Fixing Australia’s Power Pricing & Supply Crisis Means Cutting Subsidies to Wind & Solar, Right Now

The last thing Australia needs is another MW of intermittent power generation, which means slashing subsidies to wind and solar, right now.

Thankfully, the new Energy Minister, Angus Taylor is determined to do just that.

Taylor’s shortest route home is to fix the power market dispatch rules, which give preference to intermittent wind and solar.

Once upon a time, those rules required electricity generators to tell the grid manager when and how much power they intended to deliver, and over what time-frame.

Demand was forecast in advance, based on seasonal variations, time-of-day and day of the week, with allowances made for extreme weather conditions, when the use of air conditioners (either for heating or cooling) would lead to spikes in demand. Supply was organised according to schedules to match forecast demand.

Generators hoping to participate in the National Electricity Market were required to offer power according to scheduled demand, in a manner that would satisfy all power consumer’s needs.

Then, along came wind power.

With their output determined by the weather, wind power generators determined to rewrite the rules, they could never satisfy.

After Kevin Rudd’s Labor government took power in 2007, the Renewable Energy Target was jacked up ten-fold to 45,000 GWh: 41,000 GWh of wind and large-scale solar (LRET) and 4,000 GWh of domestic rooftop solar (SRES).

Under the dispatch rules that then existed, wind power was designated “non-scheduled”, which meant that wind and large-scale solar power outfits had no right to dispatch power to the NEM, unless the grid manager, the National Electricity Market Management Company (NEMMCO) permitted them to do so. The alternative was to try and meet the requirements set by the definition for “scheduled” generators: namely, guaranteeing delivery of set volumes of power, over a pre-determined time-frame. Obviously, the fickleness of Mother Nature meant wind and solar generators could never satisfy that definition.

Moreover, the grid manager hits “scheduled” generators with substantial financial penalties, in the event that they fail to deliver power according to the pre-ordained schedule.

Unable to satisfy the dispatch rules, the wind lobby did the next most obvious thing: it rewrote them.

The Australian Energy Market Commission was inundated with complaints about how unfair it was that wind power outfits were unable to ‘compete’ in a market where customers had this pesky habit of demanding power as and when they needed it, rather than having it delivered at crazy, random intervals.

If a wind power outfit wanted to guarantee regular participation in the NEM, it effectively had to build an equivalent capacity in fast-start up gas (Open Cycle Gas Turbines) or diesel generation to match whatever wind power capacity it built.

AGL did just that back in 2001, when it built its Hallett Power Station (200 MW of OCGTs that it runs on diesel), in order to match the wind power capacity, it was then planning to build between Jamestown and Hallett.

The cost of building utterly unreliable wind power capacity – as well as being forced to build additional reliable plant to compensate for the inherent intermittency and unreliability of weather-dependent wind – was viewed with contempt: operators like AGL determined that it was much fairer to pass the true cost of intermittent wind power generation to somebody else; namely, Australian power consumers.

The AEMC (packed with Big Wind friendlies) willingly obliged: under its Rule Determination issued in May 2008 it created an all new category of generator defined as “semi-scheduled”, tailored to suit the chaotic delivery of wind and solar. Masters of the English language might scratch their heads at a linguistic concept that sounds a lot like the idea of being half pregnant.

The new dispatch rule came into force in January 2009 and the rest, as they say, is history: from that point forward, more than 1,600 wind turbines were speared across four states and connected to the Eastern Grid.

Over the last three or four years, plenty of large-scale solar has been rolled out across southern Queensland and northern New South Wales, enjoying the same care-free classification: “semi-scheduled”.

From 2009, semi-scheduled wind and solar were then, and thereafter, entitled to dispatch electricity to the NEM, whenever the wind and sun permitted.

Critically, the failure of a semi-scheduled generator to deliver power to the grid has no consequences at all for the wind or solar power outfit concerned. Consistent with their general manner of operation, it was all care and no responsibility for the wind and solar industries, from then on.

The conventional generators (coal, gas and hydro) are still designated “scheduled” generators: a failure to deliver according to the agreed schedule results in the imposition of very substantial financial penalties. True it is that their operation isn’t dependent on the time-of-day or whether the wind is blowing, which makes them unlikely to be hit by those penalties. However, they still need to schedule, well in advance, if they wish to participate in the market, at all.

