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The no-name policy with little chance of reducing power prices

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I was looking at a river bed. And the story it told, of a river that flowed,

Made me sad to think it was dead.

You see I’ve been through the desert on a horse with no name, It felt good to be out of the rain.

In the desert you can remember your name, ‘Cause there ain’t no one for to give you no pain. America 1971

This policy needs a big reduction target to be meaningful

The National Energy Guarantee is to all intents and purposes an emissions intensity scheme. Its impact will depend entirely on the required intensity.

If our COP 21 commitment is taken to mean the NDIC of a  26-28 per cent reduction in CO2 from 2005 levels then we think that only a further 1.2GW reduction in coal replaced by about 4GW of renewables is required (see Fig 1, 2 & 3) by 2030. That’s less than 400MW a year.

We think the big gentailers will backend this as much as possible. They have various incentives to do that and the proposed rules entrench their place in the system.

If our COP 21 commitment/obligation is taken to mean providing our share of emissions reductions to keep the world to less than 2°C, then that means a >50 per cent reduction in electricity emissions by 2030 and that would require a lot of new investment. However, we think the current federal government hasn’t a snowball’s chance in hell of making that kind of effort.

It goes almost without saying that Australia has no chance of getting a 26-28 per cent reduction in CO2 emissions in most sectors other than electricity; land use might be one. There is a clear highly visible pathway – even a runway – to strong emission reductions in electricity generation at an affordable price. That is at risk of being thrown away under this policy.

Details of the reliability guarantee are not available, but if we take the AEMO’s current forecasts there is no forecast at the moment of a reliability issue in the NEM for some years beyond this Summer.

As Liddell closes some new dispatchable generation will be required to replace that. The same scenario as has existed for a decade, namely that the existing thermal fleet in NSW and Victoria is getting to retirement age may lead to further retirements of coal plant and their potential replacement. But this would have occurred without any rules in place.

The new supply that replaces the ageing coal fleet will, in all likelihood, be firmed renewables. The wind and solar PV will supply the energy and something will supply the firming. The cheapest firming option at the moment might be reciprocating gas engines or it might be pumped hydro.

But that’s not necessarily net new supply. So we don’t see much new investment for this heading right now. More work once details are available may change this projection.

One potential strength of the policy is that by using license penalties on retailers rather than penalty prices it makes it means that retailers have more incentives to manage their obligations at minimum costs.

Under the present LRET scheme gentailers can undersupply the renewable market, boosting their thermal profits and passing the higher than required renewables costs straight onto customers.

However an offsetting disadvantage is that it seems to make the existing big three gen-tailers even more important and somehow entrenching their market power further.

The bottom line here is that grid delivered energy is likely to remain expensive relative to behind the meter energy because the latter can arbitrage the wires and poles cost. This likely means that grid delivered energy will continue to lose market share and therefore getting unit costs and prices down is a struggle.

The details so far

The federal govternment’s no name policy as we understand has the following features:

  1. It has to be approved by COAG who would then put the rule request to the AEMC
    1. The AEMC proposes to develop a rule by the end of 2018
    2. There is no financial penalty associated with non compliance of either of the two guarantees discussed below. You just lose your retailing license.
      1. We actually see this as a positive. Under the RET any financial penalties on retailers through non compliance are just passed onto the consumers. This system puts the penalty on the retailer.
    3. It requires Retailers to hold a reliability guarantee.
      1. Is this different or separate to the Finkel Report’s Generator Reliability Obligation?
      2. It will cover a percentage of forecast peak load
      3. It is initially NEM wide but has to be translated down to individual State level
      4. There appears to be a concept of a structural hedge, but also a “short term hedge”
      5. No numbers have been provided on the required reliability percentage
    4. Retailers would be required to hold an Emissions Guarantee.
      1. The commitment is expected to be in line with Australia international reduction commitment. That is 28-30% below 2005 levels by 2030.
      2. If trade exposed large users are made exempt their obligation will fall on every one else.
      3. There are all the usual bells and whistles such as trading from one year to the next, using ACCUs and international units. We particularly dislike allowing international units. These have a very shabby and well documented global record.

Maybe 4 GW more of renewables by 2030, won’t move the price dial

We estimate that CO2 emissions in the NEM were about 186Mt in 2005. There are two notional COP21 targets, one is Australia’s unconditional NDIC of a 26-28 per cent reduction in total emissions by 2030. That’s about 52Mt NEM-wide reduction from 2005.

