Merit order, falling demand claim their biggest coal victim

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Australia’s coal-fired generation industry has announced further cutbacks, with the mothballing of one of the units at the Yallourn brown coal generator in Victoria’s Latrobe Valley – perhaps the most significant closure yet, and taking the amount of coal-fired demand closed or mothballed in recent months to around 3,000MW.

Energy Australia, formerly known as TRUenergy, confirmed the closure of one of its units at Yallourn this morning. It put the blame on the closure on falling wholesale energy costs, caused by the impact of renewable energy and falling demand.

It says wholesale energy prices are now falling to “uneconomic” levels. What it means is that the coal-fired generators no longer hold their preeminence in the National Electricity Market merit order, where for decades the brown coal generators had priority.  They have been displaced by green energy, and the addition of the carbon price, and their prospects have been worsened by falling demand. The only way they see that they can reclaim that preeminence is by halting, or dramatically slowing, the deployment of wind and solar energy.

The closure of the Yallourn unit follows the halving of output at Tarong in Queensland, the closure of Munmorah in NSW and Playford B in South Australia, and the seasonal closure (since reversed) of the Northern power station in South Australia. Some of these had hoped to receive payments from the government for the privilege of closing, but have done so anyway despite the withdrawal of the contracts for closure scheme.

Such closures have been predicted for years, but the pace – hastened by the unexpected fall in demand – has taken the industry by surprise. As we wrote earlier this week, this could be the beginning of the end of the coal industry. It echoes the situation in Germany, where it is recognised that the fossil fuel industry will only continue in the medium term as a form of back-up to renewables. That is creating its own policy challenges, but slowing the deployment of renewables is not one of them, as Repower Systems CEO Andreas Nauen points out in an upcoming interview with RenewEconomy.

It seems clear now that Australia has a unique opportunity to effect a dramatic change in its energy make-up, if it’s got the courage of its convictions. The carbon price has served to send a signal that new investment in coal is a really bad idea, and shuffled the pack in the merit order. The LRET and the additional investments that could be made by bodies such as ARENA and the CEFC could effect a transition more rapid than most could have imagined.

In this context, the timing of these plant closures is interesting, and Energy Australia has used it to repeat its demand to the Climate Change Authority that the Renewable Energy Target should be curtailed to reflect falling demand. Again it has trotted out the estimated $53 billion cost of the LRET, quoting an analysis by ACIL Tasman that claims this cost could be reduced by $25 billion over 18 years should the target be adjusted, or effectively halved.

It’s worth, once again, putting these figures into perspective. Even if you accept the ACIL Tasman numbers – which no one outside the coal industry does – it translates into $840 per household over 18 years, or $46 a year, or 90c a week, or 13c a day. Divide the household into individual units and it works out to be around 5c a day for every man, woman and child.

Other analysis suggests that the savings of halving the RET might be a quarter of those claimed by ACIL Tasman, because it is not a linear equation and the ACIL Tasman analysis does not reflect the workings of the market. That would equate to 3.5c a day for each household, or just over 1c for each man, woman and child. AGL Energy, which incidentally owns the Loy Yang A coal-fired power station, warms that overall electricity prices could actually rise because of the extra cost of financing risk caused by yet another change in energy policy.

Meridian Energy has argued that if the hidden costs and benefits of the scheme were also calculated – adding the price of reserve plants and some network upgrades, and subtracting the avoided cost of new baseload gas plants, gas turbine running costs and avoided emissions – then the net benefit of the scheme would be $4.77 per MWh, or about $1 billion a year.

The incumbent generators, however, are more worried about the loss of revenue if the LRET is allowed to continue. The Australian Energy Market Commission in 2011 said the “merit order effect” could be $10-$15/MWh – or more than $3 billion a year.

That is a scary number for the coal industry. It should be noted that an Australian Energy Market Commission report last year says that – contrary to popular belief – transmission costs and investment would be lower with more renewables than if the alternative recommended by the likes of Origin Energy and Energy Australia – more gas generation – was adopted. Indeed, it notes that if gas was used instead of renewables, it would lead to an increase in energy costs. This is a realisation dawning on the energy industry as a whole, if not the mainstream media and some politicians.

