Boardroom Energy
Bulletin

This week

Australia’s energy commentariat is losing its mind this week because the Morrison Government has decided to proceed with an unnecessary 650MW gas fired peaking power station at Kurri Kurri in NSW. The power station has been criticised by industry and independent commentators, while the extra generating capacity was not asked for by the market operator. The only party (apart from the Liberal National Party) that likes it is the Tomago aluminium smelter, which ran some media lines this week complaining that the supply contract it willingly signed meant it had to turn down when prices are high in return for below market rates the rest of time. As we discuss below in our analysis “Committing Market Kurri Kurri”, the decision reflects how nakedly political the Morrison government has become on everything from energy policy to locking down Australia’s borders to handing out billions in middle class welfare.

Meanwhile the International Energy Agency, not really known as a particularly green organisation, put out a new report warning that fossil fuel investments, like Kurri Kurri, needed to stop if the world was going to reach Net Zero by 2050. Oops. Mark Ludlow at the AFR was quick to point out the gap between heroic global advice and operational reliability.

We have a more detailed look at the IEA report “Something for Everyone”.

The gap between promise and reality was also tested this week in Adelaide, where gas distribution network owner AGIG talked a big game on rolling out pure hydrogen to new Adelaide housing developments within four years. AGIG has been at the front of the queue getting large government cheques to build expensive electrolysers and inject up to 5 per cent hydrogen mix into the existing gas network. Pure hydrogen would require a complete retooling of all domestic appliances and pipeline fittings, its own storage and compression technologies and some way of mitigating the higher NOx emissions from its high temperature flame.

Victorian electricity network owner Powercor has taken advantage of the anti-market mood to suggest it should be allowed to build batteries and other new assets throughout its network across western Victoria, breaching the ring fencing demarcation line between regulated monopolies and market facing energy businesses. We take a closer look at this in our analysis entitled “Powercor wants to tear down the wall”.

Federal Labor continues to struggle in its search for solid footing on energy policy. Already divided over its response to the Kurri Kurri announcement, shadow energy Minister Chris Bowen used an opinion piece in the Daily Telegraph to cling to the union-centric mantra of creating clean energy jobs, even if there aren’t many. Next time you drive past a wind farm count how many people you can see working there. Apparently, energy unions are less than impressed at their shrinking relevance and future, just like how many of their employers feel.

The Australian Energy Regulator threw out a belated report re-advising everyone that wholesale electricity prices had reached their lowest level in nine years. Coal fired generation was at its lowest recorded levels in Q1 2021 since the NEM was created in 1998. Origin Energy had already advised AEMO it planned on closing one of the units at the Eraring coal fired power station in NSW two years early, with 1000MW of new gas generation and more renewables meaning unsustainably low prices were unlikely to recover to commercial sustainability any time soon. Perhaps they saw our chart of the week last week on NSW coal plants, which showed that only the geriatric Liddell runs less frequently than Eraring’s unit 1.

Santos got a green light from the South Australian Government to store carbon dioxide from its operations in empty underground fissures in the Moomba basin. A collective bargaining deal from 46 Victorian councils will see them buy the electricity from a recently constructed and nearly completed wind farms at Dundonnell and Murra Warra 2. As is usual for such announcements, no-one explained how they will get their power when the wind isn’t blowing. Check out our chart of the week to see how often this coincides with lack of sunshine.

Committing market Kurri Kurri

The Morrison Government’s decision to drop $600 million to get Snowy Hydro to build a 650 MW gas peaking generator near Newcastle in NSW is a political solution to a technical problem. Electricity grids are innately complex beasts. Only an inner sanctum of a few hundred electricity nerds really understand how they work and what they need.

When it comes to electricity systems, governments have two choices: they can listen to the nerds and do what they say, or be guided by the political technicians who run opinion polls and focus groups. Since 1998 it has been the former, under the construct of the National Electricity Market. These days, in case you hadn’t noticed, the focus groups are running the show.

Importantly, the public don’t want to understand how electricity works. Outside of the outraged inner city “elites”, they want to be assured about its three key performance indicators: that energy is getting cheaper, that there won’t be any blackouts and that climate change is being managed.

