Boardroom Energy
Bulletin

This week:

  • Are renewables running out of steam?

  • What would NSW look like with no coal plant in 2030?

  • Climate innovation – does Australia have enough tools in the toolbox?

  • Chart of the week: gas and electricity prices

In Brief

Suddenly, everyone is talking about gas. Europe has been plunged into an energy crisis expected to last until the end of winter because it can’t get its hands on enough gas. This is after a decade of carbon pricing, renewables programs and closing coal and nuclear. The problems are multiple: faster than expected economic growth in Asia and Europe post-COVID19, tight supply due to hurricanes in the US, low storages and low rainfall reducing hydro capacity. Gas prices are reaching record highs in Europe. Coal generators are running as hard as they can, requiring more carbon permits and driving the price of those to around AUD$100 a tonne.

To make a bad situation worse, a fire in the 2GW interconnector between the UK and France will cut electricity supplies to the UK until March. The UK is firing up its remaining coal generators, only months after activists wereprematurely declaring Britain coal free. What is worrying about this latest energy crisis is how fragile Europe’s energy system  is faced with relatively modest changes in gas supply, and how little impact a decade of world-leading activity on climate change is having when it’s crunch time.

This reality shock in Europe hasn’t troubled combatants in the Australian energy debate in the slightest. Victoria has opposed capacity payments to keep the lights on as renewables grow. The Victorian Energy Policy Centre continues to rage against the cost of connecting Snowy 2.0, claiming the transmission line would cost $2 billion more than planned. It is hard to see how a renewables based grid could work without Snowy 2.0. NSW Energy Minister said the state could be coal free by 2030. We take a look at this in more detail. It’s a very big call.

Are renewables running out of steam?

In the first half of 2021 744 megawatts of new large scale renewable projects reached financial close. This is the critical metric measuring when a proposal becomes a project.

At this rate, the new renewables committed would reach around 1.5 GW for 2021, the lowest rate since 2016. As the Clean Energy Regulator (CER) is at pains to point out in its latest Quarterly Report, project approvals in reality bounce all over the place.

But a slowing rate of renewable investment might not be a bad thing, more a return to normalcy. Australia has been building new renewable capacity at a rate at least two to three times faster than every other country. According to data aggregated by IRENA, in 2020 Australia installed 275 watts of renewables for every Australian. China was the next closest at 94 watts per capita, Germany was building at only 78 w/capita.

Chart 1: Renewables installation per capita, 2020, selected countries

Source: IRENA

That’s probably not sustainable, so it’s not unreasonable to think a correction might be coming. The CER remains bullish that there is still 3.5GW of probable projects waiting in the wings. They are still predicting between 2GW and 3GW of projects to reach financial close in 2021, maintaining the world-leading build rate that has been set since the Renewable Energy Target was unofficially met in 2019.

Chart 2: Large scale renewables, projects to reach financial close by year

 

Source: CER

This is slower than the boom years of 2017 and 2018 which averaged around 4GW per annum. And of course this is excluding the second engine of the RET scheme – rooftop solar PV, which continues to accelerate each year and is expected to deliver another 3GW of rooftop solar in 2021. And that’s despite extensive lockdowns in Victoria and NSW.

That makes around 15GW of rooftop solar PV installed to date, which is creating escalating technical challenges for networks and AEMO, even while governments continue to subsidise it.

All that solar is driving wholesale spot prices to or below zero in the middle of sunny days, and makes the commercial case for large scale solar projects more challenging.

Wind generation between states is not as highly correlated as solar, but continued build of wind is also softening spot prices when the wind blows. While the renewables industry complains of connection constraints, the biggest factor that will slow large scale renewables investment is softening prices.

Building gas peakers to firm big renewables will keep the lights on, but it won’t solve the problem of growing intermittent over-supply. That will only be addressed by large scale storage soaking up the surplus.

Snowy 2.0 pumped hydro will add 2,000MW of demand to NSW, and Kidston a modest 250MW to north Queensland. There’s another 10GW of 1 to 4 hour batteries proposed, but nowhere near commercial close without big assistance from government. Hydrogen is at least a decade away from commercial viability.

