The South Australian government and Tesla recently announced a large-scale solar and storage scheme that will distribute solar panels and batteries free of charge to 50,000 households.
This would form what has been dubbed a “virtual power plant”, essentially delivering wholesale energy and service systems. This is just the latest in South Australia’s energetic push to embrace renewables, make energy cheaper and reduce blackout-causing instability.
The catch is that more than a third of the costs of a power system are in the distribution networks, as are most of the faults. A virtual power plant on its own can’t necessarily solve the problems of costly network management.
The bundling of batteries together to power a network doesn’t consider the needs of either households or the network.
To address these problems, we’re trialling technology in Tasmania that intelligently controls fleets of batteries and other home devices with the aim of making networks more flexible, reliable, and cheaper to operate.
The Bruny Island Battery trial
Part of what we need to transition to a more reliable and cleaner grid is better control of power networks. This will improve operation during normal times, reduce stress during peak times, and remove the need for costly investment over the long term.
For instance, sometimes the network simply needs more energy in one particular location. Perhaps a household doesn’t want the grid to draw power from their battery on a particular day, because it’s cheaper for them to use it themselves. Most models of virtual power plants don’t take these different needs into account.
Bruny Island in Tasmania is the site of a three-year trial, bringing together researchers from the the Australian National University, the University of Sydney, the University of Tasmania, TasNetworks and tech start-up Reposit Power.
Thirty-three households have been supplied with “smart battery” systems, charged from solar cells on their roofs, and a “controller” box that sits between the house and the power lines.
Participants are paid when their batteries supply energy to the Bruny Island network, which is sometimes overloaded during peak demand. Their bills will also go down because they’ll be drawing household power from their battery when it is most cost-effective for them.
In a world first, Network-Aware Coordination (NAC) software coordinates individual battery systems. The NAC automatically negotiates battery operations with the household (via the controller box), to decide whether the battery should discharge onto the grid or not.
In these negotiations, computer algorithms request battery assistance at a price that reflects the value to the network. If the price is too low for the household, for example because they are better off storing the energy for their own use later in the day, the controller will make a counter-offer to the network with a higher price.
The negotiation continues until they find a solution that works for the network, at the lowest overall cost.
The NAC-based negotiation is half of the economic equation. Battery owners will also be compensated for their work in supporting the grid. The trial team are working out a payment system that passes on some of the networks’ savings created by avoiding diesel generator use on Bruny Island.
Distributed battery systems, such as in Tesla’s South Australian proposal, represent one possible future. The question that we’re exploring is how to coordinate large numbers of customer-owned batteries to work in the best interests of both the consumer and the network.
The primary feature of virtual power plants, to lump together resources, runs counter to what is required for targeted distribution network support. Nor do virtual power plants necessarily have to act in the best interest of householders.
In contrast, we’re trialling technology that acts in the financial interests of householders, to earn value from their batteries by providing location-specific services to networks, at a time and price that suits the customer.
As currently conceived, the South Australian scheme may not be the most cost-effective solution to dealing with our evolving electricity system’s needs. The Bruny trial shows a different possible future grid – one which allows people to produce and store energy for themselves, and also share it, reducing pressure on the network and allowing higher penetrations of renewables.
– The Bruny trial is funded by ARENA, and is a collaborative venture lead by The Australian National University, with project partners The University of Sydney, University of Tasmania, battery control software business Reposit Power, and TasNetworks.
Tens of thousands of Victorians were left without power over the long weekend as the distribution network struggled with blistering temperatures, reigniting fears about the stability of our energy system.
It comes on the heels of a summer of “trips”, when power stations temporarily shut down for a variety of reasons. This variability has also been used to attack renewable energy such as wind and solar, which naturally fluctuate depending on weather conditions.
The reality is that blackouts, trips and intermittency are three very different issues, which should not be conflated. As most of Australia returns to school and work in February, and summer temperatures continue to rise, the risk of further blackouts make it essential to understand the cause of the blackouts, what a power station “trip” really is, and how intermittent renewable energy can be integrated into a national system.
Initial reports indicate recent blackouts in Victoria were caused by multiple small failures in the electricity distribution system across the state, affecting all but one of the five separately owned and managed systems that supply Victorians.
Across the whole of mainland Australia, very hot weather causes peak levels of electricity consumption. Unfortunately, for reasons of basic physics, electricity distribution systems do not work well when it is very hot, so the combination of extreme heat and high demand is very challenging. It appears that significant parts of the Victorian electricity distribution system were unable to meet the challenge, leading to uncontrolled blackouts.
Parenthetically, electricity distribution systems are vulnerable to other types of uncontrollable extreme environmental events, including high winds, lightning, and bushfires. Sometimes blackouts last only a few seconds, sometimes for days, depending on the nature and extent of the damage to the system.
These blackouts are very different from those caused by power station “trips”, although they have the same effect on consumers. When electricity is insufficient to meet demand, certain sections of the grid have to be startegically blacked out to restore the balance (this is known as “load shedding”).
It is the possibility of blackouts of this second type which has excited so much commentary in recent months, and has been linked to power station “trips”.
