Electricity woes reflect a broken market 

April 1, 2017

Readers may have noticed that Australia is in the midst of an energy war. On one side are right-wing commentators attacking renewable energy at every turn. On the other side are renewables advocates, quick to retaliate, sometimes without considering the whole story.

But we are also facing real problems with the electricity system. South Australia is particularly vulnerable. It experienced a major state-wide blackout in September, and power shortages caused by a private gas generator refusing to provide power.

Energy commentators often talk of the “energy trilemma”: how do you achieve the three goals of 1. affordable electricity; 2. security and reliability (keeping the lights on); and 3. reduced carbon emissions.

A reliable electricity system based completely on renewable energy would cost more due to the extra storage and other infrastructure required. Of course, electricity prices can be reduced through regulations to improve energy efficiency and infrastructure costs could be funded from tax revenue. But that’s a story for another day.

The SA state-wide blackout prompted the Council of Australian Governments to commission a review into the Future Security of the National Electricity Market (NEM), chaired by Alan Finkel. It will undoubtedly recommend changes to amend some of the worst aspects of the NEM. It will probably also recommend a price on carbon, which may help natural gas rather than just renewables. The final report is due mid year.

It’s the market, stupid

Climate activists are focused on supporting renewable energy and opposing fossil fuels. That’s great. But it’s also important to focus on problems with the electricity market.

Some commentators claim the market is being gamed by fossil fuel companies and want a true “free market” where other technologies can compete. But perhaps we should be questioning the whole market model. Can markets lead to a transition to 100% renewables, or do we need government planning and ownership?

There are two separate but related aspects of the market to consider. First, in electricity markets, generators compete to supply electricity. This means the cheapest source is favoured and when electricity demand is high, generators can command extremely high prices.

Second, many electricity generators have been privatised. This means governments have little control over when generators supply electricity and generators can decide to close down with little notice, as happened with Hazelwood. Private ownership plus market principles means government planning is lacking.

Such market problems also apply to how renewable energy is being built under the Renewable Energy Target. The location of new renewable energy generators is determined by the developers. Much of it, particularly wind power, has been going to South Australia, which has strong winds and favourable planning laws. 

But a high penetration of wind power also requires associated infrastructure. We tend to focus on the need for storage and interconnectors to deal with wind power’s variable output. However, electricity systems with a lot of wind power also need alternative sources of “inertia” to deal with “contingency events” such as the loss of a generator or transmission line.

Inertia is required to slow down the impact of a serious disturbance and give the electricity system sufficient time to react — such as by ramping up other generators or storage, or through load-shedding. This is a highly technical issue, but one that is fundamental to explaining why South Australia blacked out in September. Inertia is provided automatically by synchronous generators — coal, gas, hydro and solar thermal. If you have a lot of wind power, you need alternative ways to provide inertia.

So the generation mix is changing without the associated infrastructure. Power stations are closing down with little notice. More blackouts are being predicted. And prices are rapidly increasing. Something has gone very wrong. There is a lack of planning.

Lack of forward planning

The privatisation of electricity generators and networks has been a major contributor to our energy woes. These companies operate to maximise profits rather than in the public interest. If they can make more money by creating a scarcity in order to drive up prices, they will do so.

But it is not just private generators with their drive for profits that are creating problems for electricity users. The government-owned Hydro Tasmania exploited the short-lived carbon price to make windfall profits. Basically, it ran down its storage levels so it could generate more during this period. When Basslink failed, Tasmania faced an energy crisis because the hydro storage levels were too low.

So rather than just focus on problems caused by privatisation, we also need to focus on the insidious effects of competition and the requirement of government-owned enterprises to make a profit.

SA blackout

The renewables war has been particularly intense since the SA state-wide power blackout last September. Critics blamed the wind farms for shutting down due to excessive wind speeds. Environmental groups fought back maintaining that the blackout was an inevitable consequence of many transmission towers toppling over from fierce storms.

Neither was correct — indeed AEMO's modelling revealed that "it is probable that the SA power system could have withstood the loss of all three transmission lines". Australia's power systems are very robust and have at times withstood much greater disturbances without a state blacking out.

The Australian Energy Market Operator (AEMO) has now published its fourth and final report and the findings are triggering a new round of the energy wars. Many commentators have focused on the large number of wind farms that shut down due to voltage disruptions. (This problem has now been fixed.) But the system should have recovered from this. What happened was a cascading failure. Many components failed. The most serious was that the interconnector from Victoria was overloaded and then disconnected.

Once the interconnector went down, there was not enough inertia within South Australia to give the system time to respond. With more inertia, there could have been time for load-shedding. But the whole system collapsed — a much more serious outcome.

That the SA electricity system could collapse under these circumstances had been known for many years. This was a disaster waiting to happen. Certainly AEMO was investigating how to handle this through its Future Power System Security Program. But few changes had been implemented to prevent it.

Moreover, due to market principles, SA will typically buy cheap brown coal power from Victoria and reduce its own generation. Yet, on the day of the blackout, severe storms were forecast. Relying heavily on imported electricity was a high risk strategy as the interconnector had failed several times before. An electricity system that was focused on the customers’ needs would have taken a more cautious approach.  

Diffusion of accountability

AEMO is responsible for running the electricity system, but its powers are limited. The Australian Energy Market Commission is responsible for making the rules. Then there is the Australian Energy Regulator. There are state and federal governments and there are private and government-owned bodies that own and operate generators, electricity networks and electricity retailers. So who is accountable when something goes wrong?

In the old days, when we had State Electricity Commissions, it would have been clear which body was accountable. Today we just get finger-pointing.

While some want more national coordination, energy expert Bruce Mountain has proposed giving power back to the states and territories. That would be a good first move.

Certainly governments have indirect powers, after all they were the ones who set up the National Electricity Market in the first place. But governments will be blamed by the voters when things go wrong. They have a compelling reason to act.

Government intervention makes a comeback

In mid-March, the South Australian government announced it would intervene in the electricity market. It would spend money on a large battery system and a back-up gas generator. It would provide incentives for increased gas production and reduce imported electricity from Victoria.

Many renewables advocates have criticised the plan because of its support for gas. They are calling for support for a solar thermal plant in Port Augusta. Indeed, a publicly-owned solar thermal plant would help meet many of South Australia’s energy problems, providing more local electricity particularly for the summer peak, increasing inertia and providing local jobs.

The SA government also announced it intends to increase its powers to intervene in the market when power shortages were likely. This was a small move, but a clear indication that the electricity market cannot be trusted to act in the public interest.

Announcements of proposed government intervention continued apace. Soon Prime Minister Malcolm Turnbull was announcing a grand project to extend the Snowy Hydro Scheme. We look forward to hearing more details. Former prime minister Tony Abbott then proposed, unsuccessfully, that the federal government take over the Hazelwood power station to keep it open —showing that government intervention can sometimes be regressive. The Victorian government is tendering for a large battery project.

The current electricity market has become dysfunctional and change is underway. There is a big push for the rules of the market to be changed to stop the dominance of the large traditional generators and allow smaller players, including those providing batteries and load management, to compete. At the same time governments seem more willing to intervene — not only with new infrastructure proposals but also with increased powers to direct the market.

There are interesting times ahead!

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