Friday, March 3, 2017

How to fix Australia's NEM electricity grid

Why the NEM is a disaster, climate action is the primary casualty, and four essential steps to fix it.

This is a rough draft. As usual, I have an idea which I think is great and then someone else beats me to it: John Quiggin on the ABC website. Well my article is nearly finished (haven't put all references in yet & needs a lot of tidying) but in the interests of timeliness, here it is.

The recent media focus on South Australia's blackouts has brought to the surface the festering problems of the National Electricity Market (NEM) system that serves SA and the eastern states. On the one hand, an oligopoly of mostly private corporations owns and manipulates the system to their own benefit. On the other hand, despite repeated studies showing Australia could easily go to 100% renewable energy (the latest in February 2017), governments talk of new coal power stations and even grant extensions to existing, highly polluting brown coal generators.

A severe storm caused SA's statewide blackout in September 2016, knocking over power pylons that may have been neglected in maintenance since the 1999 privatisation of the state's power grid. Commentators from the ABC to the more predictable Coalition MPs leaped to blame the state's high percentage of wind energy despite knowing that it had nothing to do with the blackouts.

A February 2017 set of rolling blackouts during a heatwave in SA saw renewables once again blamed by Coalition MPs, despite the fact that the state's most efficient gas generator was sitting idle because its owners find it more profitable to sell the gas for export.

Power price spikes in SA in 2016 were also blamed on the state's wind farms and solar, despite a planned outage of the lines that import backup electricity supply to SA from Victoria at the time. Price spikes are normal in such a situation of shortage. More recently, wholesale prices of electricity have been running at the same level as those SA price spikes for all of 2017 so far in Queensland (which has very little renewable energy) This has barely made the news (presumably because there are no wind farms to blame).


With Hazelwood, one of Victoria's big four brown coal generators, set to close this month, panicked commentators and LNP Coalition opportunists are trying to spooke the public and blame Labor governments and renewable energy for a threatened spread of the problems that have occurred in SA. A confected crisis is being talked up, while various interests line up to present their interests as the solution: more gas fracking,  axe renewable energy targets, new coal or gas power stations – all on the Coalition wishlist and various of the industries that support them.

This crisis is confected and staged. There is no shortage of generating capacity (and I think there is still unlikely to be after Hazelwood is closed). Wind farms have not caused any of the problems in South Australia, despite making up around 40% of that state's electricity generation.

But there are real problems which a more careful investigation brings to light.

The big energy companies are “gaming” the electricity market. They reduce supply, cause a shortage so that the price spikes upward, and then sell less electricity at an exorbitantly inflated price to make a killing (it's been pointed out, they are quite happy selling half as much energy at ten times the unit price).

Despite the legislated requirement to build renewable energy under the Renewable Energy Target (RET), the big energy companies have been holding back in a virtual capital strike for some years. Wind farm construction is being led by state and territory governments, and the wind turbine manufacturers and development companies themselves.

While gas is sold for export, one of Australia's least polluting and most efficient gas power stations (Pelican Point, in South Australia) is closed. Yet the outdated, polluting and inefficient  Torrens generator in the same state is running to supply the state with a large proportion of it's electricity.

Three positive responses stand out in this mess of greedy vested interests rushing to get their snouts deeper in the trough of public infrastructure.

  1. Energy Australia is apparently investigating a pumped hydro energy storage facility in South Australia, near Port Augusta. This would store energy from the state's variable-output wind and solar power, and then run a turbine to supply electricity when needed, ironing out any fluctuations in supply.
  2. The Victorian state government has legislated its own state renewable energy target, following the exmple of the ACT, and has initiated the construction of new wind farms, solar farms, and a 20 megawatt battery-storage faciity to help meet its own target which is for 40% of the state's energy to be renewable by 2025. In the second most populated state, with mostly brown coal generators, this target is significant and will make a national impact.
  3. Lastly, although it was probably an empty threat, SA's Energy Minister Koutsantonios threatened to nationalise the state's generators if it was necessary to restore reliable supply. This gets to the heart of the problem of the NEM, and should be pursued vigorously by any progresssive state government. The current system is dominated by an oligopoly of a few giant corporations who bend governments to their will and who have blockaded against the popular and essential renewable energy target, something being felt particularly in SA.

