Australia today.

Prime Minister Julia Gillard during a visit to the Acciona windfarm near Gunning, NSW, in 2011. Labor’s incentives for coal stations to close were also misguided.
AAP/Alan Porritt

Make coal plants guarantee orderly closure

The Grattan Institute’s latest report, Power play: how governments can better direct Australia’s electricity market, proposes a new approach. Coal generators should be required to put money – indicatively several hundreds of millions of dollars each – into a fund, managed by an independent third party, to be held as security. Generators would be allowed to nominate their own closure window, but would get these funds back only if they closed within this window – providing a strong financial incentive for predictable and orderly closure.

Circumstances change and generators cannot reasonably fix closure decades in advance. To balance flexibility and certainty, younger generators would be allowed to nominate relatively long windows, but they would need to tighten these windows as they age.




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Limited exemptions would be available if early closure did not harm the reliability of the market, or conversely if continued operation of the coal plant in question was absolutely necessary to maintain reliability.

This policy would come with costs. Collectively generators would need to place several billions of dollars into the fund. As generators have a higher cost of capital than would be earned on the held funds, this would cost them, collectively, several hundreds of millions of dollars a year. But the measure would provide low-cost insurance against the destabilising effect of poorly managed coal closures on the A$18 billion National Electricity Market.

The policy would give a clear signal for investment in new, clean power supply before – not after – coal closures, and better manage Australia’s energy transition.The Conversation

Guy Dundas, Energy Fellow, Grattan Institute

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

Nuclear power should be allowed in Australia – but only with a carbon price



The Opal nuclear research reactor at Lucas Heights in Sydney. It does not produce nuclear energy but is used to produce medical radioisotopes and for other purposes.
Tracey Nearmy/AAP

John Quiggin, The University of Queensland

Looking at the state of policy on energy and climate change in Australia, it’s tempting to give in to despair. At the national level, following the abandonment of the National Energy Guarantee last year, we have no coherent energy policy and no serious policy to address climate change.

In this context, the announcement of two separate inquiries into the feasibility of nuclear power (by the New South Wales and federal parliaments) could reasonably give rise to cynicism. The only possible case for considering nuclear power, in my view, is that it might provide a way to decarbonise our electricity supply industry.

Yet many of the keenest boosters of nuclear power have consistently opposed any serious measure to address climate change, and quite a few have rejected mainstream science altogether.

Activists dressed as nuclear waste barrels protesting at the Lucas Heights nuclear reactor in 2001. Nuclear technology in Australia has long raised concern among environmentalists.
Laura Frriezer/AAP



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Yet in a situation which all responsible people view as a climate emergency, we can’t afford the luxury of despair. For this reason, rather than dismissing these inquiries as political stunts, I made a submission to the federal inquiry setting out the conditions required to allow for any possibility of nuclear power in Australia.

The submission was picked up by the national media, which largely focused on my proposal to lift the state ban on nuclear power and implement a carbon price.

The reception from commentators on the right, who want the ban lifted, and from renewables advocates, who want a price on carbon, suggests a middle ground on nuclear power may be achievable.

The three big problems with nuclear power

Three fundamental problems arise immediately when considering the prospect of nuclear power in Australia. First, the technology is expensive: more expensive than new fossil-fuelled power stations, and far too expensive to compete with existing fossil fuel generators under current market conditions.

Second, given the time lags involved, any substantial contribution from nuclear power in Australia won’t be available until well beyond 2030.

Third, given the strong public opposition to nuclear power, particularly from the environmental movement, any attempt to promote nuclear power at the expense of renewables would never get broad support. In these circumstances, any investor in nuclear power would face the prospect of losing their money the moment the balance of political power shifted.

A technician uses a hot cell which shields radioactive material at the Opal nuclear research reactor at Lucas Heights in Sydney.
Tracey Nearmy/AAP

On the first point, we have some evidence from the contract agreed by the UK government in for the construction of the Hinkley C nuclear power plant. This was the first new nuclear construction project to be approved in an OECD country for a number of years.