The other is the emissions required for 2°C warming. In our view that’s at least a 50 per cent reduction or about 93Mt in the NEM.

By 2016 we had already achieved a reduction of 20Mt, and Hazelwood’s emissions are a further 15Mt. So if Hazelwood is replaced by close to zero renewables, then about 35Mt of reduction, or about 70 per cent of the 28 per cent reduction from 2005 has already been achieved. This leaves about a further 17Mt.

We estimate that since FY16 about 15 TWh of energy from new renewables has been committed of which 10 TWh is notionally Hazelwood replacement.

Adding this all up we estimate about 1.2GW more of coal will need to retire, most of which is Liddell and if the coal was replaced by wind and PV about 4GW need to be committed by 2030. We expect the gen-tailers to back-end this as much as possible.

Even on average basis it comes to not much more than 400MW a year. Prior modelling for an emissions intensity scheme showed that gas would beat out renewables, but we don’t think that’s the way it will play out. We expect gas to play a firming role at best.

The calculations underlining this conclusion are shown in Fig 1,2 & 3. We would like to thank Stephen Christos and Matt Drum at www.ndevr.com.au for checking the data in Table 1. ndevr has acknowledged expertise in emission calculations and strategies. All errors are as usual and of course my own.

Figure 1 Electricity Co2 emissions for 28% reduction from 2005 in electricity. Source: National Greenhouse accounts, Clean Energy Regulator, ITKe

Figure 1 Electricity Co2 emissions for 28% reduction from 2005 in electricity. Source: National Greenhouse accounts, Clean Energy Regulator, ITKe

At the moment Hazelwood has not been fully replaced, but when the new wind and PV under construction is commissioned over the next 12-18 months our calculations are that in MWh of energy and in MW of  power Hazelwood will be more than fully replaced. In fact we estimate about 4.5TWh of renewable generation in excess of Hazelwood replacement is committed. Fig 2 takes this number and estimates therefore that about 4GW more of wind & PV are required for a 28 per cent reduction from 2005 levels. Fig 2 needs to be read in conjunction with Fig 1 and Fig 3.

Picture1

Fig 3 is the summary of committed projects MW and energy since June 30, 2016.  It does include Wind farms that have started up in 2017 including Hornsdale 1&2 and Ararat and White Rock. Our numbers are higher than most other estimates but they only include projects that have reached at least a PPA and almost all are at FID. We show rooftop PV but don’t use the numbers.

Figure 2 New renewable investment compared to Hazelwood. Source: ITKe

Figure 2 New renewable investment compared to Hazelwood. Source: ITKe

If a 50 per cent emission reduction target was adopted, then of course substantial further investment would be required. However we don’t think it’s a “credible contingency” that the current federal government will target 50 per cent reduction.

So if this is correct the first point we’d note is that the renewable obligation is unlikely to produce enough  new investment to change the supply demand dynamics.

We don’t know how much investment is required for the Retailer Reliability Guarantee but we doubt its much, maybe a little bit in South Australia.

Futures prices probably have to rise to justify new investment

So on that basis new investment will be made on the basis of price. The dispatchable generation futures curve, familiar to all regular readers of “Know your NEM” looks as follows:

Figure 3 Dispatchable generation futures Source: ASX

Figure 3 Dispatchable generation futures Source: ASX

Note that we’ve replaced “baseload”, the official ASX title, for dispatchable generation. In our opinion “baseload” is self evidently a demand concept load=demand whereas “dispatchable” is a supply/generation concept….

The point is that out in 2021 about $73 MWh is on offer for NSW. At the moment top quartile wind projects and the very best PV projects might be justified without having to also contend with a reliability cost. We don’t think new coal could possibly be done for $71, even in China new coal takes more than $60 MWh  and certainly not combined cycle gas. If a dispatchability cost is included in the wind or PV side of things the cost will in all likelihood be more like $90 MWh than $70 MWh. So the point is the price is hardly high enough to get lots of new generation built.

It may be that demand response can be supplied for less than $70 MWh.

So if generation prices have to go up, can we really see network prices falling enough to make final bills go down.

Govt buys Snowy, then makes a law to make retailers buy its expensive output the mafia would approve

We have strong reservations about the federal goverment buying Snowy. It’s the same complaint that makes us dislike State ownership of generation and wires and poles. The Government is the law maker. You can’t have the referee owning one of the teams.

