Dumb and dumber energy choices in the wild West

The Western Australia energy system can proudly lay claim to some notable firsts for Australia. In 1986, it opened the nation’s first commercial wind energy plant near Esperance. Just last month, the state government formally opened the nation’s first utility-scale solar farm near Geraldton.

Now it may have a new but less admired “first” – a power plant that is built, but doesn’t operate, and is paid for by a state-sponsored tariff imposed on consumers. The Perth-based company Merredin Energy is in the throes of completing an 82MW peaking plant near the wheat-belt town of the same name. It is being built at an estimated cost of $95 million and proposes to use expensive and highly polluting diesel fuel, but it may never be switched on.

And if it isn’t, its owners might not care – under WA’s capacity payments system, they’ll likely make enough money simply for being there – around $15 million in its first year. In fact, they might prefer if the plant wasn’t used. Some analysts suggest it would be difficult to run the diesel plant at a profit – even during critical peak periods – given the sky-high cost of diesel and the fact that WA power prices rarely jump to more than $300/MWh.

A couple of hundred kilometers away, WA state-owned generator Verve Energy is about to take a leap into the past with the reopening of the highly polluting Muja A and B coal-fired generators near Collie. Is being criticized as a knee-jerk reaction to the disruption to gas supplies at Varanus in 2008. The company says it is an interim measure that is cheaper – and less long lasting – than building a new coal-fired power station. But critics say it is a another example of overkill – again encouraged by the state’s capacity market system.

“We have a long history of strange decisions,” says Peter Newman, professor of sustainability at Curtin University, citing the decision to power the Kwinana power plant with oil in the early 1970s, just as the global oil crisis erupted, and Premier Sir Charles Court’s impulsive decision to declare later that decade that the state would soon be powered by 25 nuclear plants.

In the end, the state government went for gas. Excited by the prospect of tapping into its huge natural gas resources, the government signed a large take-it-or-leave-it supply contract based on bullish demand forecasts. Then it found itself with excess supplies that it decided to pass on to households. But it had an immediate adverse impact, and effectively brought another pioneering effort, the introduction of solar hot water systems to the mass market, to an end.

The company SolarHart began in WA in the late 1950s when a bunch of plumbers, frustrated with the expensive and dirty coal fired generation based in the south west of the state, decided  that heating water with the sun was a lot more efficient, and cheaper than with coal.

By the late 1970s nearly one third of new houses were installed with solar hot water heaters. That figure plunged to less than 1 per cent once the government started to flog subsidized gas. Now that gas supplies have reached international parity price, that is a millstone around the government’s neck – one apparently, that the Newman government is keen to repeat in Queensland.

“We don’t have a good record about making sensible choices about power,” Newman notes. “In those days you could not get anything on renewables going. It was virtually impossible.”

But even when renewable energy development has occurred, there is an air of tokenism. After the construction of the first Esperance wind farm, little was built in following decades. And on the same day that Energy Minister Peter Collier travelled to Geraldton to open the 10MW Greenough River solar farm built by First Solar, GE and Verve Energy, he and premier Colin Barnett said they wanted the federal government to get rid of the renewable energy target – a move that would surely mean that no more solar plants of that type would be built for the foreseeable future.

The irony is that WA is home to the best wind and solar resources. Across town from the Merredin diesel peaking plant is the 200MW Collgar wind farm, the largest in the country when it was built. When it opened last year, it stunned even its operators by producing energy at a capacity factor of nearly 50 per cent. (Just for comparison, black coal generators in Queensland operated at a capacity factor of 55 per cent in the last year). Collgar is believed to be still operating in the mid to high 40s, and much of the  wind comes during the day.

Newman says WA should now return to wind and especially solar, and use its natural resources to advantage. (Even the Saudis have figured this out, reasoning that its cheaper to build solar and then reallocate subsidised fossil fuels for the more lucrative international market).

Numerous solar farms, including an expansion of Greenough River, are also on the drawing board, particularly in the mid-west region near Geraldton. Some of these could be brought into production once the transmission line to the area is upgraded. Developers think it could be the first solar plants to be built in the country without the need for any support beyond renewable energy certificates, simply because they make more financial sense, and deliver a more predictable financial outcome, than gas-fired generation.

Back at the Merr

edin peaking plant, there are questions about whether a capacity market is really the answer to the energy industry’s problems. This was introduced in WA because of its “peaky” market, and is designed to encourage more peaking plants to be produced rather than baseload, so that they can respond to rapid changes in demand caused by hot weather and other extreme events.

The Merredin Energy web site makes mention of the Collgar wind farm, saying that wind needs backup from peaking generators on a 60:100 basis.( Ie. 60MW of backup for every 100MW of installed renewable capacity). But the experience of South Australia shows that no new peak load capacity has been needed to support wind – now accounting for between 22 and 30 per cent of the state’s generation.

And further down in Merredin’s explanation, it concedes that its plant’s purpose is really only for use for around 100 hours a year  “mainly during periods of extremely hot weather in the Perth metropolitan area.” But as explained above, many doubt it will be used at all and estimate that WA customers are paying around $200 million a year in payments for capacity (this and other plants) that is not needed.

While capacity markets exist only in WA in Australia, the decisions being made in that state are important to the eastern seaboard, because as renewable energy continues to be deployed, forcing down the price of wholesale energy because its fuel cost is zero, attention will one day need to turn to how enough fossil fuel capacity can be encouraged to stay on line to fill the gaps.

This is what is occurring now in Germany, where it is admitted by the biggest generators that the future of coal and gas generators, and the government has implemented a “please don’t go anywhere until we sort out the market” hiatus to its plans. The challenge is how to design a market that supports a system whose focus is no longer on meeting the peaks. Capacity markets are cited as one solution, but research suggests that they will not be flexible enough to deal with the new “paradigm” of increased wind and solar, and the push to decarbonise energy system.

What is now emerging is a proposed system called a “capabilities” markets, that reflects not just a plant’s ability to respond, but also it’s environmental and other credentials. It’s a complex system, that breaks down the market requirements, but its proponents, such as Regulatory Assistance Project, say it will help energy market regulators design wholesale markets to ensure supply security without undermining competitive markets, without locking in all the wrong resources, without creating excessive windfall profits for existing generators, and without prohibitively high renewables integration costs. But more on that another day.