‘The anarchy is over’: How to fix our broken power market

Kerry Schott, head of the Energy Security Board, in Sydney this week. Picture: Ryan Osland

On July 27 Kerry Schott handed the government her final recommendations on a new model for Australia’s broken National Energy Market. It is the hardest work the head of the Energy Security Board has ever had to do.

The three-volume report is now burning a hole in Energy Minister Angus Taylor’s in-tray. The country’s energy and emissions policy failure has claimed the scalps of four prime ministers.

“My great hope is that they accept our recommendations,” Dr Schott tells The Weekend Australian. “The most important thing is get on with it. I don’t think people realise how extensive and disruptive the changes going on in the electricity sector are.”

She says Australia’s transition to a lower-carbon economy can only happen if the NEM goes first. “Lowering emissions in the electricity sector and decarbonising is essential for being able to do it in other sectors like transport, for example. We’ve got to get this one right to allow the others to make significant progress.”

The nation’s electricity market faces a tipping point.

Schott’s comments marry energy with carbon emissions three years after her signature NEG (National Energy Guarantee) was dumped in political infighting on power prices.

In October 2018, she famously characterised the state of affairs as anarchy. “I’m still going through the stages of grief, and I haven’t left anger yet,” she said at the time.

The mission set for Dr Schott is to create the settings for an affordable, fit-for-purpose energy market that is being swamped with renewable energy without risking the lights going out or power being tripped by an unstable grid. And all against a bucketload of vested interests, from renewable investors to unions.

Within hours of the report landing in Canberra, a draft copy had been leaked to media. “It’s a pity that it’s not released publicly yet because it would quell a lot of criticism and fears that are being expressed at the moment. People haven’t seen the full report and so they are barking up the wrong tree really,” Schott says.

Hounding the ESB chief are solar and wind businesses that warn Schott’s recommended changes will mean uncertainty and delay coal’s exit. In the other camp, the CEOs of coal generator Delta Electricity and three big retailers – Energy Australia, Alinta Energy and Origin Energy – have joined forces to lobby the government as it mulls over the many contested ideas.

Ross Rolfe, who runs the Australian business of the world’s biggest wind power producer Iberdrola, said reforms could have a “chilling effect” on the investment market.

“There is an enormous amount of renewables coming into the grid, as Ross well knows, since his firm has been building a lot of them,” says Schott. “We have to make sure that not only do we have dispatchable power to back things up, but we have also to make sure we have got enough frequency and system strength.”

That strength is about whether the system can ride through a lightning strike, a downed transmission line (remember the 2016 South Australian outages) or a lithium battery fire like the recent one in Victoria.

Rooftop solar panels are changing the nature of the nation’s power grid.

“The Australian summers now are getting hotter, and hotter in more states at once. Once it’s hot in two or three jurisdictions together it really does put a strain on things,” she says.

Much of the current strength comes from existing coal and gas-fired plants which provide firm power but also have huge mechanical parts that continue spinning even if the plant is shut down. In time Schott says fly wheels and turbines from hydro and wind farms will replace coal in providing resilience.

Right now, services to offer system resilience are not being valued directly. Payment is only made for energy. Kerry Schott is proposing separate markets for capacity and also for frequency and systems strength. “You would then get paid if you were firm and particularly if you were flexible.” Pumped hydro, batteries and gas are all candidates.

Critics from the renewables side say paying for capacity and systems strength puts too much value on coal. “It is a justified concern but it depends on how things get rewarded,” says Schott. “You really need to reward flexible as well as firm, not simply firm. Certainly wind farms would get some reward. Solar doesn’t provide much in the way of services apart from energy.

“You don’t want to stop the exit of coal-fired power at all,” Schott insists. “In fact, for decarbonisation, everybody wants to have that exit as quickly as possible, but you’ve still got to make sure that you’ve got enough essential services and dispatchable power for the amount of renewables coming in.”

She agrees that coal could well exit faster than currently planned.