Once a coal or gas-fired plant is scheduled to deliver, that plant must remain online at all times, irrespective of whether it’s able to dispatch power to the grid.

When the wind is blowing and the sun is up, wind and large-scale solar generators use the value of their Renewable Energy Certificates – they receive one REC for every MWh dispatched, with a REC currently worth $85 – to undercut coal and gas generators. Those generators (forced to remain online because they’re scheduled and would face penalties if they didn’t) continue to burn fuel, pay wages and overheads, but are unable to dispatch electricity and earn revenue.

So, the scheduling rules that Angus Taylor is about to tackle involve a double whammy for conventional generators: they suffer financial penalties imposed by the grid manager if they fail to deliver power according to the grid manager’s pre-ordained schedule; and they suffer financial losses because they can’t deliver power when the sun is shining and the wind is blowing, even though they continue to burn coal and gas and run up other costs.

If anyone studying the operation of markets is looking for an example of an unequal playing field, Australia’s electricity market is it.

While there’s been plenty of talk from Liberal and National MPs about refurbishing Australia’s existing fleet of coal-fired power plants and building new High Efficiency Low Emissions coal-fired plants, unless and until the dispatch rules are returned to what they were in 2008, conventional generators will suffer the same disadvantage that’s making them unprofitable, now; and which has done so, since 2009.

The first and most obvious step towards restoring reliability to Australia’s power grid and affordable power to Australian power consumers, is redefining wind and large-scale solar as non-scheduled generators. By that definition, wind and solar power outfits would no longer be able to participate in the NEM, without the permission of the grid manager. Scheduled generators, on the other hand, would be able to dispatch electricity according to the schedule, without interference from chaotically intermittent and heavily subsidised wind and solar.

The alternative is to classify all generators as “scheduled” generators; thereby requiring wind and solar power generators to actually compete in the power market and to suffer the same financial penalties that apply to every other generator in the market. Either way, the characters who keep claiming that wind and solar are truly competitive would get the opportunity that they fear the most: a head-to-head with coal, gas and hydro.

For Taylor to meet his objective of getting power prices down, his other target must be an immediate end to the subsidies directed to wind and solar (currently worth more than $3 billion a year) that created the mess, in the first place.

The direct cost of those subsidies is added to every Australian power bill; namely the cost to retailers of purchasing the mandated number of Renewable Energy Certificates each year: 28 million this year, with the mandated requirement rising to 33 million in 2020, with that number needed each year until 2031. The alternative for retailers is paying the shortfall penalty, a $65 per MWh fine imposed for failing to meet the LRET’s mandated targets, set by the Federal government’s Renewable Energy (Electricity)(Large-Scale Generation Shortfall) Act 2000.

The indirect costs of intermittent wind and solar are also born by power consumers, which include: power market gaming around wind and solar output collapses, that send the spot price all the way to the regulated market cap of $14,200 per MWh, for power that costs less than $50 from coal-fired plant; and escalating distribution costs, the result of building networks to take spurts of ‘occasional’ power from hundreds of very remote locations.

Alan Moran takes a look at how wind and solar subsidies have distorted the Australian power market and what slashing them now means for power consumers, in future.

Will abandoning energy subsidies allow the electricity market to self-correct?
Catallaxy Files
Alan Moran
29 August 2018

Coordination of supply in network industries

Network industries involve firms cooperating in order to meet customer demands. Their success depends upon parties mutually agreeing on certain interconnection standards in order to combine components together. This need for coordination was often ensured by keeping the major supply components in-house.

Thus, railways were vertically integrated to ensure that the package comprising train types, tracks, junctions, signalling, workshops, stations and other facets could be coordinated without negotiated compromises with independent businesses. Difficulties arose in the UK system when track and trains were placed with different businesses and each attempted to foist joint costs on to the other. Some privately owned freight lines continue to operate like this – notably with Brazilian and Australian iron ore supply routes.

In the case of Australia, BHP and Rio spend hundreds of thousands of dollars a year on legal advisors to maintain control of their rail lines and what they carry; they do so to combat constant attempts by regulatory authorities seeking to force them to open their facilities to other users. Their imperative is to avoid any interruption to their shipments, since even short delays mean huge costs.

This vertical integration was also standard for electricity supply. Not only were generation and transmission under common ownership but so also, in most cases, was local distribution. Integration ensured that the lines and the different sources of supply optimised the needs of the market.

