Examining the Kurri Kurri gas plant controversy

by Imogen Hartmann, Associate Editor, Energy magazine

The Federal Government has confirmed its decision to build the Hunter Power Project, a publicly-funded gas plant in Kurri Kurri aimed at replacing electricity supply lost from the upcoming retirement of the Liddell Power Station. The plans for the gas plant – seen by many as a backwards step in our transitioning energy market – and the spending of public funds to cover it, has come under criticism from the industry. Here, we talk to Dr Ross Gawler, Senior Research Fellow, Department of Data Science & AI, Faculty of IT, Monash Energy Institute, about the Government’s plans, which he warns will create a cost to electricity consumers that is too great to justify its means.

In September 2020, the Federal Government issued an ultimatum to Australia’s energy industry – deliver 1000MW of new dispatchable energy to replace the Liddell Power Station before it closes, or the Government would do it themselves. The Government’s cut off for an industry-led project was April 2021, and with no projects put forward, the

Government announced the controversial Kurri Kurri gas plant in

May 2021.

The Federal Government confirmed a $600 million-spend on the build of the new gas-fired power station in Kurri Kurri in the

New South Wales Hunter Valley. The 660MW power plant, run by Snowy Hydro, will comprise two heavy-duty, open cycle gas turbines (OCGT).

Operating on natural gas, the OCGTs will also be hydrogenready, with diesel on hand as back-up for the extreme circumstances where the grid needs support. Snowy Hydro says the OCGTs will have the capability to run initially on up to 10 per cent hydrogen, but with “minor additional investment”, that number could jump up to 30 per cent, subject to fuel logistics.

The Federal Government is adamant that having electricity sources that can produce ‘on-demand’ or dispatchable energy are critical as large coal-fired power stations retire and we transition to renewable energy sources like wind and solar power. According to the Federal Government, the Hunter Power Project at Kurri Kurri is set to “fill the gap” in electricity demand in the wake of the Liddell

Power Station’s retirement.

Rising electricity costs

In 2020, when the Government first issued its ultimatum, the Liddell Taskforce found closing the plant without adequate dispatchable replacement capacity would risk prices rising by around 30 per cent over two years, or $20 per MWh to $80 in 2024 and up to $105 per MWh by 2030.

However, Dr Gawler argues that instead of providing a cost effective solution to the ensuing price rises, the gas plant could potentially result in even more of a rise in electricity costs, although it may slightly lower bills to consumers. This is because of the displacement of a “more efficient combination of new electricity generation resources, which would offer lower costs”.

Dr Gawler said that there could be a slight decrease in electricity prices as a result of the surplus created by building the gas plant as proposed. However, Dr Gawler said his original analysis had assumed the plant would run on gas. This may not be the case, instead the proposed plant is a peaker plant, meaning it would run on liquid fuel – which is even more expensive than gas. Dr Gawler said it is this discrepancy between the Government’s plan and his original analysis that could mean an even more expensive result.

“A combination of increasing electricity costs and decreasing prices means that other generators’ profits would be reduced by the project for a time,” Dr Gawler said.

“This will be reflected in a loss of income to the Federal Government through its earnings from Snowy Hydro, as well as Australians whose superannuation funds have invested in Australian electricity companies (such as AGL).

“So, if we did get lower electricity bills from the project, our taxes will not fall but may rise to compensate – or Government services will need to be cut to match the lower tax and dividend income of the Government.”

Dr Gawler's colleague, Associate Professor Ariel Liebman, said, “The investment of gas-fired power would also increase total electricity costs by about $70 million per year, with total system costs over the period to 2043 increased by up to $1.011 million.

“Moreover, this project would reduce the Snowy Hydro net profit by up to $3.380 million over this same period.”

Greener alternatives on hand

New South Wales currently has a target of net zero emissions by 2050 – pioneering as one of the first jurisdictions in the world to set a net zero objective. According to Professor Liebman, the Hunter Power Project would increase carbon dioxide emissions by five million metric tonnes of CO2 over 20 years to 2042/43.

Dr Gawler said this means that carbon offsets would have to be purchased elsewhere to cancel out the emissions from the project.

“That would be yet an additional cost burden on the NSW community,” Dr Gawler said.

Alternatively, Dr Gawler says that the plant could be run on green hydrogen with no material increase in emissions. He also said that renewable storage solutions, like pumped hydro or batteries, would provide a sensible solution for the longer-term outlook.

“Pumped hydro has the advantage of providing longer-term storage than batteries, albeit at slightly lower cycle efficiency than batteries,” Dr Gawler said. “It can be used to store the surplus renewable energy available in summer and make it available for winter when wind and solar yield is generally lower. Cross-seasonal storage is really needed to get the best out of our renewable resources.”

Professor Liebman echoed his sentiments. “If the Federal Government were to drop this project altogether, an alternative option would be to generate power through the development of off-river pumped hydro energy storage (PHES), as included in the AEMO 2020 Integrated System Plan (ISP) modelled investment options.”