We have already seen how NSW and QLD abused COAG processes to protect their wires and poles investments, one of the main causes of high electricity prices. Reform of the ACT appeals processes would have happened years ago had the State Govts not run dead on it. Snowy  already supplies about 9% of NEM wide generation its retailer Red Energy/Lumo is the 4th largest in the NEM by customer numbers.

However its worse than that. Snowy 2.0 is likely to be extremely expensive as a way to provide a reliability guarantee. That’s because there is a low “head” = water drop and because of all of the hard rock tunneling involved, plus all the extra transmission.

But if it is built it will quite likely crowd out private sector investment. Snowy 2.0 will require new generation if it is to be used effectively. Pumped hydro requires about 1.3MWh of generation for every MWh of pumped hydro supplied.

The point is that we have a government that is funding a very expensive project designed to supply a reliability rule that they have expressly forced onto retailers. In essence it is making a rule that requires retailers to buy the output from its own project. The mafia would approve.

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.

Hear the discussion on the latest Energy Insiders podcast with China-based Greenpeace analyst Lauri Myllyvirta.

  

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  • Ren Stimpy

    Alan Jones, Peta Credlin, Rowan Dean, Ross Cameron, Chris Kenny etc etc – they’re all wondering how this will provide a “difference” in policy to the Labor party.

    They are NOT wondering in any way whatsoever how this might solve the energy problem.

    It’s a sop to Sops.

    Just saying how the conservative mind thinks – purely politics.

    • Joe

      Climate and Energy Wars ( err policies ) have ALWAYS been about the politik for The COALition.

    • Alastair Leith

      If power prices had not risen so much in the last decade then Libs wouldn’t be all over the energy issue the way they are (like flies on feces). They have identified a point of traction in the swing electorates (political gold) and are attempting to sheet it home to renewables and protect the gentailers and networks from being (correctly) identified as the cause. And protect neoliberal government policies that created the NEM (and privatisation to some extent) in the first place which created a new set of problems instead of solving others.

      Prices have risen mostly thanks to network gold plating and air conditioners but also the ultimate failure of the NEM to deliver the kind of efficiencies promised. So renewables are the scape goat, which suits people vested in coal and gas down to the ground.

  • Joe

    David, I love your intro…’Horse with no Name’…a great song by America. We can just all zone out of the energy argy bargy be playing ‘Horse with no Name’ on continual repeat.

  • Joe

    Why doesn’t The COALition just dump the idea of Snowy 2.0. It is really only Leather Jacket Mal that pumps the idea of Snowy 2.0. They really wanted all along to build a fleet of new Coalers, HELE Coalers, Clean Coalers, CCS Coalers…it is The COALition’s wet dream.

    • trackdaze

      Its out there to stall other forms of of renewable investment just as the coalitions posturing about keeping Liddell open was intended to do.

      • Alastair Leith

        And he wanted to claim a bigger one than Weatherill, that’s the extent of policy depth I’ve even seen from Turnbull.

  • Ken Dyer

    “Maybe 4 GW more of renewables by 2030, won’t move the price dial”

    The Palaszczuk Government’s recent open tender called for the development of 400 MW of large-scale renewables and 100 MW of energy storage projects. 115 proposals were lodged from 79 businesses. These included a 2200 MW wind energy project, a 6400 MW solar project, 500 MW ofother renewable energy technologies adding to 6,000 MW of energy storage projects.

    This is greater than the current 8,200 MW generated by coal-fired power stations and is further proof that Queensland does not need a new coal-fired power station being trumpeted by the LNP.

    Will that move the price dial?

  • RobertO

    Hi David, If QLD Gov can own the coal power in QLD, if Tassi Gov can own TasHydro in Tassie, then why can the Fed Gov own Snow 2.0, then set the laws about “Despatchable Power!” That is not abuse of power, (best abuse I have ever seen) it just protecting Australians from power shortages, called “Affrodability, Reliability and Responable Power supplies. It guarantee a price rise for all grid connections in the NEM of 50% over the next 5 years while we all pay (mostly for Coal if this Gov survives this) I like your note at 1.3 MWh pumping will produce only 1 MWh for sale and if it on a river it may drop slightly if there is lots of rain up the top reservoir (1.1 MWh to !.2 MWh to sell 1 MWh, I think I saw a fig of 1.18 for the Waitato River in NZ on its 6 PHES stations).