The agreement to construct Hinkley was based on a guaranteed “strike price” of £92.50/ megawatt hours (MWh), in 2012 prices, to be adjusted in line with the consumer price index during the construction period and over the subsequent 35-year tariff period. At current exchange rates, this price corresponds to approximately A$165.




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Prices in Australia’s National Electricity Market have generally averaged around A$90/MWh. This implies that, if new nuclear power is to compete with existing fossil fuel generators, a carbon price must impose a cost of A$75/MWh on fossil fuel generation.

Assuming emission rates of 1.3 tonnes/MWh for brown coal, 1 tonne/MWh for black and 0.5 tonnes for gas, the implied carbon price ranges from A$50/tonne (to displace brown coal) to $150/tonne (to displace gas). On the basis that nuclear power is most plausible as a competitor for baseload generation from brown coal, I considered a price of A$50/tonne.

A blueprint for reform

The central recommendations of my submission were as follows:

Nuclear power, while costly, could dramatically reduce Australia’s electricity sector emissions.
AAP

Recommendation 1: A carbon price of A$25/tonne should be introduced immediately, and increased at a real rate of 5% a year, reaching A$50/tonne by 2035.

Recommendation 2: The government should immediately adopt the recommendations of its own Climate Change Authority for a 40% to 60% reduction in emissions by 2030, relative to 2000 levels, and match other leading OECD countries in committing to complete decarbonisation of the economy by 2050.

Recommendation 3: The parliament should pass a motion:

  • affirming its confidence in mainstream climate science and its acceptance of the key conclusions of the United Nations’ Intergovernmental Panel on Climate Change;
  • legislating a commitment to emissions reductions;
  • removing the existing ban on nuclear power.

Let’s all meet in the middle

Rather to my surprise, this proposal received a favourable reception from a number of centre-right commentators.

Reaction from renewables proponents, on social media at least, was cautious. But it did not indicate the reflexive hostility that might be expected, given the polarised nature of the debate.

There are immediate political implications of my proposal at both the state and federal level. It will be more difficult for the Coalition-dominated committees running the two inquiries to bring down a report favourable to nuclear power without addressing the necessary conditions – including a carbon price. If the government’s hostility to carbon pricing is such that a serious proposal for nuclear power cannot be considered, it will at least be clear that this option can be abandoned for good.

Former Nationals leader and now backbencher Barnaby Joyce is a strong advocate for nuclear power.
Lukas Coch/AAP

In the admittedly unlikely event that the Coalition government shows itself open to new thinking, the focus turns to Labor and the Greens.

Given the urgency of addressing climate change – a task that is best addressed through a carbon price – it makes no sense to reject action now on the basis that it opens up the possibility of nuclear power sometime in the 2030s. And, if renewables and storage perform as well as most environmentalists expect, nuclear power will be unable to compete even then.

Political hardheads will doubtless say that this is all impossible, and they may be right. But in a world where Donald Trump can win a US presidential election, and major investment banks support UK Labour leader Jeremy Corbyn over Prime Minister Boris Johnson, “impossible” is a big claim

In the absence of any prospect of progress on either energy or climate, the grand bargain I’ve proposed is at least worth a try.The Conversation

John Quiggin, Professor, School of Economics, The University of Queensland

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

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.




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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.




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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.




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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.




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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.

Nuclear becomes latest round in energy wars



The parliamentary committee will examine a broad range of issues related to nuclear power.
Shutterstock

Michelle Grattan, University of Canberra

The government has formally reopened the highly contentious debate on nuclear power by referring the issue to a parliamentary committee, with it to report by the end of the year.

Energy Minister Angus Taylor has asked the House of Representatives standing committee on the environment and energy to inquire into the nuclear fuel cycle – the first inquiry into the use of nuclear power in more than a decade.

It will consider the economic, environmental and safety questions involved in nuclear power.

The government’s present policy is a moratorium on nuclear power, and Taylor reiterated that.

Labor immediately attacked the move for an inquiry, which follows some backbench stirring in Coalition ranks, including from Nationals Barnaby Joyce and Keith Pitt and Liberal senator James McGrath. Pitt told parliament last month: “No one is suggesting that we build nuclear reactors tomorrow – but we need to be able to look at technologies as they change.”