“Battery storage would just as well serve the low duty expected from the gas turbine power plant, and indeed AGL and EnergyAustralia are pursuing utility-scale battery projects for this reason,” Dr Gawler said.

“It also helps to make better use of their purchased solar and wind resources and enables them to lower their carbon emission profile.”

The hydrogen-gas conundrum

Dr Gawler said low-cost hydrogen fuel can be an option in gas turbine plants that are designed to accommodate it. In this case, and when sourced from renewable energy, hydrogen can act as the back-up for a variety of energy sources without adding carbon emissions. However, this is only effective when the hydrogen can be delivered to site via carbon-free transportation (such as pipeline or tankers/trains using hydrogen fuel).

“At the moment, bulk hydrogen costs more than liquid fuel and natural gas, so it cannot compete commercially for power generation in the absence of a carbon price,” Dr Gawler said.

“Development of large-scale electrolytic processes for producing hydrogen from water using spare renewable energy is needed.

“Carbon pricing would create a commercial incentive for this transformation. There is little incentive at the moment.”

“There is no doubt that gas turbine technology powered by green hydrogen could play a role in the transition to zero carbon,” Professor Liebman said.

“However, based on the current data for the expected improvement of performance and the costs of alternative technology, there is no overall economic basis for the Federal Government’s proposal for a new gas turbine power station in the absence of low-cost hydrogen fuel.”

Dr Gawler said there are four themes at play in order to encourage investment in the development of a hydrogen industry, as opposed to more investment in gas. These are: 1. Establishing carbon pricing to value the emission abatement benefits of green hydrogen 2. Providing funds for research and development of the hydrogen economy to supplement the above 3. Developing an infrastructure plan that will enable Australia to eventually export green hydrogen at least cost 4. Discouraging the further development of natural gas producing fields with a plan to convert gas pipelines to hydrogen over time

Industry exhausted with federal intervention

According to Dr Gawler, many in the energy industry are not on board with the project, and are concerned that it may discourage or delay efficient developments in the sector as a result of market intervention.

The Clean Energy Council said the Federal Government’s build of a new gas-fired power station in New South Wales is “reckless and undermines Australia's efforts to deliver lower-cost power, reduce emissions and build a reliable energy system”.

Clean Energy Council Chief Executive, Kane Thornton, said, "Government intervention to directly build their own high-cost generation is not only a poor use of taxpayer funds but also further undermines investor confidence in the new generation.

“In the Clean Energy Council's most recent survey of CEOs of Australia's leading renewable energy investors, after challenges with the grid, 'Unpredictable or unhelpful government intervention in the energy market' rated as the second most significant challenge. "If Australia is to ensure we effectively manage the transition of the energy system, we need to restore confidence in the role of governments to work collaboratively and focus on clear market signals for investment and customer confidence.”

“As a former energy market consultant and price forecaster, I know that investors rely on comprehensive analysis of the fundamental physical, regulatory and commercial environment before they invest in new assets,” Dr Gawler said.

“Interventions of this nature make it harder to attract finance for new projects and make it more expensive due to the additional risk.”

Dr Gawler said instead of the gas plant, he would like to see the Federal Government: » Support the investment in the interconnection development and planning to open Renewable Energy Zones under

AEMO’s Integrated Strategic Plan » Stimulate the development of PHES technology and planning for the sites needed during the 2030s » Identify the most efficient deployment of batteries at residential and utility scale and establish the commercial infrastructure for these batteries to be optimised for value and to maximise system reliability

“Storage is the next big game before hydrogen becomes commercially viable,” Dr Gawler said.

Lack of carbon pricing costs industry and consumers

Dr Gawler said that the absence of carbon pricing is a core contributor to inefficient interventions and poor decisions made in the electricity industry, and while carbon pricing is not a perfect solution, it would pave the way for carbon abatement.

“Admittedly, carbon pricing has the disadvantage of creating some windfall gains for some (such as Hydro Tasmania during the 2013-2015 carbon pricing era) and requiring some expensive compensation for those unable to compete (such as brown coal power plants and aluminium smelters),” Dr Gawler said.

“We have complex schemes for large and small-scale renewable energy, which would not be needed if we priced carbon appropriately.

“Carbon pricing would enable the consumers to contribute to the abatement program through their own purchases and lifestyle changes. The value proposition of transition to electric transportation would be clearer and stronger.”

Dr Gawler said the reimposition of carbon pricing would likely result in an initial rise of grid electricity costs, but this would eventually be offset by consumer responses and new investment in grid-scale resources.

“Electricity could be better priced to avoid disadvantaged consumers cross-subsidising wealthy consumers through the smallscale certificate technology scheme and energy based network service charges.

“Those who cannot avoid the necessarily higher prices can be compensated through adjusted pension and transfer payments as the Labor Government enacted. If carbon prices raised too much revenue, the Federal Government could reduce income tax and other less efficient state taxes to compensate.

“The economists have said for decades that carbon pricing leads to the lowest cost outcomes. It just takes some thinking to mitigate those who are disadvantaged in the short-term.

“The path forward would be easier for investors if we had long-term firm targets for carbon abatement and a clear pricing mechanism to achieve it.”