AEMO looks forward. Where does AEMC look?

Whoever was responsible for picking Audrey Zibelman to be CEO of the Australian Energy Market Operator  has probably done more to improve the outlook for decarbonised electricity supply at an efficient price in Australia than just about anyone else.

Leadership matters.

The AEMO started 2017 facing black marks for its role in the 2016 South Australian blackout and for seeming to have no idea about what to do to improve the electricity reliability and price outlook.

The AEMO at that time seemed to walk hand in hand with the Australian Energy Market Commission, which sets the rules of the market that AEMO operates.

This was despite the off and sometimes on the record complaints about the perception that the AEMC acted as a wet blanket on reform. The delayed introduction of the five minute settlement is an obvious example.

Just a year on, the AEMO goes into 2018 having worked hard to prepare the NEM for the coming Summer and with the first foundations of “the plan” becoming visible.

It seems there is a ton of talent at both the AEMO and AEMC and as usual it just takes change at the top to unleash that talent and let it do its thing.

For the AEMO it’s resulted in a far more dynamic and progressive approach. I.e. Let’s build some new transmission in case  one of the few remaining coal generators has an expensive breakdown and decides to close early.

This seems like a simple idea but its entirely new thinking for the AEMO.

The NEG is a weak plan and there demonstrably more efficient alternatives

It’s unclear who was responsible for the NEG. I find it hard to believe that that the ESB (Energy Security Board) with such a small amount of time could have come up with the idea. I think it’s much more likely to be a “creature”  devised by the AEMC.

‘The NEG is, so far, not very popular in the electricity industry for reasons we have been through before.

It looks like a system designed around out-of-date ideas, full of difficulties in the detail, and enhancing the power of the existing gentailers. It essentially ignored most of the work done in the Finkel Review.

However, without more detail not much can really be said. Maybe it will turn out to be a really good plan. Maybe.

Despite the AEMC’s reservations some degree of centralized planning is essential for transmission. So bad luck AEMC. We submit that given the constraints to be forced onto retailers via the NEG there is essentially “hidden” central planning  for generation.

So we further submit that the generation investment would be more efficiently (lower cost to consumers) produced if that planning was more explicit and formalized and some of the investment risk was transferred either to the States or the Commonwealth via a more formal system of reverse auctions.

This does not mean the Crown owns the generation, although of course with Snowy that is what’s happening. Reverse auctions simply mean the Crown carries financial risk over the life of the contract. Ownership, management, and operation remain with the developer.

The reverse auctions would have annually updated 3-5 year investment plans that could be broken down into variable renewable energy (VRE) and dispatchable generation auctions. The State guarantees have been demonstrated to result in highly  competitive auctions producing low prices.

That’s been demonstrated in Australia and in numerous overseas jurisdictions.

Why is Australia, and we specifically mean the ESB and the AEMC, ignoring this large weight of market evidence in favour of a scheme (the NEG) that hasn’t been adopted anywhere in the world?

The answer seems to be that one person at the AEMC believes its appropriate to ignore the rest of the world and come up with a scheme based around an ideology that is inappropriate for the current market structure and transition requirements.

At long, long last an Integrated System Plan

The  AEMO latest report, the  Integrated System Plan foundation [ISP] is forward looking. This starts with a tight timetable, something we’ve come to expect  from the AEMO in recent times.

The ISP is to be delivered by June requiring consulatation comments to be complete in January.

It also takes a more realistic view of decarbonisation than what’s contemplated in the NEG.

It contemplates more large coal fired generators closing in the next 12-15 years, something we think is statistically and intuitively extremely likely, but which seems to not be contemplated by the ESB and its modelers at all.

The ISP is focused on two topics of importance.

(i) What makes successful Renewable Energy Zones [REZ].

I mean, what a great question.

(ii) Transmission development options.

It will be no surprise to readers that transmission development and REZ are dear to my heart. In this note we focus on the transmission question.

We covered the Texas experience  We need transmission to expand renewable options  and also Transgrid’s Aurecon NSW study study in previous articles.

We think that more transmission will open up REZs, which Transgrid called the  “coalmines of  the future”.

The AEMO is focusing on these two issues because it is asking the existential question that all of us can surely agree is the right question:

“what is the best way to achieve the policy objective of affordable, reliable, secure power and meeting emission targets”

A credible 2030 target for once

By the way the emission target is not the 28% reduction but what’s required for 2C ie at least a 50% reduction in stationary energy emissions by 2030 and more beyond that.

Thanks Audrey and thanks to the AEMO for setting up a plan with a science theory and evidence based target that most of us can commit to.

RIT test the likely stumbling block, thanks AEMC

It’s no secret to say that most interstate transmission investment proposals have not been able to pass the RIT test and as a result not much transmission has been built in recent years.

No matter how good the AEMO’s plan is it can still get held up and bogged down satisfying RIT tests that are, in our view, kind of irrelevant or at least not framed the right way.

The RIT test basically requires the proponent to demonstrate that consumers in both States will be better off as a result of the investment.

To our no doubt naive way of thinking it ignores the simple reality that much of the transmission today is in the wrong place. I.e. It’s designed to take electricity from coal field based generators to load centers.

The transmission we need now is designed to take power from REZ to load centers and its likely that network flows will change direction more often.

In addition it seems intuitively obvious that we need a strong transmission backbone around which we can base an increasingly distributed electricity grid.

So no matter what transmission plan is adopted, no matter what REZ priorities are adopted, no matter that the electricity system of the future depends on it, each project still has to satisfy the RIT test. Can’t have enough bureaucracy.

Can’t have enough reports. Can’t have enough delays in the system. Why on earth can’t we just copy ERCOT in TX and get it done?

Adding up the transmission projects

We urge interested parties to read the actual document. Nevertheless if you give an analyst some numbers they will try to make them add up to a story. The following table shows the various projects listed in the document and some indication of miniumum/maximum capacities added and costs.

The South Australia to the East projects included a proposed link from South Australia to QLD, that’s the $2.5 bn option. It would open up and enormous amount of renewable resource.

Even at the upper end the cost is about 1.5% extra per MWh

An upper end initial estimate of $10 bn is a lot of money and almost certainly not all of these projects will be done. Even so, if we say the average return required is 7% or make it 8.5% to allow for opex, that’s effectively $850 m per year to fully upgrade the system.

Spread over demand of about 190 TWh that’s about $4.50 MWh, about 1.5% of a household delivered electricity costs and around 2.8% of big business electricity delivered cost.

An example of the planning decisions that need to be made can be seen from the following graph.

Strategic reserve is another example of where the AEMC is increasingly getting in the way

The AEMO wants to develop a “strategic reserve” of 1000 MW. Never mind what form that takes the question is the mechanism to pay for it. Under the current rules its not clear there is one.

Fast frequency market – another area the AEMC could hurry up

Batteries can do a great job of frequency management. This has become very obvious following AES’s roll out in Ireland. AES built a 10 MW battery there which has worked well enough that capacity is to be expanded to 100 MW.

A fantastic relatively easy to read discussion of why batteries are going to be an important part of frequency management in every high renewables grid in the world can be found at batteries renewables and gas. Make sure you read this over Xmas.

Point here is that there is no easy market for batteries to progress into, because we don’t seem to be in any hurry to develop a fast frequency market even though there is all this concern about inertia and reliability.

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.