What is a ‘trip’ and how significant is it?
“Trip” simply means disconnect; it is used to describe the ultra-fast operation of the circuit breakers used as switching devices in high-voltage electricity transmission systems. When a generator trips, it means that it is suddenly, and usually unexpectedly, disconnected from the transmission network, and thus stops supplying electricity to consumers.
The key words here are suddenly and unexpectedly. Consider what happened in Victoria on January 18 this year. It was a very hot day and all three brown coal power stations in the state were generating at near full capacity, supplying in total about 4,200 megawatts towards the end of the afternoon, as total state demand climbed rapidly past 8,000MW (excluding rooftop solar generation).
Suddenly, at 4:35pm, one of the two 500MW units at Loy Yang B, Victoria’s newest (or, more precisely, least old) coal-fired power station tripped. At the time this unit was supplying 490MW, equal to about 6% of total state demand.
The system, under the operational control of the Australia Energy Market Operator (AEMO), responded just as it was meant to. There was considerable spare gas generation capacity, some of which was immediately made available, as was some of the more limited spare hydro capacity. There was also a large increase in imports from New South Wales, and a smaller reduction in net exports to South Australia.
By the time Loy Yang B Unit 1 was fully back on line, three hours later, Victoria had passed its highest daily peak demand for nearly two years. There was no load shedding: all electricity consumers were supplied with as much electricity as they required. However, spot wholesale prices for electricity reached very high levels during the three hours, and it appears that some large consumers, whose supply contracts exposed them to wholesale prices, made short-term reductions in discretionary demand.
This (relatively) happy outcome on January 18 was made possible by the application of the system reliability rules and procedures, specified in the National Electricity Rules.
These require AEMO to ensure that at all times, in each of the five state regions of the NEM, available spare generation capacity exceeds the combined capacity of the two largest units operating at any time.
In other words, spare capacity must be sufficient to allow demand to continue to be reliably supplied if both of the two largest units generating should suddenly disconnect.
AEMO forecasts energy demand, and issues market notices alerting generators about reliability, demand and potential supply issues. On a busy day, like January 18, market notices may be issued at a rate of several per hour.
These forecasts allowed generators to respond to the loss of Loy Yang B without causing regional blackouts.
What is not publicly known, and may never be known, is why Loy Yang Unit B1 tripped. AEMO examines and reports in detail on what are called “unusual power system events”, which in practice means major disruptions, such as blackouts. There are usually only a few of these each year, whereas generator trips that don’t cause blackouts are much more frequent (as are similar transmission line trips).
It has been widely speculated that, as Australia’s coal fired generators age, they are becoming less reliable, but that could only be confirmed by a systematic and detailed examination of all such events.
Managing variable generation
Finally, and most importantly, the events described above bear almost no relationship to the challenges to reliable system operation presented by the growth of wind and solar generation.
With traditional thermal generation, the problems are caused by unpredictability of sudden failures, and the large unit size, especially of coal generators, which means that a single failure can challenge total system reliability. Individual wind generators may fail unpredictably, but each machine is so small that the loss of one or two has a negligible effect on reliability.
The challenge with wind and solar is not reliability but the variability of their output, caused by variations in weather. This challenge is being addressed by continuous improvement of short term wind forecasting. As day-ahead and hour-ahead forecasts get better, the market advice AEMO provides will give a more accurate estimate of how much other generation will be needed to meet demand at all times.
Of course, AEMO, and the generation industry, do still get caught out by sudden and unexpected drops in wind speed, but even the fastest drop in wind speed takes much longer than the milliseconds needed for a circuit breaker in a power station switchyard to trip out.
At the same time, as the share of variable renewable generation grows, the complementary need for a greater share of fast response generators and energy storage technologies will also grow, while the value to the system of large, inflexible coal-fired generators will shrink.
It’s been hot – and it’s going to get hotter. Australia has experienced some record hot days in recent weeks and scientists say Sydney and Melbourne need to prepare for 50℃ days by the end of the century, or sooner.
In today’s episode of Trust Me I’m An Expert, we’re unpacking the research on why some of the most disadvantaged parts of our cities cop the worst of a heatwave.
And Chris Dunstan, an expert on energy policy, explains why February is the month when energy ministers and energy operators really get worried there won’t be enough electricity to go around – and how you can do your bit to curb blackout risk.
Join us as we ask academic experts to explain the issues making news in Australia.
Trust Me, I’m An Expert is out at the start of every month. Find us and subscribe in Apple Podcasts, Pocket Casts or wherever you get your podcasts.
If there is to be an effective response to climate change, it will probably emanate from China. The geopolitical motivations are clear. Renewable energy is increasingly inevitable, and those that dominate the markets in these new technologies will likely have the most influence over the development patterns of the future. As other major powers find themselves in climate denial or atrophy, China may well boost its power and status by becoming the global energy leader of tomorrow.
President Xi Jinping has been vocal on the issue. He has already called for an “ecological civilization”. The state’s “green shift” supports this claim by striving to transition to alternative energies and become more energy efficient.
