The madness of WA’s multi-billion fossil fuel energy disaster

Print Friendly

WA has conceded its electricity market is unsustainable. Its wholesale prices are double the rest of Australia, $1 billion has been spent on fossil fuel generators that are not needed, and subsidies are costing taxpayers $600 million a year. A 55-page discussion paper looking at how the market can be reformed does not even mention the word solar. Instead, it canvasses importing coal from Indonesia.

A WA government review has revealed the full catastrophe of the state’s electricity market, highlighting the extraordinary waste and misdirected subsidies that are costing it billions of dollars, and has resulted in the highest generation costs in the country.

A discussion paper prepared by the Electricity Market Review says more than $1 billion has been spent on its controversial capacity mechanism, and as RenewEconomy reported last year, much of this has been spent on fossil fuel plants that have never been switched on.

This, and a reliance on ageing coal and gas-fired generation, has resulted in the state having wholesale electricity costs twice that of Australia’s eastern states. Last year, the government had to pay $600 million to subsidise the cost of electricity to consumers, and this cost is expected to total more than $2.5 billion over the coming four years.

Astonishingly, the report does not even canvass the role that renewable energy sources could play in addressing the problem. In a chapter on future fuel options, solar and wind energy are not mentioned once. Instead, the report canvasses the possibility of importing thermal coal from Indonesia so it can be burned in the state’s ageing coal generators.

The fact that the WA grid is unsustainable should come as a surprise to no one. The government has a history of throwing subsidies at fossil fuel generation, so much so that it even squeezed out the solar hot water technology in which the state was a world leader. Despite building the country’s first utility-scale solar power station, and supporting the worlds first multi-machine wave energy project and desalination plant, it has largely snubbed renewables, instead focusing on disastrous re-investments such as the ageing Muja power station.

As we pointed out earlier this year, it could be the first grid in the world to feel the full consequences of the “death spiral”. Even the grid operator concedes that 3/4 of homes and 90 per cent of businesses could turn to solar within a decade, yet this review canvasses none of these challenges or opportunities.

But the discussion paper prepared by the Electricity Market Review Project Office is instructive for illustrating just how dysfunctional the grid’s electricity market has become,

The paper’s conclusion on its capacity mechanism are revealing, particularly as there is a push by fossil fuel generators in the eastern states to introduce a similar mechanism.

The paper highlights that the capacity mechanism is a hopeless, ineffective subsidy that has resulted in $1 billion spent on fossil fuel generators – often diesel-fired peaking plants – that are rarely, and sometimes never, used.

The subsidy to these plants dwarfs the subsidies paid to large-scale wind farms and rooftop solar. The report says that these capacity-subsidised fossil fuel additions are used just 35 per cent of the time. That compares to the 50 per cent capacity factor of the state’s biggest wind farm, the 207MW Collgar installation.

This graph below highlights how the market operator got it completely wrong. The green blocks show how much capacity was added, the yellow line how much capacity was forecast to be needed, and the red line how much was in fact required at the peak.

wa capacity 1

As the report notes: “The costs of over-investment are not borne by the investors themselves, as they would be in the NEM and in most commodity markets, but by customers and ultimately by government, which provides a subsidy to shield customers from such costs.”

This is something that RenewEconomy highlighted in late 2012, in our story Dumb and dumber energy choices in the wild west, pointing to a $95 million diesel-fuel power plant that was built with a capacity subsidy. The plant will likely never be switched on: it is not needed and if it ever had to buy fuel, the cost would be too prohibitive to run economically.

WA subsidyThe discussion paper says the current high cost of electricity in the WA market is the major reason why Western Australian electricity tariffs are so high. This has resulted in the government paying an overall subsidy to the industry of more than $600 million in 2013/14,

In the next four years, it says (see graph above) the average cost of electricity in the SWIS is projected to increase potentially by 20 per cent. This would mean that the annual subsidy would increase further, totalling more than $2.5 billion over the next four years.

“This is a major impetus for reform in itself,” it notes. But apart from tinkering with some market signals – adopting the market pricing system in the NEM, and opening the market up to more market competition – it studiously ignores the obvious solution: renewable energy.

There is not a single mention of solar in the entire 55-page report. Distributed generation – a mix of solar PV and battery storage – gets a cursory mention as an option for grid operators. Wind energy is only mentioned in passing in a listing of wind farms already in existence.

