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Why NEG may kill new renewable projects, even those with finance in place

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Power price pain is worse than we thought. AAP Image/Paul Miller

AAP Image/Paul Miller

After initially seeing the NEG as a possible win for consumers and the environment, I now see it as an almost certain disaster for prices, reliability and emissions.

The basic information is this.

  • Peak demand is 35GW and sis lowly falling about 0-0.5GW per year
  • Currently installed dispatchable power is 41 GW.
  • Demand response capacity is reaching 3-4GW over next five years,
  • Grid based and behind the meter battery installations is growing at exponential rates leading to 1.5-2GW of capacity by 2022

So even with the retirement of Liddell and availability of only 60 per cent from batteries:

Peak demand is likely to be 35GW minus *0.3(demand fall) and minus 3.0GW (demand response) = 31GW. Available despatchable capacity will be 39GW +0.6*1.7(storage) =40GW. i.e. a reserve margin of 29 per cent.

With tracking solar already being installed in northern and western parts of the grid, and new generation low wind turbines also being installed, the minimum generation from wind and solar on still hot afternoons is likely to exceed 2-3GW even if no new plants are built after the current crop is completed.

That will add further to the reserve margin.

Thus – from a reliability perspective – no new investment is needed.

As for emissions, Australians are installing about 1GW of rooftop solar per year. As grid prices continue to rise in the short to medium term and solar becomes cheaper and more and more acceptable, that number will rise.

The new installations will displace roughly  TWh by 2022. Further closures of industry and the continued roll-out of energy efficient appliances and lighting will see demand on the NEM fall by about another 6-10TWh by 2022, thus annual demand will be around 175TWh.

Wind will supply around 15-20TWh, gas around 35Twh, hydro 20Twh and utility solar PV and solar thermal around 7-10Twh, leaving coal with about 90-95TWh.

Two years ago, coal supplied around 130TWh so one could make the case that the dirtiest coal stations will be the ones that lose market share, hence it will be possible to reach a “near enough” 25-30 er cent reduction in emissions with declining demand and the commissioning of currently progressing renewables projects.

Thus, the weak emissions guarantee with no further progress beyond 2030 will be met by system decay alone.

There is also the incorrect statement floating about that 33 per cent reduction in electricity emissions will meet our Paris commitments.

As the country is doing little about industrial and commercial energy efficiency, building performance or road transport our emissions from these sources will continue to rise so even with an optimistic 33 per cent reduction in electricity emissions, total emissions will fall between 5 and 10 per cent at best.

Once this analysis is well understood, investment in new generation will virtually cease, in fact many current projects – even those with financing in place will be cancelled. Already the stock market has reduced the value future pipeline of for Tilt Renewables and Infigen to virtually zero.

Thus the market power of the incumbents will increase and prices will continue to rise because they can, and reliability may slowly decline as 25 per cent failure rates among coal and gas plants becomes the norm.

And we will dramatically fail to meet our emissions targets. Even the coal industry will still be unhappy because falling demand will mean falling sales and no new investment

Further, once industrial users get over their initial euphoria about “certainty” they will realise that there will be no realistic improvement in prices or reliability so some who have been hanging on in the hope of progress will close up shop.

The subsidies to Alcoa will become untenable, Tomago will almost certainly go and my forecasts of 2022 demand will prove hopelessly optimistic

In a week I have gone from initial optimism to almost total despair.

Peter Farley is an engineer.  

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  • Matt S

    Interesting take. What do you think the answer is Peter? Is there anything politically tenable available? And even if we could be led by science and engineering, rather than politics, what do you reckon the solution would be?

    • technerdx6000

      My solution would be to build out enough renewable plants and storage to offset the aging coal power stations. In fact, due to the reduced demand, the new plants don’t even need to completely offset the old generation MW for MW.

  • yahoo2

    My personal opinion is that we are completely misreading where the problem is here.

    The consumer is NOT private households, by my back of the envelope reckoning that households consumption is only 20% of all electricity consumed and the roll-out of rooftop solar is eating into that every day.
    The problem is the electricity we use indirectly, the other 80% (industry and business) that is the vulnerable consumer, the business with no locked in supply forced to take what price they can get and jack their price or go broke.

    Spell it out in those terms “business will pay the price for bad legislation”. I think the focus needs to be shifted away from households and squarely onto the implications for small business.