But there are material benefits as well. China’s proactive response has impacted on global energy markets. Today, five of the world’s six top solar-module manufacturers, five of the largest wind turbine manufacturers, and six of the ten major car manufacturers committed to electrification are all Chinese-owned. Meanwhile, China is dominant in the lithium sector – think: batteries, electric vehicles and so on – and a global leader in smart grid investment and other renewable energy technologies.
This is only a start. There are modest projections that just 20% of the country’s primary energy consumption will come from non-carbon sources by 2030. Nonetheless, China’s sheer size means Beijing’s aggressive pursuit of emergent and expanding renewables markets should not be ignored. After all, dominating such markets has strong material benefits, while pioneering a green revolution provides intangible benefits in terms of state image and prestige.
So what are these benefits? First, concerns over environmental degradation are very real in China, owing to issues such as air, food and water pollution, and should be acknowledged. Beijing doesn’t want food and water scarcity or smoggy skies either, whether for altruistic environmental reasons or concerns over its popular legitimacy.
But it is worth also considering the geopolitical implications of climate change leadership. Take the US for example, historically the largest carbon emitter. The country had previously been active in climate policy, if somewhat hypocritical (support for hydraulic fracturing, for instance). But the current Trump administration is forthright in its baseless denial of climate change, having withdrawn from the Paris Agreement. It has also hired climate deniers to head its environmental agencies and other offices of power.
Contrast this with China, which is becoming increasingly proactive. In 2016 it became the largest shareholder in a new Asian Infrastructure Investment Bank which, along with the BRICS-established New Development Bank, invests heavily in green energy. The two institutions are seen as potential competitors to the IMF and the World Bank.
Of course, the situation is not black and white with China “going green” and everyone else sitting idly by. The Shanghai Cooperation Organisation (SCO), which commits to political, economic and military integration across Eurasia, the world’s largest landmass, for instance, comprises of nations with strategic interests in exporting hydrocarbons and coal. However, the same is true for the more environmentally aware Obama administration which advocated forcefully the Trans-Pacific Partnership that would have overriden attempts to establish green industries and constrained signatory states to its agreements with big business ahead of climate change action.
To this end, former president Obama argued that it was necessary for the US to shape the rules of global trade to US benefit. That being the case, what about China? As a major power, it is strengthening its international agency by pioneering these multilateral alternatives, many of which heavily invest in green energy projects. Through development banks or Asian trade agreements, China can provide an alternative vision to an international integration ostensibly based on the universal values espoused by the US and its chief allies.
“Going green”, then, while undeniably necessary, is a useful image or value to uphold as it serves to legitimate Chinese international and regional leadership. In this sense, it mirrors the way G7 nations espouse “democracy” or “freedom”. Going green also happens to be economically viable for those that have the funds to invest, contributing to China’s transition from the world’s manufacturing base to a truly major power.
China’s response to climate change combined with the size of its economy has thrust it to the centre of a global shift. Large-scale funding through Chinese-led multilateral frameworks could see a new energy system emerge – led by China. This would greatly extend its influence on the international political economy at the expense of those major powers unable or unwilling to respond.
It’s just over one month since the Hornsdale power reserve was officially opened in South Australia. The excitement surrounding the project has generated acres of media interest, both locally and abroad.
The aspect that has generated the most interest is the battery’s rapid response time in smoothing out several major energy outages that have occurred since it was installed.
Following the early success of the SA model, Victoria has also secured an agreement to get its own Tesla battery built near the town of Stawell. Victoria’s government will be tracking the Hornsdale battery’s early performance with interest.
Generation and Consumption
Over the full month of December, the Hornsdale power reserve generated 2.42 gigawatt-hours of energy, and consumed 3.06GWh.
Since there are losses associated with energy storage, it is a net consumer of energy. This is often described in terms of “round trip efficiency”, a measure of the energy out to the energy in. In this case, the round trip efficiency appears to be roughly 80%.
The figure below shows the input and output from the battery over the month. As can be seen, on several occasions the battery has generated as much as 100MW of power, and consumed 70MW of power. The regular operation of battery moves between generating 30MW and consuming 30MW of power.
As can be seen, the the generation and consumption pattern is rather “noisy”, and doesn’t really appear to have a pattern at all. This is true even on a daily basis, as can be seen below. This is related to services provided by the battery.
Frequency Control Ancillary Services
There are eight different Frequency Control Ancillary Services (FCAS) markets in the National Electricity Market (NEM). These can be put into two broad categories: contingency services and regulation services.
Contingency services essentially stabilise the system when something unexpected occurs. This are called credible contingencies. The tripping (isolation from the grid) of large generator is one example.
When such unexpected events occur, supply and demand are no longer balanced, and the frequency of the power system moves away from the normal operating range. This happens on a very short timescale. The contingency services ensure that the system is brought back into balance and that the frequency is returned to normal within 5 minutes.
In the NEM there are three separate timescales over which these contingency services should be delivered: 6 seconds, 60 seconds, and 5 minutes. As the service may have to increase or decrease the frequency, there is thus a total of six contingency markets (three that raise frequency in the timescales above, and three that reduce it).
