Power Costs Crippling Business: Australia’s Renewable Target is an Economic Suicide Pact

In much the same way that a multiple truck and car pileup on a freeway draws a growing throng of gawping onlookers, Australia’s energy debacle is attracting a whole new class of journalist to the mounting carnage.

The latest to join them is the dour and humourless Paul Kelly. Kelly, Editor-at-Large for The Australian has hitherto been one of those journalists who would rather wash his mouth out with soap, than write a single harsh word about renewable energy.

Probably because every other columnist from The Australian with an interest in energy has turned on Australia’s Large-Scale RET and subsidised wind power with a vengeance, Kelly has finally decided to go with the flow. It becomes harder to sit on the fence when all your colleagues are kicking it to the ground.

While Paul Kelly deserves criticism for his tacit support of the greatest subsidy rort in Australian history, we are happy to concede that he knows Australian politics inside out.

And, as he keenly observes in this piece, the politics of power has turned utterly toxic.

Power shortage: playing politics only prolongs energy disaster
The Australian
Paul Kelly
11 March 2017

Australians now live with one of the great public-corporate policy failures in decades as the nation once touted as an energy superpower is brought to its knees with spiralling power prices, shortages and system unreliability — as the long and unresolved issue of climate change is overtaken by an energy emergency.

There is no easy fix to this crisis. Indeed, Australia faces multiple problems in meeting multiple objectives around gas shortages, renewable energy policy blunders, energy unreliability, the absence of price signals to achieve emissions reductions, the Paris climate change targets and growing uncompetitiveness hurting jobs, industry and investment.

Malcolm Turnbull’s switch after last year’s South Australia blackouts to a new agenda based on energy security and reliability is vindicated but of little compensation. The nation has spent six months learning about the difficulties of feeding renewables into the power system only to now discover gas production cannot meet demand, the latter danger having been warned about for years.

Cast the net wide for blame. There are no innocent parties. Begin with the obsessive climate change and ideological posturing by politicians, the failures by public servants, regulators and advisers to foresee unintended consequences, the utter inadequacy of the federal-state system and the ongoing shambles of conflicting energy policies across competing jurisdictions.

The costs will be borne by households, businesses and jobs. Forget any notion that this crisis will lead to bipartisanship. That won’t happen — energy policy is highly charged with ideology, cost-of-living and jobs competition. The emerging blame game will be fierce. The more the crisis deepens the more it will dominate both state and national politics. The Coalition, Labor and the Greens are locked in a deepening political struggle where an energy crisis has smashed into the already weakening public “hip-pocket” will on climate change action.

This week the Australian Energy Council, representing electricity and gas businesses, said “sustained” policy failure was driving up electricity prices to “critical” levels and the price impact now “is effectively equivalent to a carbon price in excess of $50 a tonne”. Bluntly declaring “we are running out of power”, the AEC says “ageing power stations keep closing but there is no plan about how they will be replaced”.

The Prime Minister, backed by Energy Minister Josh Frydenberg, aspires to a dual task: to limit the factors that threaten jobs and industry, and to mobilise energy as a frontline political issue to discredit Labor. Turnbull is fierce on Labor’s ideological flaws — it rejects coal, bans gas exploration and developments, and has bet the economy on renewables without proper baseload back-up power. His message is that the threat is serious and follows “years of ideological complacency by the Labor Party.” Bill Shorten has joined this battle, saying the energy crisis responsibility resides “solely” with Turnbull, who is delivering higher prices, more pollution and less reliability.

This week Turnbull, facing a crisis in gas production, announced an urgent meeting of gas producers. This comes in the teeth of dire warnings from the regulator about gas shortfalls and electricity supply shortfalls threatening NSW, Victoria and South Australia from the summer of 2018-19 onwards.

Turnbull’s task at next week’s meeting is to secure emergency pledges from companies to increase supply in the near term. “They’ve been put on notice,” Turnbull said of the gas companies. “I’ll be demanding from them their explanation as to how they’re going to deliver security for their customers.”

This followed a warning from the Australian Energy Market Operator that, in effect, there is insufficient gas in production to meet demand over the next several years. AEMO says “strategic national planning of gas developments has never been more critical for maintaining domestic energy supply adequacy across both gas and electricity sectors.”

Australian Industry Group chief executive Innes Willox says: “Without action on gas there will be massive demand destruction that will claim thousands of jobs. High gas prices and tight supply are at the heart of Australia’s unfolding energy crisis. Gas users are being offered prices three times higher than their last contract and five times the historic average, leading them to rethink planned investments. Businesses that were looking to return production from China are now considering further offshoring.”