    • Mike Westerman

      According to Productivity Commission report just out, residential is about 27%, the same as manufacturing. Utilities and mining are about the same too, at about 12% each, and these two are the real beneficiaries of ultra high reliability. Small business is a minor user. Utilities will pass on increased costs, while manufacturing and mining will become less competitive (altho’ many are scrambling to put in solar asap).

      • yahoo2

        I guess my figures are out because of my South Australian bias. I have worked in engineering, technology, and agriculture here and it all looks like small business to me. I have never thought of manufacturing as its own category.

    • RobertO

      Hi Yahoo2, better to refer to Sellers (Generators, including Gentailers) and Buyers (anybody whom buys their product electricity). Peter thinks that Alcoa and Tomago will go, at current pricing they will, but they may be able to find a way to move to someplace that has excess RE at very cheap pricing such as WA if they install lots of Wind RE (over and above what they need just for current buyers, not the new batch of buyers called Transport)

      • Mike Westerman

        Sarawak has a spare 1GW of hydro and is building another 1.2GW specifically aimed at Al producers, with pricing around 5c/kWh. Across the border, Indonesia is building 7GW around the projected output from their bauxite mine and alumina refinery, at similar prices. Australia will struggle to compete with these – it’s best shot is shipping bauxite from the Cape across to Papua Indonesia.

        • RobertO

          Hi Mike Westerman, We will never compete on our current plans for this country (aside from the fact that we do not have one). So how do we compete, ship the raw material out, but that does not help work in Australia as most mining is going to be automated. We need to find ideas that help Australians some how.

          Try this one (Off the top of my head based on the Adani Plan of $2.00 from every ton of Coal on the new railway going to the Caymane Island Tax Haven and note that even if others use the railway they still pay (eg a farmer shipping grain pays $2.00 per ton).

          Value Added Service Fee (VASF) $2.00 for every ton of material shipped (by any means) from Australian Shores when exported and the product is rated according to the Value Added Service.
          Food all types exempt
          Minerials (all Types applied with exceptions )
          Any thing that involes process that VAS in Australia exempt
          (If its a finished product using Australian Labour to value add to a product but not just a process to extract a minerial
          Examples and more would need to be defined
          Coal Pay, Copper Ore Pay, but Copper Building wire exempt
          Iron Ore Pay, Made into Cast iron Ingots, Pay but made into Steel building beams exempt, Bauxite Ore pay, Aluminum Window Frames exempt, Paper in Rolls pay, but A4 Copy paper exempt, Wool pay, but woollen clothing or Batts exempt
          Make it Fed Gov Revenue Neutral (replace Exempt with credit VASF and pay excess to Clean Energy Finance Corporation to invest in Australian Re Projects to push energy prices downwards.
          Other people may have better ideas, we need to find them!

  • Jodie Green

    The impact on new generation by predictably declining demand points to the timeliness of implementing electrification across the economy – transport, heating … – an argument that has been very counterintuitive to some.

  • Hettie

    A telling argument to hasten transition to electric vehicles of all sizes.
    Because the NEG was produced by 3 individuals heavily committed to coal, who were specifically directed to ignore climate issues, it is inevitable that it favours coal in defiance of the logics of economics, common sense, comsumer costs,or anything but the interests of the coal lobby and the big coal generators.
    It’s a total farce. A very smelly brainfart.

    • Joe

      Young Hettie you are hot on the case, as always, yes. The moment that two Tongues Turnbull dithered on The CET we all knew a political fix was coming down…the transmission line. And byJove we got it with The ESB and their 8 pager talking points media release that Two Tongues Turnbull proudly trumpets as ‘energy policy’…with NO detail. The dude has no shame to go with no energy policy.

      • Hettie

        It has already damaged the renewables market.

    • Matt S

      John Pierce and his AEMC is consistent at that. David Leitch has spelled out their many failings over the years. It amazes me there’s no reflection on historical performance before we rely on their opinion for future reform.

  • Ron Horgan

    Peter I guess that what you now understand is just what the regulation is intended to do;
    protect the coal burning assets at all costs.When is the next election?

  • technerdx6000

    If the NEG becomes Australia’s policy, household solar is going to skyrocket due to soaring prices. If they try to limit grid connected solar, only the poor will be left on the grid because solar + storage + a generator will be much cheaper. I’m already considering cutting the cord.

