Existing gas generation in South Australia is expensive, inefficient, highly polluting, and is controlled by just two market players. Battery storage is emerging as a much smarter and cheaper option
An alternative to building more gas peaking plants in South Australia – which would take years and require hard-to-get-gas – is to build a lithium battery storage plant to act as a peaker.
We don’t have access to formal quotes as to the price but our industry contracts suggest that around US$900 KW is achievable installed. On that basis we think a lithium peaker might have earned a best case return on equity of 16% last year. (See Figs 5, 6 and 8 below).
There are no barriers to entry for battery speakers, so in the long run returns will go to the cost of capital. However, over the next two-three years after Hazelwood closes, prices in South Australia could well go higher, even assuming Pelican Point gets back to running flat out.
A battery would also help the gas generators. It would charge when wind supply is high and pool prices low. This would reduce the losses gas generators incur in those conditions.
Who knew South Australia was so interesting
To recap. Last week we went through some facts that essentially showed that despite the storms and the heat at least two of the blackouts in South Australia, including the Statewide blackout need not have occurred if AEMO had done its job better.
We estimate $350 million of damage was caused by the storm related blackout last year and it wouldn’t have happened if the wind farms had had the same “ride through” settings as installed in Europe a decade ago.
We are not going to talk about politics today, but contrast the publicity AEMO’s latest views on the matter have received compared with the ideological fight of “price/security v the environment” at the time of the blackout.
Instead, we want to focus on the challenge posed by wind’s share of South Australian generation. Over the past 12 months (which does include the last days of Northern Power station) wind has supplied 38% of South Australian demand.
It’s over 42 % in Denmark and that’s not a problem, despite limited imports and exports in that country, because there are enough other power plants that can flex up and down.
In South Australia the problem is two fold.
- When demand is really high the State is actually short on generation capacity.
- When wind generation is high and demand is low there is too much wind.
The two problems are related because when there is too much wind gas generation is unprofitable and price can be negative.
The following chart over the past 12 months shows demand in South Australia after subtracting wind generation. Its arranged in percentiles. The horizontal axis shows the percent of demand less than a given “y”.
Gas generation wants to run at a constant output
Demand is negative around 5% of the time and < 100 MW around 9% of the time. Obviously it’s not much fun being a gas generator when net demand is very low. Your choices are to export to Victoria where you will compete with a much lower variable cost brown coal generator or to close down.
Looking at the other end of the curve there is a 600 MW increase in the last 1%. We’ve made a separate graph of the last 1% and it shows that most of that 600 MW occurs in the last 0.4% of time which is about 70 half hours for the year.
This is a traditional problem for electricity supply. It’s expensive to put 400 MW of capacity in place to satisfy 35 hours of demand.
Traditionally that’s been done with jet fuel/diesel type generation because the gas supply can’t always be guaranteed at short notice. We only focus here on the generation issue, but it’s worth noting that in South Australia distribution and transmission of electricity is expensive and that system too has to be sized for those top 35 hours.
Gas generation in South Australia is very inefficient
Most of the gas generation in South Australia these days is from he Torrens Island TIPS B and Quarantine power station.
The heat rate of these is about 111-12 GJ MWh, This is very wasteful of gas and carbon inefficient.
Gas generation doesn’t really want be ramping up and down all the time. Gas turbine efficiency is less at “half power”.
Gas generation in South Australia is an oligopoly
Not only is the gas generation inefficient with carbon emissions on average close to coal generation but most of its market share is split between AGL and ORG. ITK is not suggesting that either company takes advantage of this but we are suggesting that consumers generally do better when there is more competition.
Transmission, gas or batteries?
Is gas the answer?
So why build a 400MW gas peaker capital costing say $500 m (if your lucky), plus fixed operating costs including rentjng gas transmission capacity for 70 hours a year?
Why force a combined cycle gas generator into supplying Victoria when wind generation exceeds South Australian demand (5% of the year or 400 hours a year)
Transmission – would benefit if the proper planning studies were done
More transmission may well be part of the answer and is ultimately needed to take advantage of the portfolio effect of wind (wind output in NSW or QLD is not so correlated with wind in South Australia) so that the variability of total wind generation becomes less.
However, transmission itself is expensive and takes time to build. To demonstrate the value of transmission basically requires showing a net benefit to consumers (those of the source as well as the destination). Wind from South Australia would flow to NSW at times of excess supply there and vice versa. Studies to demonstrate that value don’t exist to our knowledge or certainly haven’t been publicly released.
However, transmission studies don’t generally look at renewable energy portfolio impacts because like everything else the studies are done without the benefit of NEM wide forward model.
Lithium storage
Is lithium storage economic? One answer is that if it was someone would have done it already. So lets change the question round and ask why hasn’t it been done?
- skepticism from say AEMO.
- industry views towards lithium storage change only slowly
- you could argue the incumbents aren’t that incentivized.
- Networks aren’t allowed to access market revenues or can’t combine network and market revenues into one business unit
- Existing generators of the gas variety are doing well
- Wind farm owners particularly ones such as Infigen which have merchant (uncontracted) outuput would seem the most obvious case.
Lithium battery as a peaker
Lithium batteries can provide the same service as a peaking gas plant only better.
- In addition to stopping high prices they can also help to prevent negative prices by absorbing power when wind generation is high relative to demand.
- Battery capital cost is comparable to peaking gas capital cost. The last gas peaker built in the NEM was the Mortlake station in Victoria and cost $660 m for 550 MW. It’s a bad example as it ran into union issues in Victoria that made it expensive but actually took 4 years to build. We think Lithium storage is right around the $1.2 m/MW mark.
- Operating cost is much lower
- Can be built in less than a ¼ of the time.
- Can be built in modular 1-50 MW units allowing maximum flexibility for deployment. Scale advantage is achieved when the battery can justify its own building centralizing airconditioning and fire suppression and avoiding the need for containerization.
We think lithium storage can be built and installed for about A$1.2 m/MW. That’s for a notional 4 hour system. In this world though it probably doesn’t run for 4 hours. Its probably half or ¼ full most of the time (it has to be available for charging as well as discharging)
We think it should aim to earn a return on equity of about 8%. Here’s some capital and cost of capital assumptions.
A return on equity of 8% on an equity investment of $6 m is about $0.5 m after tax. We work backwards from that to get to the required EBITDA (earnings before interest, tax and depreciation) of $1.6 m.
Could we have earned $1.6 m of ebitda last year. Sure Can (whoops can’t make any Rolf Harris jokes)
The Figure below shows the distribution of pool prices in South Australia in the 12 months ended Feb 17.
Using that data we formulate some decision rules. These include discharge battery when price greater than X and recharge when price less than Y. Using seemingly conservative rules designed to not run for more than 500-600 hours per year we see our battery peaker earning around $3 m over the past 12 months.
These numbers look to be about twice what’s required but there are some caveats.
- We assume that the battery has enough energy capacity to take advantage of all those hours. If all the high price events occurred at the one time the battery would run out quickly. Same goes for charging.
- That is just for last year and assumes the battery that is installed has no impact on the price. The reality is that if you install the battery with an expected 20 year life and the economics are as good as suggested in Fig 8 then there will be lots of batteries installed and the return will go to the marginal return. But hey that’s why markets do work.
David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.
