As with many previous budgets, matters relating to energy and climate change were relegated to little more than a footnote in Treasurer Scott Morrison’s 2018 budget speech. And even the contents of that footnote told us nothing new.
This will bring relief to some, but cause frustration for others.
What Budget 2018 did contain was three “announcables” – or, to put it more accurately, re-announcables.
First, Morrison declared that adoption of the federal government’s National Energy Guarantee would save the average household A$400 a year on its electricity bills. This is a bit of sleight of hand. Yes, modelling for the NEG shows that consumers’ bills will be on average A$400 lower than in 2017. But much of those savings will occur before the NEG comes into force in 2020.
Second, the treasurer declared that:
All energy sources and technologies should support themselves without taxpayer subsidies. The current subsidy scheme will be phased out from 2020.
The subsidies to which Morrison refers are from the Renewable Energy Target (RET). But it is hardly news that the scheme will to be phased out from 2020. This has been known for a decade. In fact, it’s a bit of a stretch to say the subsidies are being “phased out” at all.
After 2020, existing or new renewable energy projects will still be able to generate the same renewable energy certificates for every megawatt hour of electricity they produce, which they can then sell to retailers. The ability to generate certificates – and therefore generate a subsidy – will only end in 2030. The difference between the pre- and post-2020 RET is that there will be no annual increase in the target.
Finally, the treasurer pledged that the federal government will keep up the pressure on the big energy companies to give consumers better electricity and gas deals. This announcement is a signal as to when we can expect to see the next real action from the government on energy. It will come in July, when Morrison receives the report on the Retail Electricity Pricing Inquiry, which is being carried out by the Australian Competition and Consumer Commission (ACCC).
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.
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?
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.
The big questions about Malcolm Turnbull’s energy policy will be, for consumers, what it would mean for their bills and, for business, how confident it can be that the approach would hold if Bill Shorten were elected.
The government needs to convince people they’ll get some price relief, but even as Turnbull unveiled the policy the rubbery nature of the household savings became apparent.
Crucially, the policy aims to give investors the certainty they have demanded. But the risk is this could be undermined if Labor, which is well ahead in the polls, indicated an ALP government would go off in yet another direction.
And most immediately, there is also the issue of states’ attitudes, because their co-operation is needed for the policy’s implementation. Turnbull talked to premiers after the announcement, and the plan goes to the Council of Australian Governments (COAG) next month.
Turnbull describes the policy as “a game-changer” that would deliver “affordability, reliability and responsibility [on emissions reduction]”.
Unsurprisingly – given it would end the subsidy for renewables, rejecting Chief Scientist Alan Finkel’s recommendation for a clean energy target – the policy sailed through the Coalition partyroom with overwhelming support.
Finkel later chose to go along with it rather than be offended by the discarding of his proposal. The important thing, he said, was that “they’re effectively adopting an orderly transition” for the energy sector, which was what he had urged.
In the partyroom Tony Abbott was very much a minority voice when he criticised the plan; his desire for a discussion of the politics was effectively put down by a prime minister who had his predecessor’s measure on the day.
The policy – recommended by the Energy Security Board, which includes representatives of the bodies operating and regulating the national energy market – is based on a new “national energy guarantee”, with two components.
Energy retailers across the National Electricity Market, which covers the eastern states, would have to “deliver reliable and lower emissions generation each year”.
A “reliability guarantee” would be set to deliver the level of dispatchable energy – from coal, gas, pumped hydro, batteries – needed in each state. An “emissions guarantee” would also be set, to contribute to Australia’s Paris commitments.
According to the Energy Security Board’s analysis, “it is expected that following the guarantee could lead to a reduction in residential bills in the order of A$100-115 per annum over the 2020-2030 period”. The savings would phase up during the period.
When probed, that estimate came to look pretty rough and ready. More modelling has to be done. In Question Time, Turnbull could give no additional information about the numbers, saying he only had what was in the board’s letter to the government.
So people shouldn’t be hanging out for the financial relief this policy would bring. Although to be fair, Turnbull points to the fact it is part of a suite of measures the government is undertaking.
Business welcomed the policy, but made it clear it wanted more detail and – crucially – that it is looking for bipartisanship.
The Australian Chamber of Commerce and Industry said the policy’s detail “and its ability to win bipartisan and COAG support will be critical”. Andy Vesey, chief executive of AGL, tweeted that “with bipartisan support” the policy would provide investment certainty.
