The Australian Energy Regulator’s Wholesale electricity market performance report

The more desperate the situation of an industry, the more reports and regulatory overseers’ governments require, blind to any recognition of an industry’s malaise being created by their own actions.  And so, with electricity we have an alphabet soup of regulatory agencies analysing, advising and fiddling.  At the Commonwealth level we have the ESB, AEMO, AEMC, AER and ACCC all seeking a place in the sun.  On top of this are state regulatory agencies and conventional line departments.  Then we have government research agencies like CSIRO and the Cooperative Research Centres.

The Australian Energy Regulator has one necessary function, which it discharges effectively, namely setting the price the monopoly poles and wires businesses may charge for their services.  It has other functions of less obvious worth. Among these is a requirement to report every two years on “the performance of the wholesale electricity market, including analysing and identifying whether there is effective competition in the market and whether there are market features that may be detrimental to effective competition or the efficient functioning of the market”.

Its first such report was issued shortly before Christmas.  The report’s main themes are:

  • Prices have risen, largely due to the closure of Hazelwood and other coal power stations, but that increased coal prices may have contributed to this as might also, to a limited and declining extent, monopolistic behaviour on the part of Queensland government owned generators.
  • In spite of a diminished controllable supply, in the shorter term there is sufficient capacity to avoid blackouts.
  • The surge in renewable investment is creating problems for system stability, especially in South Australia; this has brought about a much larger call for Frequency Control Services and interventions, using the Reliability and Reserve Trader, by the by the market manager (AEMO), a consequence of which may mean price distortion and a crowding-out of market responses.
  • The rise in wind/solar will call for more firming capacity (gas turbines) and increased use of storage
  • Barriers to entry cited by market participants included a lack of “stable policy” and, incongruously, concerns that there could be some uncommercial generator investment by government bodies.
  • Lack of contract availability of financial instruments to manage market exposure was cited, (as it has been by other government institutions, jawboning the major generators to make these available on better terms).

The elephant in the room

The report, in line with other official analyses, hugely understated how the electricity market has been undermined by 15 years of government subsidies to the inherently low-quality supply that is wind/solar.

Those subsidies (grants, regulatory favours and soft loans) not only favour less efficient supplies but, the renewable power injected into the market in near random fashion, imposes additional costs on the coal generators that supply over 80 per cent of the power.  Coal generators are designed to operate at 90 per cent capacity but have to back-off in response to ‘must-run’ renewables which have subsidised revenues and low marginal costs. The coal generators’ response undermines their plant economics both through forcing sub-optimal capital use and by imposing increased wear and tear.

Renewable suppliers bear few of the costs they impose (they do get paid the price at their times of operation which tend to have below average prices, and the market manager has required South Australian wind farms to curtail production 10 per cent of the time).  They do not pay for the market disruption they create, including the increased requirement for frequency control (costs that the AER note have increased from under 2 per cent of energy to 15-20 per cent) and reduction to system strength they cause.

The effects of 15 years of the market manipulation through subsidies brought the 2016 closure of Hazelwood.  Consequently, wholesale prices doubled (AER, perhaps euphemistically, says higher prices have “coincided” with the growth of renewables). In addition, there was the South Australian state blackout, at the very least aggravated by the inherent loss of reliability from converting to a wind-reliant system.

The AER report describes the supply industry as responding to a market outcome.  It says

The market is undergoing a significant transformation. The NEM is transitioning to a lower emissions generation mix. Significant coal capacity has retired from the market and further plant closures are expected in the future. Meanwhile the share of generation from intermittent renewable sources has increased rapidly in recent years and more is on the horizon. Over time, this transformation will change market dynamics, with fast response ‘flexible’ generators, demand management and storage likely to have an increasing role. 

The report hints that the cause of the current market malaise was wind/solar investment, “supported by the renewable energy target, and other emissions reduction initiatives”, but suggests this may no longer be the case.  It maintains (P. 53) “the current high prices mean wind and solar investments may no longer require the support of mechanisms like the RET to be commercially viable”.

That myth of wind/solar now being cheaper than coal was further propagated by a CSIRO report also issued in December; this, if true, would render nugatory the debate over whether the renewables share should be set at  zero, 23, 30 of 50 per cent.  Group-think among policy advisers is that renewables are on the cusp of competitiveness, an oft-repeated notion that has failed to be achieved for 40 years, but few support the corollary of eliminating immediately all subsidies and requiring all supply sources to fully pay for themselves.  And powerful political pressures from green groups seek to prevent finance flowing to fossil fuel generation.