  • Les Johnston

    There is a possibility that the Federal Government is hoping that small scale solar will grow to such an extent that the energy emissions “requirement” is achieved (not due to any action by fossil generators). If battery prices continue to reduce, battery systems could take up the dispatchable “requirement.” The end result would be the energy “plan” is actually no plan other than putting a road block in front of renewables meanwhile continuing to prop up the fossil generators. I do not see any Liberal Politicians driving around in 40 year old dispatchable motor vehicles. Why would anyone chose a 40 year old motor vehicle to get from A to B instead of a modern EV?

    • Alastair Leith

      Such a (political) strategy would assume the commitments to Paris — which are not 2.7ºC but amount to 3-5 ºC of warming — do not get ratcheted up. Believe it or not there are some ambitious nations, including those on track to be substantially drowned and impacted in other ways by CC, like Bangladesh. Some European have a sense of responsibility to the rest of the world. China and India are currently shaming the USA at the level of political maturity and vision, and that’s saying something.

  • Alastair Leith

    Thanks for the thoughtful and informative article, David. It’s so typical of Turnbull to serve up a dog’s breakfast of a policy and flag none of it with stakeholders prior to the announcement.

    If our COP 21 commitment/obligation is taken to mean providing our share of emissions reductions to keep the world to less than 2°C, then that means a >50 per cent reduction in electricity emissions by 2030 and that would require a lot of new investment.

    I’d suggest if we’re talking about a peak of 2.0 ºC (not overshoot and return back down to 2.0 ºC or lower before he century is out) that to have even a 50:50 chance of making that scenario then developed nations need to do much more the 50% RE on their grid by 2030.

    In Kevin Anderson’s (TyndallºCentre, UK) appraisal of the Paris Agreement he outlines a number of problematic issues with the Agreement: (do they sound relevant to NEG?)
    The Issues [Link 11m50s]
    What, then, are the issues with the Paris Agreement? Our global plan, coming out of Paris, rests on the following assumptions:
    1. We can limit our emissions without having agreed carbon budgets – no budgets are mentioned in the Paris Agreement.
    2. Long-term targets – out to 2050 – will do the trick. We don’t need legally-binding short-term targets.
    3. We can delay action – and then reduce emissions faster once we get round to it, by at least 10% per annum.
    4. The kind of reduction rate needed – at minimum 10%, more likely 13% per annum or more – is quite achievable without affecting economic growth or prosperity.
    5. The Agreement makes no direct reference to fossil fuels or to decarbonisation.
    6. Aviation and Shipping emissions are excluded from the Agreement.
    7. Existing pledges (“Nationally Determined Contributions”) take us on the path to 3o – 4oC (not 2.7oC – that’s misleading); and will not be reviewed until 2023. That’s 300 billion tonnes of CO2 into the atmosphere between now and then.
    8. The Agreement relies heavily on speculative negative emissions technologies coming on-stream – which have not been proven to work at any significant scale.

    Kevin Anderson suggests for global net zero emissions by 2050 and providing for the developing nations (who are inheriting the developed world’s AGW problem) decarbonisation along the lines of:
    • Collectively peak their emissions by 2025
    • Then rapidly increase mitigation to ~10% p.a. by 2035
    • Fully decarbonise their energy by 2050

    Subtracting the carbon budget for the above from the 2.0 ºC emissions budget leaves for the western world leaves this kind of scenario for the developed world he says: Poorer/industrialising countries to meet 2.0 ºC and net zero emissions by 2050:
    • Collectively peak their emissions by 2025.
    • Then rapidly increase mitigation to ~10% p.a. by 2035
    • Fully decarbonise their energy by 2050

    Wealthy nations:
    • 10% reduction in emissions (economy wide) year on year
    • 50% reduction in all emissions by 2020 (including scope 3) (c.f. 1990)
    • 90% reduction in all emissions by 2030

    UK government submitted 40% reduction in all emissions by 2030 to EU (less than half what is required).

    However, we think the current federal government hasn’t a snowball’s chance in hell of making that kind of effort.

    Agreed. This policy is a smokescreen for political instability and a desire for inaction on Climate Change, so 0.001% of the population can make a lot of money from fossil fuels. Which is why these civilisation and ecosystem collapse wishing MPs in the Libs Nats (and some ALP MPs) need to be voted out. And why talking to everyone we know about how much more serious CC is than is implied in the media and from governments.