Tony Wood, energy program director at the Grattan Institute, said an inquiry made sense, in terms of keeping longer term options open.

Wood said Australia’s transition to a zero emissions energy system was most likely to be dominated by solar and wind power supported by gas, pumped hydro and battery storage.

“Today’s nuclear technology is expensive and comes in one size – XXL,” he said.

“Yet there is a circumstance in which things could change. If the cost and reliability in a very high renewables world become problematic AND there is significant progress towards commercially viable small scale nuclear reactors, they might be a serious possibility.

“It therefore makes sense for Australian governments to understand and track these developments if only to keep the option open,” Wood said.

In the terms of reference for the inquiry, Taylor asks for it to “report on the circumstances and prerequisites necessary for any future government’s consideration of nuclear energy generation including small modular reactor technologies in Australia.”

It should cover health and safety, environmental impacts, energy affordability and reliability, economic feasibility, community engagement, workforce capability, security implications, and national consensus.

“The Australian government supports an energy system which delivers affordable and reliable energy to consumers while fulfilling Australia’s international emissions reduction obligations,” Taylor said.

“Successive Labor and Coalition governments have maintained a bipartisan moratorium on nuclear electricity generation in Australia. Australia’s bipartisan moratorium on nuclear energy will remain in place.

“Australia’s energy systems are changing with new technologies, changing consumer demand patterns and changes in demand load from major industries. At the same time the National Electricity Market is seeing a significant increase in capacity in intermittent low emissions generation technologies.”

Shadow energy minister Mark Butler said Taylor’s action showed “the extreme right of the Liberal Party is still dictating the government’s energy policy.”

Butler said nuclear energy was up to three times more expensive than renewables, while “posing significant health and environmental risks”.

“It is dangerous, expensive and consumes vast amounts of precious water at a time Australia faces increased water security threats,” Butler said.

He also raised the political spectre of the siting of power plants.

“If the Prime Minister is open to using nuclear energy, would he be prepared to have a nuclear power plant built in the Sutherland Shire, in his own electorate?

“Research by the Parliamentary Library and the Australian Nuclear Energy Association has confirmed there are dozens of sites around the nation where nuclear power plants could be constructed, including in or near all major coastal cities across Australia,” Butler said.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

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



Demand response sounds good, but is punishingly difficult to execute.
Matthew Henry/Unsplash, CC BY-SA

Bruce Mountain, Victoria University

Last week the body that governs Australia’s energy market released a draft proposal to introduce a demand response mechanism to the wholesale electricity market.

It argues the proposal will unearth some electricity users’ “latent flexibility” to prices in the extremely volatile wholesale market, and that this will potentially promote more efficient use of electricity, more secure power systems, and lower prices.

The move comes after nearly two decades of sustained campaigning, which prompts the question: why doesn’t such a useful-sounding mechanism already exist?




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Managing demand can save two power stations’ worth of energy at peak times


It’s a good question. If this demand-response mechanism does what it is claimed to do, it could be a significant development for the electricity markets in southern and eastern Australia. But the actual proposal is eye-wateringly complex and there is reason to be circumspect.

What is proposed and how does it work?

The Australian Energy Market Commission’s determination is that new market participants, to be known as “Demand Response Service Providers” (DRSPs), will be allowed to offer hypothetical demand reductions into the wholesale market at prices they determine. If the price they offer for such reductions is less than the price at which the market clears, the DRSPs will be paid the market price, as if they were a generator, for these hypothetical reductions.

One obvious difficulty here is the fact that the reductions are hypothetical. They are the difference between the customers’ demand if they did not respond to an enticement to reduce demand – the “baseline” – and their actual demand. Customers (and DRSPs) have an incentive to overstate the baseline, as this increases the volume of the reductions they offer and, if accepted, get paid for.

DRSPs profit from the demand reductions they sell, and so they have an incentive to seek out customers who are willing to reduce demand relative to the baseline.

Retailers that sell electricity to DRSPs’ customers will buy (from the wholesale market) the actual volume of electricity consumed and also the hypothetical demand reduction, and pay the wholesale price for both. The retailer charges the customer for the actual demand and charges the DRSP for the demand reduction at a regulated price equal to the 12-month load-weighted average wholesale price.




