Aug 04 2016

Mythbusting or missing some facts?

South Australia’s electricity market continues to attract substantial commentary around the causes of its high prices events, and this week the Climate Council joined the fray. It released a paper[i] to argue that renewables were not responsible and for more competition for the remaining thermal power generation in the state.

The Climate Council cited factors such as high gas prices, limited grid connection with the eastern states and lack of competition as being primarily responsible for higher wholesale prices, while arguing that renewables have been an effective brake on prices.

In our view this a partial analysis. And here’s why.

First, the low availability of wind during key weeks in July was also a factor in the recent spikes in the SA wholesale spot market. Higher prices reflect scarcity of generation, just as lower prices reflect abundance of generation.

The high price events were a result of this scarcity and constraints on the main interconnector between SA and Victoria, which is in the middle of being upgraded, and colder weather pushing up demand. As a result, the gas generators (the remaining dispatchable plant) in South Australia needed to acquire extra gas on the spot market to meet the substantial increase in demand.

These short run spikes were on top of more sustained increases in the contract price for electricity following the announced closure of the Northern Power station. As short run market conditions return to normal, they return to this new normal of higher prices.

Second, the Climate Council and others cite a lack of competition in the South Australian electricity market. Yet, the development of new renewables projects in the state has increased diversity of generation sources and ownership. There are fewer dispatchable generators following the closure of the Northern Power Station earlier this year. But a major contributing factor to this is the commercial impact of so much new generation in the market[ii].

In a paper on the South Australian market released late in 2015, Deloitte Access Economics warned that as thermal plant exited the South Australian market it would lead to higher price volatility and was “leading to an increased cost of managing risk. Electricity derivatives that are used to offset generators’ and retailers’ exposure to market volatility are increasing in price and decreasing in volume as generators exit the market. Intermittent generators and flexible generators that only operate at peak times are not well placed to offer baseload contracts (which large users rely on to help manage their risk).”[iii]

Third, the Climate Council paper claimed “average prices in SA are lower than they were in 2013 and 2008, when the state’s share of wind and solar were lower”. In 2013 wholesale prices included the carbon tax, while in 2008 South Australia experienced prolonged drought and heatwave conditions. In that year Adelaide recorded 15 consecutive days above 35 degrees Celsius – the longest for any Australian city[iv]. The Australian Energy Regulator pointed to the extreme temperatures as a contributing factor to record high prices at the time, as well as constraints in the Victorian interconnector capacity and the bidding of capacity at close to the price cap to meet the high demand. As a result “on the last day of the heatwave prices reached the cumulative price threshold and administered price caps were applied. This was the first time that administered pricing had been triggered since the commencement of the NEM in 1998”[v].

The Climate Council suggests a number of solutions.

  • A reduction in the time intervals set for spot price settlements from half-hour blocks to five-minute blocks in a bid to increase competition - This rule change proposal is currently before the AEMC. Changing the time intervals is unlikely in itself to lead to investment in new dispatchable generation, so it is difficult to see how this would increase competition;
  • Developing alternative reserve capacity, such as large-scale and distributed energy storage, which would reduce exposure to short-term price increases when wind and solar are low - The market allows for the introduction of storage today, but, as with any major investment it will depend on the business case; so there is no existing impediment to large-scale storage assuming it is cost effective and can achieve the desired outcome. Conversely, if the Climate Council means that governments should intervene to sponsor such alternatives, then it is effectively advocating for an abandonment of the market. It would be a step further in the direction of all generators needing to be underpinned by a long term contract or regulatory guarantee from the government. While this might assist with ensuring adequate capacity through the transition to a lower emissions electricity system, it represents a transfer of risk away from investors to consumers (or taxpayers), and is unlikely to result in lower prices overall than the current market framework delivers; and
  • Increased interconnection with the eastern states - This is already under active consideration with proposals for additional interconnection with NSW as well as another Basslink between Victoria and Tasmania. We are yet to see the business cases to support the substantial investment required, while greater imports via new interconnectors may in turn impact the economics of existing dispatchable generators based in South Australia. This would leave South Australia particularly vulnerable to the implications of Victoria and NSW moving towards a similar plant mix (wind, solar, gas back up) as those regions decarbonise under state or national policy drivers. Again, there is no barrier to proving up the case for a regulated interconnector or building one as a market asset, so the absence of greater interconnection is not a sign of market or regulatory failure. Interconnectors are expensive long-term investments that need to be proved up on a basis of providing long-term benefits, rather than as a reaction to short-term price issues.

Like the Climate Council, we think the South Australian electricity market is important, and warrants particular attention. We welcome robust, informed debate on what is happening there and how we deliver solutions that enable the continued decarbonisation of electricity supply whilst maintaining reliability and at the lowest cost.

We would observe two final things about the Climate Council paper. First, it illustrates a cognitive dissonance in some of the discussion. If we are going to look at market conditions in South Australia, we should consider the market as a whole. Focussing attention around high gas prices and lack of competition in firm generators, only reinforces a discriminatory mindset between conventional and renewable energy. It’s not us, it’s them. Second, the paper reinforces the need to carefully assess the factors behind recent higher prices in South Australia to properly inform energy planning and co-ordination at a national level.

  


 

[i] Mythbusting: Electricity prices in South Australia

[ii] https://alintaenergy.com.au/about-us/news/flinders-operations-announcement

[iii] https://www.energycouncil.com.au/media/1250/south-australian-renewables-study-25nov2015_final-1.pdf

[iv] http://www.bom.gov.au/climate/current/annual/sa/archive/2008.summary.shtml

[v] State of the Energy Market 2008, AER, page 88

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