    • neroden

      At some point, even the poor will go off the grid — they will get loans to go off the grid, and pay the loans back through the savings in electricity costs.

  • Mark Roest

    My take on: “if we could be led by science and engineering, rather than politics, what do you reckon the solution would be?” The science would be to contract with university coalition to provide ample data for predicting demand in detail, with high granularity, so people can arrange for a switch to lowest possible consumption level when the sun doesn’t shine for days, or make other arrangements. Meanwhile, take advantage of (and demand) the battery and solar prices that are coming within 2 to 3 years to maximize off-grid reliability, and also use smart electricity management and passive solar design to make homes and businesses energy-efficient, net-zero or even having a surplus over the year that includes powering the vehicles associated with the buildings.
    Convert vehicles to solar, with capacity for vehicle-to-building and vehicle-to-smart-microgrid as priority, with vehicle-to-grid getting the crumbs. With this self-use approach (comparable to Germany), the people who invest will reap the benefits, and more people will invest, and / or demand financial support to get in on the benefits too.
    To hasten the day, invest in companies that are pursuing this future.
    Ideally, the stock valuation of the incumbent fossil fuel companies will collapse as investors see the writing on the wall, and as their cost of funds rises as a result, and the people get educated and see how they’ve not only been ripped off, but been bamboozled, they will force the incumbents into bankruptcy, and reallocate their physical and financial assets to building a sustainable energy economy, including meeting the energy needs of people living on low incomes, and recycle the big turbine generators’ materials for other uses.

  • RobertO

    Hi Peter, Just putting the 5 Min rule in place will help stop the gaming of the market (Wholesale), the the lawyer (if he is one) has been defending the gamers (Coal, Gas and Hydro) and I believe that a reasonable timeframe would be 6 months (12 months at the most). I see only 20% year on year price rises for the next four untill we start getting new suppliers (as opposed to just new supply) into the system. If we get regulations that protect the current gentailers, ie Solar Tax, or Front Door Fee or even a ripple control disconnect of household/business solar via the inverter the states will revolt because there is no advantages for the states and many disadvantages. Even just on employment the NEG will slow the numbers down as some projects in the pipeline will slow, pause or even completely stop, I saw a suggestion that the NEG was like the CDO in the finanical markets, really good value (How much money can I make out of thei contract) for the sellers (Coal, Gas, and Hydro) but worthless for the buyers (all customers whom will pay for this worthless paper).
    How much investment in Australia will stop $50 Million?
    Electricity is the fastest way to reduce our carbon foot print, Transport will follow and then the other sectors need to help.
    There is no plan, no 5 to 10 year plan where the Fed Gov wants us to go, no 10 to 15 year plan on where the Fed Gov thinks we might be going.

  • Farmer Dave

    Peter, thank you very much for the article. Please do not give in to your totally understandable despair. None of us can afford to weaken in our demands for a fast and equitable phase-out of fossil fuels. Every bit of progress we can make will improve the planet we leave to our children and grandchildren. We also need to hold today’s decision makers to account.

  • Flint Family At Gmail

    Thanks Peter for an interesting article (if a little gloomy). Your logic reads well to me – the only thing I don’t get is that none of the factors you list seem to be a direct result of the so-called NEG (apart from maybe its lack of emissions ambition). In other words your prognosis applies with or without the NEG.

  • John Goss

    I think you are right Peter that because of all the changes coming down the pipeline it will be really easy for the retailers to meet the reliability part of the NEG. And with only a 26% emissions reduction under this government it will also be really easy to meet the emissions reduction part of the NEG. But that also means that a Labor Government can ramp up the emissions reduction component at very little cost to anyone. And when that happens the incentives for large scale solar and wind will be restored. Its true that a NEG if this Government continues will result in less large scale solar and wind investment after 2020, but small scale solar and storage will continue to boom, so there wouldn’t be a significant problem. And I’m hoping this Government won’t continue, so there won’t be a problem at all, even under a NEG architecture.

  • neroden

    The problem lies in the “grid”, controlled by corrupt thieves connected to the LNP.

    Any smart industrial operator will install their OWN local solar and batteries (and perhaps wind) and go off the grid. We already know that several are doing so. Same applies to residences and commercial locations.

    Off-grid and microgrid is the future of Australia. Those who get there first have a competitive advantage.