The Morrison Government has no moral compass or principled theme guiding its actions except its own re-election. It is purely and completely political. In the energy sector it is demonstrably not ideologically supportive of business, nor is it wedded to the principles of free markets. These are now quite merrily being thrown under the bus because they might impede its re-election.

Last August the Australian Energy Market Operator (AEMO), one of the main electricity nerd centres of Australia, released what it calls its Electricity Statement of Opportunities (ESOO). Every year it models future electricity demand and supply and identifies if there are investment “opportunities” arising from any shortfall. It has been doing this supply-demand forecast for decades now.

The Liddell coal fired power station will close over 2022-23. When the Hazelwood and Northern coal power stations closed at short notice in Victoria and South Australia, wholesale prices spiked afterwards, as the market was spooked by the increased risk of a shortage of dispatchable, firm generation.

The forward contract prices – the price at which you can buy baseload electricity in NSW – are stable through 2022 and 2023. There is little sign of a panic driven price spike.

The 2020 ESOO predicted NSW doesn’t need new generation to keep the lights on until 2029 because of already committed generation and increased transmission connection to Queensland.

But only three weeks after the ESOO was published, Federal Energy minister Angus Taylor issued a statement requiring an additional 1000MW of new firm generation to be committed in NSW by April. It was not a technical request. It was a political request.

Taylor has been suspicious of AEMO ever since former CEO Audrey Zibelman took the helm in 2017. Zibelman, who left AEMO last year, was more political than your typical technocrat. She would spin the executive summary of each ESOO and other key documents to push whatever reform she was trying to achieve at the time. For what it’s worth, Taylor is also suspicious of his own department. Most of the Government’s energy policy work comes from inside Taylor’s office. It gives their policy design a truly political lens.

The headline of the Government’s media release attached to the 1000MW target was illuminating: “Ensuring affordable, reliable and secure electricity supply”. It was about fixing a problem that didn’t exist. Wholesale electricity prices are the lowest they have been in nine years. This has been driven by massive generation oversupply caused by 28GW of new renewables with very low levels of fossil fuel generator exiting.

Low wholesale electricity prices kills new private investment unless Governments pay for a large chunk of the asset costs. EnergyAustralia just received $83 million from the NSW and Federal Governments to build the 316MW Tallawarra B gas power station at Port Kembla. The power station itself may only cost around $200 million (the company’s public cost estimates appear somewhat conservative). That sharply illustrates the price of the investment risk.

When the NSW Government announced its scheme to centrally plan future generation investment, the Morrison Government did not swerve an inch. It remained focussed on and loyal to its political narrative. Markets don’t vote, nor do financially impaired electricity companies. The Federal Government wants to go to the next election, probably later this year, owning the low wholesale prices. It wants to demonstrate to its base that it can deliver “common sense” solutions that look after electricity consumers and keep the lights on. The more the power companies complain, the better.

Building gas generators has the additional political advantage of splitting Labor between its inner city anti-gas base and its more pragmatic regional voters. It’s a sweet political bonus, like a set of steak knives.

The technical reality is that Snowy’s new Kurri Kurri gas peaker will only run around 2 per cent of the time. It will have little impact on wholesale prices and its biggest impact will be to push older gas generators out of the market. No one who the Coalition is targeting with this messaging understands or cares about any of that.

Meanwhile, the Federal Government takes every opportunity it can find to point to the continued flow of renewables investment and shout evangelically about the wonders of hydrogen and other technologies to reduce emissions, to manage the third leg of the political stool.

It is clear that the Coalition’s internal polling shows these sorts of decisions resonate with their regional, rational base and key voters in swing seats. They’re still talking up another hydrogen gas generator at Port Kembla to be built by Andrew “Twiggy” Forrest as a key source of demand for his proposed gas import terminal.

Kurri Kurri is a triumph of politics over engineering, over climate, over markets, of politics over all. The destruction of the National Electricity Market and the damage to major companies invested in it are but collateral damage in the Coalition’s win-at-all-costs political strategy.