Compounding its naïve acceptance of renewable industry disinformation, the AER report also repeats the canard that “Australia is particularly well suited to wind and solar due to our abundance of sunshine and strong winds”.  This is true only of central Australia – the east coast is similar to most other world regions.

Such shortcomings severely deflate the report’s airy conclusion that we need policy stability

It is now more important than ever to support an effectively competitive market so that the transformation can deliver outcomes that are in the long term interests of consumers.

Concluding comments

Its analytical shortcomings aside, the report’s call for stable policy is a forlorn one.  With half a dozen major Commonwealth policy direction changes since 2001 (and many others at the state level) there is zero prospect of policy stability.  There never can be such stability when energy policy is inextricably tied to emission reduction policy and the targets for renewable energy vary from zero to 100 per cent.

The government will be disappointed that the AER report did not endorse its view that government support is required for a new coal fired power station.  The fact is that with existing policy settings favouring wind/solar, a new coal power station would simply expedite the closure of an existing coal station, though the AER, unfortunately, did not offer this as a reason for avoiding government investment.

The day following the AER report’s issuance, the government directed its soft loan energy agency, the Clean Energy Finance Corporation, “to support the development of a market for firming intermittent sources of renewable energy and to prioritise investments that support more reliable, 24/7 power”.  While this may assist in reducing the market-undermining stemming from renewable subsidies, its effect will be minor in view of the existing volume of subsidised renewable energy and the on-going program, one likely to be augmented, especially by an in-coming Labor government.

 

 

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22 Responses to The Australian Energy Regulator’s Wholesale electricity market performance report

  1. So the people who run and oversee the generating systems have no idea how stuffed up it is, nor do they have a clue on how to fix it – except by throwing money at the people who broke it?
    Sounds about right.

  2. Rafe Champion

    Is there any mention of the German experience. The Failure Trifecta. Cost up, grid stability down, CO2 emissions unchanged since 2009.

  3. Rafe, from the Open Fred, it looks like Germany is heading into a recession due to its buggered up Energiewind policies.

  4. RobK

    Thanks Alan,
    Dont forget https://arena.gov.au/17-18-annual-report/overview/
    Sampler;(RTWT)

    This year ARENA has broadened and deepened its work across the renewable energy sector and our efforts are helping to forge pathways for Australia’s energy transformation.

    Over the past 12 months, ARENA’s financial assistance to a range of projects has unlocked value through smarter, more efficient ways of producing and using energy. This is helping to reduce costs, boost efficiency and increase the uptake of renewable energy.

    Accompanying this, there has been unprecedented interest in co-investing with ARENA to keep pushing the frontiers of innovation and test new markets and technologies.

    Since its inception, ARENA has provided $1.2 billion of targeted financial assistance, which has helped unlock almost $3 billion in additional private and public sector investment. This partnership approach has helped accelerate Australian innovation and provided the means by which the benefits and outcomes of ARENA’s work are being felt across the economy.

    Australia’s energy transformation is dynamic and gathering pace. Solar and wind are the cheapest forms of new generation available, rapidly bringing renewable capacity online and with it a wave of other technological advances. As the private sector’s appetite for investment in the sector accelerates, ARENA is supporting innovations that connect the elements of this new energy system to make our energy transition stable and affordable. We have also broadened our work to inform the regulatory and market reforms necessary for Australia to benefit most from these new technologies.

    For example, ARENA has continued to focus on the transition of grid-scale generation and storage like big batteries and pumped hydro. At the same time we have increased our support for projects that meet the new challenges and opportunities of distributed energy, which is the other major shift underway as Australian households and businesses rapidly change the way they source and use energy.

    I have an inkling there are more alphabet components but i don’t have the time right now.
    Keep up the good work.

  5. Alan Moran

    Robk
    I despair that there is so much misery promoted by government on our behalf using tax dollars a regulatory muscle.

  6. None

    Why the hell do we still have a Clean Energy Finance Corporation? If we’re gonna keep such an abomination why not rename it to something that reflects what it really is: a tax dollar incinerator.

  7. Peter Castieau

    Great piece Alan.

    I’ll be sure to share this widely.

  8. BrettW

    Thanks for posting this. A “keeper”.