This is usually done by rapidly increasing or decreasing output from a generator (or battery in this case), or rapidly reducing or increasing load. This response is triggered at the power station by the change in frequency.
To do this, generators (or loads) have some of their capacity “enabled” in the FCAS market. This essentially means that a proportion of its capacity is set aside, and available to respond if the frequency changes. Providers get paid for for the amount of megawatts they have enabled in the FCAS market.
This is one of the services that the Hornsdale Power Reserve has been providing. The figure below shows how the Hornsdale Power Reserve responded to one incident on power outage, when one of the units at Loy Yang A tripped on December 14, 2017.
The regulation services are a bit different. Similar to the contingency services, they help maintain the frequency in the normal operating range. And like contingency, regulation may have to raise or lower the frequency, and as such there are two regulation markets.
However, unlike contingency services, which essentially wait for an unexpected change in frequency, the response is governed by a control signal, sent from the Australian Energy Market Operator (AEMO).
In essence, AEMO controls the throttle, monitors the system frequency, and sends a control signal out at a 4-second interval. This control signal alters the output of the generator such that the supply and demand balanced is maintained.
This is one of the main services that the battery has been providing. As can be seen, the output of the battery closely follows the amount of capacity it has enabled in the regulation market.
More batteries to come
Not to be outdone by it’s neighbouring state, the Victorian government has also recently secured an agreement for its own Tesla battery. This agreement, in conjunction with a wind farm near the town of Stawell, should see a battery providing similar services in Victoria.
This battery may also provide additional benefits to the grid. The project is located in a part of the transmission network that AEMO has indicated may need augmentation in the future. This project might illustrate the benefits the batteries can provide in strengthening the transmission network.
It still early days for the Hornsdale Power Reserve, but it’s clear that it has been busy performing essential services and doing so at impressive speeds. Importantly, it has provided regular frequency control ancillary services – not simply shifting electricity around.
With the costs and need for frequency control service increasing in recent years, the boost to supply through the Hornsdale power reserve is good news for consumers, and a timely addition to Australia’s energy market.
But for most Australians, the most visible impact of this crisis has been their ever-increasing electricity bills. Electricity prices have become a political hot potato, and the blame game has been running unchecked for more than a year.
Electricity retailers find fault with governments, and renewable energy advocates point the finger at the nasty old fossil-fuel generators. The right-wing commentariat blames renewables, while the federal government blames everyone but itself.
The truth is there is no silver bullet. No single factor or decision is responsible for the electricity prices we endure today. Rather, it is the confluence of many different policies and pressures at every step of the electricity supply chain.
Four components make up your electricity bill. Each has contributed to this increase.
The biggest culprit has been the network component – the cost of transporting the electricity. Next comes the retail component – the cost of billing and servicing the customer. Then there is the wholesale component – the cost of generating the electricity. And finally, the government policy component – the cost of environmental schemes that we pay for through our electricity bills.
Each component has a different tale, told differently in every state. But ultimately, this is a story about a decade of policy failure.
Network costs form the biggest part of your electricity bill. Australia is a big country, and moving electricity around it is expensive. As the graph above shows, network costs have contributed 40% of the total price increase over the past decade.
The reason we now pay so much for the network is simply that we have built an awful lot more stuff over the past decade. It’s also because it was agreed – through the industry regulator – that network businesses could build more network infrastructure and that we all have to pay for it, regardless of whether it is really needed.
Network businesses are heavily regulated. Their costs, charges and profits all have to be ticked off. This is supposed to keep costs down and prevent consumers being charged too much.
That’s the theory. But the fact is costs have spiralled. Between 2005 and 2016 the total value of the National Electricity Market (NEM) distribution network increased from A$42 billion to A$72 billion – a whopping 70%. During that time there has been little change in the number of customers using the network or the amount of electricity they used. The result: every unit of electricity we consume costs much more than it used to.
There are several reasons for this expensive overbuild. First, forecasts of electricity demand were wrong – badly wrong. Instead of ever-increasing consumption, the amount of electricity we used started to decline in 2009. A whole lot of network infrastructure was built to meet demand that never eventuated.
Second, governments in New South Wales and Queensland imposed strict reliability settings – designed to avoid blackouts – on the networks in the mid-2000s. To meet these reliability settings, the network businesses had to spend a lot more money reinforcing their networks than they otherwise would have.
Third, the way in which network businesses are regulated encourages extra spending on infrastructure. In an industry where you are guaranteed a 10% return on investment, virtually risk-free – as network businesses were between 2009 and 2014 – you are inclined to build, build, build.
The blame for this “gold-plating” of network assets is spread widely. Governments have been accused of panicking and setting reliability standards too high. The regulator has copped its share for allowing businesses too much capital spend and too high a return. Privatisation has also been criticised, which is slightly bizarre given that the worst offenders have been state-owned businesses.
The second biggest increase in your bill has been the amount we pay for the services provided to us by retailers. Across the NEM, 26% of the price increase over the past decade has been due to retail margins.
