Opportunity knocks

AEMO recently updated its Electricity Statement of opportunities (ESOO) to reflect the agreement between Energy Australia and the Victorian Government to close the Yallourn brown coal power station in 2028.

Unsurprisingly, the forecast is that Victoria will need investment in new dispatchable generation by the time of Yallourn’s closure to replace the 1,480 MW plant, which provides around 22% of Victoria’s electricity. Media reports presented this as Victoria being at risk of blackouts, which is true in one sense if there is no investment in the intervening seven years. But there is a reason the ESOO has the word “opportunities” in the title rather than “threats” or “risks”. The original purpose of the report was to help the market understand where and when investments would be most useful to the grid and hence valuable to investors.

Accordingly it was never intended as a predictor of blackouts. Indeed, if it had been read that way it would have done a terrible job. Boardroom Energy has examined the ESOOs since 2010 to evaluate what actually happened against the forecasts* used to underpin the ESOOs. Each ESOO has a ten-year horizon.

In 2010, the key metric was the period in which “low reserve conditions”, i.e. risk of reliability-driven blackouts, were expected to show up in each region of the NEM if there was no new investment in the intervening period. This was forecast to occur first in Queensland (in summer 2013/14), then progressively Victoria, South Australia and NSW. Notably, Tasmania has not been forecast to have any reliability issues within the ten year forward horizon in any ESOO since 2010.

The forecast dates for low reserve conditions got pushed out progressively until 2014 when nowhere in the NEM was rated as being at risk. While there were a few investments in new plant that assisted, the change was mostly due to declining demand forecasts. From 2015, on, however, as old coal plants began closing, the supply/demand balance began to tighten up. By 2017 with the Hazelwood closure imminent, AEMO was forecasting the reliability standard could be breached in Victoria and South Australia by the following summer. It was at this point that AEMO started procuring emergency reserves (RERT), which helped keep the lights on in these states (and NSW) in the next few years. Even so there were three load-shedding events (where a large customer or a group of customers get their power turned off because there is not enough supply to meet demand):

  • 8 February 2017 – 300MW in SA for 27 minutes (only 100MW was required but a software error led to more load shedding than needed).
  • 24 January 2019 – 75MW in Victoria for two hours (the Portland aluminium smelter had to turn off its potlines in succession, so households were spared).
  • 25 January 2019 – 250MW in Victoria for nearly three hours.

The gap left by Yallourn is too large to be filled by RERT. But neighbouring NSW may see up to three new gas plants built in the next few years. Energy Australia have signalled they may install a large battery at the Yallourn site, although this may not be before the power station closes. Victoria is likely to see more new large-scale renewables, which may help at the margins, but can’t necessarily be counted on for meeting peak demand. The introduction of a wholesale demand response mechanism in October this year may also help fill the gap. It will be interesting to see how AEMO treats demand response in future ESOOs.

If all else fails, there’s the government. The Victorian government has progressively tightened its grip on the electricity sector through its renewable energy auctions, its sponsoring of the Big Battery at Geelong, subsidies for distributed energy resources and tightening its grip on the transmission investment process. In this environment, it would be a brave private investor who second-guessed what they will do next. It seems this ESOO update is less a signal to the market and more a signal to the Andrews government that it has seven years to fill the gap created by Yallourn.

 

* the ESOO usually contains a few different scenarios that can produce different results. For simplicity, our analysis focuses on the central scenario in each case.