“Coal makes its money by selling energy and the cost of energy from coal is so much more in the market than it is from wind and solar,” she says.

“It’s really on the way out in this market.”

Adding degrees of difficulty to the task is government intervention, both federal and state.

Kerry Schott was appointed for her formidable track record of work with politicians, numerous Sir Humphreys in the public sector, tough private players like Chris Corrigan and even crooks.

As chief executive of Sydney Water, she famously stood up to powerbroker and convicted criminal Eddie Obeid who wanted to “sack the bitch”. Now 76, her reputation remains as a stickler for principled behaviour.

Energy, she says, has been a whole different ball game. “It’s been the hardest gig I’ve ever done really. It’s very technically difficult. Most of the infrastructure work I’ve done has been working with largely one government but the NEM involves Queensland, NSW, Victoria, the ACT, South Australia and Tassie and the Commonwealth.”

Each state has its own bevy of bureaucrats. On politics, Schott admits there “have been moments” but in general energy ministers are protective of the ESB they created. But the states all have different priorities.

“They all have different degrees of anxiety and therefore have different risk appetites and some are more likely to step in that others. It’s been very difficult.” Then there are the policy discussions. “As a minister, you can’t just grab something in 10 minutes. They’ve really got to work hard at this portfolio.”

Schott acknowledges state government efforts to set emissions targets and encourage renewables. What is missing, she says, is a national consensus to plot the best transition. “It would be very helpful if we had a national emissions policy to state the bleeding obvious. By that I mean not just a target for 2050, which in fact we have, according to the Paris Agreement. What we don’t have at a national level is targets along the way. The states, as they often do, have stepped into the vacuum and that has led enormous change.”

Governments have intervened with subsidies or support for renewables and for fossil fuels: Victoria ensuring the Yallourn coal power station exits at a particular date, the NSW government helping Energy Australia with the Tallawara gas-fired plant and the Commonwealth with Snowy 2 and the Kurri Kurri gas plant. “Those things really do disrupt the market,” says Schott. “When you are in a board room and thinking about making an investment, the next thing you know is that government has just stepped in and done something. It just stops it.”

Energy reform will play a key role in lowering emissions

Australia’s carbon emissions will be in the cross hairs in October at the COP26 climate change conference in Glasgow. The two highest emitting sectors are transport and agriculture and a shift to electric vehicles and other electrification make reform of the grid even more urgent. “It does need to go first,” says Schott.

“If the NEM can be net zero and then everybody else is using electricity to provide their energy. It gives them a huge start.”

Schott says the NEM can certainly reach net zero by 2040 and will be pretty close in the early 2030s. “It’s quite simple actually. You get as much renewables and hydro in there as you can and you back it up with as much pumped hydro and batteries as you can,” she says. During the transition, flexible and firm gas-fired plants would come on, as needed.

“When we are close to the end of this track they would be running for very short periods and the amount of emissions they made would need to be offset in some way – could be through planting trees. That would get us there.”

There are regrets. The ridiculous political fallout over energy and climate policy has been a costly delay to reform. Schott says losing the NEG, which had the backing of industry, was very sad as it would have allowed emissions levels to be matched against the essential services and dispatchable power needed.

In the end two unstoppable forces are changing the market anyway: rooftop solar and individual businesses putting in their own targets and contracting for green energy. “Everybody is getting on with it, whatever the politicians think about it,” she says.

Schott is fired up about how reform, if done right, can change the country. Demand response management will be a new industry. Already energy-hungry smelters are being paid to drop their loads and households stand to benefit as the retailers become like aggregators running people’s hot water or airconditioning. “It’s a whole revolution in little things and it’s already providing about 8 per cent of the energy demands of the country,” she says.

Schott says anarchy is behind us now. “I feel very proud of the report that the ESB team have put together and the work that industry and the market bodies have put into getting it done.”

And what’s next? “I’m not going to do anything. Nothing. Sit around read a book for a while.”