Concerns over 5-minute rule as ESB warns of perils of wind and solar

Fears that the pace of Australia’s clean energy transition could be throttled by the proposed National Energy Guarantee have deepened, with concerns that the switch to the 5-minute rule could be further delayed and warnings by the Energy Security Board about the dangers of high levels of wind and solar.

The change in the settlement period on energy markets from 30 minutes to 5 minutes is considered crucial to encourage new technologies such as battery storage, and to limit the gaming of the market by fossil fuel generators, lower prices, and allow for a high penetration of renewables.

Its introduction was fiercely resisted by the incumbent coal and gas generators – and delayed until 2021 at the earliest be the Australian Energy Market Commission, the market rule maker – and there are now concerns it may be further delayed because of the proposed introduction of the NEG.

Observers have noted the contrast between the speed with which regulators moved on the 5-minute rule, which will take a minimum of six years from proposal to implementation, and that of the NEG, the broad outline of which was put together in a matter of days, and which regulators want to introduce to the markets in less than two years.

Both changes are considered fundamental, and concerns have been raised over why a change that would likely favour incumbents is being fast-tracked, while another rule change that would be to their disadvantage is being put in the slow lane because of the potential “disruption” to markets.

And fears the NEG is likely to be structured to favour incumbent technologies, such as coal and gas, have been reinforced by the contents of a briefing to stakeholders by the ESB on Friday, and separate comments by ESB chair Dr Kerry Schott.

In an interview with The Conversation’s Michelle Grattan, Schott lamented the lack of investment in coal, gas and pumped hydro in recent years and described the situation as “dire,” and likely to be made worse as more coal plants retire over the coming decade.

“You just cannot have an energy system that is reliant on huge amounts of wind and solar without backup that can come on when required,” Schott said.

“It comes down to physics. If you have got intermittent power – you must have power you can dispatch. You cannot have 100 per cent provided by intermittent renewables.

“We really must have sufficient reliable and dispatchable capacity to replace the coal fleet. If this (the NEG) is not the solution, I don’t know what is.”

Many would argue that the answer to having “reliable and dispatchable” capacity does not come from having new coal or gas plants – particularly if the country is serious about emissions reductions – and that while pumped hydro is expected to play a critical role, much of the existing capacity is rarely used.

The ESB’s initial modeling indicates a share of renewable energy of between 28 and 36 per cent by 2030, which analysts such as Bloomberg New Energy Finance and others have pointed out represents little or no new capacity after 2020, when the share is expected to be around 27-28 per cent.

But material presented by the ESB to a briefing at AEMC’s Sydney offices on Friday reflects an even lower share than that unveiled by prime minister Malcolm Turnbull and energy minister Josh Frydenberg two weeks ago.

The bottom range of the proposed share of total renewables is lowered from 28 per cent to 27 per cent by 2030, while the anticipated share of wind and solar in 2030 is now put at just 18-20 per cent, rather than 18-24 per cent described in the original NEG modelling.

The continued use of modelling outcomes that represent a lower share of renewable generation in 2030 than will exist in 2020 is seen as a further sign that the new policy – of which there are few details beyond the broad concept of a “reliability” obligation and an “emissions” obligation – will be designed in a way that limits new wind and solar because, while it may not result in new coal and gas, it could serve to protect existing assets.

Questions have also been raised about the assumed price benefits, and by instructions from the Coalition – revealed in RenewEconomy last week and confirmed later in the week – that the ESB can only model a single low emissions reduction target for 2030, and no further reductions afterwards.

The one hope is that the mechanism can be designed in a way that can provide flexibility and allow targets to be ramped up in future – but analysts such as BNEF suggest it may not be scaleable.

Modelling to be completed before the next COAG energy council meeting on November 24 is to be conducted by Frontier Economics – a consultancy that, like the AEMC, has argued strongly against renewable energy targets in the past.

The result of the modeling will be crucial.

A result that suggests that the level of renewable energy will be virtually stopped in its tracks – as the ESB’s initial modelling suggests, and its latest presentation confirms – will almost certainly be rejected by the states, most of whom have their own ambitious targets, albeit subject to the results of state elections over the next year.