The Australian Industry Group said it was “a plausible new direction for energy policy” but “only bipartisanship on energy policy will create the conditions for long-term investment in energy generation and by big energy users”.
It’s not entirely clear whether the government would prefer a settlement or a stoush with the opposition on energy.
Turnbull told parliament it had arranged for the opposition to have a briefing from the Energy Security Board, and urged Labor to “get on board” with the policy.
But Labor homed in on his not giving a “guarantee” on price, as well as the smallness of the projected savings. Climate spokesman Mark Butler said it appeared it would be “just a 50 cent [a week] saving for households in three years’ time, perhaps rising to as much as $2.00 per week in a decade”.
But while the opposition has gone on the attack, it is also hedging its bets, playing for time.
“We’ve got to have … some meat on the bones,” Butler said. “Because all the prime minister really announced today was a bunch of bones.”
“We need detail to be able to sit down with stakeholders, with the energy industry, with big businesses that use lots of energy, with stakeholder groups that represent households, and obviously state and territory governments as well, and start to talk to them about the way forward in light of the announcement the government made today,” he said.
The initial reaction from state Labor is narky. Victorian Premier Daniel Andrews said it seemed Finkel had been replaced by “professor Tony Abbott as the chief scientist”, while South Australia’s Jay Weatherill claimed Turnbull “has now delivered a coal energy target.”
These are early days in this argument. Federal Labor will have to decide how big an issue it wants to make energy and climate at the election. Apart from talking to stakeholders and waiting for more detail, it wants to see whether the plan flies at COAG.
If it does, the federal opposition could say that rather than tear up the scheme in government, it would tweak it and build on it. That way, Labor would avoid criticism it was undermining investment confidence.
But if there is an impasse with the states and the plan is poorly received by the public, the “climate wars” could become hotter.
The most important thing to understand about the federal government’s new National Energy Guarantee is that it is designed not to produce a sustainable and reliable electricity supply system for the future, but to meet purely political objectives for the current term of parliament.
Those political objectives are: to provide a point of policy difference with the Labor Party; to meet the demands of the government’s backbench to provide support for coal-fired electricity; and to be seen to be acting to hold power prices down.
Meeting these objectives solves Prime Minister Malcolm Turnbull’s immediate political problems. But it comes at the cost of producing a policy that can only produce further confusion and delay.
The government’s central problem is that, as well as being polluting, coal-fired power is not well suited to the problem of increasingly high peaks in power demand, combined with slow growth in total demand.
Coal-fired power plants are expensive to start up and shut down, and are therefore best suited to meeting “baseload demand” – that is, the base level of electricity demand that never goes away. Until recently, this characteristic of coal was pushed by the government as the main reason we needed to maintain coal-fired power.
The opposite of baseload power is “dispatchable” power, which can be turned on and off as needed.
Coal-fired plants can be adapted to be “load-following” which gives them some flexibility in their output. But this requires expensive investment and reduces the plants’ operating life. The process is particularly ill-suited to the so-called High Efficiency, Low Emissions (HELE) plants being pushed as a solution to the other half of the policy problem, reducing carbon dioxide emissions.
Given that there is only limited capacity to expand hydro (Turnbull’s Snowy 2.0 is years away, if it ever happens) and that successive governments have made a mess of gas policy, any serious expansion of dispatchable power would realistically need to focus on batteries. The South Australian government reached this conclusion some time ago, making a decision to invest in its own battery storage. That move was roundly condemned by the federal government, which at the time was still focused on baseload.
The government’s emphasis on baseload was always mistaken, but the confusion and noise surrounding energy policy meant that few people understood this. That changed in September when the Australian Energy Market Operator (AEMO) reported that Australia’s National Electricity Market faced a capacity shortfall of up to 1,000 megawatts for the coming summer, and that older baseload power stations will struggle to cope.
Clearly this situation called for more flexibility in dispatchable sources in the short term, and widespread investment in dispatchables for the long term.
A question of definition
Obviously, this presented Turnbull with a dilemma. The policy advice clearly favoured dispatchables, but vocal members of his backbench wanted a policy to subsidise coal.
