It’s not wind it’s gas that’s driving the power shock

Via Peter Martin today comes the Australia Institute:

“When the rises flow through, retail prices will be the highest ever in real as well as nominal terms,” writes Australian National University specialist Hugh Saddler in a report to be released on Thursday by the Australia Institute.

“More detailed analysis shows that market wholesale prices are consistently lower when there is a high level of wind generation, than when there is little wind. Over the past four or five years in the South Australia wholesale market, volume weighted prices received by wind generators have been around 20 to 30 per cent lower than volume weighted average prices for the market as a whole.”

“Higher wholesale electricity prices, and hence higher retail prices are almost entirely caused by higher gas price.”

“A similar, though less stark effect is seen in the other mainland national energy market states. This is not a malfunction of the market, but precisely how it was expected to operate.”

“The launch of the market in 1998 was followed by a rush of construction of gas turbine power stations in Queensland, NSW and Victoria and even in Tasmania, accelerated in Queensland by a gas generation mandate policy introduced by the state Labor government.

“It was envisaged that both the much lower greenhouse gas emissions and the superior operational flexibility of these power stations compared with coal would make them ideally suited to supplying hour-to-hour and day-to-day variations in demand for electricity, while also reducing emissions, by using a then relatively low cost source of fuel.”

“It seems that the decision to allow so much of the gas resources of eastern Australia to be exported was made without considering the likely effects on the electricity market,” Dr Saddler writes. “Household and business consumers of electricity are now paying the price.”

Precisely. As we know, gas sets the marginal price in the NEM owing to where it sits in the wholesale electricity market bid stack. See Australian Energy Market Operator description below:

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It has been a rough consensus for fifteen years that Australia would undertake decarbonisation via the transitional fuel of gas as a bridge to renewables. It may be that SA outperformed other states in attracting renewable investment but that is largely because it has the best assets for it in consistent wind and sun. What disrupted the plan was not SA over-investment, nor coal power closing, it was the price of gas which has launched 600% owing to Curtis Island exports and cartel discriminatory pricing.

The only way to reduce power bills short term is to force the price of gas lower using draconian anti-monopoly regulation. Sadly the government cocked that up by failing to install a gas reservation mechanism wide enough, deep enough and quickly enough to make any short term difference. The gas price is a national crisis, even the government declared it so, yet it has been treated in policy terms like a Sunday stroll.

Alas, we now appear destined to take the worse case scenario. Demand destruction will be the key to adjustment ahead. I just hope that we get some kind of effective cartel busting mechanism operational in the medium term. Otherwise as local gas consumption falls the cartel will raise prices even further to offset volume losses.

Comments

  1. It seems to me that the true problem is in our expectation that we will be able to apply global solutions to our local Electricity production costs without incurring international competition for the resources that power this global solution. That’s a rather naive assumption and one that any functioning global energy arbitrage system would ensure we pay dearly for.
    Looks to me like we’re simply paying for a) naivety and b) our lack of local regionally specific energy production solutions. SA in particular has excellent geothermal resources that could be developed but instead we chose gas turbines largely because someone else had already done the development work making Gas Turbines a drop in solution (unfortunately it’s a drop in solution for us and Everyone else in the world)
    As they say only two things are limitless, Human stupidity and the universe whereby I’m not certain about the later.

    • The gas producers have no logical argument about the right to export that gas, so without the right to export it there is no competition for it. Before Curtis Island they couldn’t export it and the gas extraction was based on it being used domestically and they saw fit to invest on that basis. To export they needed Gov approval and it should have been rejected based on the impact it would have on electricity costs.

  2. GunnamattaMEMBER

    Thats about the first sign of anyone in the MSM catching onto a point you have been making for at least 3 years – that gas is the marginal setter of the electricity price and that exporting LNG without forcing the development of new gas fields is essentially just reaming Australian households

    • Are we saying anything different? my point is that nobody can adopt a generic solution to a global problem and not expect competition for both the resources that power the solution and the hardware to make the solution possible (in this case gas turbines)
      Compare this to the Latrobe valley power stations, they developed electricity generators / power systems to use Brown Coal (a globally worthless commodity) this step created value from a commodity which has no intrinsic value, no intrinsic global value means no competition for the resources and guarantees your ability to forecast costs in a vacuum.
      Our current fixation with Renewables is a guaranteed path to failure, if our Aussie currency collapses to 25c on the USD. Those wind turbines that generated electricity at a levelized cost of 3 to 5c/kwh (will suddenly find they cost 3 to 4 times that) At generation costs of over 10c/kwh renewables are not all that attractive whereas Brown coal continues to have an extraction cost that is calculated in Aussie dollars and has no other known uses.

  3. @ Dennis (above) Certainly a valid point…yet here we are! …..personally I given up being astounded when obscure political processes create these dilemmas….a cynic would probably suggest that that’s the whole point of obfuscation wrt political processes especially those that involve access rights to valuable common property.

    • Easy solution to that; remove exports rights above the level that results in higher domestic gas costs.

  4. MarcusOzMEMBER

    You are missing the point. Of course intermittent renewables are cheaper when there is a lot of them. But the mere fact that they ARE intermittent and require a reliable alternative when they are not available has driven up prices. Because they are driving out of the market reliable coal this creates the opportunity for higher priced gas to fill the gaps. It’s true what’s driving the price of gas is related to other factors but you cannot simply ignore the intermittent role of renewables in that process.