This increase in the retail component was never supposed to happen. To understand why, you must go back to the rationale for opening the retail sector to competition. Back in the 1990s, it was felt that retail energy was ripe for competition, which would deliver lower prices and more innovative products for consumers.
In theory, where competition exists, firms seek to reduce their costs to maximise their profits, in turn allowing them to reduce prices so as to grab as many customers as possible. The more they cut their costs, the more they can cut prices. Theoretically, costs are minimised and profits are squeezed. If competition works as it’s supposed to, the retail component should go down, not up.
But the exact opposite has happened in the electricity sector. In Victoria, the state that in 2009 became the first to completely deregulate its retail electricity market, the retail component of the bill has contributed to 36% of the price increase over the past decade.
On average, Victorians pay almost A$400 a year to retailers, more than any other mainland state in the NEM. This is consistent with the Grattan Institute’s Price Shock report, which showed that rising profits are causing pain for Victorian electricity consumers. Many customers remain on expensive deals, and do not switch to cheaper offers because the market is so complicated. These “sticky” customers have been cited as the cause of “excessive” profits to retailers.
But the new figures provided by the ACCC, which come directly from retailers, paint a different picture. The ACCC finds that the increase in margins in Victoria is wholly down to the increasing costs of retailers doing business.
There are reasons why competition might drive prices up, not down. Retailers now spend money on marketing to recruit and retain customers. And the existence of multiple retailers leads to duplications in costs that would not exist if a single retailer ran the market.
But these increases should be offset by retailers finding savings elsewhere, and this doesn’t seem to have happened. History may judge the introduction of competition to the retail electricity market as an expensive mistake.
So far, we have accounted for 65% of the bill increase of the past decade, and neither renewables nor coal have been mentioned once. Nor were they ever likely to be. The actual generation of electricity has only ever formed a minor portion of your electricity bill – the ACCC report shows that in 2015-16 the wholesale component constituted only 22% of the typical bill.
In the past year, however, wholesale prices have really increased. In 2015-16, households paid on average A$341 a year for the generation of electricity – far less than they were paying in 2006-07. But in the past year, that is estimated to have increased to A$530 a year.
Generators, particularly in Queensland, have been engaging in questionable behaviour, but it is the fundamental change in the supply and demand balance that means higher prices are here to stay for at least the next few years.
The truth is the cost of generating electricity has been exceptionally low in most parts of Australia for most of the past two decades. When the NEM was created in 1998, there was arguably more generation capacity in the system than was needed to meet demand. And in economics, more supply than demand equals low prices.
Over the years our politicians have been particularly good at ensuring overcapacity in the system. Most of the investment in generation in the NEM since its creation has been driven by either taxpayers’ money, or government schemes and incentives – not by market forces. The result has been oversupply.
Up until the late 2000s the market kept chugging along. Then two things happened. First, consumers started using less electricity. And second, the Renewable Energy Target (RET) was ramped up, pushing more supply into the market.
Demand down and supply up meant even more oversupply, and continued low prices. But the combination of low prices and low demand put pressure on the finances of existing fossil fuel generators. Old generators were being asked to produce less electricity than before, for lower prices. Smaller power stations began to be mothballed or retired.
Something had to give, and it did when both Alinta and Engie decided it was no longer financially viable to keep their power stations running. Far from being oversupplied, the market is now struggling to meet demand on hot days when people use the most electricity. The result is very high prices.
A tight demand and supply balance with less coal-fired generation has meant that Australia increasingly relies on gas-fired generation, at a time when gas prices are astronomical, leading to accusations of price-gouging.
Put simply, Australia has failed to build enough new generation over recent years to reliably replace ageing coal plants when they leave the market.
Is it renewable energy’s fault that coal-fired power stations have closed? Yes, but this is what needs to happen if we are to reduce greenhouse emissions. Is it renewables’ fault that replacement generation has not been built? No. It’s the government’s fault for failing to provide the right environment for new investment.
The current predicament could have been avoided if we had a credible and comprehensive emissions reduction policy to drive investment in the sector. Such a policy would give investors the confidence to build generation with the knowledge about what carbon liabilities they may face in the future. But the carbon price was repealed in 2014 and replaced with nothing.
We’re still waiting for an alternative policy. We’re still waiting for enough generation capacity to be built. And we’re still paying sky-high wholesale prices for electricity.
Green and gold
Finally, we have the direct cost of government green schemes over the past decade: the RET; the household solar panel subsidies; and the energy-efficiency incentives for homes and businesses.
They represent 16% of the price increase over the past 10 years – but they are still only 6% of the average bill.
If the aim of these schemes has been to reduce emissions, they have not done a very good job. Rooftop solar panel subsidies have been expensive and inequitable. The RET is more effective as an industry subsidy than an emissions reduction or energy transition policy. And energy efficiency schemes have produced questionable results.
It hasn’t been a total waste of money, but far deeper emissions cuts could have been delivered if those funds had been channelled into a coherent policy.
The story of Australia’s high electricity prices is not really one of private companies ripping off consumers. Nor is it a tale about the privatisation of an essential service. Rather, this is the story of a decade of policy drift and political failure.