Powercor Vic battery proposal

Victorian distribution business Powercor has set out its stall in a bid to cash in on the Victorian Government’s renewable ambitions. In a radical plan that seeks to further upend the foundation principles of the National Electricity Market, Powercor wants to deliberately cross the ring fenced line between its regulated assets on one side and market facing assets on the other. It is the electricity market equivalent of tearing down the Berlin Wall. Market participants would agree, with the caveat that, in Powercor’s proposal, it would mean the Soviets take Berlin, not the other way around.

Powercor’s response to the Victorian Government’s Renewable Energy Zone (REZ) directions paper points out that the high-voltage transmission network is not the only part of the grid where large-scale renewables and supporting technologies (batteries, synchronous condensers) can be located. Their medium voltage network, which covers the western half of regional Victoria, already has 2GW of large scale renewables connected. Their proposal is to enable a further 1.3GW by 2025, largely through installing a fleet of eight synchronous condensers and one network upgrade project. In a potential second stage, they would install eight more synchronous condensers and more than a gigawatt of battery storage on their network.

The basic principle of utilising the distribution network, which may enable faster and easier connection of renewables than transmission-scale assets, is a technically sound one. The deeper question is commercial: who should be installing assets such as batteries and synchronous condensers, and how should they be paid for? Powercor’s proposal conveniently glosses over this question, with the underlying presumption being that they would install them, and the Victorian government would pay (and then recover the costs from consumers and taxpayers).

But in both cases, the services they are offering can also be delivered by generators, who operate in the competitive market. So, on the face of it, the proposal would seem to violate the AER’s ring fencing requirements, which seeks to keep regulated networks out of competitive markets on the basis that they have the materially unfair advantage of competing for these serviced from the privileged position of a monopoly business that has its revenue guaranteed by the Australian Energy Regulator.

Possibly, Powercor intends to install these assets through its unregulated affiliate, Beon. But, if that’s the case, why should they just be handed the contracts on a plate (assuming the Victorian government wishes to go ahead with the proposal)?

Competitive energy suppliers are already wise to this, as their own submissions to the directions paper indicate. AGL argues for competitive tendering for batteries and for system strength (i.e., the service that synchronous condensers would provide. Infigen goes one further and points out that where transmission extensions have been subject to competitive tendering overseas they have delivered saving of 18-50 per cent over monopoly regulated provision. This point would apply equally to major distribution investments.  The Australian Energy Council (AEC), which represents a range of generation and retail businesses, advocates for a framing of system need in terms of services rather than assets, which then allows a technology-neutral approach to meeting the needs of the grid.

The AEC has also been looking at the emerging situation in Western Australia, where the government has allowed the network business it owns, Western Power, to begin deploying batteries around its network and recover the costs through regulated revenue. Analysis carried out for the AEC by Oakley Greenwood shows that this could crowd out private competitive supply of battery services and be less efficient than leaving it to the market. Their estimate of the source of value for a large scale battery suggest 2/3 will come from the market and only 1/3 from network savings. This indicates it would be preferable for the market to build batteries and Western Power to procure networks support services from the battery operators.

Perhaps tellingly, Powercor only published the executive summary of their proposal, so we’re yet to see the detail of how the proposal stacks up (and Victoria has not published submissions yet). Nor did Powercor think the proposal was worth including in their revenue bid to the regulator. It remains to be seen if the Victorian government is a softer touch than the AER.

IEA – Something for everyone

The IEA’s new report, Net Zero by 2050  – A Roadmap for the Global Energy Sector, sets out a vision of rapid technological innovation and deployment to stave off the worst impacts of global climate change. This vision, which the IEA describes as “narrow but achievable”, has a bit of something for everyone. It requires a massive ramp up of solar PV, wind farms and electric vehicles, but it also includes some of the ugly ducklings of decarbonisation: nuclear power and industrial carbon capture and sequestration (CCS).