  9. BoyfromTottenham

    Alan, you mentioned ‘those subsidies (grants, regulatory favours and soft loans)’, but forgot to mention the biggies, the twin RET subsidies, which are cunning theft from retail and SME consumers paid as huge $multi-billion a year subsidies to ‘renewables’ generators and those who flog rooftop solar systems to the unsuspecting public. In comparison the grants, regulatory favours and soft loans are far the lesser evil, IMHO. They are at least overt, whereas the average Joe doesn’t have a clue about the vast RET confidence trick, which may not even be constitutional, being neither a tax or a subsidy in the legal sense. Perhaps the now famous Section 51 (xxxi) – ‘on just terms’ clause? I for one would be more than willing to donate $500 to crowdfund a serious legal challenge to this legislated pox. Is there a legal libertarian willing to take up the challenge?

  10. DaveR

    Simple solution. Make the renewables generators pay for the grid disruption and stabilisation costs the baseline producers are forced to pay for. Take it through the courts if necessary. It cant be any worse than what the nation is facing, under either government. Then the fantasy is over.

  11. Herodotus

    We are seeing and are affected by the single biggest policy disaster since WW2. It appears to have a zombie quality that is unkillable.

  12. Mark M

    Why the World Bank chief quit:

    Africa, US question World Bank policy on poor

    But it wasn’t the text that stung so much as some of the quotes.

    Indian government minister Piyush Goyal, for example, could have been speaking for Zimbabwe or any developing country when he said, ‘The people of India want a certain way of life.

    They want jobs for their children, schools and colleges, hospitals with uninterrupted power.”

    Solar, he complained, only worked when the sun is shining.

    “We need a very large amount of baseload power and this can only come from coal.

    … But the frustration of many in Africa might be summed up by Nigerian finance minister, Kemi Adeosun.

    “We want to build a coal power plant,” Mrs Adeosun said.

    “However, we are being blocked from doing so, because it is not green.”

    http://www.thezimbabwean.co/2017/10/africa-us-question-world-bank-policy-poor/?utm_source=CCNet+Newsletter&utm_campaign=b09519252a-EMAIL_CAMPAIGN_2019_01_08_12_45&utm_medium=email&utm_term=0_fe4b2f45ef-b09519252a-20142293

    ” Their unlikely ally is Donald Trump.”

    > The government worries about & taxes for the end of the world.
    The rest of us just worry about the end of the month.

  13. John Constantine

    Paying the australian metal smelters to shut down then buying our metal from the chicoms is our unwavering comittment to our signed obligations to the treaties paid agents of the chicoms drafted and bribed australian quisling traitors made their marks on.

    Comrades.

  14. John Constantine

    We can always just wait for an act of God blackout that freezes the molten aluminium in the smelter potlines solid, then that demand is destroyed, we can borrow money to dynamite the smelters and transition to a services economy.

    Comrades.

  15. Rohan

    Alan, that first link gives me an access denied error on the AER website. Is this a restricted report?

  16. Rohan

    BoyfromTottenham
    #2902977, posted on January 9, 2019 at 11:31 pm
    Alan, you mentioned ‘those subsidies (grants, regulatory favours and soft loans)’, but forgot to mention the biggies, the twin RET subsidies, which are cunning theft from retail and SME consumers paid as huge $multi-billion a year subsidies to ‘renewables’ generators and those who flog rooftop solar systems to the unsuspecting public. In comparison the grants, regulatory favours and soft loans are far the lesser evil, IMHO. They are at

    And in Victoriastan we have the VEET added to the LRET and VRET for a total of $24.9 something a MWh. As we have about 13-14% ruinable generation nameplate, and the bills are showing generation as $100 MWh, if you extrapolate the push to 50% ruinables all demanding this fleecing, then that equates to $88 MWh in addition to generation.

  17. All of these policies rest on a foundation of myth, fiction, and superstition that “emissions” play any role whatsoever in the weather. That is the root of the problem.

  18. Alan Moran

    Rohan
    Not sure why that happened but link is now fixed

  19. Article in todays Aust that notes the CEO of the CEC is a former Macquarie Bank exec who has extensive dealings / investments in the renewables scam.

  20. Rafe

    Thanks Winston. My next video will be on the German Trifecta.

  21. min

    From Frydenberg’s latest newsletter
    We are committed to supporting lower emissions while providing secure and affordable power
    and then lists how much money is being spent through different alphabet organisations REt,😀 CEFC. Etc.
    I got lost adding up the billions and asked why are we wasting this amount of money when the Chief Scientist ,under oath, said that it would make no difference to the temperature.
    Moreover we are creating more toxic pollution by having to use lithium , cobalt and as far as I know , wind turbines ,the concrete needed to install them and solar panels cannot be made with renewable energy.

  22. Rafe

    min is that on line?

    Check out Poland. All bird mincers out by 2035!

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