Governments have been repeatedly warned about the need to tackle these problems, but have done very little.
Instead they have focused their energy on squabbling over climate policy. State governments have introduced inefficient schemes, scrapped them, and then introduced them again, while the federal government has discardedpolicies without even trying them.
There is a huge void where our sensible energy policy should be. Network overbuild and ballooning retailer margins both dwarf the impact of the carbon price, yet if you listen only to our politicians you’d be forgiven for thinking the opposite.
And still it goes on. The underlying causes of Australia’s electricity price headaches – the regulation of networks, ineffective retail market competition, and our barely coping generators – need immediate attention. But still the petty politicking prevails.
The Coalition has rejected the Clean Energy Target recommended by Chief Scientist Alan Finkel. Labor will give no guarantee of support for the government’s alternative policy, the National Energy Guarantee. Some politicians doubt the very idea that we need to act on climate change. Some states have given up on Canberra and are going it alone.
We’ve been here before and we know how this story ends. Crisis wasted.
As we approach the end of the year, it’s useful to look back and forward. Now is an auspicious time, as two major energy-related reports have been released this week: the federal government’s review of their climate change policies, and a discussion paper from the Australian Energy Market Operator (AEMO) on future energy paths.
The difference between the two is striking. The AEMO paper is practical, direct and realistic. On the other hand, the climate policy review relies essentially on Australia buying lots of international carbon permits to meet our Paris target (and, implicitly, on state governments taking up the challenge their Canberra colleagues have largely abanondoned).
It’s amusing to read a document that plays with numbers in such creative ways. But it is a fairy story, and it’s no way to drive national climate policy.
But things have in fact shifted a long way – the revolution is accelerating and unstoppable. The federal government is almost irrelevant; the public statements and policies it presents are simply aimed at getting “something” through the Coalition party room, or trying to throw blame on others. It’s very sad.
The real games are being played out within state governments; in battles between energy policy agencies and regulators; by emerging industry players who do not even have formal roles in energy legisation; and by business and the community as they defend themselves from the failures around them by implementing “behind the meter” solutions and working together.
The real heavy lifters
Medals of Valour should be awarded to Chief Scientist Alan Finkel, AEMO chief executive Audrey Zibelman, and South Australian Premier Jay Weatherill.
The government’s response to this year’s Finkel Review showed that no amount of compromise would allow a sensible energy and climate policy to pass through the minefield of the Coalition party room. Prime Minister Malcolm Turnbull and Environment and Energy Minister Josh Frydenberg, both of whom know what they need to do, simply have too little political capital within that place to drive realistic energy policy.
But the Finkel Review also successfully recommended many changes that will help to fix the physical operation of the grid. Innovation and the laws of physics have finally begun to triumph over market politics and ideology.
AEMO worked out a way to get around the glacial and obstructive tactics of the Australian Energy Market Commission on demand-side action by setting up a “pilot project” to drive demand response. It has been clear for decades that this is a very cost-effective tool. Zibelman has been a voice of practical reality and clear understanding of the future of energy, including the demand side, and AEMO’s future energy paths reflects that.
Weatherill has weathered a storm of abuse over his state’s innovative energy strategy. His government has shown how a diversified approach can transform an energy system in little more than a year. But he needs to put more effort into long term energy efficiency and energy productivity improvement measures integrated with renewables and storage, to reduce pressure on electricity systems over time. For example, home cooling comprises a third of South Australia’s peak electricity demand, but could be slashed by efficient buildings and cooling equipment.
What lies ahead
Looking forward, the coming year will be shaped by some key issues, some of which are already playing out at a frenetic pace. Consider a small sample of many recent events:
As mentioned, AEMO has released a discussion paper framing a very different electricity future, and including a low-carbon scenario.
The Victorian Essential Services Commission has proposed a new “time of day” feed-in price for rooftop solar that reaches 29 cents per kilowatt-hour in afternoons and evenings. If approved, this will be a game-changer, as adding battery storage to rooftop solar will become far more attractive.
Meanwhile the federal government has released energy modelling to underpin ongoing negotiation on the National Energy Guarantee (NEG) that is simply irrelevant and embarrassing. The Energy Security Board’s involvement in this has undermined perceptions of its independence, especially when it is contrasted with the vision AEMO is discussing in its paper.
While the states have agreed to continue discussion on the NEG in April, there are some major hurdles. Primarily, states must be allowed to set and achieve their own energy targets: the federal energy minister has put the blame for problems on the states, and they now have to be seen by their voters to act.
Second, the design must ensure it does not give the dominant energy companies even more power to distort markets. Some members of the Energy Security Board seem to understand the challenges, and are optimistic they can be overcome. Time will tell.
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?
One of the most striking features of the Queensland election campaign is that all major parties are advocating public investment in electricity generation.
The real choice to be made is whether this investment will promote the goal of a decarbonised energy system, or whether it will seek to delay this transition and prolong Australia’s reliance on coal-fired electricity.
Labor and the Greens are advocating public investment in renewables, while the LNP and One Nation want a new coal-fired power station.