This is not an entirely new approach. Before the government decided to abandon the proposed Clean Energy Target it put a lot of effort into redefining coal as “clean”. The approach here involved creating confusion between carbon capture and storage (CCS) and HELE power stations. CCS involves capturing carbon dioxide from power station smokestacks and pumping it underground, thereby avoiding emissions. This would be a great solution to the problems of carbon pollution if it worked, but unfortunately it’s hopelessly uneconomic
By contrast, HELE is just a fancy name for the marginal improvements made to coal-fired technology over the 30-50 years since most of our existing coal-fired plants were designed and built. The “low” emissions are far higher than those for gas-fired power, let alone renewables or, for that matter, nuclear energy (another uneconomic option).
The core of the government’s plan is a requirement that all electricity retailers should provide a certain proportion of dispatchable electricity – a term that has now been arbitrarily defined to include coal. By creating a demand for this supposedly dispatchable power, the policy discourages the retirement of the very coal units that AEMO has identified as ill-suited to our needs.
Given that the policy is unlikely to survive beyond the next election, it’s unlikely that it will prompt anyone to build a new gas-fired power station, let alone a coal-fired plant. So the only real effect will be to discourage investment in renewables and create yet further policy uncertainty.
This undermines the basis for the (unreleased) modelling supposedly showing that household electricity costs will fall. These savings are supposed to arise from the investment certainty resulting from bipartisan agreement. But the political imperative for the government is to put forward a policy Labor can’t support, to provide leverage in an election campaign. If the government had wanted policy certainty it could have accepted Labor’s offer to support the Clean Energy Target.
It remains to be seen whether this scheme will achieve the government’s political objectives. It is already evident, however, that it does not represent a long-term solution to our problems in energy and climate policy.
The Turnbull government has announced its new energy policy, called the National Energy Guarantee (NEG). The NEG contains two new obligations on electricity retailers. The first is to ensure we have enough electricity generation available to meet our needs (the Reliability Guarantee). The second is to drive down the sector’s greenhouse emissions (the Emissions Guarantee).
No, it’s not Chief Scientist Alan Finkel’s Clean Energy Target. But it is a policy that will drive down emissions in the electricity sector after 2020 and can be adapted by the Labor Party to hit the emissions-reduction target of any future Labor government.
In other words, the NEG can offer the previously elusive prospect of a bipartisan and credible emissions reduction policy, of the kind that industry has been crying out for.
What is the Emissions Guarantee?
Under the Emissions Guarantee, retailers will be required to buy or generate electricity with a set level of emissions intensity – the tonnes of carbon dioxide emitted per megawatt hour – each year. The allowable level of emissions intensity will be reduced each year, to stay in line with Australia’s Paris climate target.
To meet this obligation, retailers will probably build or purchase their own generation assets, or sign contracts with other generators. Over time, retailers’ portfolios will become cleaner and cleaner, as new low-emission generators are built and more high-emission generators are shut off.
There are several benefits to this scheme. Australia’s emissions targets for the electricity sector should be met. And the scheme can theoretically be ramped up to meet more challenging targets over time, simply by lowering the emissions intensity limit for retailers.
It should also be reasonably cost-effective. Rather than the government imposing quotas or limits for various types of technology, retailers will be given a free hand to pick the cheapest mix of generation that will meet their emissions obligations. It is genuinely technology-neutral.
This makes the Emissions Guarantee superior to Finkel’s Clean Energy Target. The CET would have acted as a mechanism to push clean energy technologies into the system, but it would not have cared which generators left the market as a consequence.
Under a CET, a black coal generator could leave the market instead of a higher-emitting brown coal generator, if the black coal generator produced more expensive electricity. Then even more low-emission generation would have to be built to meet the target.
The Emissions Guarantee overcomes this problem. The important outcome is that the mix of generation meets a level of emissions intensity. This can be achieved by pushing in low-emissions generation and/or by pushing out high-emissions generation. The outcome will be similar to that of an emissions intensity scheme: lower levels of renewables than under other schemes, but a cheaper way to reduce emissions.
There are downsides to this approach. First, like an emissions intensity scheme and the CET, the Emissions Guarantee is not linked directly to the absolute emissions that need to be abated if Australia is to meet its Paris targets. But this problem can be overcome if the mechanism allows some flexibility around the setting of the emissions intensity target – which it appears to do.
Nor is the scheme integrated fully with the wholesale energy market – the National Electricity Market (NEM). As a result, it could produce some perverse outcomes in the NEM, where some regions have too much of particular types of generation.
What is the Reliability Guarantee?
