Patrick Conlon: Relying on old coal burners could see blackouts and huge prices at breakdown
BIG, old, dirty and cheap. Coal burners have long supplied most of Australia’s electricity. It was expected that over time older coal plants would be replaced by cleaner gas-powered generation and renewables.
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BIG, old, dirty and cheap. Coal burners have long supplied most of Australia’s electricity, but it was expected that over time older coal plants would be replaced by cleaner gas-powered generation and renewables.
That didn’t happen, and poorly maintained coal plants, some beyond their design life, are now a serious issue for the National Electricity Market (NEM).
Here’s the problem. No one invests in new coal plants because a carbon price on electricity generation is seen as inevitable. But with no carbon price, gas can’t compete with coal, hence no gas generation investment either.
And new investment in wind generation has not given optimal returns because the NEM and renewable schemes do not work optimally together.
For decades South Australia has taken cheap coal power over from Victoria (via an interconnector). Our one coal burner was running out of coal and has closed.
In the past, most installed generation capacity in SA was gas – cleaner, but costing more than coal. We have had big investment in wind generation driven by mandated renewable energy targets.
In an NEM with a carbon price, wind would likely have displaced old coal plant. Instead, gas has been squeezed out. Australia’s most efficient gas plant, at Pelican Point, cannot compete against Victorian coal prices. Wind and solar are now virtually our only ongoing SA-based generation.
This drives long periods of very low wholesale prices, with occasional short-lived, extreme price spikes. It may seem the average price should be low, but the price of nearly all electricity we use is not set by the wholesale price.
Instead, retailers agree with generators to pay a contracted price for all electricity. This is because almost every customer has a contract with a retailer to supply at a fixed price. If a retailer is exposed to the wholesale price, it might find itself during a price spike having to buy electricity at 100 times the price it sells it for.
The potential for huge spikes sees generators demand a higher contract price. Volatile summer demand exacerbates the problem.
The narrow generation mix gives market power to fewer, big participants. This market power is sometimes abused to drive up prices artificially. The temptation for aged coal burners to make money while they can is obvious.
The fact that electricity is not stored but must be made as it is used also makes a narrow mix costly. Sudden spikes in demand or drop-offs in wind generation must be met by a spinning reserve plant that is operated below capacity and able to increase its output on demand. This service was often formerly supplied by gas burners in SA and is now sourced at high cost interstate.
Some commentators seek to blame wind for SA’s electricity prices. It is true that the total cost of wind farm produced electricity, including capital investment, is higher than coal, but it is not this differential that is driving cost.
The reliance on interstate generation and a single interconnector is what forces retailers to pay higher prices for contracts and services. The end user pays a retailer for its contract and service costs, including network costs, plus a retail margin. If contract costs are high, end user costs are high.
A second interconnector would change this significantly but it has been very difficult to get the national regulator to allow one. In any case the core problem is NEM-wide. Reliance on old, under-maintained coal burners flirts with disaster.
If a couple of big units break down during a hot, high-demand summer, price hikes will obliterate any benefit of cheap coal. In that scenario you could see rolling blackouts and gas plants restarted at huge prices.
There is still a place for coal but it should be the most efficient, reliable and cleanest units. Gas should have a place, as it did in SA when prices were lower. And renewables will have a place. We need a modern generation mix.
There are short-term measures that would assist prices. New interconnection is an obvious one. The NEM also needs to be far more vigilant against participants gaming the current market. But above all we need to start putting in place the long-term solutions:
SET a carbon price on electricity with certainty into the future. This will allow new generation investment and existing high-efficiency plants like Pelican Point to operate.
ENSURE the NEM institutions give some regard to carbon reduction. Along with a carbon price, this will allow rational investment decisions on generation and interconnection.
ADDRESS existing impediments for closure of old generating plant.
You cannot fix our electricity system without fixing carbon. Recent history makes that plain. Remember that even John Howard was persuaded by the weight of evidence to promise a carbon price for electricity in 2007. A further nine lost years have only made the situation worse.
Patrick Conlon is former SA Energy Minister.