World record renewables pace is a great headline, but it’s probably not sustainable without major financial support in storage, coupled with accelerated exit of coal generators. That’s likely to be expensive on multiple fronts. But that hasn’t stopped us to date.

What would NSW look like with no coal plant in 2030?

NSW Energy Minister Matt Kean is driving his state’s energy transition, having instituted an electricity infrastructure roadmap – a combination of renewable energy zones, new wind and solar and some back-up generation. On a radio interview last week, he sounded confident that the state could shut down its coal plants by 2030. While two of them are slated for closure by then (Liddell in 2023 and Vales Point by 2029) the other three are expected to still be in service, although Origin has indicated it will begin closing the state’s largest, Eraring around that time. If they do all close, what’s going to replace them?

The obvious answer is to look at the roadmap. This is intended to deliver 12GW of renewables and 2GW of long duration (at least 8 hours) storage by 2030. On sunny days and windy nights, the renewables will do a good job filling in for coal. The current capacity of all NSW coal plants is 10,255MW, but they don’t run flat out all the time. Looking back over the last month, coal has generated 100-160GWh each day, or 4.2-6.7GW average capacity.

But renewables are weather dependent and there are winter periods of low solar and wind output that can last for up to 16 hours and repeat for several days (we call this Dunkelflaute and have analysed this in previous Charts of the Week). Adding more wind and solar will make little difference to available capacity during these periods, when coal is typically contributing 7GW to demand that can peak at around 10GW (existing gas and hydro supplies the other 3GW).

The Commonwealth’s energy company Snowy Hydro intends to fill much of that gap, with Snowy 2.0 pumped hydro (2040MW) and the Kurri Kurri gas plant (750MW). These two projects along with a 50MW/75MWh battery are the only committed dispatchable projects recognised by AEMO.

So further new investment is definitely required. Even if NSW fills its 2GW storage target (and what with – batteries are 2-4hours, so is there scope for enough pumped hydro?) and EnergyAustralia builds Tallawarra B (316MW), there’s still a 2GW gap. Big batteries may get built outside the NSW target, such as Origin’s proposed 700MW at its Eraring site, but at 4 hours duration, around 12 of these would be required – and they may not get enough time to recharge before the next Dunkelflaute period. Andrew Forrest’s Squadron Energy continues to talk up its Port Kembla “hydrogen-ready” gas plant (660MW), but AEMO’s not even got that listed on its potential projects. In any case it’s dependent on his LNG import terminal going head as well. Other companies still have planned gas plants on their books, such as AGL’s Dalton and EnergyAustralia’s Marulan B, but these have been there for a decade or more, so don’t hold your breath.

Imports could play a role, but since other states are going through the same transition, this is likely to be a NEM-wide issue. California is an object lesson in what happens if you assume more imports than you can actually get your hands on.

All this assumes peak demand stays the same. If there’s a gas-to-electricity switch, a rapid take-up of EVs, or the development of a hydrogen sector that needs to run through periods of low renewables, the gap could grow. In theory, demand response could reduce the gap, but 2GW is a huge amount of new demand response to deliver and 16 hours is too long for most customers to offer it for. Don’t look at Tomago for help – a 16 hour stoppage would jam up its potlines for good.

Even if reliability can be maintained – at what price? Snowy Hydro will have a pretty good grip on the market in this brave new world. Its existing plant plus Snowy 2.0 and Kurri Kurri will give it around 5.8GW of dispatchable capacity. This is 1GW more than AGL currently has, a state of affairs that has upset ACCC boss Rod Sims ever since AGL acquired its NSW coal assets.

It’s also worth remembering that coal plants produce more than just energy. They provide stability to the power grid, based on the ability to tweak the rate of rotation of the giant spinning turbines. Inverter-based resources such as wind, solar and batteries don’t have this inherent ability to stabilise the grid, although with some nifty electronics and software this situation may change. So high renewables days will present a different challenge from Dunkelflaute, and this is what AEMO boss Daniel Westerman is worrying about when he talks of preparing for coal-free periods in the NEM as early as 2025.

All-in-all Matt Kean has a job on his hands if he’s serious about a coal-free state by 2030.

 

Climate innovation – does Australia have enough tools in the toolbox?

