16 minute read
Keynote address | The future of electricity in Australia | Matthew Warren, Author, Blackout
Key points:
• Australia faces financial and environmental obstacles in either maintaining the status quo or moving to a sustainable energy market. • Political instability has caused great difficulty in settling energy policy. • The Australian energy conversation should remain focused on emissions reduction.
Many people are aware of the energy policy debate, but do not necessarily understand it. My intent is to try and shed some simple light on the subject.
In very simple terms, the electricity system that we use was invented in the late 19th century and built through the 20th century. It was the dotcom boom of the late 19th century. Everybody wanted electricity, and governments worked tirelessly to get it to them. The original investors in electricity were private sector investors, but the capital intensity of the investments overwhelmed their ability to get returns. And that’s why government stepped in, in the 1900s and gradually bought or acquired those assets from businesses. It couldn’t develop them fast enough, and it often lost money on those investments.
This reminds me of a few examples. My favourite is someone from Hobart who built the first tram system in Australia. He bought an entire tram network from Siemens in Germany and had it installed in Hobart. People in Hobart really liked the tram, and they rode it every day. But the owner went broke because the cost of the asset simply overwhelmed the returns he could get from the people travelling on it; however, governments and councils realised that it was something the public wanted. So, they took over those assets and rolled them out.
The first electricity in Tasmania was coal-fired, not hydro, which always disappoints people. Energy systems were subsumed into a government department through the 20th century, and that’s where they stayed. So, basically, energy was a machine run by governments, and there were no market arrangements. Governments simply charged whatever they thought customers and households were willing to pay for the service. It was used as a state development tool. It was only in the late 20th century that we began to think about market arrangements. This was change, and acted as an invitation for the private sector to start investing in what is a large, capital-intensive asset.
But the private sector required a market setting. In essence, you have the machine – which is the generator, the poles and wires – and then you have governments introducing a market arrangement in the 1990s – the signal for the private sector to invest. So, there are two boxes sitting one on top of the other. Now, governments could run the machine without the market and return to building and owning the machine, but I don’t think that governments have the appetite to spend the $250 billion it would cost to rebuild this system.
In very simple structural terms, the challenge is to work out what the new machine looks like in a setting where we have to decarbonise the coal-fired generation system that we have in Australia for the 21st century.
That requires a new market design that’s fit for that purpose, including governance arrangements. In very simple terms, that’s the main challenge; however, the problem is that we don’t have a blueprint to do this.
For the last 10 years, we’ve been debating what design a new market should take. Whether we use an emissions trading or other mechanisms, that is where the frustration lies. There’s no settled blueprint – and one is needed.
Distilling that right down to very simple binary options, there are two types of machine. There’s a nuclear-power-based machine, and there’s a renewables-based machine. They can be slightly compatible. You might use some nuclear in large renewables, but effectively that’s it. They don’t really work together – it’s one or the other.
The second element of market design is that you can either have an energy-only market (the arrangement currently in place on the east coast of Australia) or a capacity market. The latter means that rather than having the pure cost of the value of the electrons being transacted through parties in a market, you pay for capacity. Basically, you pay for the megawatts on the ground as a base payment for a power station, a pumped hydro facility, or a wind farm, and then make the rest of your money through a market arrangement.
In essence, it de-risks that process. It’s a lot less efficient, but it’s more stable for investment. When you compare what a nuclear power grid and a renewable power grid would look like, it’s an interesting breakdown.
A nuclear power grid is expensive. This is certainly the case with the most recently built nuclear power stations in Georgia, in the United States. Building nuclear assets is very expensive, especially when you add in safety and security components, and the method required to build them. If Australia were to move to a nuclear grid, it would cost more than $500 billion. The result would be a grid that looks and functions like the electricity grid of Australia in the late 1990s. This is because a nuclear power station is basically a coal-fired power station with a different heat source.
If you’re a technical conservative, then it’s an attractive option because you don’t have to do anything; you already know how the grid works – it’s just nuclear instead of coal. To support reliability, you may use pumped hydro peakers like Snowy 2.0, instead of using gas peakers. That system would work, but it’s very expensive.
Then there’s a renewables grid, where the capacity of this kind of grid is much higher. For a renewables grid, you must overbuild. Given the intermittency of renewables, there is a live technical debate about how much you need to overbuild. After the Greens did a deal with Julia Gillard in 2010 to get
the carbon tax, market operators were asked to analyse what a 100 per cent renewables grid looked like. They found that you need to have double the renewable generation capacity compared to the needs of the market.
There’s also a very live debate about how much storage is needed to support it, given that renewables don’t work all the time. As a proxy, take 30 gigawatts as an example – about 15 times Snowy 2.0 and all of the available pumped hydro on the east coast of Australia. That’s a lot of hydro, and it’s also a rough estimate. I’ve also included about 10 gigawatts of demand management, which is a very important growing part of the market in helping to manage demand, particularly in the industrial sector.