Note: Energy Australia said the unit that is to be closed has avcapacity of about 360MW. A spokesperson said, “we will operate the unit when market demand and wholesale prices send signals for its return.”  

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  • Mark Wakeham

    Nice story Giles. Also important to remember that Yallourn’s mine collapsed in June and they are still having coal supply problems which no doubt contributed to the decision. See pics here:
    Also Yallourn decision is for temporary closure- the unit could start up again if circumstances change.

    • The Playford B, Tarong, and Yallourn coal capacity shutdowns are all called temporary, or at least preservedd the possibility of starting up again. But the conditions that caused them are very unlikely to go away. For example, solar panels aren’t going to suddenly become expensive, efficiency won’t suddenly go out of style and global warming won’t suddenly turn out to be a calibration problem down at the thermometer factory. I would guess there are several reasons why the shut downs are called temporary. One is the spare capacity could come in very handy in an emergency. For example if there was a serious fire at a large power plant, or for South Australia if the gas line burst worse than already has in the past. Also, shutting down units could be part of a low cost plan to extend the life of the coal plant. For example, half the units could be put in mothballs and then used to replace the operating units when they are in need of major maintenance. Basically, part of a plan to run the coal plants into the ground while getting as much money out of them as possible. Thirdly, perhaps some value could be obtained from the assets in the future. I’m not sure how, but maybe they could be used in peak or load following mode, or possibly used to burn biomass. And fourthly, and this might be the most important reason, once the plants are shut down permenantly, they go from being an asset to being a liability. These sites can cost millions of dollars to clean up. Calling the shutdowns temporary is a way to delay paying these costs. Of course where the shutdown units are part of an operating power plant, there may not be much point in doing clean up until the whole plant is closed down. And finally, maybe pride comes into it. Permanently shutting down a unit before its expected lifespan is a greater admission that mistakes have been made than calling it a temporary shut down.

    • Jonathan Maddox

      Thanks Mark — I think that Yallourn, unlike the rest of the Latrobe Valley, does indeed have coal supply issues and that its fuel costs are effectively much higher now than ever anticipated or than elsewhere in the valley.

      The considerations mentioned by Ronald here are also all quite relevant.

  • I wonder if they are hoping electric cars will suddenly increase demand. I don not see many people mention it.

    However I agree, there seems to be a strong element of group self delusion, saying that clean energy is never going to be as powerful as the coal fired establishment

  • Chris

    this isnt good if this trend continues, what people dont realise is renewable energy isnt a constant and reliable source of energy. If closure of coal plants continue we are going to run into serious power shortages on high demand days!

    • jd

      …or perhaps they’ll realise that the idea that renewables can’t produce reliable energy is a silly myth perpetrated by people who have vested interest in suppressing its success.

      Renewables invite a different way of thinking, a different strategy to engineering, but any statement that they can’t provide constant and reliable energy is either a failure of lateral thinking or (possibly wilful) ignorance.

      It’s a fantastic trend – king coal is indeed starting to look very sick and decrepit and ought to be let out to pasture as soon as possible.

      • Chris

        Silly mith? Mate the sun doesnt always shine and the wind doesnt always blow, its a bit of common sense if you ask me! Just do some research to what happened with Germany, they thought they could shutdown their nuclear power plants and replace them with wind. Their grid has became very unstable so they had to build one of the worlds largest coal plants. They are now polluting more than they were before. Renewable generation is a fantastic trend, but todays technology needs significant improvment and as Jordan says, storage in order to start replacing coal as our primary source of energy. I hope that one day Australia will become 100% renewable, but it will be costly!

        • Giles Parkinson

          The decision to build the large coal plants was made years ago, well before the decision to phase out nuclear. Interestingly, the company that built that plant now says it will not be building any more fossil fuel generation, because it is not needed, despite the phasing out of nuclear. The plant has been designed specifically to act as a sort of peaking plant (very unusual for coal), so it can fit in with renewables.

        • Jonathan Maddox

          “They are now polluting more than they were before.”

          Er, no.

          “Coal-fired generation made up 43.5% of generation in 2011, down from 56.7% in 1990.”