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Here’s a glossary of the energy debate



This will typically leave the retailer out of pocket by an amount equal to the difference between the actual wholesale price at which they have “bought” the demand reductions, and the 12 monthly weighted average wholesale price (which will almost certainly be lower, because demand reductions will occur when wholesale prices are higher than average)

Retailers will seek to recover the shortfall from the DRSPs’ customers or, more likely, from all their customers. To the extent that they are unable to recover the shortfall, retailers are likely to try to offload those of their customers that are paid to reduce demand.

This is a simplified description of the arrangement. The complexity of the actual data and money flows between customers, DRSPs, retailers, the energy market operator, network service providers and regulators is enough to provoke a nose-bleed from the most seasoned corporate lawyers.

By now, I am sure you are wondering why all the bother with baselines and hypothetical reductions. Why not simply pay customers for actual load reductions? The answer, in short, is that the pool of possible directly contracted customers is small.

If demand response is to be extended to thousands of customers – as this proposal seeks to do – setting baselines and hence hypothetical demand reductions, with all their unwelcome consequences, is unavoidable.

Will it work?

I am not sure. It is certainly punishingly complex. The energy market operator and regulator will have their hands full ensuring that baselines are not set at a level that prints money for DRSPs and their customers, at the expense of retailers and other electricity users. If the market operator and regulator achieve this without imposing undue cost and administrative burden, this demand-response proposal has promise.




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It will be fascinating to see whether DRSPs can indeed flush out the “latent flexibility” in a manner that is advantageous to themselves, the latently flexible, and the rest of us. Like many others, I will be watching with interest.

Update: Following publication, the AEMC clarified they intended to refer to the 12 month load-weighted average wholesale price of energy, rather than the simple average price. The article has been updated to reflect this.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.

Wind and solar cut rather than boost Australia’s wholesale electricity prices



Power failure. It’s gas, not wind, that’s pushing up electricity prices.
Shutterstock

Zsuzsanna Csereklyei, RMIT University

The 2019 Australian Conference of Economists is taking place in Melbourne from July 14 to 16.

During the conference The Conversation is publishing a selection of articles by the authors of papers being delivered at the conference. Others are here.


Wholesale prices in the National Electricity Market have climbed significantly in recent years. The increase has coincided with a rapid increase in the proportion of electricity supplied by wind and solar generators.

But that needn’t mean the increase in wind and solar generation caused the increase in prices. It might have been caused by other things.

Colleagues Songze Qu and Tihomir Ancev from the University of Sydney and I have examined the contribution of each type of generator to wholesale prices, half hour by half hour over the eight years between November 1, 2010 and June 30, 2018.

We find that, rather than pushing prices up, each extra gigawatt of dispatched wind generation cuts the wholesale electricity price by about A$11 per megawatt hour at the time of generation, while each extra gigawatt of utility-scale solar cuts it A$14 per megawatt hour.

Merit order matters

Here’s how.

In Australia’s National Electricity Market, prices are determined at five-minute intervals and averaged over 30-minute intervals for settlement. Generators place bids for supplying electricity to meet the expected demand which are accepted in a “merit order” of cheapest to most expensive.

The final price – awarded to all the bidders accepted – is determined by the final and most expensive bid accepted, which is often a bid by a gas generator.




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Wind and utility-scale solar generators bid into the market at low cost because their power is essentially free when the wind is blowing or the sun is shining. They displace higher cost bids, usually from gas or diesel turbines that have high fuel costs. We find this effect on prices (known as the “merit order effect”) has grown as wind and solar generation has grown.

The daily impact of wind and solar on wholesale prices is somewhat lower. A 1 gigawatt per hour increase in daily wind generation
is associated with about a A$1 per megawatt hour decrease in
the average daily wholesale price. The same increase in solar generation is associated with A$2.7 per megawatt hour decrease in daily wholesale electricity prices.

These findings and those of others since 2003 challenge the previous conventional wisdom that mandating renewable generation necessarily increases prices.

So why are prices climbing?

