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Who’s responsible for over-capacity? Not renewables

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One of the main arguments proffered by the owners of Australia’s fossil fuel generation fleet against the renewable energy target has been the massive over-capacity on the country’s main National Electricity Market.

Last year, AGL Energy estimated this overcapacity to be around 9,000MW. The arguments put forward in the submissions to the RET Review have said putting more renewables into the market is counter-productive. Not only will it reduce wholesale electricity prices – and therefore revenues for the coal and gas incumbents – but it is likely to force existing plant to retire earlier than might have been planned.

But whose fault is this overcapacity? The implication from the submissions is that it is the fault of the RET, and the build up of renewables.

But check out this graphic presented by EnergyAustralia retail chief Adrian Merrick at a recent energy conference hosted by UBS. It shows how much capacity has been added in the last five years.

Wind energy accounts for a little more than one quarter, and there has been a small amount of hydro. Around 70 per cent of increased capacity has come from coal, combined cycle gas plants and peaking gas plants.

energy australia new capacity

Why did they do that? Pretty much for the same reason that the networks asked – and were granted – permission to build $45 billion of new and upgraded poles and wires: they assumed that demand would continue to rise, as it had done for the previous century.

But they ignored the warning signs on energy efficiency and the imminent rise of solar PV. As the red line shows, demand peaked five years ago and has been falling dramatically ever since.

The generators made the wrong call, and now they want the rollout of renewables stopped – or at least slowed down dramatically – to protect those dud investments.

This is the point that must be made clear. It is the only reason that generators have for wanting the RET stopped or diluted – to protect their assets. It has nothing to do with consumers.

EnergyAustralia built some of that capacity. It has already taken a $94 million write down on the value of its Tallawarra baseload gas plant in NSW, built in 2009. Other gas and brown coal generators have also been written down. Origin Energy has had to convert its newly built Darling Downs generator into a peaking plant, rather than a base load operator.

This is the third major myth around the renewable energy target that has been blown in the past week.

Other reasons proffered by the government and its urges to repeal the RET have also been dismissed, even by the federal government’s own hand-picked consultant. These include the contention that the renewable energy target cannot be met, an argument proffered by the major generators who are trying not to sign contracts with wind and solar farms. ACIL Allen – along with global energy supply giants such as General Electric and Vestas – says it can.

The RET also lowers prices for consumers, even if Prime Minister Tony Abbott continues to insist otherwise. The ACIL Allen report admitted to that as well.

 

 

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  • Winston

    That gas capacity is good for renewables. It provides a nice solid backing for those calm, cloudy days. The OCGTs (green in the chart) aren’t supposed to run much anyway, maybe 1% to 2% of the year, and that’s factored in when they were built.

    If that seems like a very small margin, it is. Because solar’s suppressing prices in Qld and wind is doing the same in SA (see http://reneweconomy.com.au/2014/energy-prices-crash-queensland-solar-takes-hol-21256), the occasions when these generators can start up become less frequent. The really high wholesale prices of the past appear to be generally gone, and they just can’t make the revenue they used to.

    In WA generators like these get paid to sit around and do nothing. Perhaps that’s a good thing? They’re a safety net for the whole grid, and it does cost to have a generator ready to go at a moment’s notice. They don’t pollute if they don’t run, and when you do need them they’re there.

    The write-down of Tallawarra is almost certainly down to a re-negotiation of EnergyAustralia’s gas contracts. A near tripling of their gas price will pop them right off the top of the merit order, and you can’t blame renewables for that. They should be having words with their partners in the Pilliga instead.

    There’s a reason why all those generators were built at the same time (2009-10). CSG in the east became a real thing, and the people drilling the holes realised you could get $5/GJ for electricity compared to $3/GJ for heat. Then they realised they could get $9/GJ at an LNG terminal and the rest is history. The funniest thing about it is that Origin, EnergyAustralia and AGL (who own about 12GW of thermal capacity between them) all have their fingers in the CSG pie.

  • Stephen Gloor

    However as many have known from the past a lie told often enough becomes the truth. Abbott is master of catchy one liners however has little else. One thing can anyone list one positive new initiative that this new government has done? So far the only actions is to dismantle and cut- nothing new

  • http://au.linkedin.com/in/paulmcardle/ Paul McArdle

    My understanding is that the story is more nuanced than that.

    There have been a number of incentives driving generation development, even in the face of the emerging reversal of century-long demand growth trends. The RET is one, solar feed-in-tariffs another, but there are other schemes (like the Queensland GEC policy) that have contributed to the overbuild of capacity.

    In an environment of growing demand (both average and peak) these types of externalities tended not to matter as much for incumbent assets, but now they all matter significantly.

    There’s plenty of scope for finger-pointing on all fronts and accusations of “socialising costs and privatising profits” – but that may not get us anywhere sustainable (i.e. outside of flip-flop political cycles).

    Also, there seems to be a growing trend to believe that the signs of demand destruction were so obvious to be unmissable – and that it’s only due to negligence that these signs were overlooked. Many old-timers working in the industry will remember similar prophecies (that did not come true) in prior decades.

    Keep in mind that it was in 2009 that I was posting this:
    http://www.wattclarity.com.au/2009/07/should-last-summers-peak-nem-wide-demand-have-surprised-us-so-much/
    (where increases in peak demand were being experienced) and it was not until 2011 that I was posting analysis like this:
    http://www.wattclarity.com.au/2011/07/another-look-at-declining-energy-consumption-in-the-nem/

    I don’t recall seeing or hearing a volume of people pointing at demand declining in the period between 2009 and 2011 (hence my early posts about declining demand being a little uncertain).

    If anyone can point me at earlier analysis, I would be very interested to read?

    • JonathanMaddox

      My understanding is that between 2009 and 2011, gross energy demand ceased to grow, but peak power demand did not. Peak demand only began to fall after power price hikes really began to bite and the solar boom took flight, both of which happened in 2011.

  • Alan Baird

    Exporters have ramped up gas to get the big bucks overseas and it’s made gas generate big bucks right here (for a few people). The poles-and-wires-tax that dwarfs the much-trumpeted carbon tax continues to cruise along just below the surface, kept quiet by those who don’t want to let the great unwashed know that IT has ramped up power bills more than any other factor. The billing “system” is so distorted it will take a miracle to disentangle it. Lots of lovely expensive capacity brought about the “greed is never enough” crew. The announcement from the Federal Govt is, “The Carbon Tax and RET are to blame”, a lovely simple message for simple people. What will they do to dramatically reduce those prices once both have gone? Invent another reason? Surely they can come up with something that will fool most of the people most of the time, willingly assisted by Mr Murdoch. It would be so easy. I can’t see too many awkward questions being asked. Most journalists have got out of the habit.

  • JonathanMaddox

    What was the coal-fired capacity addition in 2011? I’m aware of several coal-fired power stations that have closed some or all of their capacity in the last few years, but no new ones since Kogan Creek in Queensland which opened in 2007.