I haven’t seen a paper anywhere that seriously looks at renewables as the main source of generation. At 80 per cent, the grid can still operate, but you would need 20 per cent of an ‘engine’ in that grid – something mechanical of scale operating inside that grid to recharge during periods of dark and still weather, and help to meet peak times in demand. That engine may be gas, nuclear or hydrogen, but the point is, you still need the engine.
Wind and solar are clearly the two dominant sources of renewable generation. The big change in these technologies has been reduced costs largely through scale of production in both cases. Solar is an incredibly simple technology. It’s just photons of light hitting silicon, and it releases electrons – it’s easy to drive down cost in that kind of technology. Both are intermittent, predictable, cheap and generate completely independently of demand. Given this flexibility capability, you will inevitably overbuild that capacity.
Turning to the build rate of renewables since the Renewable Energy Target (RET) was introduced, over the last two to three years, there has been enormous growth in building assets to meet the RET goal of around 20 per cent of generation by 2020. For context, the build rate in Australia over the last two years has been the fastest per capita on Earth – twice that of Germany and about five times that of the United States.
Australia also hasn’t just had one renewable energy target scheme – we’ve had two. The first was the original large-scale industrial scheme introduced in 2009, and we also have a household rooftop scheme. The latter is the scheme that is continuing to put solar on household roofs.
Looking at what we require in terms of renewable and storage infrastructure for a renewables grid in 2050, the current run rate for renewables investment is where it needs to be, if maintained. But we will need to be rebuilding renewables at a fairly aggressive scale for the rest of our lives – it will be an ongoing 40-year infrastructure project.
Where we fall is on storage; we are much further behind. Now, Snowy 2.0 will provide two gigawatts – and that’s good, but we need 30 gigawatts. Over the next 30 to 40 years, we’re going to have to build storage at an aggressive rate, much faster than at present. And that is true whether it is chemical batteries, pumped hydro, hydrogen or whatever else.
Rooftop solar is also another interesting challenge. It is basically a completely political phenomenon, as it was introduced as a scheme as one of the things the Democrats wanted in return for passing the GST. That went along for a little while until the political debate around climate change hit in around 2006. The scheme was one of the few things the Howard Government had going for climate change, and then it increased the household rebate to $8000.
Of course, the scheme lit up like a Christmas tree. It was incredibly popular and oversubscribed. The scheme evolved into a managed system for deploying rooftop solar panels. There were three groups of people predominantly installing them – they were either retirees, first home buyers, or those in marginal electorates. So, it’s very popular, it’s fallen in cost, and it genuinely saves households on their power bills. They buy it primarily for cost savings, not to save the environment. Given that they live in marginal electorates, governments do not want to change those schemes because of their popularity.
The problem with that is twofold. One, there’s high voltage in parts of our cities, particularly Adelaide and Brisbane. Voltage is code for pressure. There’s too much electricity during mild sunny days in Brisbane and Adelaide, and the electrons can’t get to market because it’s not designed to hold them. And the cost of upgrading it would be borne by all consumers if you do.
The second problem is that there is now so much of it, it’s like a giant ‘black ops power station’ that sits in the middle of the grid, and we can’t control it. We can guess how much it’s generating, but we don’t know how much it’s generating. In Perth, they’re approaching minimum demand by mild spring and autumn afternoons where rooftop solar will be the only source of generation by 2025. Nobody knows how to run that grid, and it’s created a significant technical challenge. Now, everyone has ideas on how to fix it, but the principal challenge is in seeing it and controlling it. And it requires imposing a constraint of some description on households in marginal electorates, on something that they like.
Chemical batteries are going to be a critical part of the electricity grid. The largest battery in the world is in South Australia. It’s tiny compared to the scale of the electricity grid, but it’s very good at managing frequency and stabilising the grid. But its volume is very small at grid scale, and these batteries are unlikely to be a major player in providing bulk electricity storage. But they are great in stabilising intermittent generation, and they’ll play a key role there.
How do you store electrons at scale? It’s going to take more work, but currently leading this is the Wivenhoe pumped hydro generator in Queensland. The problem with pumped hydro is that it’s pipes, tunnels and a large pump, which cranks the water up a hill and then releases it – it’s very binary. If you look at Wivenhoe, it discharges about 60 times a year, which isn’t a lot. Even though prices have been volatile, it hasn’t significantly increased its discharge rate. When I asked why, I was told that it’s harder than it looks. This is because once it’s loaded, you have to wait until you can unload it – you can’t just load it again. When demand is low in Queensland and they try to charge it, they can affect the price of the market in Queensland.