This is where the other part of the policy comes in. Under the Reliability Guarantee, retailers will be required to contract (or own) a certain amount of “dispatchable” generation – electricity that can be switched on at will – to meet demand in each state.
The Reliability Guarantee appears to be a type of “capacity mechanism”, aimed at ensuring that generation can always meet demand. It appears to be consistent with the “retailer capacity obligation” proposed in a Grattan Institute report last month.
Many of the precise policy details are yet to be worked out – not least the precise definition of “dispatchable generation” under this scheme. But the hope is that it will ensure all NEM states have sufficient electricity supply. Avoiding any repeat of last summer’s blackouts and shortages has become a political imperative.
While reliability might be guaranteed under the new policy, it should be remembered that capacity mechanisms tend to be both complex and costly. The devil will of course be in the detail. But the fact the government has chosen to impose the obligation on retailers suggests the market will be given the opportunity to find the least-cost solutions to our reliability needs.
A way forward?
So the retailers will now be responsible both for delivering our emissions reductions and for making sure that the lights stay on. These obligations will strengthen the incentives for retailers to own their own generation assets, rather than being hostage to wholesale prices. The issues raised by ACCC boss Rod Sims relating to the power of the big gentailers now have increased importance.
The National Energy Guarantee is not the best policy solution. A carbon price imposed on electricity generators may have avoided the need for either of the two “guarantees” contained in the NEG. But the political reality is that a carbon price of any sort is not going to be adopted in Australia any time soon.
So this is not a perfect solution, but it is better than what we have now. And importantly, it is supported by all members of the newly formed Energy Security Board. Opportunity knocks for this nation’s politicians.
The government is set to unveil its long-awaited energy plan that would scrap subsidies for renewables and impose obligations on power companies to source a certain proportion of “reliable” supply.
While the plan emphasises reliability and reducing power prices, the government is also confident it would allow Australia to meet its commitments under the Paris climate change agreement.
Cabinet considered the scheme on Monday night. It goes to the Coalition partyroom on Tuesday morning, before being announced later in the day.
It follows months of uncertainty and internal pressures within the Coalition over the future of energy policy, as the government battles to head off the risk of blackouts as well as to quell mounting voter anger at soaring bills.
In a report released on Monday the Australian Competition and Consumer Commission said residential electricity prices have increased by 63% on top of inflation in the last decade, with network costs being the major contributor.
As the government has flagged for a week, its plan rejects the clean energy target recommended in June by Chief Scientist Alan Finkel, to which Malcolm Turnbull initially appeared favourably disposed.
Ironically, the alternative scheme has been worked up by the Energy Security Board, a new body that was established on a recommendation from the Finkel inquiry.
Under the scheme, power companies would have twin obligations imposed on them by the government.
They would be required to get a certain amount of power from “reliable” sources – whether coal, gas, hydro, or batteries.
They would also have to source another amount that was consistent with lowering emissions in line with Australia’s international commitments. Australia has signed up to reducing greenhouse gas emissions to 26–28% below 2005 levels by 2030.
It would be up to the companies as to how they met the obligations put on them.
The plan assumes that prices would be driven down because the scheme would give the certainty that investors have been looking for, so supply would increase.
The Coalition party meeting will be given an estimate of the expected savings on power bills, which would be more than the A$90 annual household saving estimated under the Finkel target.
The scheme is expected to appeal to the right in the Coalition because there are no subsidies for renewables, making for a level playing field – coal is treated the same as wind and solar.
The present renewable energy target would continue until its expiry in 2020, after which there would be no new certificates issued under it.
The Energy Security Board has on it an independent chair, Kerry Schott, and deputy chair, Clare Savage, as well as the heads of the Australian Energy Market Operator (AEMO), the Australian Energy Regulator, and the Australian Energy Market Commission.
The ABC reported that Drew Clarke, a former chief-of-staff to Turnbull and former head of the communications department, will become AEMO’s chair. This would be an appointment by the Council of Australian Governments.
In Question Time, Opposition Leader Bill Shorten accused Turnbull of “caving in” to Tony Abbott by rejecting a clean energy target.
Turnbull said the government “will deliver a careful energy plan based on engineering and economics, designed to deliver the triple bottom line of affordability, reliability and meeting our international commitments. And that is in stark contrast to the ideology and the idiocy that have been inflicted on us for years by the Australian Labor Party.”