        • Robert

          Hy Chris,
          you are right with saying that sun doesnt always shine and the wind doesnt always blow. Another problem is, that transformers usually are made for an one way flow of energy which isn´t true anymore. It seems as we need in Germany a new kind of grid and more energy storage. There are lots of ideas, for example using old coal mines to produce pumped-storage hydroelectricity. There is even one person, who proposes to use a whole mountain to store potential energy. He says, that it is possible to cut a mountain in such a way, that you can lift it up by pumping water beneath it. In this way you can store huge masses of electricity with high efficiency.

          Maybe the solution will be local combined heat and power (CHP) with local thermal energy storage, because CHP can produce electrify if needed and store the thermal energy for later. And, in winter, we don´t have much sun in Germany and it is rather cold.

          And there is research going on to convert surplus electricity into methane, which could be stored in underground storage or in pipelines for months or weeks. In this way, if there is a lot of wind or solar energy, you don´t have to throw it away.

    • Jonathan Maddox

      This is why the closures are temporary. We get reasonably good warning from the Bureau of Meteorology about both the causes of high demand (extreme heat and cold) and the causes of low renewable energy production (large regions becalmed or overcast). Bringing up these “mothballed” generators ought to be possible in just a day or two. In the meantime, shh, let them get some rest.

      Seriously though : at 1-5% penetration the daily variations in demand drastically outstrip the variation in intermittent generation. To date, intermittent generators have higher penetration only in South Australia.

      In the longer term as penetration increases, storage of excess energy from intermittent generators will begin to look economically attractive as an alternative to using fossil fuels as backup. There are many candidate technologies for this.

      • Chris Fraser

        That’s an interesting thought about demand variation being more changeable than generation variation. I think it slays the very old and cliched idea that problems arise when the sun don’t always shine and the wind don’t blow. I think it reinforces the idea that all plant, regardless of fuel source type, could be made more efficient with the use of storage. Increasing the capacity factor of generators then reduces the number of generators or capacity of generation needed.

    • Chris, a couple of points:

      1. A grid with a large amount of mothballed generating capacity is the exact opposite of a grid that has trouble meeting demand on account of how some capacity can be taken out of mothballs if needed. But it won’t be needed as demand is far below where it was predicted to be. They wouldn’t take the units off line if the demand was there.

      2. Recently South Australia did without any baseload generating capacity for several months and we did not miss it. Both the states coal plants were shut down. One permanently and the other is currently only being used for six months of the year. So coal plants are not necessary for a reliable electricity supply.

  • JD, I don’t think that anyone who really understands energy generation in electricity networks believes that renewables can’t provide constant and reliable energy. The issue is at what cost.

    Most renewable sources rely on energy storage to provide constant and reliable energy. Only burning biomass (which will only ever supply a relatively small contribution to our energy needs) can provide constant and reliable energy without storage (other than the biomass fuel itself of course). Water storage (reservoirs and pumped hydro) is the only practical and inexpensive storage options available today. Unfortunately, we are unlikely to see significant increases in Australia’s hydro capacity – the environmentalists will probably see to that.

    All other storage options: batteries of various kinds, compressed air, heat storage in molten salt, hydrogen, flywheels are all very expensive today. The costs will definitely come down over time and hopefully new storage methods will be developed but it may be decades before we can reliably rely on 100% renewables at a cost the market (and its consumers) are prepared to pay. I think you will find that this will be the outcome of the AEMO report being prepared now.

    • Jonathan Maddox
      • They all look like pilot plants. No mention of cost per MWh. Commercialisation is when we should get excited – not before.

        • Jonathan Maddox

          Yes, these are pilot plants. Everything commercial starts out with a pilot, but some of these enterprises are not afraid to try quoting costs already.

          “As you will see from the attached presentation we have very similar characteristics to
          pumped hydro, but with the ability to install in any location and any size.

          Key features are
          72% charge/discharge efficiency
          1MW-1GW size installations possible
          1-10 hours storage
          Cost per kWh $125”


          • Thanks Jonathan. Pumped hydro is between $1-15 per MWh so these pilots need to move by 5 orders of magnitude to compete. That sure looks like decades to me.

