Markets: What are they good for?

Today the Victorian Government is reportedly briefing renewable energy investors about its brand new but still secret scheme to support an additional 600MW of new renewable generation in the state.

With details of the government’s latest energy policy coming via media reports and, presumably, from those who are briefed today, the rationale for the new measures appears to be to drive growth in the state’s locked down economy and avoid a slump in renewables investment.

Investment in renewables is slowing in Australia following world-record build rates over the past two years, the delivery of the Renewable Energy Target and the halving of wholesale electricity prices over the last year.

Soft prices are driven by low oil and gas prices, but slowing investment also reflects a market that is not signalling strong demand for new renewables capacity. Demand for new renewables has recently been driven by business customers looking to contract renewables to reduce their scope 2 emissions. It’s become a harder business case to stand up while uncertainty about future wholesale prices remains.

It’s also less clear the extent to which Victorian renewables are in crisis, or the extent tot which 600MW of new capacity would help. According to the Clean Energy Regulator Victoria now has 5371MW of large scale renewable generation operating in the state.

Around 1500MW of new capacity was brought on line this calendar year, with another 730MW under construction and 380MW close to reaching financial close. In addition Victoria has around 2400MW of rooftop solar generation from nearly half a million solar households.

The real looming crisis in Victoria is probably not new renewable capacity, but firming generation. The caps market which is like an insurance policy for spikes in electricity prices due to high demand and limited supply have spiked to around $41 for the first quarter in 2021 in Victoria.

That market signal suggests Victoria could do with a lot more fast starting generation: batteries, pumped hydro or gas, to jump in and help manage short term spikes in demand. Market conditions clearly aren’t helping enough of those assets get across the line. But that genuine need signalled by the market continues to be stoically ignored by the Victorian government.

Longer term concerns about supply-demand balance hinge around the futures of the Yallourn coal fired power station and the Portland aluminium smelter. The pain of Yallourn closing around the end of the decade is mitigated if the demand from the ailing smelter goes with it. It’s another awkward energy conversation were unlikely to hear much about on Spring St.