    You cannot run a modern power system on intermittent sources of supply (battery fantasies notwithstanding) any more than you can run a reliable 24/7 business with narcoleptic unpredictable absentee part time employees.

    Of course the solution that dare not speak its name for fear of shutting down the otherwise intelligent minds of people on either side of the political spectrum is never mentioned. But it seems the world is determined to ignore the most reliable, low emission and safest technology for power generation because of ignorance and irrational fear.

    Alas MB correspondents are amongst the group that are sadly ill informed on the topic

    • Thank Christ; some sanity at last. As we add more intermittent renewables to the grid, we need additional capacity to cover sudden supply/demand gaps (e.g the wind stops blowing). That means we either need generators that can fire up quickly (i.e. Brayton/combined-cycle gas turbines), or we need significant energy storage capacity that can release back into the grid quickly (i.e. chemical batteries or mechanical hydro).

      Of course wholesale prices will rise during these ‘output gap’ periods: demand is suddenly outstripping supply. For-profit generators will charge whatever the market will bear, and what their competition will not undercut (so there’s potential for collusion here). But the key point is that intermittent renewables create a negative externality in the electricity market: the cost of ‘system balancing’ rises. I don’t know if it’s sensible for the taxpayer to cover this cost (e.g. SA taxpayer funded battery); this is a point well worth discussing (if both sides could just give the cheerleading a rest for a bit).

      @MarcusOz: Totally with you on nuclear fission. People truly are irrational about nuclear: the only other type of power generation that beats nuclear on a ‘deaths per TW/h’ basis is hydro generation (as distinct from storage), which we don’t have the geography for. However, we’re basically the perfect country for nuclear: techtonically stable, populations clustered on the coast (near water), over half the land is uninhabitable desert (meaning waste storage is not an issue), shitloads of uranium etc. etc.

      If the government insists on heavy-handed intervention in the electricity market, then possibly the most efficient form of this would be to publicly fund the construction of nuke plants, given government borrowing costs are so low (and the business case for nuclear is so sensitive to cost of capital).

      • drsmithyMEMBER

        Nuclear is a ten year build time *at best*. The total lifecycle cost is stratospheric due to liability and cleanup.

        Do you really think for the same money, in a ten year time frame, the same capability couldn’t be delivered through renewables, storage and smarter energy management ?

        Nuclear’s time was fifty-odd years ago. We should have done it then. It’s too late now.

      • @drsmithy

        That seems to be the popular notion. I guess I’m not so certain that wind, solar and storage will be able to put greenhouse gas emissions to bed within a decade (at least not at a reasonable cost). You are right in saying that the lead times for nuclear fission are very long: India’s multi-stage generation programme is case in point (also very forward thinking IMHO). The death of Hitachi’s / Westinghouse’s nuclear division was also a big blow, as the AP1000 looked like a promising stop-gap. However, I believe there’s some derivative IP still alive and kicking in China for a larger version of the AP1000, and there is the possibility that small modular reactors will be developed and become commercially viable in the next few years. At that point, ‘construction’ will happen on an assembly line. And I guess there’s the outside chance of sub-critical reactors becoming viable, although this probably requires advances in particle accelerator design and construction (I’m not holding my breath on this one; neat idea though).

        At the very least, government policy should not be actively biased against nuclear. And supposed ‘comprehensive reviews’, like the Finkel Review, should not avoid even examining the technology on the grounds that it’s “too politically controversial”. On current policy, in the absence of a broad price on greenhouse gas emissions, nuclear fission should be placed on the list of ‘renewable’ generators that are eligible for a cross-subsidy under the RET scheme. It’s crazy that a technology like biomass (which often involves the destruction of co2 sinks and release of the stored co2, i.e. burning trees) is on the list and nuclear is not. At worst, nuclear remains nonviable, so placing it on ‘the list’ costs taxpayers nothing. At best, we discover it actually is viable and it solves quite a lot of problems we’re currently facing…

      • drsmithyMEMBER

        Whoa there. The question is whether, within the build time and TOTAL LIFETIME COST of some significant nuclear infrastructure, you could get the same outcome (from generation, supply perspective and pollution perspectives) using renewables.

        The question is not whether in that same timeframe you can solve emissions with renewables. Let’s keep the goal posts in the same place.

        Note that in this same timeframe and cost window, some (relatively) out of the box thinking might be required, like putting in that renewables infrastructure in a distributed, rather than centralised, fashion.

        The political unpalatability of nuclear is inescapable. That’s not to say nuclear shouldn’t be considered at all, but the fact that a lot more people are going to be happy with a wind or solar farm, and some neighbourhood scale batteries, than nuclear reactors cannot simply be dismissed and ignored – and that’s before even getting into the ramifications internationally of (effectively) becoming a nuclear power.

        The point is that it needs to be considered as a whole system, not bits and pieces here and there.

        (To be clear, I don’t have anything against nuclear power per se, I just think that its time has passed in the context of total lifetime costs/benefits (which includes political feasibility). The money and resources are better used on other technologies. I’d also be more concerned about it safety-wise in today’s “everything must be privatised” world.)

    • + 1 Marcus, I don’t have anything against renewables, but they are hopelessly inadequate to the task required, that is to run our modern societies, as well as allow for the development of poorer countries up to western living standards with zero net CO2 emissions. If we are serious about this, we need to listen to the likes of James Hansen and use nuclear energy as it’s the only real chance we have.