Kerry Schott swats McCrann energy bug

Former chair of the Energy Security Board, Kerry Schott, is no climate change or renewables soft touch. She’s a hard-nosed, highly experienced, non-nonsense energy regulator. Today she swats the energy panic insects swarming the Cannon-Brookes AGL bid:

The reason for the massive increase in wind and solar renewables is economic. In the wholesale electricity market, generators bid to supply at five-minute intervals.

The Australian Energy Market Operator matches supply and demand and dispatches the cheapest bids in the stack. When wind and solar are available, they are invariably the cheapest bids and are dispatched.

The most expensive in the bid stack and typically fares worse than hydro and gas power. The reason is that hydro and gas power plants can be built so that they do not need to run continuously and incur operating costs (including fuel) when they are not needed. This is not true for coal-fired generation, which must run continuously whether it is dispatched or not.

As the supply of renewables increases, coal-fired generators are dispatched less. In due course, losses occur and indeed increase.

…Two important questions are being raised: will prices increase, and will there be enough power supply ?

…The increase in renewables places significant downward pressure on wholesale prices. This has been reflected in recent falls in the wholesale price.

Thus any pressure for price increases is likely to be associated with network costs, particularly the cost of new transmission.

…The AEMO releases a transmission plan every two years. This integrated system plan is acted upon, with building under way in a number of locations.

It is an optimised least-cost plan, and transmission costs are regulated so the price rises that may occur should be manageable.

…On balance, it is difficult to envisage price increases in electricity, given that the transmission cost is aimed largely at increasing wind and solar renewables, and this in turn brings the wholesale price component down.

…Is there sufficient power supply?

The renewables increase is mainly intended to replace retiring coal generation and there is no sign of any slowdown in this capacity replacement.

…Whoever owns AGL must manage their retail risk by covering that load at all times. If coal-fired plant is uneconomic it must be replaced, or AGL customers will not be able to be supplied except at huge cost, and the effect on the business would be catastrophic.

It is difficult to see a reasonable case for any veto of the Brookfield/Grok Ventures takeover bid by the Morrison government.

I will add that any move to not do so will be immediately be filled by competitors as they gobble up any area of excess profitability. Why would MCB give up market share by retiring coal he hasn’t substituted knowing that prices will fall back almost immediately owing to competition?

It used to be the case that Australian PMs and business commentators like Terry McCrann knew a thing or two about markets and had faith in them.

These days they are no better than the politically correct wokesters on the other side of debates. Just as biased and identity-driven, only doing the opposite.

Splat!

Houses and Holes
Latest posts by Houses and Holes (see all)

Comments

  1. …Whoever owns AGL must manage their retail risk by covering that load at all times. If coal-fired plant is uneconomic it must be replaced, or AGL customers will not be able to be supplied except at huge cost, and the effect on the business would be catastrophic.

    Not really across the electricity generation market but I presume gas fired would still be part of that “covering” role?

  2. Forgive me but I am with Terry on this one. What about the shareholders of AGL and Origin sue the state and federal govts for losses brought about by subsidies for solar and wind brought about by the religious fanaticisms of climate change zealots eg Kean. If carbon dioxide is only 20 % culprit of GHG where does that leave Australia? Only time will tell but look at the problems in Germany going on this path and having to buy EDF electricity and Putin gas.

  3. Interesting market dynamics at play. As we transition to 100% renewables (a clever solution will be required to work out the intermittency issue), coal generation, which is still well over half our electricity generation, are losing money (as renewables are cheaper to dispatch). All fine and good you say. However, does this situation not create a scenario where coal fired generation is subsidising the entire electricity market? Are the losses being privatised here? I think Government subsidies to the coal power plants are on their way, because if they shut down, so does Australia’s electricity market.

    • I.e., the coal generators will hold the market for ransom until there is an available replacement. Same result in the end, 100% renewables / less coal, but its about the path to get there.

  4. If we are subsidising coal and have for a long time, then is that not the definition of a dysfunctional market?

    As in we privatize the market saying everyting will be awesome, and it doesnt work so we manipulate it to make it look like it works (subsidising).

    And when green-energy now enter the market with a massive momentum and actually makes the market work, we persist on manipulating it, and resist the natural market.

    Obviously we cant turn coal off overnight, junkies need rehab for happy ending.
    But seeing their failed market actually having a chance of working should be a Liberal wet dream…

    Only big money flowing in from somewhere could make them go against their own principles.