Australia’s research funding agencies – ARENA and the CEFC – are constantly in the public eye. But as the OECD has pointed out, the irony of this is they don’t fund a lot of research.

The OECD released its assessment of Australia’s economic policies and prospects this week. It’s the first such report since Matthias Cormann  – controversially in some quarters – took the top job there.

If the Morrison government hoped that their former colleague would ensure Australia got a glowing report card, they would be disappointed. The report has plenty of advice for better economic policy, including thorny topics such as tax reform and climate policy. One area of analysis that caught our eye here at Boardroom Energy was Australia’s mediocre record on climate-related research and development (R&D).

In its assessment of Australia’s climate policies, the OECD noted approvingly the existence of ARENA and CEFC to support innovation funding. The CEFC in particular is one of the few national “Green Banks” among the OECD membership. However, they go on to say: “despite these institutions being considered best practice within the OECD and having been in existence for many years, innovations are less likely to be environment-related than in other OECD countries. Furthermore, there has been a trend decline in environmental R&D over the past decade.”

This is illustrated in the chart below, showing that while Australia was marginally ahead of its peers at the turn of the century it is now below the average in terms of its environment related inventions.

Chart 3: Environment-related inventions

Source: OECD

This may seem a harsh judgement on Australia in a week in which a local company broke a world solar cell efficiency record. But it is borne out by our analysis of ARENA’s funding by stage in the innovation cycles, shown in table 1.

Table 1: ARENA funding by stage

R&DStudyDemonstrationDeployment
2016-173%0%9%88%
2017-1818%17%50%15%
2018-1912%12%51%26%
2019-200%16%33%51%
Average9%12%38%41%

Source: Boardroom Energy analysis of ARENA annual reports

As the table shows, less than 10 per cent of ARENA’s funding in the last four years has actually gone into research and development. The majority has gone into demonstration and deployment, in other words into assisting the commercialisation of existing technologies rather than inventing new ones. The other category study is ambiguous but includes feasibility studies of new transmission lines and other work on further deployment of mature technologies.

One factor in this may be ARENA’s own objectives. IT has a target of leveraging its funding 2-3 times, i.e., attracting 2-3 times as much funding for projects as its own contribution. For R&D, studies and even demonstration, the ratio is 1.5-2.4, while for deployment it can be 10-12. So, the best way to ensure leverage of 2 or more is to ensure plenty of funding goes to deployment as that is the only stage in the innovation cycle that reliably attracts leverage of over 2.  CEFC, for its own part has goals on leverage and on average returns on its investment that may bias it towards safer, more conventional investment.

However, there may be a simpler answer – there may just not be that many great inventions out there in the energy and climate space that merit support. Most of the heavy lifting of decarbonising the energy sector is being done by wind turbines and solar panels- two inventions that are several decades old but have only recently become commercially viable.

All this does not bode well for the government’s “technology not taxes” mantra, which is pretty much the extent of its climate policy. It has recently expanded ARENA and CEFC’s remits so they can fund a wider range of technologies, in line with the government’s low emissions technology priorities. But if these priorities can’t be achieved simply by more widespread deployment of existing technologies, then there are no other tools in the toolbox. Even then, those technologies need to be close to price parity with incumbent technologies. Reversing out ARENA’s deployment funding leverage of 10-12 equates to funding projects that are only 8-10 per cent more expensive than a commercially viable cost benchmark. While ARENA can fund a couple of demonstration projects per technology to bridge that gap, any more than that and its funding will get used up pretty quickly, given it needs to fund 30-50 per cent of a demonstration project.

It’s not surprising then, that the OECD is pretty clear that this approach is not sufficient alone, citing the need for a long-term strategy for emissions reduction with clear goals and policies, as well as reminding of the role a carbon price could play.

Chart of the week: gas and electricity prices

Gas prices are on the rise, driven by strong global post-COVID demand growth and constrained supply. This is pushing up spot electricity prices in Australia, as gas peakers continue to set prices as the marginal cost generator. When gas gets more expensive they have to recover higher prices by bidding higher. Despite various theories expounded by the ACCC and some analysts about gaming of the market, this gas-electricity price relationship has endured for the past decade.

Chart 4: Quarterly gas ($/GJ, LHS) and electricity prices ($/MWh, RHS), selected states