These are good news, but very limited. To reform (I mean, replace) the NEM, I propose three essential lines of action, that would ideally be pursued simultaneously.

1. Abolish the NEM spot market.

The bidding system for generators to offer electricity in the NEM rewards them for offering less electricity, as shortages lead to price spikes (although not normally blackouts) which benefit the generators at everyone else's expense. Some commentators have called for more competition, for example by breaking up and privatising the QLD state-owned generators. This would only perpetuate the problems of a system that is pretty well designed to be rorted.

Instead of a spot market, a centralised system to control which generators are used at any given time could be run with the twin goals of reducing emissions and cost, selecting generators based on those considerations. Prices should be set based on actual costs of generation, not the speculative and manipulated spot market.

As the NEM is across several states it may be difficult for a single state government to implement this alone, but all options need to be investigated to  circumvent or undermine this corrupt system (such as states taking power supply back into public ownership -- see below).


2. Construct renewable energy strategically

The existing RET relies on a market approach to determine which projects are built. This has had some wins – such as the fall in the global price of solar seeing a massive, unexpected expansion in homeowners buying solar panels. However, if Victoria joins South Australia with 40% or more renewable energy, at some point strategic investment in energy storage and despatchable renewable power will be needed.  Transmission network upgrades will probably also be necessary.

Several options are available for despatchable stored renewable energy, and all should be deployed and tested in the journey to 100% renewables: pumped hydro, solar thermal, and battery technology all have potential to be vital enablers. Starting constructing each now will prepare the ground for rapid scaling up in the next decade as the urgency of the climate threat is turned into stronger action.

In practice, this means that the existing RET should be replaced in 2020 when it finishes. A planned scheme to construct renewables is needed, to mesh with a planned electricity generation system from 1 above. The current RET simply favours whatever is the current cheapest technology. Most fossil fuel generators are expected to reach the end of their life by 2030 anyway; a goal for 100% renewable energy should be set no later than then, and earlier if possible.

3. Scheduled closure of fossil fuel generators

The immediate cause of Hazelwood's closure was safety laws, as the operator had run the facility into the ground rather than maintain it properly (it was not designed to operate beyond the 1990s anyway). Conveniently, it is also the most polluting coal power station in the NEM. However, closures should be planned to ensure the most polluting generators close first (not the least polluting, as in the case of Pelican Point closing while Torrens steams on).

A publicly known schedule of closures will remove speculation and games by big energy companies, and provide some certainty to their workforces - and (as per 4 below) this should be coupled with redeployment into renewable energy industries. The schedule can be designed to fit in with the planned rollout of renewable energy in each state while maintaining reliable electricity supply.

4. Bring power back into public hands

Even the neoclassical economic theory that supports extreme free market ideology recognises, in principle, cases where markets do not work. The concept of “market failure” includes systems that do not have true competition. True competition in a massive system such as energy supply would mean building several times the required energy generation capacity, just to have enough competing generators. This would be very expensive and inefficient for society (including for other market sectors who rely on affordable electricity to run their operations). The cost of electricity would rise, as each competitor would still have to maintain their generators and make a profit, with a smaller share of sales. This is exactly why current generators are opposing the entry of more (renewable) generators under the RET.

It would be possible, under 1 above, to contract out operation of generation in a regulated, planned electricity system. (perhaps similar to the WA system, although that may have its own problems too). The usual theory behind this kind of system is that private industry is more “efficient” than public industry. In practice, efficiency comes at a cost, often by skimping on maintenance and running down assets while maximising profits, and similar ruses. On the other hand, if the generators are able to make a profit, why shouldn't the profit go to the public?

However, a government with the political strength and momentum (and budget) to take over the generators may not need to take over fossil fuel generators that will have to be closed anyway. Here, the emphasis should be on ensuring that the private owners meet their obligations to their staff who are facing retrenchment, and to fully rehabilitate the sites of old power stations and mines.

A publicly owned renewable energy industry could choose to be a little less profitable by setting up some operations (manufacturing, maintenance, etc) in areas where ex-coal generator employees may be retrained. This would ensure a just transition for coal communities, but is unlikely to be done by privately run renewable energy industries without costly and complicated incentives from government.

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