One small step for the grid…

Published in The Australian Financial Review on January 31, 2020.

On Friday the National Electricity Market made an important shift in strategic direction from which it may never return. It left the orbit of a market based system towards one which is centrally planned. Not with a bang but a whimper.

The event seemed innocent enough. On Friday the Australian Energy Regulator approved a new $1.5 billion 330 kV transmission line between South Australia and New South Wales.

This 900 kilometre extension cord will stretch from South Australia’s mid-north to Wagga, and is likely to be operational by around 2023. It came packaged with a marketing pitch filled with blue sky: cheaper electricity, improved reliability and increased capacity for renewable generation projects.

The reality is more complex and less certain. We’re unlikely to know whether we regret or rejoice this major shift in trajectory until much later this decade, by when either way it will be too late to turn back.

As the name suggests, transmission lines move large quantities of electricity over large distances. They are the system’s intra and interstate highways, first built to connect large power stations to cities and other big loads like aluminium smelters.

Transmission played a crucial role in creating a national market in the 1980s and 90s, connecting each of the previously independent state grids together and enabling them to trade power with each other, helping to manage peaks in demand and optimising the cheapest source of electricity.

Transmission planning in the 20th century was relatively straightforward: constant growth in electricity demand meant building new power stations and then connecting them to customers.

Those days are gone. Electricity demand forecasting is now a lottery. Demand will increase with population growth and electrification of vehicles and decrease with deindustrialisation, increased efficiency and rooftop solar panels.

New generation used to be built down the road from the old power stations in the Hunter and La Trobe Valleys, now it’s increasingly scattered, chasing the wind and the sun. The scale up of renewables requires a different way of thinking about how we move electricity around.

To address this in 2018 the Australian Energy Market Operator released its first Integrated System Plan (ISP), which radically expanded its role from transmission planner to central planner, mapping the future shape of the entire system.

The plan identified 34 renewable energy zones across eastern Australia, like a series of giant theme parks for developers to explore wind and solar farm projects, with the idea that some, most or all of these would eventually get their own transmission line to link them to customers.

The plan was useful in thinking aloud what would be required to make a renewable based electricity system work. The devil was in the detail, or more specifically, the implementation, particularly given not only uncertain demand, but uncertain policy.

The Renewable Energy Target ends this year, without signs of any national policy replacing it. Wind and solar generation keep getting cheaper, but revenues keep sliding too, with more wind and solar generators all producing at similar times.

The proposed SA-NSW transmission line was identified as a high priority in the plan, because it would connect new renewable zones in South Australia and western NSW to bigger load centres on the east coast.

In its approval, the regulator downgraded the financial benefit to $269 million over 20 years. That’s small change over such a long time frame, suggesting that no one really knows for sure if this new transmission line is going to work out in the black. There are big risks just below the waterline.

After 2023 when the wind isn’t blowing in South Australia, it will import cheap coal fired electricity from NSW. This is expected to undercut the commercial viability of three of South Australia’s largest remaining firm gas generators.

As a result, some or all of these generators could go out of business. This will make SA even more reliant on importing “firm” electricity than it is today.

This would change the very DNA of a century old electricity system: from being a secure and independent grid connected to other systems, to being a giant renewable hub attached to and highly dependent on Victoria and NSW.

There are two options to manage this: either subsidise some of SA’s gas generators, or subsidise enough local pumped hydro to cover the shortfall. Or a mixture of both.

In other words, the approval of this transmission line formally accepts the likelihood of ongoing future government intervention in the electricity market.

These risks amplify when more coal generators eventually close in NSW and Victoria, and ease when Snowy 2.0 comes on line. South Australia’s increased dependence on NSW and Victoria will only increase the impact of generation changes there.

South Australia is already a world leader in renewable integration. Friday’s transmission decision is likely to tip it even further into unchartered waters, and with it the future design of the electricity system.