As Europe turns towards coal-fired power in response to scarce and expensive natural gas – think Germany, Austria, The Netherlands and Britain – it’s all systems go here for even more investment in renewable energy to generate electricity. This is notwithstanding the inherent intermittency of renewable energy and the problems of firming electricity to meet our 24/7 demand.
Last week’s release of the final version of the Integrated System Plan of the Australian Energy Market Operator is the latest example of well-intentioned aspiration trumping the grim realities of engineering and economics.
Against the backdrop of the closures of coal-fired plants that already have occurred, AEMO anticipates a further reduction of 8000 megawatts by decade’s end but concedes it may be 14,000MW – a big difference.
Look at what happened when the 1600MW brown coal-fired Hazelwood plant closed unexpectedly in 2017, in part because Victoria’s Labor government raised the royalty rate on coal. Wholesale prices shot up, notwithstanding the Premier’s assurances any price impact of the closure would be negligible.
Owners of power plants are now required to give at least three years’ notice of plans to close them. Origin Energy announced it would close its 2800MW Eraring coal-fired plant in NSW in 2025, bringing its exit forward by seven years. This case illustrates the potential strains the national electricity market will face.
AEMO’s response is to place great store by accelerated investment in renewable energy – AEMO’s chief executive describes the required expenditure as “staggering” – and to “urgently sanction $10bn of transmission projects”. The hope is that additional storage will enable the NEM to provide reliable electricity while meeting decarbonising objectives. What happens to price is another matter.
There is a chart in AEMO’s 100-page blockbuster which, by the way, is replete with dubious assumptions. There we learn about the rapid exit of dispatchable power, particularly brown and black coal. (They currently account for about 60 per cent of all power generated, on average.)
But since there are no realistic options for affordable, long-duration storage beyond pumped hydro (itself limited), the picture that emerges is a substantial fall in the proportion of dispatchable power that will be available. What occurred in the NEM recently – supply falling short of demand, rapidly rising prices and AEMO suspending the market – could become a regular occurrence.
Given the intermittent nature of renewables, it is necessary to have enough dispatchable power to cover close to the total amount of demand, despite the fact there will be times when renewable energy can meet more than 80 per cent of total demand. The degree of redundancy in the system is high and it’s one reason the cost of electricity is likely to skyrocket – it already has increased substantially – under AEMO’s scenarios.
It is worth querying AEMO’s call to arms on transmissions investment. The immediate projects cited are in the works but are unlikely to proceed at the pace AEMO regards as necessary.
There are significant problems securing planning approvals; locals understandably are not keen to have large pylons in their backyards. There are also shortages of necessary supplies and workers.
Bear in mind regulatory approval of new transmission lines guarantees a rate of return to the owner, which also drives up the price of electricity to consumers. A network of new transmission lines crisscrossing rural Australia, some of which will be lightly used, will help renewable energy get to market but will contribute to a further loss of affordability. (Transmission/infrastructure costs make up about 40 per cent of electricity prices.)
AEMO’s report was not the only one released recently that has a bearing on the NEM. The Energy Security Board issued a high-level design paper on a capacity mechanism. According to this report, “we could get the timing (of the transformation of the NEM) wrong (too little, too late) or the mix wrong (not enough dispatchable capacity, including long-duration storage, to firm variable renewable energy). The results would mean high prices (driven by scarcity and uncertainty-inflated costs of capital).”
One solution is to pay “providers of capacity to have their capacity available during certain periods, which will help reduce the risk of a disorderly transition”.
While the design features are important, the key is to ensure 24/7 power at the least cost by getting providers to bid in to auctions to meet specified capacity needs.
Such a mechanism is important to deal with low probability events with serious consequences. A prolonged windless period that occurred in Europe last year is a case in point. Solar power also can be disrupted for days at a time.
The possibility of a capacity mechanism is raising alarm bells with some green activists and renewables investors. Victoria’s Energy Minister unconvincingly declared that the building of offshore turbines in the state – at four times the cost of onshore ones – obviated the need for such a mechanism. There is some opposition to the inclusion of gas as a source of energy, while coal is close to a no-go.
The idea of each participating state and the ACT being able to specify their energy sources within a capacity mechanism could potentially sound the death knell for the NEM. After all, an electron is an electron however sourced and there are interconnectors between participants. In other words, this idea makes no sense at all. The only conclusion to draw is that the NEM is a complete mess and there is a strong likelihood that its performance may decline even further. The idea that we require even more renewables investment – a sevenfold increase, in fact – has to be assessed against the highly subsidised investment that has already occurred.
As the ESB notes, “since 2012, more than 90 per cent of investment in electricity generation in the eastern states has been in wind and solar. And, in per capita terms, Australia has the highest rate of renewable grid-scale generation in the world. It’s about 10 times the world average.”
Without dispatchable power, we are heading in the direction of possible blackouts and load-shedding and even higher electricity prices. The Europeans have woken up this fact; we are just late on the scene. By the time it is fully recognised that we have taken the wrong turn, it will be a long, painful and expensive process to rectify the problems.
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