This choice, in turn, depends on attitudes to mainstream climate science. If the findings of mainstream science are accepted, a complete phase-out of coal-fired power, and its replacement by renewables, must take place over the next couple of decades. This implies a target of 50% renewables by around 2030.
The Queensland Renewable Energy Expert Panel modelled the achievement of a 50% renewables share for Queensland. The Expert Panel identified economic benefits of a renewable investment program including an average gain of 6,400 jobs.
Queensland has retained publicly owned electricity generators, primarily focused on coal-fired power. It would make sense for the public to diversify more into renewables.
Where the parties stand
At its recent conference, Labor committed to continued public ownership in the electricity sector and a 50% renewables target by 2030. The conference motion proposed a publicly owned energy corporation committed to protecting customers’ interests and building at least 1000 MW of clean energy.
The Greens propose more comprehensive public ownership with investment of $15 billion over the next 5 years to build publicly-owned clean energy and storage, estimated to create 5,500 jobs every year. The Labor-Green emphasis on renewables is consistent with the movement of the global mainstream.
Last week, at the UN Climate Conference in Bonn, 19 nations including the UK, New Zealand and Canada joined the Powering Past Coal Alliance, pledged to phase out coal-fired power altogether.
In sharp contrast, One Nation’s policy is based on the claim that climate change is a hoax, promoted by the United Nations as part of its sinister Agenda 21 policy, which, according to the One Nation platform, seeks to control you and your life .
This position is, at least, internally consistent. The willingness of conservative, liberal and labour governments around the world to sign up to a common climate change policy is seen by One Nation as evidence that the UN is making progress towards its goal of world domination.
The LNP takes a more ambivalent position. While backing coal and opposing renewables, its Queensland state conference narrowly rejected a motion calling on Australia to withdraw from its Paris commitments to reduce greenhouse gas emissions.
‘HELE’ of a big gamble
The key idea used to reconcile these contradiction is the idea that we can meet our commitments using “high efficiency, low emissions” (HELE) coal-fired power stations.
HELE power stations rely on the process of ultra-supercritical generation. That sounds impressive, but the reality is more prosaic. The term supercritical refers to the fact that at high temperatures and pressures, fluids are neither liquids (in this case, water) nor gases (steam) but display characteristics of both. Supercritical boilers are 10-20% more efficient than subcritical boilers.
The first supercritical boiler was invented in the 1920s. The technology was fully commercialised by the 1990s. Coal-fired power stations built in Queensland since 2000 operate on supercritical technology.
‘Ultra-supercritical’ plants, first installed around 2000, operate at even higher temperatures and pressures, but the additional increase in efficiency is limited, by the physics of the Carnot cycle, to between 10 and 15 per cent. The HELE acronym is misleading: emissions are lower than those of 20th century plants, but higher than any other generation technology.
So, the moment any substantial carbon price is imposed the proposed power plant will cease to be financially viable and will become a stranded asset. Investment in such a project is a bet that all the world’s scientists and every other government in the developed world have got things wrong or, alternatively, that Australia can go it alone on this issue.
It’s hard to see any financial institution taking a risk like this. Given the warnings already issued by regulators about the dangers of investing in stranded assets, a loan that goes bad will leave the lender open to litigation and regulatory sanctions. Will banks be willing to lend the necessary billion dollars or so on such collateral.
Should the LNP gain office, then, their policy will face a critical test. Even with a substantial public investment, will any private firm be willing to take an equity stake in what looks certain to become a stranded asset? If not, will the Queensland public be forced to bear the entire risk?
The preliminary report on energy prices released last week by the Australian Competition and Consumer Commission (ACCC) suggests that the consumer watchdog is concerned about almost every aspect of Australia’s electricity industry. It quotes customer groups who say electricity is the biggest issue in their surveys, and cites several case studies of outrageous price increases experienced by various customers.
The report is long on sympathy about the plight of Australia’s electricity users. But the true picture is even worse – in reality, the ACCC’s assessment of Australia’s energy prices compared to the rest of the world is absurdly rosy.
The ACCC quotes studies from the Electricity Supply Association and the Australian Energy Markets Commission (AEMC) to compare electricity prices in Australia with those in other OECD countries. But the ACCC’s comparison is based on two-year-old data, and badly underestimates the actual prices consumers are paying.
The AEMC’s analysis assumes all customers are on their retailer’s cheapest available offer. This is an obviously implausible assumption, and gives a favourable impression of the price that customers are paying.
As previously pointed out on The Conversation, the Thwaites review – which looked at customers’ actual bills – found that in February 2017 Victorians were typically paying A35c per kilowatt hour (kWh) – 42% more than the AEMC’s estimate. What’s more, we know that Victoria’s electricity prices are lower on average than those in South Australia, Queensland and New South Wales, and hence below the Australian average.
A part of this 42% gap – around 15% – is explained by the latest price increases that are not included in the ACCC’s comparison. But this still leaves a 27% gap between what the AEMC assumes and the evidence of actual prices.
This begs the question: why did the ACCC not recognise the widely known flaw in the AEMC’s analysis?