At the same time, any modeling that shows an increase in renewables – matching or even going beyond the 42 per cent suggested by the Finkel Review for its now discarded Clean Energy Target – will cause problems in the government’s conservative base, which wants renewable energy stopped in its tracks.

The states – angry about being initially excluded from the ESB plans, and now questioning its independence – have signaled that one bright light might be the ability to pursue their own targets.

The briefing on Friday suggested this would be the case. But again, the devil will be in the detail, and there is no indication of what level of “disaptachable” generation would be required.

In contrast to Dr Schott’s rather bleak assessment of the role of wind and solar, and the ESB’s description of 18-20 per cent variable renewables “that can cause reliability concerns”, the CSIRO has suggested that any share of intermittent renewables of up to 30 per cent should be considered “trivial.”

“When we do modelling where we increase the renewable penetration above around 40 per cent of the energy delivered that starts to force out some of that existing dispatchable generation, and then we find that you need to add other technologies to support renewables,” CSIRO researcher Paul Graham told the Senate earlier this year.

The CSIRO assessment has been endorsed by the network operators, in a major joint study that urged the country to just get on with the transition to a decarbonised grid. Transgrid, which Dr Schott chaired until August, says that a 100 per cent renewable grid is both feasible and affordable.

The instruction by the Turnbull government to effectively ignore the long-term Paris climate goals – the ESB has been told to assume that once the modest 26 per cent reduction in emissions from the electricity sector is met by 2030, then no further reductions are to be assumed – is also alarming.

It is difficult to imagine how the ESB could possibly construct an effective policy on emissions reduction and ignore the need to reduce them over the long term and in greater quantity.

The ESB document circulated to stakeholders confirmed that the only modeling variables in their report will be demand, retirements, gas prices, coal prices, technology costs and “other key inputs”. But not emissions, or environment.

And the modelling will be done on a 30-minute settlement, not the 5-minute settlement that the market is supposedly preparing for.

Questions were raised at the Friday briefing about the impact of the new “obligations” on the 5-minute rule, and whether this would cause a further delay because of the major changes that would be brought to the market. Attendees say the response was not clear.

Frontier, like the AEMC, has also been a fierce critic of state-based policies. Its boss, Danny Price, earlier this year said that the proliferation of state-based targets could cause Australia to have a “third world” grid.

Frontier has been a favoured modeller for the AEMC, although a report released late last year relied on some absurd costings for large-scale renewables; and two years earlier, Frontier teamed up with the AEMC to argue for the reduction of the RET (they won).

Price helped design Direct Action, and an Energy Security Target for South Australia, but that was dumped because it was seen as an “industrial relic” that would favour gas over battery storage, and would cause electricity prices to rise, not fall.

But he also helped the design of a pricing mechanism that would allow the solar tower and molten salt storage plant to be built in Port Augusta and deliver power to the state government at around $75/MWh.

The presentation from the ESB also confirmed its goal was to reduce volatility on wholesale markets and increase bilateral contracts – “contracting is encouraged”, it says.

This, say most market and energy analysts, could simply reinforce the power of the incumbents retailers and make it extremely difficult for new players to enter the market, or for renewable energy projects to proceed without a contract from a big retailer, or a major corporate customer.

Overall, market analysts are unanimous in saying that the result of the policy would be to push prices up, rather than down, because there will be less renewables in the system.

Analysts such as Deutsche Bank have also begun to downgrade the outlook of major renewable energy companies and their portfolios of undeveloped wind and solar projects, saying there is little likelihood these could get developed under the policy.

Others have suggested that the policy could actually stop projects that have already progressed to financial close from going ahead, due to the uncertainty around the markets.

Roger Price of Windlab, which is looking to build a 1200MW hybrid wind, solar and battery storage facility in Queensland, said on Friday the industry was disappointed by the apparent choice of a “4th best” policy that may not even survive beyond the next election.

He also spoke of the advantages – both in economic and in engineering terms – of siting storage closer to demand, rather than with generation. You can hear our interview with Price in our Energy Insiders podcast here, and below.

(Note: RenewEconomy has sought an interview with Schott on several occasions, but our requests have been declined).