Gas was supposed to be the essential baseload substitute for declining coal. But an epic ideological blunder for which Australia pays a high price was the decision by the green and environmental lobbies to cut gas out of the plan in favour of their fixation on renewables. This anti-gas campaign was lethal, had multiple dimensions, exploited the arrogant stupidity of the industry and tapped into farmer discontent.

The reality has come home — relying on renewables, as South Australia does, means that the system needs baseload back-up from gas. The political class, completely unaware of the technical and engineering aspect, has been taught a stark lesson. The message is: if you want renewables, then you want gas. The two fit together.

The gas problem springs from three factors — the ludicrous, destructive moratoriums on gas exploration and development in the states, notably NSW and Victoria; the higher costs for gas development; and the consequences of our massive liquefied natural gas exports, with Australia now exporting two-thirds of the gas it produces, leading to higher parity pricing.

AEMO raised the option of LNG exporters redirecting gas to the domestic market. The left will beat the drum for a gas reservation policy. Turnbull says all measures will be considered but warns of sovereign risk in imposing gas reservation policy, given binding contracts and investment decisions.

But Frydenberg has welcomed as “creative” and worthy of consideration the Queensland government’s recent decision on a tenement in which companies can invest, with provision for domestic market gas. Turnbull and Frydenberg are going to hold the feet of the states to the fire — they need to fix their own mess.

The irony is that Australia has massive gas reserves. It is set to become the world’s biggest LNG exporter but is now being poleaxed on a gross supply-demand gas imbalance. AEMO warns in its report that “holistic planning” across the entire energy supply chain is now imperative. Its suggestions for immediate action include a lift in coal-fired generation, higher gas production, the option of LNG producers redirecting a “small portion” of their export production for domestic use, and greater battery storage.

The long run demands a new approach to exploration and development. The craziness of energy policy is exemplified by the Victorian Labor government, with Frydenberg saying: “(Premier) Daniel Andrews has a real case to answer here. He’s got a 40 per cent renewable energy target, he tripled the royalties on coal which in part has led to the closure of Hazelwood and now he’s got a moratorium on onshore gas developments. So I don’t know where he expects Victorians … to get their power from.”

The Turnbull government believes the impact of coal-fired Hazelwood’s closure has been underestimated. It provided about 20 per cent of Victoria’s baseload power and is also important to South Australia. The AEMO report says it was assumed that other sources, including gas, will substitute for Hazelwood, yet the future for gas is “highly uncertain.”

But Labor, courtesy of Treasury spokesman Chris Bowen, looks smart. In the face of much criticism, it embraced a national interest test at the last election in which new gas projects would be assessed according to domestic market needs in the national interest. The only conclusion is that the government misread the full impact on the domestic market of the massive LNG export sector.

Turnbull told the Australian Financial Review summit this week that his government’s three core goals remained energy security, affordability and meeting the Paris emissions reduction targets. He continued to rule out a market-oriented emissions intensity scheme that was rejected late last year essentially on political grounds, but which is now backed by a near consensus of interest groups as the main mechanism for emissions reductions.

This looms as a significant political problem for Turnbull. Labor’s environment spokesman Mark Butler had a field day this week, pointing out that a who’s who of stakeholders now supported Labor’s stance on an EIS, including the National Farmers Federation, AGL, EnergyAustralia, BHP, Origin Energy, the Australian Energy Council, the CSIRO, Frontier Economics and most state governments. “This is the scheme that will get investment going again to replace our ageing electricity infrastructure,” he said. “There is an investment strike on right now.”

The stakes are high surrounding the final report into the energy system by Chief Scientist Alan Finkel. This is a report to the Council of Australian Governments. Its recommended position on the EIS will shape the future of the policy and political debate on emissions reductions and achieving the Paris targets.

The government now pushes the idea of a cleaner, efficient coal-fired power station — but there is little financial appetite for such a venture that would have a 50-year life, subject to high risk from conflicting political positions and financial uncertainties. The Australian Energy Council’s head Matthew Warren has dismissed the viability of such a project: “Plans for expansions to coal-fired power stations have been basically shelved over the past decade. We’re now looking at gas and renewables as the mainstay of investments for us, at least for the next 10 to 20 years.”

