Brown swan event signals the return of risk

Victoria’s ageing Yallourn brown coal fired power station could be flooded for the third time this century, risking the sudden removal of 1,480MW – around 20 per cent – of the state’s generation as it heads into the winter demand peaks.

Worried? The market doesn’t seem to be, with the Victorian price of caps – the insurance product protecting customers from price spikes – trading at $11 per MWh while the same price risk is valued four to five times higher in NSW and Queensland after an explosion forced the 12 month closure of the Callide C power station in late May.

Worried? Victorian Energy Minister Lily D’Ambrosio has assured the public there won’t be power supply problems. The Australian Energy Market Operator has confirmed no supply problems “in coming days”.  Of course, if the levee holding back the Morwell River does break then it is likely to flood the mine for months, likely to take the power station off line until Christmas.

That’s a long time to have another big coal generator out of action. Yallourn is too big not to have significant price and reliability implications, especially given the Victorian Government has been mainly focussed on building renewables capacity to replace closing dispatchable coal fired generators.  Currently EnergyAustralia has switched off three of its four units and is running the fourth on minimum generation to stretch remaining coal supplies. So far there has been adequate supply.

This “brown swan” event raised more than a few questions. Is the way AEMO forecasts generation supply adequacy sufficient given it did not include this type of repeat offender event in its projections? If rolling blackouts ensue over summer as a result of this failure, who is to blame?

If the market can survive without Yallourn, then doesn’t this suggest a weak case for EnergyAustralia to pay the circa $120 million to repair the levee and pump millions of litres of water from the mine only to flood it anyway in 2028? What if this triggered a commercial decision to close Yallourn permanently? How would the Australian Energy Regulator  (AER) enforce its three year closure notice period when the mine supplying the power station is now a lake?

In 2007 an 80 metre high wall called the north east batter collapsed after heavy rainfall. It was holding back the diverted Latrobe River from the large, flat open cut mine that supplies Yallourn with brown coal, inundating the mine.

Then in 2012 a levee holding back the Morwell River broke after heavy rainfall, filling the mine with 60 billion litres of water and taking 6 months to bring the power station back to full generation.

The Yallourn mine is again under threat as heavy rains have resulted in cracking in the retaining wall holding back the Morwell River (same as 2012). The mine has been evacuated for safety reasons, while EnergyAustralia tries to source additional coal from other safer parts of the mine while the risk remains. Rain is forecast for the rest of this week.

Holding aside the reliability, safety and environmental considerations, it’s a commercial nightmare for EnergyAustralia. Fortunately they have existing contracts with gas generators to help cover their generation position, but still face multi-million dollar lost revenues and repair costs. And all for an old generator they are about to close. They had recently signed a deal with the Victorian Government to close the power station in 2028 in exchange for government funding for a 350MW battery. Suddenly that doesn’t look so clever now.

Wholesale electricity prices have been skyrocketing in NSW and Queensland following the Callide C explosion on May 25. That unexpected 12 month closure shorted supply sufficiently to send the market into the stratosphere. We may be only days and a crumbling levee wall away from discovering what will happen if another unexpected generator closure was stacked on top of it.