"The Lights Aren't On, But Everyone's Home"
An Important Issue
Anthropogenic climate change is one of the greatest challenges of our
time. There is a preponderance of considered scientific studies and literature
that details the potential consequences of global warming, and the dire
consequences of not dealing with it as a matter of utmost urgency.
For those that question the science, or doubt the consequences of
climate change, the words of Rupert Murdoch 'we should give the planet the
benefit of the doubt', should at least resonate. That is, in a world of
uncertainty it is important to understand the risks inherent in not doing all
that is reasonable to address potential consequences of human induced climate
We should be mindful of Giddens' paradox. This is the central paradox of
climate change politics, argued by the sociologist and a member of Britain's
House of Lords, Anthony Giddens, that electorates can't grasp the significance
of climate change because it is too abstract, and not dramatic enough (they
need catastrophe footage), and won't — until it's too late.
Australia needs a national energy market framework, backed up by
policies and rules, that are consistent with the Government's target of
reducing emissions by 26–28 per cent (on 2005 levels) by 2030 and the further
greater challenge of meeting the Paris Agreement targets by 2050.
Australia also desperately needs national energy market policies that
enjoy bipartisan support so that crucial investment confidence, currently
absent, is restored to the generation market. Australia now faces an effective
drought in energy investment because of unnecessary uncertainty.
On the matter of investment uncertainty Professor Garnaut raised this
issue when giving evidence to the inquiry:
While there is such uncertainty there will not be new
investments. If, for example, we had bipartisan support for a form of carbon
pricing, which could be an emissions intensity scheme, and business had
confidence that was going to last for quite a long time, then it would be much
easier for business to calculate that there was going to be a role for gas for
a certain period of time, which would justify investment. In current
circumstances the extreme uncertainty about policy inhibits all investment.
This inquiry has been most useful for establishing a much clearer
understanding of the current electricity market environment, and inherent
problems with it, including the factors which led to my home state of South
Australia experiencing a complete blackout on 28 September 2016 and to
experience load shedding on 8 February 2017. The inquiry has also helped
identify solutions to our system price, security and reliability problems.
However, I believe the Chair's report is making a fundamental error in
seeking to pit gas against renewables. Gas is an important transitional fuel to
help us meet our climate change targets, that can complement, not necessarily
compete with renewables. The consequences of the approach in the Chair's report
will be that energy prices will be driven so high and reliability will be
driven so low that it will lead to a damaging deindustrialisation of the
Australian economy. Whilst our emissions will inevitably reduce with this
deindustrialisation the paradox is that businesses will go offshore to other
countries where the environmental standards and carbon pollution policies will
not be as robust.
A practical alternative proposition must be advanced to provide
political certainty, and with it, policy certainty.
Proceed with Care
South Australia serves as a good example of how to avoid the pitfalls
inherent in reducing emissions without compromising grid stability.
The SA Government, in proceeding down the renewable pathway, carried out
the relevant due diligence but then ignored the advice provided to it.
A Report prepared in 2009, recently revealed, to the South Australian
Department of the Premier and Cabinet by McClennan Magasanik Associates (MMA),
entitled 'Potential for Renewable Energy in South Australia'
A level of 20% wind capacity is proposed as a level that can
be achieved without compromising grid stability.
The MMA report also set out a number of measures and market developments
that had to take place before that 20% level of intermittent wind energy could
be exceeded without compromising grid stability. That clearly did not take
place and as a consequence South Australia was left vulnerable.
A second independent report prepared in May 2009 (the same month as the
MMA report) prepared for the Sustainability and Climate Change Division of the Department
of the Premier and Cabinet of South Australia came to similar conclusions. That
report prepared by the National institute of Economic and Industry Research
sounded similar dire warnings. It stated:
Limitations on wind power output to ensure South
Australian grid stability is estimated to be associated with about a 20 per
cent limit on wind capacity (emphasis in original).
The failure to heed the expert advice contained in the above two reports
as well as other independent advice has led to serious price, security and
reliability problems in South Australia which has required dramatic Government
intervention. I believe such intervention would not have been necessary had
these reports been heeded and acted upon.
Power Affordability and Security Scheme
Australia must adopt a scheme that ensures that the price of energy is
affordable and is supplied reliably.
To ensure price affordability, gas must be used as a transitional energy
until such time as renewables can offer the affordability and security that
consumers and businesses require and expect.
Such a scheme would require high emission generators to buy credits from
low and zero emission generators. The process would simultaneously raise the
cost of the high emissions generators and lower the cost of low and zero
emission generators. These offsetting costs mean prices stay the same. As old
power stations are shut because of the costs of staying open is too high, the
credits for cleaner generation will fund the investment in new generators.
Having extra power stations operating pushes prices lower through greater
Setting the baseline at current levels and dropping to zero between now
and 2050, and leaving it on this trajectory will provide the investor the
certainty needed for a secure power system.
Such a scheme would ensure all technologies compete in the same market.
The only thing that will distinguish one technology from another is the price
they charge for a credit and the value of the energy produced. Naturally,
energy sources that provide more certain reliability will be valued by the
market more than facilities where reliability is less certain.
The above approach was first described in work
that I jointly commissioned with the then Opposition Leader, the Hon Malcolm
Turnbull, in 2009.