Abbott, speaking on 2GB, said that “we’ve got a big policy problem” that needed to be addressed. This included “continued heavy subsidies for unreliable power”, lack of new coal-fired baseload power, bans on gas and a lack of incentives for farmers to go along with gas development, and bans on nuclear power.
Abbott said the problem over the last few years was that “we haven’t been running a system for affordability and reliability, we’ve been running a system to reduce emissions. It’s given us some of the most expensive power in the world and this is literally insane, given that we are the country with the largest readily available reserves of coal, gas and uranium.”
Monday’s Newspoll found that 63% thought taxpayer-funded subsidies for investment in renewables should be continued; only 23% thought they should be removed. But 58% said they would not be prepared to pay any more for electricity in order to implement a clean energy target to foster more renewable energy sources.
The chairman of the Australian Competition and Consumer Commission (ACCC), Rod Sims, holds out the prospect of an absolute fall in electricity bills over coming years – but says this will require focusing centrally on affordability, not just reliability and sustainability.
In its Retail Electricity Pricing Inquiry preliminary report into the electricity market, released on Monday, the ACCC says residential electricity prices have increased by 63% on top of inflation in the last decade, with network costs being the major contributor.
Household bills rose by nearly 44%, from an average of A$,1177 in 2007-08 to $1,691 in 2016-17.
Household bills have risen less than electricity prices because usage has fallen, mainly due to self-supply by solar panels.
The report comes as cabinet is set to consider on Monday the government’s energy policy, which it hopes to take to the Coalition partyroom on Tuesday. Energy Minister Josh Frydenberg last week signalled the government had moved away from the Finkel inquiry’s recommendation for a clean energy target.
Facing the prospect of a shortage of power in the period ahead, the government is particularly focused on the need to increase dispatchable power.
The clean energy target, even in modified form, is also unpopular in Coalition ranks.
The ACCC report indicates that supporting renewable energy has been a relatively minor driver of the spiking of prices.
Sims – who flagged the ACCC findings when he addressed the National Press Club recently – says affordability should be the “dominant” objective in policy but in recent years it has come after several other objectives – including reliability, dividends and sustainability.
He said different approaches were needed to pursue each of the objectives of affordability, reliability and sustainability. As reliability and sustainability were pursued, it was important to do it in “the least-cost way and to let people know the costs”.
“What’s clear from our report is that price increases over the past ten years are putting Australian businesses and consumers under unacceptable pressure,” he said.
The ACCC found that on average across the national electricity market (which does not include Western Australia or the Northern Territory), a 2015-16 residential bill was $1,524, excluding GST. This was made up of network costs (48%), wholesale costs (22%), environmental costs (7%), retail and other costs (16%) and retail margins (8%).
Sims said the primacy of network costs in rising bills was not widely recognised.
Since July 2016, retail price rises were likely to be driven by higher wholesale prices.
“We estimate that higher wholesale costs during 2016-17 contributed to a $167 increase in bills. The wholesale (generation) market is highly concentrated and this is likely to be contributing to higher wholesale electricity prices.”
The ACCC estimates that in 2016-17 South Australia had the highest residential electricity prices, followed by Queensland, then Victoria and New South Wales. SA prices were roughly double those in Europe.
Sims said measures the government had already taken – notably telling companies to make customers aware of better deals, and its plan to scrap the process allowing companies to appeal against decisions of the Australian Energy Regulator – would help lower prices.
The ACCC is now looking in detail at further measures, ahead of making a final report. In the meantime, its preliminary report puts forward some suggestions. These include the states reviewing concessions policy to ensure consumers know their entitlements and concessions are well targeted to the needy, and a tougher stand against market breaches.
It says increased generation capacity (particularly from non-vertically integrated generators), preventing further consolidation of existing generation assets, and lowering gas prices could help reduce the pressure on bills.
The ACCC will also look at how to mitigate the effect of past investment decisions – but it notes that many are “locked in” and will continue to burden users for many years.
It will as well consider what more can be done to make it easier for consumers to switch suppliers.
The report says that “an increasing number of consumers are reporting difficulties meeting their electricity costs, and some consumers have been forced to minimise their spending on other essential services, including food and health services, to afford electricity bills.
“Businesses across all sectors have faced even higher increases over the past 12 months, following renegotiation of long term contracts. Many of these businesses cannot pass the increased costs on and are considering reducing staff or relocating overseas. Some businesses have even been forced to close.”
The ACCC’s final report will be released in June next year.