Can the Finkel Review fix a dysfunctional electricity market?

Saturday, June 17, 2017

Australia’s Chief Scientist Alan Finkel presented the Blueprint for the future: Independent review into the future security of the national electricity market, known as the Finkel Review, to the Council of Australian Governments (COAG) Leaders’ meeting on June 9.

The mainstream media has focused on one recommendation — a Clean Energy Target — and the Coalition’s reaction.

Slashing carbon emissions is vital. But the Review was actually about repairing the dysfunctional National Electricity Market (NEM). Of course, we could fix problems in the electricity market by ditching the NEM and returning electricity to public ownership and control. But that is not on governments’ agenda — yet.

The Review hopes to restore investor confidence, so business will build new gas generators to replace coal generators that are closing down. The Clean Energy Target is intended to encourage this.

Problems in electricity system

Our electricity system is plagued with problems. Consumer prices have risen steeply. Wholesale prices are volatile. Coal generators have closed at short notice. Gas generators have experienced fuel shortages. Insufficient supply saw customers blacked out last summer. And in September, South Australia experienced a black system — a state-wide blackout — prompting COAG to commission this Review.

Technological change and climate imperatives are changing our electricity systems. Solar and wind power, variable renewable energy or VRE, is increasing, batteries are being deployed, the grid is becoming more decentralised, and customers are seeking to participate by controlling their demand.

Australia’s electricity comes mainly from coal and produces 35% of Australia’s carbon emissions. Under the Paris Agreement, Australia has undertaken to reduce emissions by 26–28% of 2005 levels by 2030.

The electricity system transition is creating challenges, which are being mismanaged. The challenges are represented as a trilemma: how to simultaneously achieve affordable electricity; security and reliability (keeping the lights on); and reduced carbon emissions. People differ in which goal they prioritise, but we need all three.

Because climate policy is so polarised, it is difficult to discuss these challenges. Fossil fuel supporters blame renewables for any problems. Renewable energy supporters rise quickly in defence. This was illustrated by the polarised debate following the SA blackout. Because the public debate was framed as pro- or anti-wind, we lost an important lesson: the NEM is dysfunctional.

The Finkel Review is about maintaining the “security, reliability and affordability of the NEM” as it transitions to decentralised renewables. Power shortages, blackouts and price hikes trouble governments the most, as the public holds governments accountable.

Clearly we need more pressure on governments to increase Australia’s emissions reduction targets, because governments will prioritise other goals. The Finkel Review was based on current emission reduction targets.

So what are security and reliability? Both are necessary to keep the lights on. Security is keeping the electricity system within specified technical limits (in particular, frequency and voltage) following a disruption, such as generator or transmission line failure. The blackout in SA was a security incident.

Reliability is about having sufficient generating capacity to meet consumer demand. Load-shedding during heatwaves last summer and forecasts of power shortages are reliability issues.

Security

The NEM is becoming less secure. Designed for large conventional generators, the market framework has not kept up with the changing generation mix.

Much focus is on the variability of solar and wind power — and hence on storage. But other technical issues also affect security. Conventional generators (coal, gas, hydro, biomass and also solar thermal) automatically provide “resilience services”, such as inertia and system strength, to help our electricity system cope with serious disturbances. Higher penetrations of VRE are reducing these resilience services. They may be provided by other means, all of which cost.

SA has a high penetration of wind power. It has long been known that SA is vulnerable to a system collapse if the SA–Victoria interconnector tripped while SA was depending heavily on wind power, with little conventional generation. That is what happened on September 28 and the predicted black system eventuated.

It was not about wind power’s variability. The main problem was low inertia, a resilience service. Conventional generators automatically provide inertia, slowing down the impact of a serious disturbance, enabling sufficient time to react. Wind power displaces conventional generators under the Renewable Energy Target (RET), but there is no mechanism to replace inertia, although large-scale batteries can help with a “fast frequency response”.

That a predicted system collapse occurred is a sad indictment on the electricity market. The transition to renewable energy is being badly managed.

The current proliferation of institutions within the NEM means it is never clear who is accountable when things go wrong. The Finkel Review seeks to correct this by establishing an Energy Security Board, which would take a whole-of-system view, facilitate planning and coordination, and report annually on the “Health of the National Electricity Market”.

The Review also recommends Generator Security Obligations, that is that VRE offer more resilience services. This will impose costs, but it seems reasonable for generators to offer not only energy but also grid stability.

Reliability

Concerns about reliability have arisen because several large power stations have shut down, and business is not building new gas generators. One reason is uncertainty about future carbon pricing. Another relates to the wholesale price of electricity. Wind farms tend to bid at zero, which lowers the wholesale price. When there is little wind, prices are high. Increased volatility means uncertainty for potential new investors.

The NEM is an “energy only” market: generators are paid for the electricity generated. Some have called for an additional “capacity market”: paying generators to be available if required. Many other jurisdictions have introduced capacity markets to incentivise new generators, thereby improving reliability. The Review opposes it, assuming that investor confidence will return once governments provide certainty about climate policies. Indeed, if a capacity market were introduced, it would probably benefit fossil fuel generators.

