Investor News

The cost of failed energy policy slowly emerges

"Big firms get $50m in bid to keep lights on"

The above headline is front page of today's Australian.

The cost of failed energy policy is starting to emerge, though much of it still remains hidden.

The cause appears to be two-fold; the closure of Hazelwood, taking 1600MW of dispatchable capacity out of the market and the failure of Wind to blow when needed.

Since the closure of Hazelwood power station in March last year, the state of Victoria has gone from having Australia's cheapest average wholesale power to the second most expensive.

The resulting lack of reliability has triggered the Reliability and Emergency Reserve Trader (RERT) provisions twice in the past 3 months.

RERT is part of the Australian Energy Market Operators (AEMO) suite of tools to maintain power system reliability and system security using reserve contracts.

Essentially, it means paying large power consumers to shut down (or use their own on-site diesel generators) to avoid blackouts for retail consumers.

It makes sense to have such emergency plans. You never know when a storm may take down some power lines.

But the RERT was not activated due to an emergency.

The first time the RERT was used was on the 30th of November last year when electricity supplied to retail customers came under threat.

The article notes:

That event coincided with moderate temperatures — in the mid-30Cs — in SA and Victoria, but the contribution of wind to the energy grid that day fell to just 16 per cent of total capacity in Victoria.

The second event was a hot day, reaching 41C across Victoria and South Australia. No extreme record. Again, a quick check of records shows wind generation failed to deliver much more than 15% of its capacity on the day.

The article notes that AEMO purchased a total of 32MW via the RERT on 30 November but couldn't say how much for 19 January.

What isn't apparent is the cost per MWh of the RERT. Understanding this would help inform consumers of the real cost of current energy policy failures.

Moving on, the article highlights the battleground between Labors' promise to source 50% of our electricity from renewable sources by 2030 and the Coalition's technology-neutral National Energy Guarantee (NEG), which claims to restore reliability and affordability.

Given the example set in South Australia, which has wind capacity penetration of 36% and energy penetration of 34% (AEMO report), and the highest average wholesale electricity price in Australia, it's understandable that some may question the financial impact of further increases in intermittent renewables, especially if the cost of expensive, limited-life batteries or additional gas backup (or more RERT) is added to the bill to fill the gap. We're yet to see any detailed modelling, and the limited hypothetical modelling we have seen assumes the wholesale power price doesn't hit $90MWh until years down the track (it hit $90 in March last year).

As you can probably understand, we're in favour of a technology-neutral approach. Will the NEG deliver its claimed savings while restoring reliability and affordability? Again, we haven't seen any detailed modelling, so we can't reach any conclusions. What we do know is that a Coldry-enabled HELE power station would help restore reliability and affordability while reducing emissions intensity by 43% to 62% compared to the traditional brown coal power generation.

We think this is sensible for a number of reasons, not the least of which is economic security; reliable and affordable electricity is essential to economic security. Electricity is a fundamental economic input, and its cost ripples through our entire economy. The lower the cost, the greater the competitive advantage, which supports jobs.

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Big firms get $50m in bid to keep lights on

The Australian | 12 February 2018 | Ben Packham

Energy users paid $50 million in total to buy back power from major manufacturers so as to keep the lights on in Victoria and South Australia on two occasions in the past three months.

The Australian has learned that the Energy Market Operator was forced to activate its “reliability and emergency reserve trader” mechanism on November 30 and January 19 as supplies to retail customers came under threat.

The $50m price tag includes the cost of signing up businesses, standby fees and activation payments, Energy Minister Josh Frydenberg’s office confirmed.

Source ($)Big firms get $50m in bid to keep lights on