          • Jonathan Maddox

            I think you may be looking at a lifetime levelised cost of energy throughput. The number quoted is a capital cost of energy storage capacity. Five orders of magnitude would account for the number of days in a 27-year lifetime.

            See “slide eight” of the pdf.

          • Yes it is important to be clear about whether storage costs per unit of electricity stored is the capital cost or the lifetime levelised cost. I think 5 orders of magnitude is actually the number of days in 270 years but it’s probably irrelevant for this discussion.

    • Martin, a problem for grid operators is that due to recent changes in feed in tariffs, residential energy storage is no longer expensive and may soon become a money saver for households. Currently Australians pay about 24 cents a kilowatt-hour for grid electricity but many can only sell electricity from rooftop solar for 8 cents a kilowatt-hour. In the first quarter of this year electric car battery packs cost about $650 dollars per kilowatt-hour of capacity. For stationary use they give a storage cost of about 16 cents a kilowatt-hour. And 16 cents is the difference between buying electricity from the grid and selling it to the grid for millions of Australians. This means the cost of storage is around the break even point for many households. A variety of home energy storage products are being developed and deployed and are being used now in Australia for off grid use. I expect that it won’t be too long before they start becoming popular for grid connected households. If the cost drops below 16 cents per kilowatt-hour stored, then a small amount of storage can pay for itself rapidly by preventing a household dipping into grid electricity during periods of patchy cloud or high household demand. Of course, home energy storage could be killed by raising feed in tariffs, but I suspect that won’t happen, or at least not soon enough to prevent grid operators being affected.

      • Domestic storage may well have a place in the storage mix but we might be looking for one TWh of storage across the network to guarantee reliability using all wind and solar. If the average house has 20 kWh, even if every home had storage we would still be well short of 1 TWh.

        We need to be looking at large storage systems like pumped hydro. The largest PHS system in the UK is Dinorwig in Wales which stores only 9 GWh. So we may need to split up our 1 TWh of storage across 100 sites. This is no small problem.

        • Energy storage that’s used everyday, or twice a day, can currently pay for itself in the right locations. But energy storage that’s used once a week cannot, so there’s not much point in building a TWh of storage in Australia. That much storage won’t be used enough to be worthwhile. It would be much cheaper to do what we do now, burn gas, but remove and sequester the CO2 it releases into the atmosphere (plus some extra to account for methane leakage). Right now this can be done for about 5 cents a kilowatt-hour and it should be possible to get the price considerably below this. Or alternatively, biomass or biogas could be used to directly generate electricity.

          • Jonathan Maddox

            Truly? 5c/kwh to safely, permanently sequester carbon dioxide? Has it actually been done? References?

        • Martin, see my reply to Jonathan below.

        • David

          Martin, the scale of pumped storage schemes only appears to be a problem because all of the schemes which have been built to date are designed around a daily cycle for use with baseload coal and nuclear generation. There is simply no point in making them store more than a day or so of generation. Thus they tend to be around 5 to 20 GWh for 500 MW to 1 GW of generation.
          This is not what is needed for use with renewables. The power stations and tunnels etc. can remain the same but the reservoirs need to be bigger. It need not make the scheme much more expensive to build.
          In Australia, our biggest pumped storage scheme is Tumut 3 which stores 60 GWh, pumping between two of the lower reservoirs within the Snowy-Tumt cascade. If the entire height of the cascade of dams was used; more than 1000 GWh could be stored between Blowering and Eucumbene Dams. No new dams needed.

          • David I fully agree with you. Unfortunately I suspect the environmentalists will have other ideas.

          • Jonathan Maddox

            I hadn’t realised there was potential to pump so much more water uphill within the Snowy. Thanks for this information!

            I do think there are engineering limitations (the reversible Francis turbines have a practical limit on the head of water they can pump) but these are probably surmountable, or might be worked around with small intermediate pumping stations.

            However relying on pumped storage for seasonal demand, or seasonal intermittency shortfall such as prolonged calm, is probably not worth the cost unless existing dams really can be utilised.

