Damn. Why can’t we have a reasonable discussion around energy? From The Australian:
Households are exposed to a $41 billion capital cost for state government promises to embrace renewable energy, according to new federal analysis that raises the stakes in a political clash over energy security at a meeting of ministers today.
…The Queensland and Victorian governments would need to build the equivalent of 4800 wind turbines to meet their renewable energy targets under the scenario, which contradicts state claims the extra cost would amount to only “cents per week” for consumers.
Federal Energy Minister Josh Frydenberg will today press the states to rethink their renewable targets at a meeting in Melbourne that will hear from regulators and scientists on ways to protect the national energy grid from a repeat of last week’s outage.
…Mr Frydenberg is gaining strong support from NSW counterpart Anthony Roberts. “If jurisdictions go it alone on energy policy, they must recognise the potential impacts, which range from security of supply to the increased cost of supplying electricity, which may also impact other states and territories,” he said. “That’s why NSW believes we must take a national approach and ensure we have a smooth transition to renewable energy.”
…Frontier Economics chief Danny Price, an analyst of carbon pricing schemes, said: “In that vacuum, the states are going ahead with policies they think are needed to reach the Paris agreement, and I’ve got some sympathy for that.
“The longer the Turnbull government delays action, the more valid those state arguments look.”
A national target would obviously be far better. But how can there be one when Coalition government continually trash them? Even if Minister Frydengberg is now committed to one how can anyone trust he will be energy minister in 18 months time with no majority to work with and carbon skeptic Tony Abbott rising in the wings?
None of this argument makes sense, either. The investment in renewables will not cost households $41bn. The investment will displace existing generation and occupy existing revenues streams. If it is more expensive it will not be because the wind doesn’t blow or sun doesn’t shine. Renewables are not the marginal price setter in the National Energy Market. Gas is. Here is what Professor Ross Garnaut (who is also chairman of Zen Energy) said last night on the subject at the SA Premier’s Renewable Energy Summit:
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High penetration of intermittent renewables introduces high variability in wholesale prices, and the potential for destabilising variation in systemic frequency and voltage. The maintenance of systemic stability requires countervailing variations in volumes of wholesale power supply, and new sources of frequency control and ancillary services (FCAS).
Let me focus at first on the wholesale power market.
High penetration of renewables leads to low wholesale power prices at times when renewable energy is able to meet local demand, and high prices when the market has to be balanced by gas peaking power. Charts 4,5 and 6 illustrate the point with data from three months in last financial year—months for which I had taken out data for other purposes, and not selected deliberately for this presentation. In July, December and February of last financial year, the times of lowest wholesale prices each day—typically the early hours of the morning—revealed substantially lower wholesale prices in South Australia than in the two states with the lowest cost thermal coal resources—Victoria and Queensland. These were times when wind, supported by solar power in daytime hours, largely met requirements. The times of highest wholesale prices each day—typically the morning and evening peaks when gas provided the incremental supply to meet higher demand— prices were highest in South Australia. Queensland had even higher high prices in February 2016, as demand was lifted by commissioning of new LNG capacity. In the intermediate hours, prices tended to be a bit lower in Victoria than the other States, but not wildly different.
The expansion of intermittent energy supply in South Australia will tend to increase the number of hours each day with very low prices. The challenge is how to reduce prices at times when demand is strong and intermittent energy supply weak. Price volatility is not a problem in itself. Volatility provides the incentive to reduce demand, or to invest in new sources of electricity generation that produce power when prices are highest, or for investment in storage. Volatility provides the signal that increased transmission capacity may be warranted and should be considered alongside other means of balancing intermittency. Large users of power have opportunities to hedge against price uncertainty, and retailers can hedge to insulate their customers from variable prices.
The main sources of countervailing variation are demand management, storage, gas peaking generation, long‐distance transmission, and diversity in renewable energy supply. Each has its strengths and limitations. Each has an important role to play through the transition to a low carbon economy. Demand management, co‐generation from industrial processes, storage, long distance transmission and renewables diversity all have important roles in the zero carbon economy of the future. Whether or not gas peaking has a role after the transition depends on the availability of commercially viable sequestration of carbon dioxide wastes from gas combustion.
The challenge of policy is to allow and to facilitate good use of all means of balancing intermittent energy, and to ensure that reliance is placed on the most cost‐effective of them in particular circumstances. Exclusive emphasis on only one or two of them alone will greatly increase the cost of the balancing.
Efficiently operating markets embodying a carbon price in some form—perhaps the baseline and credit scheme favoured in the recent Climate Change Authority report—can sort out the economically efficient contributions of alternative forms of generation and storage in wholesale power supply.
The wholesale power market currently contains distortions that block efficient use of new storage technologies. The most damaging of these distortions is the averaging of settlement prices over 5 minute periods. Suppliers and users of wholesale power bid into the market each 5 minutes. However, contracts between buyers and sellers are settled by averaging prices over half hour periods. This dulls incentives to expand output in short periods of exceptionally low supply, and to reduce them in short periods of high supply. The importance of this distortion is demonstrated by experience through July 2016, when average South Australian prices were exceptionally high. A large part of the exceptionally high average prices came from less than 40 five minute periods when prices were at or close to the regulated maximum of $14,000 per MWH. Some of these high price episodes occurred within the same half hour as other 5 minute periods with negative prices down to the regulated limit of minus $1000. Battery systems, unlike thermal generators, respond fast enough to contribute to stabilisation by absorbing energy in one 5 minute period when prices are low and expanding wholesale supply in an adjacent 5 minute prices when prices are high. Averaging over 30 minute periods removes incentives for stabilising behaviour, and actually introduces incentives to destabilise the market.