Essential Rule Changes
Professor Garnaut made the point to the Committee that the
rules of the National Electricity Market were set for a world in which big coal
based generators provided nearly all of the power. He went on to say:
Some of the rules of our system systematically discriminate
against new technologies that could help that; for example, an arcane
Australian approach to settlement of pricing in the wholesale electricity
markets, where the average price is over half an hour, when generators and
users now bid every five minutes. That averaging takes away a lot of the value
of a battery, which can respond in less than a second to requirements of power,
whereas many of the coal based and gas based generators take much longer to
That is why pricing must be recalibrated to five minute settlement, but
it must be done in an orderly manner such that it does not cause unintended
consequences to the market.
Professor Garnaut also gave evidence that there could be a secondary
market to ensure that renewables could provide 'backup power' in any contracts
entered into, something supported by Mr Danny Price of Frontier Economics. Such
an approach would be essential to provide greater grid stability and lower
prices. The following exchange sets out the dilemma and what needs to be done:
Senator XENOPHON: Professor Garnaut, we have had these
debates and discussions over many years. As you remember, Mr Turnbull as
opposition leader supported the emissions intensity scheme. Now he does not,
and both parties have gone 180 degrees. Further to Senator McAllister's line of
questioning, you talk about having two markets in respect of this. Wouldn't it
make more sense to require changes in the market rules so that renewables need
to bring with them market system security services when they connect? In other
words, we would have the renewables but we would ensure that they have to
provide that backup, whether it is battery or a contract with a thermal or gas
generator, for instance. Wouldn't that be more efficient than having two
markets that could be discordant with each other?
Prof. Garnaut: I think you are suggesting something
that is entirely consistent with having two markets. If you required the
large-scale supplier of intermittent energy to pay for the services that are
necessary to balance it, they could pay for it either by putting in the battery
themselves or contributing, through the Australian Energy Market Operator, to
the costs of someone else contributing it. There you could get a lower cost response.
If you required every wind farm to have a battery, you would not get the full
value out of each of those batteries.
Senator XENOPHON: I understand now. So you are saying
it does not matter how you get there; the most efficient way of getting there is
to ensure that, in order for a supplier of intermittent renewable power—I
hasten to add that the proposal for Port Augusta, the solar thermal, is not
intermittent; that is effectively baseload. But, if it is an intermittent
supply, so long as there is an efficient contracting mechanism to provide
backup power, that would have the same effect.
Prof. Garnaut: Yes, and we do have in our electricity
markets elements of that. We have got markets run by AEMO for frequency control
ancillary services for what I would describe as slow-response frequency control
ancillary services, but we do not have markets for fast-response services,
which are the kind you need when you have got a large amount of wind and you
get sudden changes in the contributions, or, similarly, large amounts of
large-scale solar and suddenly the cloud goes over. You need quick responses.
Reducing Gas Prices
An essential element to achieving greater energy affordability is to
have affordable and fair gas prices, which tragically Australia doesn't have
due to abject market and policy failures. Australia has an abundance of gas yet
consumers and businesses are, in many cases, paying twice to three times as
much as their counterparts overseas (some of whom are consuming exported
Australian gas). This dries up personal disposable income that could otherwise
be being spent in the general economy. This makes businesses uncompetitive by
comparison to their international competitors. Prices are so high now that
businesses and consumers are being hit hard, with an increasing number of
energy intensive businesses facing economic ruin as a result.
Urgent policy measures needed for increasing the supply of gas and
reducing prices include:
Gas and gas pipeline market transparency so that consumers and
businesses are not left negotiating in the dark.
Ensuring gas company exports are subject to a public interest
test, having regard to, amongst other things, the affordable, reliable,
efficient and long-term domestic supply to Australian energy consumers. As an
interim measure until such a test could be brought in and applied to new gas
fields, the government should, short of an alternate domestic supply agreement
from them, prohibit gas companies with extant gas export contracts from buying
up domestic gas supplies to meet their export needs.
Ensuring that the significant gas reserves are not left untapped
by companies holding back from developing them because it is not in their
commercial interests to do so. A strict 'use it or lose it' test is required
for retention leases in order to help address the commercial barriers to
commercial development of gas fields. This test must be applied rigorously.
These and other approaches to deal with the failed market conditions
must be brought in now.
There is a need to encourage renewables that supply the grid in a manner
that meets consumers demand and in a way that adds, rather than detracts, from
An example of such an approach is the solar thermal project under
consideration by Government for installation at Port Augusta.
One exemplar is SolarReserve's proven solar thermal solution which uses
a large array of tracking mirrors to heat molten salt which in turn drives a
steam turbine generator. It's a solution that supplies to the grid without the
sun shining and does so with 'inertia' which helps grid stability.
Such an installation at Port Augusta would serve as an iconic and lead
example for other renewable projects providing more reliable energy.
In coming months, noting the closure of Hazelwood power station and a
deeply flawed and dysfunctional energy market, there is the real prospect that
Australian consumers and businesses in the eastern states will be subject to 20
to 30% increases in their energy bills compared to today's prices.
Australia needs to address the current energy price and security in a
manner that recognises the reality of climate change and the need to transition
to a renewable system in a calm and careful manner that brings the community
along with it and does not destroy businesses and jobs along the way. The
following recommendations are made.
Recommendation 1: That the National Electricity Market
Rules be urgently reformed in order to ensure investment certainty, to drive
greater power reliability, grid stability and lower prices whilst at the same
time meeting our international agreements to reduce Carbon Emissions.
Recommendation 2: That in acknowledging that gas is an
important transitional fuel to meet our carbon pollution reduction targets,
that there be urgent reforms to gas market transparency, a strong public
interest test involving exports, and a strict 'use it or lose it' approach to
Senator for South Australia
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