The report compares the net zero scenario (by which it means net zero CO2, though other greenhouse gases such as fugitive methane will decline along with fossil fuel extraction) with two other scenarios: stated policies, and announced pledges. Stated policies is – hopefully – the minimum outcome as it is predicated on implementation on all current policies in place to reduce greenhouse gas emissions. Announced pledges is based on achievement of all the national targets pledged at the Paris summit (or any subsequent increases in ambition), regardless of whether there are policies in place to achieve them. Table 1 compares the scenarios by the numbers:

Table 1 IEA policy scenarios

ScenarioExpected rise in global temperatures (℃)CO2 emissions in 2030 (Gt)CO2 emissions in 2050 (Gt)Proportion of renewables in the electricity mix
Stated Policies Scenario (STEPS)2.73636c. 60%
Announced Pledges Case (APC)2.13022c. 70%
Net Zero Pathway1.5210 (net)c. 85%

Source: IEA

What may surprise some is the remaining role for fossil fuels even in the net zero pathway. The IEA explains that there are three cases for continuing to use fossil fuels:

  1. Use for non-energy purpose, i.e., as a feedstock for plastics, chemicals, lubricants, waxes and asphalt.
  2. Installation of CCS, with an estimated 3.5 GT of annual emissions captured by 2050. The majority of this is from gas to hydrogen plants, with the remainder from coal and gas power plants.
  3. Use in sectors where alternative technologies are scarce/prohibitively expensive, largely the aviation sector. These emissions are offset by processes such as direct CO2 capture from air with sequestration.

This is not to say that fossil fuels get off lightly. The pathway requires an almost immediate global moratorium on opening up new oil and gas fields, as well as new coal plants without CCS.

Fossil fuel prices are expected to fall to historically low levels, as lack of demand destroys supply, leaving only the cheapest sources left to supply the remaining fossil fuel uses. Falling prices and falling demand is counterintuitive economics and relies on some combination of two things. Firstly, consumer choice to move to what – at least initially – will be more expensive energy sources and conversion technologies, and secondly, government policy to support the take-up of these low/zero emission alternatives. In the likely absence of widespread carbon pricing, this is going to have to include bans/phaseouts of high-emission technologies and production or consumption subsidies for their replacements. The Victorian government’s mix of pro-renewable and anti-gas policies, with proactive moves to manage the phaseout of the Latrobe valley coal plants, is an indicator of what this approach looks like. Whether this is or should be, the global template for the next thirty years remains to be seen.

Chart of the week

Dunkelflaute is the German word for “dark and still”, or those times when the sun isn’t shining and the wind isn’t blowing. As renewables grow to dominate power grids, keeping the lights on during Dunkelflaute periods when the renewables are off will be increasingly important. So, we thought we should start tracking it for the NEM.

There is no clear definition of how little renewables need to be on to be “Dunkelflaute”. As chart 1 below shows, capacity factors of the NEM’s combined wind and solar fleet are rarely above 50 per cent and can dip below 10 per cent.

Chart 1: Capacity factor of renewables in the NEM, April 2021

Source: Boardroom Energy, NEM-Review

Of key interest is the circled period late in the month. This was a week when there was little wind overnight (and – obviously – no solar), leading to a run of up to 16 hours with low renewbales output. Using 15 per cent capacity factor as a benchmark, chart 2 below shows the number of consecutive hours of Dunkelflaute conditions on each day of April.

Chart 2: consecutive hours of renewables capacity below 15 per cent

Source: Boardroom Energy, NEM-Review

The point of these consecutive periods are that these are the ones that will need to be filled by storage and/or flexible but firm generation in a decarbonised NEM. Just building more wind and solar will not help meet demand in these periods, even if they are able to fully meet demand at other times. Everyone’s favourite all-purpose energy technology, Lithium-ion batteries, are built to deliver two to four hours’ worth of output before they are fully discharged. They are not going to be enough to fill 15-16 hour gaps. Plus there may only be 8-9 hours of daylight to replenish before the next one.  So, the NEM is going to need long-duration storage such as pumped hydro or flexible generation such as zero-emission gas turbines. To replace the coal generation that was keeping the lights on overnight in the last week of April would require eight Snowy 2.0s. We are only building one.