The real problem is overbuilt network infrastructure
The report estimates that rising network charges account for more of the price increase than all other factors put together. There is no doubt that network charges are a real problem at least in parts of Australia, although their significance relative to retailers’ costs is contested territory.
But why would distributors build far more network infrastructure than they need? And why have government-owned distributors built far more infrastructure than private ones, despite having no more demand?
The answer to this perplexing question is to be found in part in Australia’s “competitive neutrality” policy. This is Orwellian doublespeak for an approach that is neither neutral nor competitive.
Under this policy, government-owned distributors are regulated as if they are privately financed. This means that when setting regulated prices, the Australian Energy Regulator (AER) allows government distributors to charge their captive consumers for a return on their regulated assets, at the same level as if they were privately financed. That is despite the fact that private financing is much more expensive than government funding.
It’s no surprise that when offered a rate of return that far exceeds the actual cost of finance, government distributors have a powerful incentive to expand their infrastructure for a profit. This “gold-plating” incentive is a well-known in regulatory economics.
Regulators, the industry and their associations have explained higher spending on networks in a variety of ways: higher reliability standards; flawed rules; flawed forecasting of demand growth; and the need to make up for historic underinvestment.
But was there ever historic underinvestment? A 1995 article co-authored by the current AEMC chair concluded that distribution networks had been significantly overbuilt. That was more than two decades ago, government distributor regulated assets are at least three times bigger per customer now.
The chart below – based on data from the AER’s website – examines how the 12 large distributors that cover New South Wales, Victoria, Queensland and South Australia spent their money on infrastructure between 2006 and 2013. This period covers the last five-year price controls established by the state regulators, and the first control established by the AER. It was during this time that expenditure ballooned. The monetary amounts in this chart are normalised by the number of customers per distributor.
The first five distributors from left to right (and Aurora) were owned by state governments and the others are privately owned. A clear pattern emerges: the government distributors typically built much more infrastructure than the private distributors. And the government distributors focused their spending on substations, which are much easier to build (or expand or replace) than new distribution lines or cables.
We also know that the distributors’ spending on substations far outstripped the increases in the peak demand on their networks. The figure below compares the change in the government and private distributors’ substation capacity (the blue bars) with demand (the red bars) over the period that most of the expenditure occurred. Again, the amounts have been normalised by number of customers.
The gap in spending between government and private distributors is stark. It is also obvious that in all cases, but particularly for the government distributors, the expansion of substation capacity greatly exceeded demand growth – which hardly changed over this period (and is even lower now, per connection).
To put it in more tangible terms, as an average across the industry, peak demand between 2006 to 2013 increased by the equivalent of the power used by one old-fashioned incandescent light bulb, per customer. But government distributors expanded their substation capacity by more than one 100 light bulbs, per customer. The private distributors did relatively better, but still increased the capacity of their substations by the equivalent of about 30 light bulbs per customer.
My PhD thesis included econometric analysis that shows government ownership in Australia is associated with regulated asset values that are 56% higher than private distributors, and regulated revenues that are 24% higher, leaving all other factors the same.
To some, this evidence supports a “government bad, private good” conclusion. Indeed it was this line of argument that the Baird government in New South Wales used to justify its partial privatisation of two network service providers.
But in international comparisons of government and private distributors in the United States, Europe and New Zealand, no such stark differences are to be found. The huge disparity between government and private distributors is a peculiarly Australian phenomenon.
In response, the AEMC said the regulations were consistent with the “competitive neutrality” policy. But this is not true: in the policy’s own words, it was designed to stop government businesses from crowding out competitors. Distributors are protected monopolies; they do not have competitors.
The AEMC also argued, somewhat bizarrely, that it was good economics for a regulator to assume that government distributors are privately financed.
This represents the triumph of an idealistic “normative” regulatory model in which regulators act on the basis of how the regulated entity should behave rather than how they actually behave.
But it would wrong to blame the AEMC alone for this failure. All of Australia’s key institutions and governments have agreed that government distributors should be regulated as if they are privately financed. For governments that own their distributors, this has been a wonderfully profitable fiction.
Therein lies much of the explanation for what is effectively, if I may call a spade a spade, a racket.
It is an indictment of Australia’s polity and so many of its economists that the 2011 Garnaut Climate Change Review stands alone, in a library of reviews, as stating this problem clearly. In fact, if you review last week’s report from the ACCC, you will not find a single distinction between the impact of government and private distributors.
And if you thought this was yesterday’s war, you would be wrong. Despite the mass of evidence, our regulators persist in the fiction that ownership and regulation should be independent of one another.
It is difficult not to lapse into despair about Australia’s energy policy morass. Despite the valiant attempts by many, a deeply entrenched culture of half-truths, vested interests, ideology and wishful thinking still characterises all too much of what emanates from the political and administrative leadership of this industry.
Some energy consumers – Prime Minister Malcolm Turnbull among them – will buy their way out of this problem through solar panels and batteries. But the poorest households and many business customers will increasingly be left carrying the can.
Australians are angry about electricity. Not unreasonably.