ZEN Energy’s partner company in grid level battery storage and grid stabilisation, Greensmith, has installed more than one third of the large and rapidly growing battery storage capacity in the United States. This morning I asked its senior officers what contribution a battery storage system would have made to easing the recent power problems of South Australia. Greensmith’s assessment from reading public materials including the AEMO report is that the system‐wide problem is likely to have derived from variations in frequency, which batteries are particularly well placed to manage. It is not clear from the published material what caused the wind turbine trips. If later analysis suggests that the cause was systemic variation in frequency, then batteries would have provided the most cost‐ effective remedy. If the problems derived from local voltage issues, batteries located with wind farms could have avoided the problem. Once the system had tripped, and the challenge was to bring gas generators back into service as quickly as possible, a battery would have provided reliable and quick‐acting black start services. By contrast, both contracted black start providers failed to restart the South Australian system last week.
Other characteristics of Australian market regulation discourage use of decentralised battery storage that has the potential to contribute to evening out demand and supply of wholesale power, and also to reduce peak demand for network services.
While more efficient markets can help in the allocation of resources among types of power generation and storage, they cannot play this role in defining efficient allocation of resources between network expansion and new forms of generation and storage. Electricity distribution and transmission networks are natural monopolies that require planning decisions in the public interest. The Australian regulatory system is poorly designed for taking decisions on maintenance and expansion of the networks. Major reform is required. It is important to shift the initiative in putting forward proposals for investment in network maintenance and expansion in the hands of a public body charged with taking decisions in the national interest. That would remove the conflict of interest embedded in current arrangements. Such a body would be charged with assessments of whether investment in network maintenance and expansion is likely to yield higher returns than investment in decentralised generation and storage. To do its important job well, the energy planning agency would need to have deep professional capacities, and insulation from the day to day vicissitudes of partisan politics. The Australian Energy Market Operator could be strengthened to perform this planning role.
It is impossibly unlikely that such a planning process would have led to the $85 billion of investment in expansion of transmission and distribution capacity that Australia has seen over the past decade of mostly declining total demand for wholesale power through the network. At the same time, it may have led to greater investment in some forms of long distance transmission. Australia has made massive investment in its power networks over the past decade, which has been added with high margins to the bills of power users. Recent experience suggests that this massive expenditure has not purchased energy security.
Rational network design in contemporary circumstances would see evolution towards greater use of decentralised power, supported by a central transmission network designed to play a large role in balancing intermittent energy from different sources. It might not necessarily lead to reduced power flows through the grid. An efficient electricity system may see the electrification of transport gathering pace in the years ahead. An efficient system is more likely to see Australia’s advantages as a low‐cost producer of renewable energy reflected in expansion of energy‐intensive industries as the whole world shifts to greater reliance on renewable energy. These developments would mean an expansion of total power demand as the proportion of supply through the networks declined.
The new technology and economics of energy suggest that judicious application of local renewable energy supply technologies such as solar and battery storage can greatly reduce peak demand for power through the networks and therefore the costs of providing network services. At the same time, it can reduce vulnerability to disruption of networks from extreme weather events. The lights that stayed on in South Australia through last week’s blackout were in homes and businesses which had invested in local battery storage, and on Kangaroo Island where the anticipation of failure of the submarine cable had led to provision for decentralised back‐up generation.
Judicious investment in solar and wind generation, co‐generation from industrial processes supplemented by gas generation where adjacent pipelines make this feasible, demand management and battery storage, supported by efficient integration into established networks, can reduce power costs for users outside Adelaide below what is available from reliance on the grid alone. Decentralised provision of power also provides security against future disruption from extreme weather events.
There are gaps in current markets for Frequency Control Ancillary Services that have become more important and costly with the expansion of intermittent energy supply. Fast response stabilisation services are required. These are much more likely to be made available at low cost if thier supply is secured through introduction of new competitive markets, designed so that the new technologies can compete on a level playing field with incumbent thermal generators.
The costs and technological capability of battery storage has fallen to the point where it can contribute substantially to price stabilisation and grid stability alongside high and rising penetration of renewable energy. It can be introduced quickly. United States experience suggests the possibility of full deployment of grid level batteries within six months from commercial decisions to invest in them.
Pumped hydro‐electric facilities have longer lead times. Recent commercial research and development suggests that this form of storage will be able to play a major role in low‐cost balancing of intermittent electricity supply as eastern Australia moves towards much higher penetration of intermittent renewables.
Increased interconnection between South Australia and other States would not remove the requirement for investment in storage to stabilise wholesale prices and the grid. Long distance trade in renewable energy will reduce price volatility to some extent. However, the national expansion of renewable energy supply will make the balancing of intermittency as important to Australia as a whole as it is to South Australia now.
If Mr Frdydengberg is worried about a burden on household budgets from higher energy costs then don’t grandstand on renewables. Fix the NEM so that markets can compete to provide the cheapest and most stable mix of low carbon energy, including breaking the eastern gas cartel using whatever means possible to unleash cheaper gas into the system.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