On renewables, the Turnbull government has made progress on the political and policy risks flowing from Labor’s 50 per cent renewable energy target by 2030. The Opposition Leader has walked away from his April 2016 policy to legislate this goal while retaining the commitment overall. There is growing recognition that individual state renewable energy targets should be abolished.

At the West Australian election the Labor Party abandoned its plan for a 50 per cent RET. Coalition oppositions in Victoria, South Australia and Queensland now reject the idea of state targets, opening the way for aggressive political campaigns on the consequences of ambitious renewables targets.

BHP Billiton chief Andrew Mackenzie says: “We have lost $US100 million in this period because of the intermittency of power in South Australia and also we are facing more expensive electricity.” BlueScope’s chief Paul O’Malley says Australia’s mistake had been to focus “on renewables first and everything else second”, adding that “if we continue to talk that way, there will be more blackouts and there will be more jobs leaving Australia”.

While Labor remains pledged to the 50 per cent renewable concept, this debate has got a long way to run. Labor remains in denial about the significance of the South Australian blackouts. As Frydenberg has said, this shows “the vulnerability of a jurisdiction that relies too heavily on intermittent sources of generation such as wind and solar without the necessary storage and back-up”.

The pro-renewables cult has much traction in Australia — as revealed by polls — but the price, reliability and security costs have now come into play. Frydenberg has helped to establish in the public mind that there is a price to pay, and that the power system should not become the zone for “experiments”, as happened in South Australia. For Labor, however, this issue transcends policy because it has a non-negotiable need to protect its left flank from the Greens. For electoral reasons, Labor cannot surrender the “renewables position” to the Greens.

At the same time, there is no prospect of Turnbull and Frydenberg succumbing to the demands of their conservative wing and cutting their own 23.5 per cent renewables target. Most of the industry lobbies want the target kept, given long-run investment needs, and the government points to the necessity of achieving its Paris emissions commitments.

Turnbull argues, again, that state governments have failed, saying he is the first head of government to put storage on the agenda. “If you have a large amount of variable renewable energy, wind and solar, isn’t it obvious that you need storage?” he said at the AFR business summit. “Isn’t it blindingly obvious that you do?”

Australia’s energy grid is being disrupted by consumer preferences, new technology, high costs, ill-judged and ideological government interventions and politics preceding policy. Every government, federal and state, is now caught up in the mire. No solution is possible short of a degree of commonwealth-state concord, not yet evident. Meanwhile, investment in the sector is too high-risk and the upshot is an “enduring dysfunction” in the system.

It has become a template for the Australian disease — the polarisation of politics that makes agreement among governments and in the national parliament a forlorn project. The bottom line is obvious: politics has been given priority for too long and both sides carry much blame. The crisis has now been called — it is a test for the politicians, the companies and all stakeholders.
The Australian

***

Not a bad effort for a recent convert. However, there are a couple of points that might help Paul in future.

Falling for Frydenberg’s line about South Australia relying “too heavily on intermittent sources of generation such as wind and solar without the necessary storage and back-up”, is an obvious rookie error.

The way Frydenberg puts it, it’s as if South Australia went out and built 1,576MW of wind power capacity and, like some ditzy housewife, simply forgot to put the necessary grid-scale battery storage on its shopping list.

Note to Paul: there is no such thing as grid-scale battery storage operating in Australia or anywhere else in the world, for that matter; it’s little more than a pipedream.

In an effort to fleece the South Australian taxpayer, Californian carpet-bagger, Elon Musk popped up with a suggestion he can save the day in SA with a 100 MWh battery. Here’s the take on that cruel ruse from The Australian.

No easy fix to our energy woes
The Australian
14 March 2017

Twitter sponsors a dialogue on power, then blows a fuse

When we first heard Twitter and Malcolm Turnbull had teamed up to solve the energy crisis, we assumed it was another jape from that satirical organ The Betoota Advocate. But it turned out to be truish, in a Twitter kind of way.

The clean energy impresario Elon Musk had promised South Australia 100 MWh of battery storage free of charge — if it took him longer than 100 days to set up the Tesla system. A Twitter love-in ensued. Mr Musk talked to South Australia’s Premier Jay Weatherill, declaring his government to be “clearly committed to a smart, quick solution” — an alternative fact not clear to anyone who has been suffering through the state’s protracted power troubles. Then it was the PM’s turn to tweet-thank Mr Musk for a chat about “energy storage and its role in delivering affordable & reliable electricity”.