This should not be surprising. WA’s energy minister Mike Nahan is a former head of the right-wing think tank the Institute of Public Affairs who has rejected climate science (although, like Tony Abbott, he now says he accepts a certain role for humans), and dismisses renewable energy as a valid energy source. So too does the inquiry’s former head, Lyndon Rowe, who this week moved from the Energy Regulation Authority that he chaired to become chairman of Synergy, the state’s retailer and generator.

WA pricesThe report says that wholesale prices in the state – often decided through bilateral contracts rather than the open market – average $180/MWh (see graph above). This is twice the average of the eastern states. What’s more, it is twice the cost of wind energy and more than the cost of solar. But the capacity mechanism subsidy favours the development of fossil fuel generators.

Clearly, though, Nahan and Rowe recognise what is at risk: The state will lose its competitiveness.

“Increases in tariffs for both domestic and industrial customers will also continue to erode the state‟s competitiveness and may constrain economic growth to levels below what could otherwise be achieved,” the report says.

“While the next four years may see further increases in subsidies to customers, in the absence of reform the longer term outlook could be even more challenging. As we have discussed above, there will be upward pressure on both coal and gas prices and potential increases in network costs given asset replacement needs and the costs of servicing a peaky load profile.

“Taxpayers currently underwrite 76 per cent of capacity in the market either through direct ownership or bilateral contract commitments. Should the current industry structure and market mechanism remain, taxpayers will be required to fund the majority of new investment (network and generation).”

So what do they think might be the solution? They come up with this truly incredible suggestion. The report notes that the state has plenty of coal, it’s just that it is lying in ever deeper seams and is getting increasingly expensive to extract.

“If prices need to increase significantly (to make generation profitable) it may be that other coal resources become competitive or, more likely for power stations in the region of the Collie mine, there is the possibility of coal imports from countries such as Indonesia. This would provide an effective cap for domestic prices at import parity levels.”

WA, meanwhile, has some of the best solar and wind resources in the world. Dozens of proposals for large-scale solar plants and wind farms are stalled because, as Nahan made clear last year, he would rather that none were built.

Yet, the WA Renewable Energy Alliance, which unites many of the renewable energy developers in the state, as well as various industry groups, said in June that the state could be a world leader in renewables, and solar in particular.

“We could lead Australia – and the world,” it says. Because of the state’s excellent solar resources, it could become a leader in Australia for installed solar capacity, and utility-scale projects – a total of more than 2GW. It would also make it one of the grids with the most solar in any advanced economy in the world.  

RenewEconomy Free Daily Newsletter

Share this:

  • David Martin

    My favorite Australian epithet seems to apply (I don’t get to use it much in the US because few understand it). Flaming drongos seem to be in charge.

  • Chris

    What is the effect on Retail prices in WA? Surely then the likelihood that solar and battery technology could be become cost effective sooner in WA for commercial and residential installation than anywhere else in Australia. It is a shame that grid scale renewables don’t get a look in here though.

    • RobS

      Could become cost effective? You’re about two years too late, they are cost effective which is exactly why all the capacity additions have turned out to be unnecessary because solar has eaten the demand projections.

  • michael

    Is there some irony in proposing more capacity to address a problem of overcapacity?

  • MrMauricio

    The adults in control!!!

    • Miles Harding

      What they didn’t mention was cretinism

  • AmT

    Michael, if you read the source of this article, the Energy Review document
    you will note that overcapacity as such is not the problem.
    In economic terms, overcapacity should always lower the prices, eh? More supply than demand means cheaper stuff for everyone! No, in this case. Why?
    The problem is long-term contracts between market operators. People of WA must pay for what has been bought (over-estimated future capacity), no matter do we actually use that energy or not.
    The market itself is incredibly poorly designed, because it’s based on an assumption that demand will grow forever and there will always be need for more supply.
    Renewables – along with the market structure revamp – could bring costs down significantly, because once installed, there are no fuel costs, ever. Unlike with coal and gas, which WA currently uses.

  • bill

    I have lived in Perth for 35 years and seen no real evidence of forward planning! Why spoil such an excellent record??