In most of Australia that meant maximising the use of the cheapest source of supply, coal, while using more flexible, higher cost gas or supply constrained hydro to fill in peaks and ensure reliability. The coal generators remain lowest cost but, since most of their costs are in fixed plant and incurred whether or not they are generating, only when they can continue running continuously for prolonged periods. Coal generators are also not easily adaptable to stop-start operations.

Of course, with integrated electricity systems, especially where government is the owner and a monopoly is in place, there is a risk that the workforce or politicians will take control and boost costs. To a greater or lesser degree there was such loss of cost control in Australia.

The competition policy reforms of the 1990s followed by privatisation reversed this and brought massive productivity gains– in the case of generation in Victoria, the former state government monopoly employed four times as many people (including contractors) as the new private owners and was unable to operate with the reliability the private owners achieved.

Considerable gains were also made in poles and wires operations. The benefit of these was seen in stable prices, with upward movements in 2007-8 (when the millennial drought cut hydro supplies) and subsequently, when the progressive increase in subsidised renewables forced the closure of coal generators.

Another network industry, air travel, never had integrated services. But the airports impose requirements on the airlines. To use an analogy with electricity supply, airports would not tolerate a sizeable and highly variable proportion of their landing slots being taken by aeroplanes that arrive unscheduled and demand to be serviced ahead of scheduled arrivals.

In other words, airports would not allow non-despatchable renewables to squeeze out scheduled arrivals. Airports which tried to operate in that way would need to make comprehensive adjustments to their charges so that the variable suppliers’ costs were reflected in the prices they paid. Any such airport in competition with others would find scheduled airlines re-locating to avoid facing discriminatory treatment as a result of the airport’s accommodation of random arrivals.

Disruption from new technologies 

While the effects of competition in forcing down costs and forcing suppliers to pass these reductions is standard economics, Schumpeter considered this process to be far less important than innovation where new competitors were so potent that they displaced the established suppliers.

This outcome, now referred to as disruption, can be seen today with taxis, perhaps hotels, certainly newspapers. Where Schumpeterian market disruption occurs, the losses to incumbent suppliers with sizeable sunk costs in newly obsolete technologies must be accepted.

Many claim that renewable energy is such a disruptive technology. Bill Shorten is not alone in maintaining that energy from wind and solar is the “technology of the future”.

This may well be its destiny but, if so, it would be one of those very rare technologies that have achieved that triumph as a result of government subsidies. And the subsidies in place over the past two decades do not, at least yet, appear to have brought the infant industry into maturity. Its sponsors continue to abuse those advocating a cessation of renewable subsidies under the Renewable Energy Target and under the National Energy Guarantee (NEG).

Former Energy Minister, Josh Frydenberg, argued that the NEG he was promoting was “technology neutral”. By that he meant the carbon tax (emission intensity scheme) that was central to the NEG placed a price impost on energy supplies in proportion to the greenhouse gas emissions they entail. It would not actually be technology neutral unless the greenhouse gas free sources are also the cheapest sources. In the absence of that, their scarcity in relation to the regulatory requirements of abatement would result in them commanding a premium price over alternative generation sources.

Frydenberg may have accepted the industry’s claims that renewables would be competitive five years from now, hence there would be no premium price required. The ACCC certainly seems to have done so, since it recommended the removal of the subsidy to rooftop solar installations from 2021, as the subsidy would not then, it claimed, be needed.

The NEG also required “firming contracts” for non-despatchable generation (i.e. wind and solar). Minister Frydenberg estimated the cost needed to “firm up” wind and solar supply would be around $16 per MWh. That is 20 per cent on the spot price, clawing back some of the $80 per MWh subsidy wind currently receives (small scale solar receives $40 per MWh plus the variable value of feed in tariff subsidies.). Some proportion of this, perhaps all of it, would be incurred even without a regulatory requirement since risk assessment departments in retailers would require the capacity they contract for to be firmed up.

No market participant really expects wind and solar to achieve cost parity with coal – anyone who did so would also acquiesce in the elimination of the subsidies. Instead we see these augmented with batteries and the, perhaps now forestalled, $10 billion Snowy 2 water recycling project.

