Hazelwood power station

Over the last week we have been treated to the depressing spectacle of the Prime Minister and his government reacting in a knee jerk, wrong-headed manner to two sensible and useful reports that have been released by the Australian Energy Market Operator (AEMO).  This highlights the folly of not having a national plan for transitioning the National Electricity Market towards an increasingly renewable energy system.

AEMO has released two reports in September on the issue of the challenges of electricity market security:

  • 2017 Electricity Statement of Opportunities, which provides a projected outlook under various scenarios for the next 10 years to 2026-27 on electricity supply and demand;
  • Advice to the Commonwealth Government on Dispatchable Capability, which draws on the projections of the first report to assess the implications for electricity market security and identify what policy and market actions are required. The release of this report was accompanied by a letter to the Energy Minister and a copy of a report by energy consulting firm the Brattle Group on international experience with managing the transition to a renewable energy market

Giles Parkinson has posted on the first report and the Commonwealth’s efforts to have Liddell power station continue operations beyond 2022, which is a misguided response to the two reports. In this post I will seek to place these developments in the broader context of what is wrong with electricity market policy and what needs to be done to address the problem.

The broad environment for the electricity market can be characterised as follows:

  • Progressive retirement of base load fossil fuelled generators, with the most recent being Hazelwood in Victoria and the next planned closure being Liddell in NSW in 2022;
  • Flattening in the demand for electricity transported by the grid, reflecting both energy efficiency and growth in roof top PV, the latter supplying power off grid;
  • Strong growth in large scale renewable wind and solar energy as well as increased use of rooftop PV;;
  • Increased domestic gas prices which, in combination with withdrawal of base load capacity, has produced a substantial increase in wholesale electricity prices
  • Advances in energy storage capability and reduced costs; and
  • Declining costs of renewable electricity which have declined by about 80% over the last decade and will continue to decline into the future

It must be stressed that Australia is not alone in addressing these changes. All power systems in the developed world and many in the developing world are responding to these changes, most much more sensibly than is the case in Australia.

Over the last 10 years 5200MW of base load generation has been retired in the National Electricity Market (NEM), replaced by 2900MW of gas powered generation, 2965 MW of wind power, 273MW of hydro, 265 MW of grid scale solar (plus off the grid rooftop PV) and 277MW of other energy sources, including bio mass. This is all in accord with the policy objective of shifting towards greater use of renewable electricity production as part of Australia’s commitment to addressing climate change, an objective shared by the Commonwealth government and the opposition.  Despite the view of the so-called conservative wing of the coalition, this objective is not the problem. The problem is the lack of a national transition plan to take Australia forward to a substantially renewable NEM combined with a lack of an emissions reduction target and a mechanism to deliver on that target for the NEM.

AEMO has identified both a short-term and a longer-term problem in the NEM, which are both essentially transition problems in moving towards the goal of a renewable electricity market. The short-term problem relates to the summer of FY 2018 and, to a lesser extent the three subsequent summer periods where it is assessed that there is the possibility, on the base projections of AEMO, that the reliability standard will be breached in Victoria and South Australia. The reliability standard is set to allow a very low level of tolerance of outages, with unserved energy (USE) not to exceed 0.002% of consumption for any region in any year. This is quite a stringent standard based on standards in other countries. Both Victoria and South Australia are close to breaching that standard on projections for the summer of 2017-18 and to a lesser extent in the following three years. As a result AEMO has concluded that there is a need to put in place arrangements for a strategic reserve of 1000MW of flexible dispatchable energy resource.

The risk of summer outages in that period has been flagged for some time and hence this assessment and the proposed response is not really a surprise. However, the second and longer-term problem has created the recent  political drama. AEMO has concluded that “the current market design is unlikely to provide adequate and sustained signals to the market to incentivise development of new, flexible dispatchable resources at the level required to maintain system reliability over the medium and longer term”.  The report goes on to note that with the planned closure in 2022 of Liddell, there will be a need for an additional 1000MW of flexible dispatchable generation capacity. Without such additional capacity NSW, Victoria and South Australia will all approach or exceed the reliability standard trigger over the next ten years. In order to respond to this risk AEMO recommends that it proceed to consult widely to develop “a longer term approach to retain existing investment and incentivise new investment in flexible dispatchable capability in the NEM”.  The careful crafting of the words should be noted, with the actual mechanism to effect the policy response kept deliberatively vague. This recommendation is the apparent trigger for the Prime Minister to make his appeal to AGL to maintain Liddell power station beyond 2022 and to subsequently talk about exploring other options to maintain Liddell in operation. It is hardly a coincidence that the Minerals Council called for such an action on that same day.

This raises two questions:

  • What is the cause or causes of the longer-term problem of maintaining system reliability and the need for a partial redesign of the NEM to address this problem?
  • Is the solution proposed by the Prime Minister viable and appropriate and if not, why not?


*Read the rest at John Menadue’s blog, Pearls and Irritations

Michael Lambert is a former Secretary of NSW Treasury, was involved in the development of the National Electricity Market, former non-executive director of Energy Australia and is a director and senior adviser on health economics at the Sax Institute.