If ever there were an industry at an inflexion point, it is our electricity supply industry.
In most states, supply has long come from black or brown coal used to fuel large generators in the coal fields by state-owned monopoly enterprises.
We now have major changes and challenges: privatisation of the industry in several states, climate change, substantial tariff increases, and potential supply instability.
Reducing our CO2 emissions, curbing escalating price rises and security of supply are all important objectives to address these. But to achieve all three is a hard ask.
Reducing our emissions
Australia has 0.32% of the global population yet we account for 1.4% of emissions – this is in part due to our industrial base, reliance on coal and transport distances. While we have cut back on our emissions, the projections are for some reductions to 2020 and then a slight increase. Our population growth of about 1.4% pa makes the absolute reduction harder. Our Paris target is 26-28% reduction in our 2005 emissions by 2030. This is to be achieved across all our emissions, not just electricity.
Electricity generation accounts for about a third of our emissions, making it our largest sector emitter. Its emissions are reducing slowly (from 187 Mt CO2 equivalent in 2015 to a projected 176 Mt in 2020) but on business as usual are expected to rise slowly in the next decade. Reduction is due to solar and wind renewables, closure of some high-emitting generating plants, and through energy conservation. While renewables will continue to grow, they are coming from a low base. Options for further reduction include growth in renewables, gas replacing coal, greater energy efficiency, and potentially some consumer industry closures although that brings with it unemployment.
Pricing tariffs have soared in the past decade. The ACCC Preliminary Report estimated retail bills have risen by 44% in real terms over the past decade (retail prices have risen by 63% in the same period – the difference due to reduction in use by some due to PV systems, more efficient appliances, greater consumer awareness, and consumers shopping around). Some 48% of a bill in 2015-16 was due to network costs (poles and wires). The network cost increases were to “replace ageing assets, meet stricter reliability and bushfire safety standards, and responding to forecasts made at the time of rising peak demand.”
It also found that the tightening of the wholesale generating market due primarily to the closure of Hazelwood and the Northern plant at Port Augusta had led to a wholesale price increase of around $167 in 2016-17 over the previous year. The price increases for industry seem at least as bad as for residential households. BlueScope Steel – which is subject to international competition – has seen a near doubling of its electricity costs since 2016 (see p. 20 of the Report).
In reading the Preliminary Report, it seems at best that we can expect a plateauing of the price increases, but no dramatic reduction, bearing in mind the costs and maintenance of a PV system, along with issues of dispatchable sources and forms of energy storage. I do not see re-nationalisation of the industry as a solution, and as I read it, nor does the ACCC.
Security of supply
Security of Supply is also very important. Traditionally we have sourced from large dispatchable generators, which can be readily turned on or off to meet demand. Renewables are increasing but their output is not always controllable. Solar depends on the heat of the sun which can be weak in winter and of course absent at night. Wind power also has supply problems when the wind drops; and wind ‘droughts’ can affect large areas. So we still need some dispatchable sources or some other solution (see 1-4 below). A problem here is that as renewables’ capacity increases, the utilisation of the dispatchable sources becomes less efficient and therefore adds to the costs and effectively to the cost of renewables in toto (see footnote 4). So what can we do to protect supply from interruptions which are bad for residents and even worse – reducing us to Third World status – for business? In a growing renewable market there are four options:
- Increased interconnectivity: this will help, and seems necessary, but will cost.
- Additional hydro, such as Snowy 2.0, which would pump water up to a holding dam during the day and release it for generation when needed or during peaks. But this is some years away. There is also a 30% efficiency loss in the round trip of pumping the water back up and then using it again.
- Greater gas generation because, like hydro, it is flexible, i.e., this can be fired up almost instantly (as compared with coal), but this means Victoria and New South Wales ending their gas exploration embargoes and would also be a few years away. If they are to develop these, it would ease the generation cost as tight supplies have seen gas prices rise in recent years.
- Battery storage is a potential solution, but cost-wise it may be some time away. See a recent paper by Allan O’Neill which estimated that the cost of large-scale batteries is “impractically large”. His ball-park figure for South Australia if operated in isolation is around $500 billion!
However, the Finkel/ACOLA (Australian Council of Learned Academies) report of 20 November is optimistic on storage – whether battery or pumped hydro – and concludes storage capacity needed for 50% renewables could cost an estimated $11 billion in 2030 prices, which would be a very reasonable figure. In the period up till then, pumped hydro may be preferred but the cost of batteries would gradually reduce.
Federal government action
To meet both emissions and supply security targets, the Federal Government recently announced its National Energy Guarantee initiative comprising a Reliability Guarantee (whereby retailers and large users have contracts with dispatchable resources to cover a predetermined proportion of their forecast peak load) and an Emissions Guarantee (which requires retailers to meet certain average emissions levels for their load by entering into contracts with their generators to meet these obligations). Dispatchable resources have yet to be fully defined, but could include coal, gas, hydropower, storage and demand response (where customers are paid to reduce their use when required to).
It remains to be seen how this will work. The Labor States and Federal Labor have apparently kept the door open on this. I am advised that the Emissions Guarantee could become something like a Clayton’s trading mechanism – trading could arise between the retailers and the generators, although this would be one step away from government, so honour would be served all round. This might be the mechanism to achieve a further kick in desirable emission cuts to help achieve and go beyond the Paris target (to perhaps 50% by 2030, which could be a great outcome). So there is hope in this proposal.
A key obstacle for the industry has been the political bunfight over this issue, and if this achieves bi-party agreement it might achieve a much needed policy certainty breakthrough for investment. More so, some clarity is needed within the states. The SA Government’s re-entry into power generation does not help as it discourages other investment by adding uncertainty (i.e., if there is the possibility of government also investing and operating under different rules, the private sector will not invest).
Meanwhile the ACCC Inquiry continues. So there is action on all three fronts.
The triple targets of GHG reduction, price stabilisation, and supply security are all very valid, albeit difficult to achieve. For the next year – especially this summer and next summer in the south-eastern States – there may be increased emphasis on energy conservation by all.
Bill Frilay is a member of Social Policy Connections and a regular contributor to our newsletter. He wishes to acknowledge the help and advice of an energy expert, who wished to remain anonymous, in preparing this article.