            As Ronald points out, fossil fuels are already a form of stored solar energy and we have a huge infrastructure devoted to releasing this storage. If it is depleted only in case of seasonal need (given other storage sufficient to cover most daily supply and demand cycles, this need only be 2%-10% of total annual energy requirements, depending mostly on the weather), this store can readily be replenished at leisure through natural photosynthesis (biomass and biogas) or synthesis of fuels using excess renewable electricity when available.

            There are a number of projects working on synthesis to capture the value of excess wind or solar generation which would otherwise be curtailed (“spilled”):




            Some of these focus on supply of methane to the natural gas grid (or a small fraction of hydrogen, which is permitted in the pipeline system in Europe); others aim to produce mobility fuels to displace biofuels and tar-sands oil (and realise a higher price for the energy used in synthesis). In all cases the round-trip energy losses are substantial, but not so high as to make the concept prohibitive for seasonal storage meeting a small fraction of electric power demand using existing fossil fuel consumption infrastructure.

            As with the pumped-heat and adiabatic compressed air storage techniques I linked to above, these projects are embryonic (pilot plants at best). Even so, I think there is great potential for them to develop in parallel with ever-increasing penetration of low-cost intermittent renewable electricity generation.

    • Martin, also, with regards to grid electricity, it’s not necessary to use energy storage for Australia’s electricity sector to go carbon neutral. One method is to use biomass, which you say will only ever supply a small amount of our energy needs. I don’t know why you say this because Australia is one of the few rich nations which could actually get a sizable fraction of its energy from biomass. Biomass will be used if the carbon price increases and the cost of energy storage does not decrease. Or alternatively, since we have under utilized natural gas capacity sitting around, we could dump biomass in an area of ocean downwelling to sequester the carbon in it to make up for the carbon released when we burn natural gas. Now it’s not very practical to attempt to sequester Australia’s current coal CO2 emissions, but it could be done for natural gas used to fill in the gaps left by renewables. And it can done it for less than current energy storage costs. But I do expect energy storage to soon be competitive, at least at for consumers if not wholesalers.

      • Jonathan Maddox

        I was going to say, fossil fuels *are* stored solar energy, which we simply deplete constantly now, and mention biogas and synthetic fuels as ways to replenish the supply.

        But dumping biomass under downwelling oceans? That’s a new one to me. Whatever happened to soil carbon and biochar?

        • The reason is it takes too long to explain why I think biochar soil amendment can sequester carbon at low cost. It’s a lot quicker and easier to point out that right now I can load low grade barley onto a ship for about $200 a tonne. As barley is roughly 50% carbon, each tonne represents about 1.8 tonnes of CO2 removed from the atmosphere. Dumped into the deep ocean it will be sequested for at least hundreds of years. (It doesn’t have to be in an area of downwelling, just preferably not upwelling.) This gives a cost of roughly 11 cents per kilogram of CO2 sequested or about 4.5 cents per kilowatt-hour of electricity generated from gas. As we don’t need to use food and mallee roots and chaff and other material will do, the actual cost should be less than this.

          • Jonathan Maddox

            It’s all clear now! I honestly thought you were talking about sequestration of actual CO2 gas for a moment there. It did not occur to me that the “dumping biomass” comment was the answer to the “how do you sequester CO2 so cheaply?” question.

            I suppose we could mine coal and dump it under the sea too, to sequester actual fossil carbon instead of renewables.


  • Matt

    I find it laughable that fossil fuel-focussed companies are arguing to reduce the RET given that we need as much penetration of renewables into the system as is technically feasible as quickly as possible to avoid catastrophic climate change.

    Forward-looking fossil fuel-based companies are already diversifying into renewables, and that should be the message for the whole industry: the paradigm is changing, change with it or you’ll be left behind.

  • I’ll mention that it’s not particularly difficult to meet most of Australia’s electricity demand with renewable energy thanks to the low cost of solar PV. Installation costs are approaching $2 a watt in Germany and there is no reason why they won’t do the same in Australia. It appears that even if there are never any improvements in solar panels from this point on, $2 a watt installation is baked into the cake. This low cost will push down the price of electricity during the day and moving more demand into daylight hours. And up to a point, it will be cheaper to build more solar capacity than is required to meet minimum daytime demand and curtail some production when it is not needed rather than use storage or fossil fuel generation. Just what that point is would depend on the cost of the alternatives.