But nothing has been solved because the role of storage is quite limited, given today’s technology and pricing. It is likely that storage will become a serious proposition in the future but the whole point of the South Australian disaster is that the Weatherill government allowed intermittent renewables, wind in particular, to knock out baseload coal-fired power before storage technology was up to the mark.

The contribution of Tesla batteries seems likely to be modest at best. In this newspaper yesterday, a former chief executive of Caltex Australia, Barry Murphy, calculated that a 100 MWh battery system could have supplied South Australia’s entire demand (measured at 3pm on Saturday) for 3.6 minutes before requiring a recharge, or 4276 homes for 24 hours based on average household demand. Not much good during a heatwave with no wind and the interconnector to Victoria down. South Australia — in fact, Australia at large — is not going to escape an energy crisis so easily.

Victoria’s coal-fired Hazelwood power station is to close this month, taking the equivalent of 5 per cent of electricity supply out of the national market. Premier Daniel Andrews has presided over a 40 per cent renewable energy target, a tripling of the brown coal royalty, and an onshore exploration ban for gas, which is supposed to be the substitute baseload power source.

State moratoriums such as his, the export liquefied natural gas boom and parity pricing mean that gas is less able to perform its role as a transition fuel to a renewable energy future. The Australian Energy Market Operator predicts there will not be enough gas in production to meet demand over the next several years. Summer will be difficult, too, with reliability problems expected in the electricity network for South Australia and Victoria in 2017-18. An extra complication is that without Hazelwood, Victoria will be less able to meet the demands of South Australia in extremis.

For all these reasons, Mr Turnbull’s Twitter dialogue with Mr Musk struck exactly the wrong note. He should stick to the policy and political script: we face a serious energy crisis, more baseload power generation is needed, and Labor has failed to learn from South Australia’s mistakes.

Paul Kelly summarised the situation well in this newspaper on Saturday: “There is no easy fix to this crisis. Indeed, Australia faces multiple problems in meeting multiple objectives around gas shortages, renewable energy policy blunders, energy unreliability, the absence of price signals to achieve emissions reductions, the Paris climate change targets and growing uncompetitiveness hurting jobs, industry and investment.”
The Australian

Returning to Paul Kelly’s piece, South Australia had more than adequate dispatchable, synchronous power generation capacity before the market perversion created by the LRET drove Alinta’s Port Augusta power plants out of business and led to AGL using its 1,280MW Torrens Island gas-steam plant as a peaking plant, rather than as a base-load generator, as designed.

The next indication that Paul Kelly is still on his ‘L’ plates, is his repeated use of the phrase “baseload back-up power”.

Paul is confusing two very different concepts, there: base-load is the minimum level of demand on an electrical grid over 24 hours. Base-load power sources are power stations which can consistently generate the electrical power needed to satisfy this minimum demand.

Once upon a time, a reference to ‘back-up power’ would be a reference to a synchronous, dispatchable power generation source which would be available to respond to either sudden increases in demand (ie increased load) or the unscheduled failure of a generator supplying to the grid (eg a breakdown of a boiler, turbine or generator).

These days, however, ‘back-up power’ is taken to mean a combination of ‘spinning reserve’ held by gas-fired Combined Cycle plant, coal-fired plant (or gas-steam plant, such as Torrens Island); hydro and fast-start-up Open Cycle Gas Turbines and diesel generators.

And the purpose of having back-up power has altered from covering unexpected faults at base-load plants, to keeping the grid from collapsing whenever wind power output collapses on a total and totally unpredictable basis.

The cost of holding spinning reserve and other back-up power to cover the chaos delivered by wind power is phenomenal. That cost is born by the owners of that plant, who naturally seek to pass it on to power consumers: hence, on those occasions when wind power output collapses, those operators in charge of the so-called back-up power plants holding the grid manager to ransom, charging between $2,000-$4,000 per MWh and all the way to the regulated market cap of $14,000 per MWh (see our post here).

Perhaps a better term for that kind of ‘back-up’ power supply should be: ‘back-up against the wall and hand over your wallet’.

However, with those minor quibbles aside, Paul Kelly’s piece is both timely and pointed.

Kelly is right. No one is going to escape this energy policy nightmare unscathed.

Australia’s power hungry industries are on a collision course with the power industry and the politicians who have generated the policies which have allowed the latter to profit at the destruction of the former.

For Malcolm Turnbull, the politics of power just got real and the unfolding nightmare isn’t going away anytime soon.

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