The levers of power

The Victorian government has announced the second round of its renewable energy reverse auctions. “VRET2” as it’s known is targeting at least 600MW (about 10 per cent of the state’s average demand) of new renewables. This is described as matching the government’s own energy consumption entailed in the services it provides, e.g. Victorian hospitals and schools, Melbourne’s entire train network and a range of other government infrastructure and services.

Victoria has a legislated target of 40 per cent renewables by 2025, with 100 per cent of the government’s own consumption being renewable by the same date and so the fact that it’s trying to reach its own target is not in question. What is in question is whether it’s going about it the right way.

First, it’s not clear what “matching” means. Generally, renewables don’t match anyone’s underlying load profile especially well. If you have big daytime load – like schools, say, then solar might be a rough match. If you have big night-time load – like council street lighting, say – then wind might be  a better fit. But there’s still no guarantee that the weather will provide the electricity supply to match the load.  An example of the challenge of matching variable renewables to actual consumption is shown below, based on a Google data centre in Chile with a solar PPA.

Figure 1: Indicative mismatch of renewables PPA with actual consumption

Source: Google

Google has ambitions to have all its energy use matched to carbon-free sources 24/7. It recognises that this entails use of conventional zero emissions sources (nuclear, hydro) and newer technologies like battery storage as well as variable renewables like wind and solar. It will also manage its own consumption where efficient to do so. It already procures enough renewable electricity to be equal in total to its own use but matching this to consumption is a bigger challenge that will take time to achieve.

By contrast, the Victorian government is taking an approach more like the ACT government. To meet its total all it needs to do is procure enough renewables in total to match its consumption over the course of the year. It uses the same basic procurement tool as the ACT, a reverse auction contract-for-difference (CFDs) that effectively guarantees the renewable generator a fixed price for each megawatt hour, regardless of when it is produced. The ACT thought that this approach, as well as being attractive to bidders, would result in stable electricity prices for ACT electricity consumers. Unfortunately, this latter assumption does not hold. The ACT regulator recently confirmed a 12 per cent increase in household electricity prices for 2021-22 ($195 for an average home), primarily due to the escalating cost of paying out on the CFDs. This has gone up due to the fall in wholesale prices. On the face of it one might expect the two to cancel out, but in practice the net impact for 2021-22 is around $20/MWh.

A key reason for this is that as more renewables enter the system, they are typically competing with each other at the same time and this drives the price down when the sun is out or the wind is blowing. This lack of diversity was in illustrated in last week’s subscriber-only Bulletin. So, wind and solar farms are typically achieving less than the average wholesale price and the ACT government has to make up the difference.

Commercial PPAs now usually have a clause that they don’t pay out when the wholesale price is less than zero, which protects the buyer somewhat against these outcomes. The Victorian government has not adopted this approach. It is however, using a cap on the total payments as a way of partially guarding against paying for renewables that only compete with other renewables. How effective this cap is depending on how loose it is, of course. In any case renewables costs are much lower than when the ACT government embarked on its spending spree, and so Victorian consumers may be spared the same price hikes ACT consumers are experiencing.

The Victorian government is clear that it doesn’t expect to procure any dispatchable capacity in this auction (although dispatchable technologies are eligible). This is another sign that it’s not really trying to match supply and consumption. While it may procure dispatchable capacity separately, the approach carries some risks of unbalancing the state’s supply mix, especially with the Yallourn coal plant closing in 2028. By contrast, Queensland is adopting a belt and braces approach to keeping the lights on. It is buying up renewables to meet its 50 per cent target by 2030 but it is also intending to keep all its coal plants open at least until that date and is looking at zero carbon storage options such as batteries and pumped hydro plants. Quite how any generator will make any money in Queensland if these all go ahead is not clear.

The fact remains that the Victorian government has now squarely positioned itself as the key decision-maker in the Victorian electricity system, outranking private generators, and the NEM-wide energy market bodies. It recently fired a warning shot across the bows of the AEMC. Its submission to the AEMC’s controversial solar export charges rule change process argues against allowing networks to introduce export charges and requests state authority to veto such charges. Based on its track record, if this clause is not included in the final rule, they’ll just over-ride it anyway. One way or another, it’s down to Dan Andrews and his Energy Minister Lily D’Ambrosio to keep Victorian lights on.