Natural gas prices have been climbing dramatically over the recent years, mainly due to the opening up of east coast export capacity and the integration of the Australian market with international markets. The higher prices have made it more expensive to run gas turbines and have pushed up the price of what is often the last bid to be accepted.

We find the price of natural gas has a strong positive effect on wholesale electricity prices. An increase of A$1 per gigajoule in the natural gas price pushes up wholesale electricity prices by about A$5 per megawatt hour.

Although in recent years the upward price pressure from more expensive gas has overwhelmed the downward pressure from greater wind and solar capacity, it is nevertheless true that wholesale prices are lower than they would have been without renewable generation.

Therefore, a continued expansion of renewables is likely to put downward pressure on wholesale prices for some time.

There’s a case for moving away from gas peaking plants

This means that rather than reconsidering renewables, authorities should reconsider their reliance on gas plants for handling peaks in demand. While peaking plants are more needed with the increased penetration of renewables, there is a case for switching to alternative providers of peaking power, such as large-scale batteries and pumped hydro.

In doing so governments should also consider something else. Wholesale prices that are too low will discourage investment, leading to higher prices down the track.

The lower prices go, the more the government might need to provide investment incentives.

For now, all other things being equal, more wind and solar power means lower wholesale prices. But they’ll have to be watched.




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The Conversation


Zsuzsanna Csereklyei, Lecturer in Economics, RMIT University

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

Is Australia’s electricity grid vulnerable to the kind of cyber attacks taking place between Russia and the US?



Power grids are high priority targets during conflict.
Shutterstock

Andrew Dowse, Edith Cowan University and Mike Johnstone, Edith Cowan University

The New York Times reported earlier this month that the United States was increasing its cyber attacks on Russia’s power grid. The attacks are seen as a warning against Russian intrusions into US systems, but one that carries a risk of escalation.

The public reporting of previously covert cyber attacks earned a retort from US President Donald Trump, who accused the New York Times journalists of a “virtual act of treason”.

But the story has been useful in generating discussion about the reasons for – and potential consequences of – such actions. It also raises the question of how vulnerable Australia’s power grid is.

So let’s take a look at who is capable of carrying out these kinds of attacks, how they work, and whether Australia is doing enough to protect itself.




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Are these attacks limited to the US and Russia?

Recent events may be newly reported, but the events themselves aren’t that new. Russian cyber attacks on US infrastructure may have been going on for years. According to the New York Times report, the US may have been undertaking similar intrusions in Russia since 2012.

While the story is limited to discussing cyber conflict between the US and Russia, there are many nation states with the ability to carry out such attacks.

To make things more complex, non-government actors can also launch cyber attacks. That includes individuals, organised crime groups, and proxies for nation states.

Why are we learning about this now?

When we talk about cyber security, and how to defend against threats from nation states, we’re usually talking about protecting confidential information. But when it comes to power grids, confidentiality isn’t particularly important. What is important is continuity of service, also called “availability”.

An adversary’s power availability would be a high-priority target during a conflict. Outside of conflict, the only logical rationale for a nation state to intrude on such systems would be to undertake reconnaissance and deploy malware that can remain dormant until needed.

In this regard, it doesn’t make sense that the US would intentionally leak its efforts, as appears to have been the case. It would prompt Russia to find the malware and, by disclosing intrusion techniques, it would “burn capabilities”.

Additionally, evidence of attacks could lead to an escalation of cyberwar between the US and Russia. Escalation is unlikely as long as responses to counter cyber attacks are undertaken in line with the principles of necessity and proportionality. But the uncertainty of attribution and consequences creates a potential for miscalculation in conducting cyber attacks.

The New York Times article was notable because it suggested the US president gave his commanders authorisation to undertake cyber attacks without his oversight. To avoid miscalculation, a balance is needed between a speedy response in cyber “active defence” and the kind of proper deliberation that will ensure the response is appropriate.

To date, there is no evidence that nation-state delivered attacks have resulted in power outages in the US or Russia. The apparent leak to the New York Times may not relate to a specific counterattack against the Russian power grid. Instead, it may be a form of diplomacy intended to signal US willingness and capability to counterattack.




