Renewable energy policy sparks electricity free-for-all

A wind farm south of Port Augusta in South Australia. Picture Chris Russell

There were some important developments in our electricity market last year that attracted scant attention but have potentially important future ramifications.

The National Electricity Market — which covers all the states bar Western Australia, plus the ACT — is now a national market in name only. Every state — and the ACT — has decided to dance to its own tune, and the national nature of the market is being held together only by relatively weak interconnectors that link the states’ electricity supplies.

In the event of blackouts or persistent price increases, consumers (and voters) will know who to blame — the state governments. Fortunately, this realisation is acting as a brake, stopping even worse energy policies, with the possible exception of NSW.

The original vision of the NEM was to unite the state-based electricity generation systems so electricity could be produced more efficiently using an agreed set of rules. In this way the NEM would replace the self-reliant, over-engineered and overstaffed state systems. For many years the NEM worked well. Productivity in the electricity sector improved and wholesale and retail prices fell. Investment decisions were made with the backdrop of the NEM in mind. Privatisation occurred in some, but not all, states.

Cracks began to appear with the uncoordinated addition of intermittent renewable energy into the system, initially wind but more recently large-scale and rooftop solar. In this context, the combination of the federal government’s renewable energy target, which began in a modest form in 2001, and state initiatives to promote renewable energy has been critical. Without these impetuses, the growth of renewable energy would have been a fraction of what has occurred.

By 2010, all the earlier sectoral productivity gains had been eliminated. And since then, sluggish productivity in electricity, gas and water has been a drag on national productivity. Electricity prices soared, reaching some of the highest tariffs in the world. Thankfully, there has been some recent abatement in prices.

Fast forward to this year, and the final RET target of 33,000 gigawatt hours was met. One effect has been the decline in the underlying degree of subsidisation implicit in the RET. Another effect has been the halving of the value of the large-scale generation certificates, the subsidy mechanism that operates alongside the RET.

Renewable energy companies, many overseas owned, increasingly have turned to state governments and the ACT to underwrite their projects by entering into power purchase agreements that effectively guarantee cashflows on projects. With the price of electricity often close to zero at certain times of the day, there are few companies that would be prepared to invest in renewable energy without this support.

State governments and the ACT, in turn, have devised their own plans involving RETs, entering into contracts with renewable energy companies and opening up zones in which renewable energy installations are concentrated. South Australia was an early mover and now has massive installations of renewable energy with the output often being curtailed because there is no demand.

But with the backdrop of the 2016 statewide blackout in mind, the SA government’s obsession is to see an interconnector built with NSW to reduce the degree of renewable energy curtailment as well as improve the reliability of the state’s grid.

While Victoria has entered into deals with renewable energy companies, the fragility of that state’s grid has made the Andrews government wary of pushing large-scale renewable energy installations too quickly without immediate firming capacity. Account is taken of the unexpected growth in rooftop solar installations when determining the required investment in large-scale renewable energy.

This latter consideration is significant and errors can make a great deal of difference. For instance, the Australian Energy Market Operator recently predicted that a certain amount of additional rooftop solar will occur in the coming years, when the likely figure is three times greater based on the current uptake.

The latest development in these self-directed state government policies is the initiative announced by NSW Energy and Environment minister Matthew Kean. Using the veil of cabinet-in-confidence to refuse to release the modelling underpinning his proposal to push an additional 12 gigawatts of renewable energy into the NSW grid within a decade, he at least has an inkling that the modelling is full of holes and would not withstand scrutiny.

The failure to adjust the amount of large-scale installations to accommodate variations in the uptake of rooftop installations means the timing of the closure of the remaining coal-fired power stations easily could be brought forward. Balancing (reliable) supply with demand into the future is a tricky proposition.

Of course, Kean may be in another position or out of politics when real troubles arrive. But the NSW grid wobbled recently when one of the Liddell units went down, the Tomago smelter was put on standby and the wholesale price peaked at more than $10,000 a megawatt hour.

In addition to the fragmentation of the NEM back to its state components, the market is also separating between intermittent and firmed capacity, with the characteristics and pricing of the two parts quite distinct.

Without state government con­tracts, intermittent operators wouldn’t make money. By contrast and depending on what happens with the timing of coal-fired plant closures, the establishment of new gas plants and pumped hydro — batteries are likely to remain a side play for some time — the money is likely to be in provision of firmed capacity.

While all this may sound complicated, it’s essentially the result of cack-handed government intervention and woolly thinking about the economics of electricity generation. In the meantime, the federal government is doing its best to offset the more perverse effects of the states’ policies, including by underwriting a new gas plant to replace the lost Liddell capacity. And lower gas prices as well as close to zero electricity prices during some days are helping to reduce wholesale electricity prices. But watch this space in 2021 and beyond.