The focus of this piece is about what the Finkel Review delivers for a Mojo customer, Jenny. Jenny has solar on her roof and a smart battery in her garage.
Having your attention though (and also my cake and eating it) I’d like to start by noting that we should think carefully before opposing the Clean Energy Target (CET), the big ticket item in the Finkel Review designed to reduce emissions in the power sector.
It’s become more important to put the carbon wars behind us for a time than to find the perfect policy.
The CET is far from perfect. It’s all carrot and no stick. It’s a political and environmental compromise. But it’s our last best hope of ending the lost years of uncertainty in the generation sector that are now leading to wholesale electricity price rises that will start flowing through to customers like Jenny in a few weeks.
The CET can also form the bones of a scheme that can evolve over time to sweeten the carrot for renewables or add a cane for fossil fuels, when the political will returns.
Mojo’s mission is to drive down the costs of energy for its customers (including Jenny), and we think that ending the uncertainty in the policy environment is an essential step in that direction.
The CET however makes up just a fraction of the 212 page report. It’s a few paragraphs out of the 7 pages packed with recommendations 1.1 through 7.14. It’s fair enough to ask the question, what’s in all those recommendations for Jenny?
The answer is somewhat unclear at this stage, but the signs aren’t great for Jenny in the short to medium term.
The big problem that the Finkel Review is charged with solving is how to decarbonise the energy sector while keeping the system secure and inexpensive for consumers.
A key focus however is on the security of the system in the wake of a particular storm in South Australia (plus more than a few in teacups in Canberra). The security issue is summed up well in the Review:
“Because [system security services such as inertia, system strength and voltage control] were historically plentiful, as essentially a by-product of power supply from synchronous generators, they were not explicitly valued in the [National Electricity Market (NEM)]. With their growing scarcity, the hidden value of these services has emerged. New mechanisms will be needed to source these services, or appropriate alternatives, from synchronous machines and a range of other technologies.”
As more renewable energy pushes into the NEM, driven initially by policy, but increasingly by sheer economics, system security services are in decline. The same process contributes to reliability issues, where the lights go out because available supply can’t meet demand in the NEM.
People with batteries and controllable devices behind their meters (the so called prosumers, or Jenny) can provide system security services to the market as well as help supply meet demand in the NEM.
The key issue in the Finkel Review for Jenny is what the mechanisms for sourcing these services will be, and whether she will be able to benefit from the value that her assets provide.
There are choices to be made here. Do you get regulators to tell businesses what technologies or services they have to provide, or do you build a competitive market for the provision of these services. The Review highlights the trade-offs:
“There are choices to be made between using market or non-market approaches. Under the right conditions, a well-designed market-based mechanism can be the most cost-efficient means of delivering a service.
For the delivery of technically-specific or location-dependent services, the absence of sufficient competition and other practicalities may necessitate a non-market approach, such as selective procurement or a regulatory requirement.”
To deliver system security and reliability services through the transition to decarbonisation the Finkel Review recommends initially implementing non-market options, while promising to investigate market options down the track.
The non-market options are put forward in a set of Security Obligations and Reliability Obligations. In short, the Security Obligations tell large scale generation assets connecting into the grid that they need to provide a certain level of security services, and the Reliability Obligations tell the same connecting generators that they need to provide a certain level of dispatchable power to ensure supply can meet demand at all times in each region.
This means that in the short to medium term the key mechanisms proposed to ensure security and reliability in the power system involve telling big generators connecting into the grid that they have to provide specific services for inertia and reliability in order to connect.
Given the CET it’s likely that most of the new connections will be renewables, which in order to meet these requirements will need to install more equipment, such as batteries, capacitors and flywheels.
This non-market approach is unlikely to be the cheapest option to source system security and reliability services. The Review is effectively making the call that it is best for grid scale assets to provide those services as a condition of connection, increasing the cost of commissioning new generation (which will flow through to wholesale prices and then customers like Jenny).
Market based mechanisms to procure the same system security and reliability services don’t pick technologies (or their scale). They don’t care what asset contributes the service, they just buy the service at the lowest price.
This leaves others to work out what’s cheapest. Indeed, it may be cheaper for Jenny to provide the services. That is, it might be cheaper to coordinate lots of batteries and other devices behind customers’ meters to provide system security and greater reliability (and paying Jenny for the use of her assets).
What it ultimately means for Jenny is that her solar system and battery are less valuable. Her assets can’t access all the value in providing security and reliability services because initially the markets don’t exist for those services.
In the longer run, when the markets may exist after the long process of review and policy development, the value may not be there anymore. The lions share of the value could be taken by the grid scale batteries and other devices that were required to be built in the non-market phase.
We think a better approach is to fast-track the development of market based solutions to these issues. Doing so will not just increase the benefits for Jenny, but also reduce costs for other consumers not fortunate enough to afford solar and a battery.
At Mojo we will keep up the fight for Jenny and our other customers, because they have better things to do than read the Finkel Review.
Dominic Adams is Regulatory Strategy Manager for energy retailer Mojo Power