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How are such attacks possible?

Critical infrastructure is a term that refers to chemical production plants, power stations, oil platforms, and water pump stations. The technology that operates such infrastructure is called “operational technology” (OT). OT is a cyber-physical system that controls electricity generators and valves that mix chemicals in vats or transfer gas through pipelines.

To understand the threat, it helps to contrast OT with information technology (IT).

Confidentiality is a primary consideration for IT staff, who are focused on securing data from threats. They are well practised in patching vulnerable systems under their control. In an OT environment, availability is the primary driver, so keeping the plant working is considered more important than protecting against cyber threats.

Another difference between the IT and OT worlds is the lifetime of assets. OT system devices are built to last a long time before replacement. Using legacy OT technology that still works in itself is not a problem, as long as that technology is separated from other systems.

But the IT and OT worlds are converging to enable remote control and access to real-time plant operating data. Aside from the tension between priorities of confidentiality and availability, this convergence opens up OT vulnerabilities to attack.

When OT systems were developed decades ago, there was little thought of security, since most systems were only accessible on-site or through dedicated networks. With IT-OT convergence, keeping systems secure becomes a priority, but not at the expense of availability. Stopping a system, either for an update or due to a cyber attack, results in lost revenue and impact upon customers who could, for instance, lose power to their homes.

Have we seen successful attacks in the past?

Cyber attacks on Ukrainian power stations in 2015 and 2016 affected more than 200,000 customers, and provided lessons for the rest of us.

These events showed that an attack was more than just theoretical in the domain of energy systems. Engineers needed to physically visit each substation to return systems to operation.

As similar technology is used worldwide, the power grids of other nations are potentially vulnerable. Additionally, the malware used to command and control attacks is increasingly available for hire as cyber crime moves to a service-based model. And more sophisticated tools mean attackers require less skill to locate and attack internet connected devices.




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How vulnerable is Australia’s power grid?

In 2016, Australia’s Chief Scientist Alan Finkel released a review into the future security of the national electricity market. Following advice that the cyber threat to the national energy market was increasing, Finkel recommended stronger security measures be put in place.

By 2017, some action had been initiated to mitigate threats in the energy sector. Subsequently the Security of Critical Infrastructure Act 2018 was passed. The Act contains elements to help the government better appreciate the risk and to make certain directions to service providers to increase security.

The government is reportedly considering a proposal to enable the Australian Signals Directorate (ASD) to access the networks of companies operating critical infrastructure to defend them against cyber attacks.

In 2018, the Australian Energy Market Operator (AEMO) released the first annual report into the cyber preparedness of the market, identifying that current provisions are inadequate. AEMO has established a framework for operators to assess their security maturity, and strengthen measures.

Notwithstanding these efforts, recent reports suggest the number of attacks on critical infrastructure is growing. Meanwhile, the ability to prevent, detect or respond to these attacks remains low.

For many critical infrastructure systems, OT is a sunk investment that would be expensive to replace. Implementing substantial security improvements to upgrade the legacy energy environment will also be expensive, and it’s likely that costs will be passed onto customers. But there are cost-effective ways of improving security, including threat/vulnerability system monitoring. Some companies in Australia are doing this.

Cyber warfare is a reality. We should expect that cyber criminals and nation states adversaries could have some impact our lives in future by attacking critical infrastructure, such as the electricity grid.

Securing our infrastructure is a priority for the government and increasingly recognised as such by the market participants. The cost and need for security mitigations may seem unpalatable to many, but steps need to be taken to prevent a return to the dark ages.The Conversation

Andrew Dowse, Director, Defence Research and Engagement, Edith Cowan University and Mike Johnstone, Security Researcher, Associate Professor in Resilient Systems, Edith Cowan University

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

Australia’s still building 4 in every 5 new houses to no more than the minimum energy standard


Trivess Moore, RMIT University; Michael Ambrose, CSIRO, and Stephen Berry, University of South Australia

New housing in Australia must meet minimum energy performance requirements. We wondered how many buildings exceeded the minimum standard. What our analysis found is that four in five new houses are being built to the minimum standard and a negligible proportion to an optimal performance standard.