In addition, the Australian Energy Market Operator has embarked on an aggressive purchase of reserve capacity and is foreshadowing a considerable expenditure to link wind rich regions to major markets.

The artificial disruption of established energy supply sources from wind subsidies has undermined the energy markets based on meeting customer requirements at lowest costs. The effects will now be difficult to unscramble.

Elimination of the wind subsidies and abandonment of new taxpayer subsidies to renewables is an essential first step.

Whether this will allow markets to apply a self-correction in light of the on-going policies of subsidies being promoted by the alternative government is dubious. But at least the Liberals, having rid themselves of the cancerous effects of Malcolm Turnbull’s mistaken policy preferences, have an opportunity to search out a solution.
Catallaxy Files

About stopthesethings

We are a group of citizens concerned about the rapid spread of industrial wind power generation installations across Australia.

Comments

  1. Jackie Rovensky says:

    Growing up I was told ‘keep it simple to make it work’. Well when looking at the mess the production and supply of electricity is in in this country I can only say I wish those in charge had been told the same thing.
    It has become so complicated money is being wasted left right and centre. What is needed is a complete overhaul of the system with a clean out of all the existing garbage procedures, (Acts and Legislation).
    It needs someone to take control and bring in a completely new system which will benefit US the people and business, to ensure those who produce what we need when we need it are ’employed’ to be the priority supplier and the rest are there to act as stand-bye producers to fill any gaps.
    There is no way haphazard electricity supply is the way to go, we need secure supply, then and only then can this country get back to being a place where security of our future as a first world nation for living, employment and production is not challengeable.
    If there are politicians or any of their advisors who cannot accept that then they need to be sent on their way and replaced with people who do accept it.
    Our politicians need to step out of the lime light and back into the offices where they are employed to do the right thing by this Nation, not their back pockets or ideologies and stop whinging and whining.
    Parliament House is not a halfway house for people waiting and doing nothing, it is meant to be a place where those who stood for election on promises to serve the people of this Nation work hard to ensure we, the people are not let down.
    It’s time they started to ‘keep it simple to make it work’.

  2. If Morrisson faces a walkout from ‘the wets’ as you say STT, I say bring it on! This debacle is just 1 of many that has to be addressed. The $50Billion diesel subs is another colossal waste of the taxpayers hard earned. Also, when was the last time anyone mentioned anything about the debt problem that is climbing everyday?

    Politicians from all sides of politics deserve to be hung and quartered over their irresponsible mishandling of this nation!

    BTW I would have thought that pollies would have long ago realised that the voters are sick and tired of pollies who refuse to answer the questions they are asked. We want, and we deserve answers to our questions. Give me a straight shooter anytime of the day. At least I then have a good understanding of what is going on.

    • In regional SA last thurs 30/8 Electranet had a scheduled blackout for exactly seven hours (so as not to pay any compensation for 8hrs and over in accordance with Service Guarantee). This is about the 3rd time in less than the last couple of years. When contacted they would not give any information as to the actual reasons for this ‘interruption to improve the quality /reliability of supply ‘. Contacting the new Energy Minister Mr Pelikann yielded a number that would not answer and office staff that assured a reply that has not been forthcoming.

  3. Son of a goat says:

    Quite frankly after 6 years I’ve chucked in the towel regarding this whole energy debacle.

    I listened to Angus Taylor’s interview today with Alan Jones and it became quite obvious that Angus is hamstrung by the moderates within the liberal party.
    Jones questioned him repeatedly about leaving the Paris climate agreement to which Taylor’s only reply was that as minister his sole objective was to reduce energy prices.

    Jones questioned him on scrapping the LRET and the $3.5 billion/year in subsides to which he replied the RET had only a year or two more to run.

    We need a maverick like Trump to put an end this debacle quickly but Angus is no Trump.

    Unfortunately it will take blackouts on a national basis before any common sense enters this debate.

    To STT I don’t now how you do it, all the best to you and your contributors and in the words of Dave Allen , “may your God go with you.”

    P.S. To those morally bankrupt idiots that brought us the ill feted Ceres project all those years ago, we wont forget you…..and at the risk of being a little self indulgent I feel certain you forget us!

    • Be patient SoaG. STT hears things are close to an eruption over Paris. Only a few Libs and a couple of Nats want it. We could see an early election fought on ditching it. Morrison knows it has to go, but he will face a walk out from the wets.

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