  • Martin

    “Last year, the government had to pay $600 million to subsidise the cost of electricity to consumers”

    According to state government publications 2013-14 Budget Factsheet and 2013-14 Economic and Fiscal Outlook:
    – Revenue from public corporations: $1,334m
    – Electricity subsidies: $589m
    – Water subsidies: $601m
    – Public transport subsidies: $684m
    So a significant share of the “subsidies” paid to us as customers are paid by us as customers.

    According to the WA 2011-12 Annual Report on State Finances:
    – Lower electricity retail revenue (down $188m)
    – Lower expenses for Synergy (down $214m)
    Would seem to me that one way of tackling the electrcity “subsidies” would be to invest in negawatts.

  • Good article, thanks Giles
    WA (my home state for 60 years) has a sad legacy when it comes to electricity, which has been a ‘political football’ more many years.
    – Both sides of politics kept tariffs artificially low (13c/ kWh) to ‘win votes’ for more than 10 years until a few years ago. This meant that the distribution grid was run down and is now costing a fortune to renew.
    – The Varanus Island explosion made gas much more expensive for about a year and the government in its foolishness decided to revamp the 40 yo Muja power station, instead of just fixing the gas pipeline problem.
    – When the Muja boilers failed again due to corrosion another foolish decision was made to chuck more good money after bad (>$300 million I think).
    – The current Liberal government disbanded the renewable energy unit so there is zero work being done to plan renewables.

    So we have the Libs who have wasted millions in taxpayer funds on a coal power station that should be written off, broken up and the boilers and turbines sold off. They should be kicked out of Government. But then we have the Labs who are weak and do not have an alternative strategy.

    Perhaps this strategy will push Labor to come up with a viable strategy supporting renewables; with all the excess gas/ diesel peaking plant cheap land based wind could easily be trebled or quadrupled as SA has done.

    Unlike other states, a huge portion (1/3) of WA’s load is off-grid – mainly mines. Solar CST is already viable for mines, which pay $200- 500 / MWh for diesel generation and 150-200 for gas. Most of which are in desert areas where CST works best.

    • ac baird

      Very much agree on the point about the weak Opposition in WA (and everywhere else). They’re the part of the problem that causes the Libs to get away with so much. TINA: There Is No Alternative.

  • Connor Moran

    Oh behalf of WA, I apologise for our denier Energy Minister, ex-IPA director Mike Nahan.

  • taiyoo

    Commercial solar (>=30kW) pay back of between 2.5 and 4 years in WA.
    As long as they don’t follow Ergon’s outrageous lead of charging businesses over $180,000 a year (up from $15,000) for a “daily supply charge” ie for the privilege of connecting to the network and reducing $/kWh costs expect to see peak demand plummet even further.

  • Alfredo Louro

    Let´s call a spade a spade – this is an elaborate scam to funnel money from taxpayers to sham businesses. There is such a thing as legal robbery, and this is a prime example.

  • marc wenzler

    Seems to me that they are just stealing subisdies away from renewable and then wasting it on expanding their infrastructure in hopes that fossil fuels will somehow, some way, win out in the long run?? The extremes that people are willing to go to just to make money are appalling. Pretty much f@%* everyone else, I will ruin millions of lives to make more cash. What happens when they run out of fossil fuel options and don’t have a backup plan in place? I wonder that for the US too..

  • Andrew Woodroffe

    I am sorry, but the fuss about capacity factors and unused diesel gensets also means neither Giles nor writers of the electricity review paper quite understand the capacity market. It is about addressing those few, few hours a year when the load is extremely high – diesel gensets are the best technology for this – cheap to install and the huge expense of actually operating not being an issue because of the number of operating hours is so small/zero. Yes, the IMO stuffed up the actual capacity required. For the first time ever, we had a decrease in consumption (a few years after the east coast because of the mining boom): consumers after 16 years of the same electricity prices were hit with a 80% increase within 4 years, rooftop solar (which does not get any capacity credit – worth 28% of rating) was bigger than expected and some large block loads failed to get up. But, and people don’t seem to get this either, there was no risk of blackouts from insufficient capacity – a major fear born out of the Varanus Island disaster.

    I totally agree that they missed the potential for rooftop PV to help out not only customers but the network as well – with just a little behind the meter storage to shift that 28% to maybe 50 – 75%. Close a 30yr old coal power or 2 and cancel the capacity credits could be one quick solution, here.