Before these standards were introduced the average performance of housing was found to be around 1.5 stars. The current minimum across most of Australia is six stars under the Nationwide House Energy Rating Scheme (NatHERS).

This six-star minimum falls short of what is optimal in terms of environmental, economic and social outcomes. It’s also below the minimum set by many other countries.




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There have been calls for these minimum standards to be raised. However, many policymakers and building industry stakeholders believe the market will lift performance beyond minimum standards and so there is no need to raise these.

What did the data show?

We wanted to understand what was happening in the market to see if consumers or regulation were driving the energy performance of new housing. To do this we explored the NatHERS data set of building approvals for new Class 1 housing (detached and row houses) in Australia from May 2016 (when all data sets were integrated by CSIRO and Sustainability Victoria) to December 2018.

Our analysis focuses on new housing in Victoria, South Australia, Western Australia, Tasmania and the ACT, all of which apply the minimum six-star NatHERS requirement. The other states have local variations to the standard, while New South Wales uses the BASIX index to determine the environmental impact of housing.

The chart below shows the performance for 187,320 house ratings. Almost 82% just met the minimum standard (6.0-6.4 star). Another 16% performed just above the minimum standard (6.5-6.9 star).

Only 1.5% were designed to perform at the economically optimal 7.5 stars and beyond. By this we mean a balance between the extra upfront building costs and the savings and benefits from lifetime building performance.

NatHERS star ratings across total data set for new housing approvals, May 2016–December 2018.
Author provided

The average rating is 6.2 stars across the states. This has not changed since 2016.

Average NatHERS star rating for each state, 2016-18.
Author provided

The data analysis shows that, while most housing is built to the minimum standard, the cooler temperate regions (Tasmania, ACT) have more houses above 7.0 stars compared with the warm temperate states.

NatHERS data spread by state.
Author provided

The ACT increased average performance each year from 6.5 stars in 2016 to 6.9 stars in 2018. This was not seen in any other state or territory.

The ACT is the only region with mandatory disclosure of the energy rating on sale or lease of property. The market can thus value the relative energy efficiency of buildings. Providing this otherwise invisible information may have empowered consumers to demand slightly better performance.




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We are paying for accepting a lower standard

The evidence suggests consumers are not acting rationally or making decisions to maximise their financial well-being. Rather, they just accept the minimum performance the building sector delivers.

Higher energy efficiency or even environmental sustainability in housing provides not only significant benefits to the individual but also to society. And these improvements can be delivered for little additional cost.




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The fact that these improvements aren’t being made suggests there are significant barriers to the market operating efficiently. This is despite increasing awareness among consumers and in the housing industry about the rising cost of energy.

Eight years after the introduction of the six-star NatHERS minimum requirement for new housing in Australia, the results show the market is delivering four out of five houses that just meet this requirement. With only 1.5% designed to 7.5 stars or beyond, regulation rather than the economically optimal energy rating is clearly driving the energy performance of Australian homes.

Increasing the minimum performance standard is the most effective way to improve the energy outcomes.

The next opportunity for increasing the minimum energy requirement will be 2022. Australian housing standards were already about 2.0 NatHERS stars behind comparable developed countries in 2008. If mandatory energy ratings aren’t increased, Australia will fall further behind international best practice.

If we continue to create a legacy of homes with relatively poor energy performance, making the transition to a low-energy and low-carbon economy is likely to get progressively more challenging and expensive. Recent research has calculated that a delay in increasing minimum performance requirements from 2019 to 2022 will result in an estimated A$1.1 billion (to 2050) in avoidable household energy bills. That’s an extra 3 million tonnes of greenhouse gas emissions.




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Our research confirms the policy proposition that minimum house energy regulations based on the Nationwide House Energy Rating Scheme are a powerful instrument for delivering better environmental and energy outcomes. While introducing minimum standards has significantly lifted the bottom end of the market, those standards should be reviewed regularly to ensure optimal economic and environmental outcomes.The Conversation

Trivess Moore, Lecturer, RMIT University; Michael Ambrose, Research Team Leader, CSIRO, and Stephen Berry, Research fellow, University of South Australia

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