So, other market participants looking to buy low and sell high are compromised by Wivenhoe’s presence in the market. This presents a real challenge in the current energy-only market. It has an impact on how investible and bankable projects are. It will only get worse as we build more of it, because they will undermine each other. The more storage goes into the market, the more they compromise the arbitrage spread.
I theorise that the energy-only market we use on the east coast was effectively fatally wounded when the Emissions Trading Scheme (ETS) failed to pass in Parliament. The problem is that an energy-only market is a pure market design. It’s very elegant, and the price signal in an ETS was designed to work with the market by using the pricing in the market to signal investment in different types of assets. The RET has worked against the market as it drives investment regardless of price signals. That’s partly why we’re seeing volatile wholesale prices. Renewables have been built regardless of the price signal, and we need to find a way of correcting and balancing that.
This is an investment problem. In the current market, there’s very little investment in generation that doesn’t have government subsidy. This has been the case since 2012, with one exception being the Barker Inlet gas peaker being built in South Australia by AGL.
This operating context is trampolining the wholesale price. Now, the market is designed to be volatile and bounce around – that’s part of its elegance. But when you start getting consistently low and zero wholesale prices, that’s bad. That’s not free electricity. It’s bad for all the asset owners who are trying to recover costs – particularly renewables investors who aren’t protected by contracts with state governments. This isn’t sustainable. We need to get prices to a point where they’re balanced and getting returns for all types of investment, particularly for builders of renewables and pumped hydro.
This just illustrates the problem of returns. According to the market operator, the costs and returns of running a battery compared to the cost of electricity and pumped hydro varies. Running pumped hydro is a marginal business because you have to use a lot, and the loss rates are high. For instance, Wivenhoe has about a 60 per cent efficiency, so you still lose 40 per cent of the electrons you’ve used to pump the water up the hill. They’re not recoverable in the discharge.
Batteries make more money because there’s a good market now in providing frequency services. When there’s instability in the grid, batteries have proved to be outstanding in stabilising the grid. But as more batteries come online, they’ll be competing and putting the price down for that service. That’s not a bad thing, but it’s not a sustainable business model.
Consider Wivenhoe Queensland during a bouncy period. The data shows it’s missing opportunities to arbitrage, because it’s got both a sticky charge and a discharge mechanism. It’s trying to guess what it needs to do. For instance, it will often hold water in anticipation of hotter days when the ramp-up rates are going to be aggressive. So, they will leave it to solar during
the day, then when that dies off in the evening you need lots of coal to recover quickly. This is where Wivenhoe comes in; they hold the water back so they help with that very rapid charge up to stabilise the grid. That means there are physical constraints on the grid.
Shifting from an energy-only to a capacity market is one of the biggest debates right now. Germany debated this, and it’s stayed with energy only, the same as Calgary and Alberta in Canada. But it’s a live debate, and I don’t know the right answer.
This leads to thinking about how we value different asset classes. The more complex elements are the kind of intervention in the market. It may make it less efficient and more expensive, but at the same time, do you need to do it to stabilise the grid?
We’ve never changed from one market to another. We’ve changed from government ownership to a market. The main problem is that there are $120 billion worth of assets in the market. Changing the market will mean that those assets variously increase or decrease in value, depending on the change in market rules. Those who get asset increases will be cheering, but those who are losing value will be fighting with every fibre of their being to stop it. There will be significant conflict and debate about that kind of changeover.
Finally, the governance. Now, governance is a complex area. The fundamental problem with electricity is that it’s a difficult transformation, and it’s been politicised. The problem for governance is that we won’t know whether it’s fit for purpose until we’ve designed the machine to build in the market. As a first step, we need to get the politics out of this, because it’s technically not that difficult. There’s plenty of capital and it seems investible, but the politics is impeding the transformation. So, it’s a bit of a ‘cart before the horse’ question at the moment. But we may need a significant change in the way we do this.
Recently, the ‘big stick’ legislation has popped up again, which may provide the ability to force businesses to divest. Recently, the energy market regulator announced that it is taking a group of wind farm owners to the Federal Court over the system blackout in South Australia. And it’s taking another generator to court for a blackout in South Australia in February. It has also announced that it’s going to increase penalties and prosecutory powers against energy businesses.
All of this means that there’s a very strong anti-business sentiment in the market, driven by the politics at play, rather than what we need to do, to get market transformation right. If the businesses lose the court case over the system blackout in South Australia, you can expect class actions against the four South Australian companies that lost millions of dollars in business and assets. The idea that this is a good outcome for investment in the sector at this critical time is a worrying trend.
Matthew Warren – Author
Matthew Warren is an economist and journalist. He has spent the past 15 years working for the electricity, downstream gas, renewable energy and coal industries. He was Chief Executive of the Australian Energy Council, the Energy Supply Association of Australia and the Clean Energy Council. He was also Environment Writer at The Australian and worked for the New South Wales Minerals Council.