Much VRE is being built under the RET. However, unless these generators are accompanied by sufficient storage to make them dispatchable (so the output can be adjusted to match demand), then VRE is not equivalent to the generation capacity being shut down.

The Review has recommended Generator Reliability Obligations on new generators. This may require new VRE to pair with storage or gas generators, to increase the amount of dispatchable generation. Again, this will raise the cost of renewables. Critics have argued that this is unfair on renewable energy; rather, we need a system-wide approach to reliability. Either way, our electricity system needs a way to bring in a substantial amount of grid-scale storage.

We need a plan

We cannot depend on the market to drive the transition of our electricity systems. The Finkel Review says “We need a plan”.

When the NEM was established, a highly planned system run by state-owned utilities was replaced with a market, which would supposedly provide “investment signals” for new generators. There has been a separate mechanism for new renewable energy: the RET.

However, electricity is not like any other commodity. Electricity supply and demand must remain balanced every second or stored, such as in batteries. Standards, such as frequency and voltage, must be maintained. We are so dependent on electricity that disruptions have significant adverse impacts throughout our society and economy. Electricity supply is too important to be left to the market.

The Review recommends that Australia develop a strategic energy plan to help manage the energy transition, as other countries have done. It recommends a NEM-wide integrated grid plan, and that governments intervene if necessary to ensure transmission lines are built to areas with renewable energy potential. This is useful, albeit much weaker than others’ calls to renationalise the grid.  

The Review recommends existing generators give three years’ notice of their intention to close, allowing time for affected communities to plan for new jobs, and for new generators to be built.

Currently, decisions to close are made on commercial grounds by private companies, with little consideration for how this affects the local community and the electricity system. Constraining how these private companies make decisions is a good thing. Yet, the decision still rests with the owner. The climate movement wants a plan for the orderly retirement of coal generators. Three years is also a long time for an electricity system that is transforming rapidly.

A controversial recommendation is that there be no penalty for coal, which is predicted to provide 53% of electricity in 2030, and 24% in 2050.

Under an Emissions Intensity Scheme, coal would be penalised. The Review’s proposed Clean Energy Target does not impose costs on high emission generators — probably to appease the Coalition. The Review argues that system security and reliability would benefit if coal generators remain in the market.

The review argues that investors are unlikely to invest in new coal generators. The climate movement would want a guarantee of no new coal generators, rather than depending on arguments that coal is “uninvestable”.

Emissions reduction trajectory

Finkel proposes that state and federal governments agree on a trajectory to reduce Australia’s emissions, along with a “credible and durable mechanism”, to ensure investor confidence. Modelling for the Review was based on a reduction of 28% by 2030, and zero emissions by 2070.

An agreed trajectory and mechanism sound appealing if it breaks the current impasse. But Labor’s current target (45% reduction by 2030) is higher, and the science demands we slash emissions much faster. State governments with higher ambition could drive stronger responses. The climate movement will certainly keep pushing for much higher targets. So while an agreed emissions reduction trajectory helps investor confidence, it seems like a recipe for slowing down.

The electricity market is excessively supply focused. Ways to reduce consumer demand, or enable consumers to shift their demand to better match supply are neglected.

The Review recommends that consumers be rewarded for managing their demand, and for allowing the benefits of solar PV and batteries to be shared. This is a welcome recommendation given predictions of a “death spiral” if many consumers go off-grid. Householders sharing storage means lower costs for other consumers, since it reduces costs for poles and wires.

The Review also recommends that governments accelerate energy efficient measures, including providing programs and funding to help low-income households become more energy efficient and install solar PV systems.  

The Review assumed that the electricity sector will reduce emissions only by its share of the Paris Agreement. Critics have said that the electricity industry needs to do much more, as it is easier to reduce emissions from electricity compared with other sectors. This may well be true. However, we also need to rapidly decarbonise other sectors, particularly transport and agriculture.

Clean Energy Targets

A Clean Energy Target (rather than an Emissions Intensity Scheme) was undoubtedly proposed to appease the Coalition. It is similar to the current RET, with retailers required to buy certificates produced by eligible generators. Eligibility criteria have been expanded so that generators with emissions intensity below a specified benchmark would qualify. Gas and coal with carbon capture and storage would qualify.

However, since the amount paid per MWh to the generator would depend on the emissions intensity, renewable energy should be the main beneficiary, though the cost of renewables will rise due to new security and reliability obligations.

A Clean Energy Target was reportedly favoured because it just requires that the existing framework for the RET be adapted, rather than the establishment of a completely new framework. Given that the current RET is due to finish in 2020 (with certificates produced until 2030), this is good news for renewable energy.

The Finkel Review hopes that the NEM can be repaired. It recommends more planning, better oversight and accountability and some government intervention in transmission. But it avoids the bigger question: why is electricity supply in the hands of private operators and subject to a market? As problems continue to emerge, we need to be arguing for a return to public ownership and control.

[Dr Andrea Bunting is a climate activist from Melbourne. She was formerly a sustainable energy engineer, specialising in wind power.]

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