    Opening the retail market to residential customers is also an idea, allowing Synergy to retail gas and Alinta to sell electricity is real competition compared to the insane idea of gas vs electricity for energy services. That was always daft.

    As for opening WEM to the east players? They have always had this opportunity, why have they not chosen to taken it up?

    • JeffJL

      Andrew, perhaps you missed the first graph in the article. Unlike in the eastern states consumption is still increasing in WA.

      Then in the second paragraph after the graph it points out that the diesel generators are not likely to be switched on as 1) their capacity is not needed, 2) their cost is so much higher than other power sources.

      You may claim Giles does not understand the ‘capacity market’ but your credibility is slammed in your first paragraph by an apparent lack of attention to details.

      I will stick with Giles’s analysis.

      • Andrew Woodroffe

        Actually, it is decreasing as shown the above graph, it is peak consumption not average that matters here. I did/do acknowledge we now have way too much capacity. The IMO got caught out big time by changes in consumption, PV and a failure to install of some big block loads.

        As for cost of gensets being higher, this is only true if they actually operate – they are the cheapest to install. Given that if they do operate, it will only be for a few hours a year, operating costs do not matter, here. The capacity market is about addressing the peakiest peak loads, nothing else. They do not have this on the east coast. One of panel of the review paper spent time with Stanwell, a massive coal fired power station in Queensland, and it shows; fossil fuel thinking, baseload thinking. No good on a Friday afternoon in Perth in February after 3 nights of 30 degrees . . . let alone carbon emissions – a seriously major omission in the paper.

        As for enough gas, after 10 yrs of wind plant buildout in Spain, the full load hours of the average gas plant there halved. This is the potential of wind, with solar in Oz it is even greater and quicker. No fracking or further gas exploration required. . .

        Also, it is not just the gensets that have benefited from the capacity credits, any generation since about 2006, including about 400MW of wind (particularly on the south coast, not so much in Merridan) benefits. Note that rooftop solar does not get this – there is an argument that this cancels out the subsidy of RECs, ie rooftop solar is NOT really subsidised – plus, of course, there is also the downward pressure on wholesale prices from spilt rooftop solar generation – very large, long term bilateral PPAs notwithstanding.

        Let us be careful not to throw the baby out with the bathwater.

        Also, where is the $300million wasted on a failed restoration of a coal fired power station in all of this?

        • JeffJL

          Sorry Andrew, my fault. When you said that consumption was decreasing I read that consumption was decreasing not that peak power had decreased.

          So it is the peak usage that is important? Pity the article was about fossil fuel generators that were not needed and not about excess poles and wires. Want to have a go at Giles perhaps you should not introduce straw man arguments. The article is on excessive generator construction.

          For the record I believe the science that AGW is real and that it poses a serious threat to the Earth. We need a higher RET and a faster movement to 0 nett green house gas emissions. I just trust Giles more than you.

          • Andrew Woodroffe

            OK, I should have specified peak consumption, because it is the peak consumption that is all important when discussing the capacity market, it is MW, not MWh. Be aware that here in WA, the top 20% of peak load occurs for only 2.3% of the time compared to NEM’s 24.8% of the year above 75% of peak. The question of whether we need this generation or not depends on that very spiky peak.

            Closing the 396MW of Kwinana C ahead of schedule would help.

            I had a go at Giles because I have tried to help him understand, before. Why get half of it right, when you can get all of it? Always good to go to source,

          • Henry WA

            Andrew, is the average wholesale cost of generation of $180 MWh the actual annual cost for electricity purchased by Synergy. If so it seems extraordinary high and way out of line with the NEM and wholesale prices in Europe or the USA As you point out the high running costs of diesel peaking generators don’t significantly add to the average cost as they are rarely used. So how do we halve current wholesale prices?

          • Andrew Woodroffe

            This is where it gets tricky. We have the Short Term Energy Market (STEM) and there is easily obtainable data from the website of how much, $, this is and how much, MWh, it is for every half hour of the year. But this amount, 987GWh for 2013/2014 financial year (based on clearing prices and quantity, gives an average of $57.8/MWh) only accounts for just over 5% of generation, the rest, is tied up with long term bilateral and probably highly confidential contracts. I do not know where the $160/MWh comes from, presumably it include the capacity credits. It will interesting to read of the IMO’s reply to this paper.

            We could certainly save money applying the capacity requirements at say 20% PoE rather than 10% PoE. Turn Kwinana C off, now, not next year, likewise Muja A and B stages C and D. Live with the fear of blackouts when it gets really hot. Interestingly, WA with much gas generation and some diesel is in a good position to close down some coal and install more solar and more wind. Gas prices are expected to increase dramatically over the next years, but install enough solar and wind, who cares?

  • Tim Buckley

    At the same time as the WA Government is proposing importing coal from Indonesia, they are also approving the export of thermal coal from Collie’s Griffin Coal. No consideration that Griffin Coal occasionally cant be arsed to even pay its workers, nor can it actually supply the coal it has contracted to send to the WA coal-fired power stations, nor any consideration that Griffin Coal has no capacity to borrow another $1bn to fund this uneconomic stranded asset in the making.
    Interesting to see that the WA Government paid Griffin Coal A$45/t in the last three months, up 12% year-on-year (as disclosed by Griffin’s loss-making parent Lanco Infratech of India) despite global coal prices dropping 20-30% in this same period.

  • TechinBris

    So we have the Society of Australia being subjugated into compliance, to the demands of a legal construct within our Law, an entity in Law created for the benefit it could possibly bring (well, that was the promise) in it serving that same Society, for which is the only reason it exists, in the first place, anyway.
    Our biggest problem is that our once healthy Society, is in conflict with a psychosis within itself, a pack of socio-psychopaths have taken over Board Rooms and Political Offices within our legal structure for governing ourselves in a Commonwealth of all the people of Australia, but the behaviour displayed in evidence in this story shows the complete lack of any empathy to anyone else, but themselves.
    What is Law everyone? It isn’t rape, pillage and plunder.
    I am sorry, this is all absolutely, stupidly pathetic. Hello? Australia? Anyone awake? We have a very unpleasant problem to deal with and it is not going away if you try to ignore or hide from it. You currently haven’t realised you’re just a resource to use, so they can have it good.
    “Here, want to join us?” they tempt you with. “You can. Just follow our carrot we have you to reach for. If you can get lots of $$$$ like us, then thought might occur about it, if you can pay for the choices.”
    Sux, does it not?
    You know we can solve this problem, if we have the courage to. It is only a choice, so why does it have to be from someone else, who doesn’t care about anything, but that their own demands are met.
    Are we that uncivilised, or are they?

  • Miles Harding

    And it just gets stupider and stupiderer in the west!
    This story today:
    in the Worst Australian, is now telling the public that the coal quality is so bad and expensive to extract that the state may have to import coal from Indonesia. This is a perfect demonstration how the Perth army of elected morons have succeeded in completely trumping sanity with ever-more stupid state policy.

    There goes the future, slipping; bye! Mainly because these dolts refuse to accept that there are fundamental changes occurring in energy, the environment and society.

    • Miles Harding

      Further demonstration of how rotten the political brain is at forward planning was in the airport wrap over the “Worst Australian” weekend edition, a couple of weeks back. It was a spread of the great new Perth Airport 25 year plan for 2040.
      As I read geopolitics, there probably won’t be an airline industry in 2030. There are virtually no free thinking analysts (not lobbying for oil or coal interests) that see the next big oil crunch occurring much later later than 2020.

      This should be very concerning, as even if the coming years don’t see essential liquid energy (oil) tanking the economy, it will surely put it under great stress. Much of this stress could be avoided by decarbonising, while developing new sustainable industries.

  • Les Johnston

    This is an important article which develops an analysis of the current energy investment strategies being followed in WA. The critique highlights the need for Government policies to be subjected to independent analysis which is placed on the public record. The whims of politicians cost current and future generations large amounts of wealth. It is time that citizens are no longer subjected to ideological leadership which is not held to account for the waste and diversion of public resources.

  • Adam Lucas

    Another example of malfeasance in Australian politics. Time to wake up, fellow Australians, and demand accountability from our elected representatives, including bans on corporate lackeys becoming government ministers, and former government ministers becoming corporate lackeys. Our political system is clearly broken, and desperately in need of reform. Elective oligarchy by clowns and plutocrats is anything but a functional democracy.