It’s time for a smarter RET that recognises flexible generation

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The RET should be extended, but also adapted to encourage “flexible” capacity that recognises and amplifies the varying time value of generated renewable electricity.

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So here we are in an election campaign. The opposition is advocating a 50% renewable electricity target by 2030 – as are several states – and the current federal government continues to suggest negative consequences from too much renewable generation.

It seems Labor will go the election with the actual detail of how 50% might be achieved saved for later. That is probably good as what we don’t need is rushed detail that fails to carefully anticipate future perverse outcomes.

There is talk of re-using ideas from the NEG (National Energy Guarantee) and maybe quite a bit could be achieved with that. It would be truly wonderful if we ended up with something effective and bipartisan.

Fundamentally, what we need is a policy that can take us all the way to 100% zero emissions electricity generation and do it with the orderly transition that the Finkel review so obviously pointed out is desirable.

I would like to add my voice to consideration of adapting and extending the Renewable Energy Target (RET). Specifically, adapting it to become a ‘flexible’ or ‘dispatchable’ RET that recognizes and amplifies the varying time value of generated renewable electricity.

Up to now, Australia has been pursuing a Renewable Energy Target (RET) with considerable success. Originally introduced by a Liberal government and subsequently supported by both sides, the RET will see around 20% of annual generation being provided by renewable energy sources when the current target is reached in 2020.

It rewards generators with tradeable certificates for actual megawatt hours generated and obligates electricity retailers to buy certificates in proportion to their wholesale energy purchases and the current year’s target.

So far the technology winners in the RET market have been wind and rooftop photovoltaics (PV), with utility scale PV systems now increasingly significant. Ie it is variable renewable energy (VRE) that is cheapest when all MWhs are treated as equal.

The RET as it stands becomes perverse as the share of generation grows beyond small levels, because it rewards generation irrespective of the instantaneous demand or wholesale spot price of electricity.

It partially shields the renewable generators from the main supply and demand market signals and so favours the cheapest VRE over the more costly, but also more valuable (per MWh) dispatchable renewable generators.

The Finkel review clearly identifies the issues on reliability and security associated with over-encouragement of VRE without considering the consequences for the whole electrical system.

In layman’s terms any renewable electricity future needs to ensure a minimum level of dispatchable generation is also adopted. We should move forward building new RE systems in a balanced mix.

A RET that rewards in proportion to market need

The RET could be modified for a growing target post 2020 but with certificates allocated to renewable generation with a multiplier applied that is proportional to the wholesale pool price at the time of generation. For example an approach could be:

Certificates earned = C (Generation in half hour NEM settlement period) (Pool price in NEM settlement period) / (Average pool price in previous month)

Where C is a factor close to 1, to be determined annually or so, that sets the relative incentive for generation at high pool price times vs low and so can adjust the actual total levels of RE generation to match the target for each year.

Using this methodology, the number of certificates earned would be higher than actual generation at times when the pool prices was high and the number earned would be lower than actual generation when the price was low. They would be zero if the pool price drops to zero (or even below zero), thus not incentivising further generation capacity at such times.

This incentive would encourage renewable generators to generate in high price periods and thus have the further effect of increasing competition in the overall electricity market and lowering the pool price at such times.

This is not just about dispatchable generators, it would also have the effect of preferentially encouraging such things as west facing or tracking PV panels compared to static north facing ones if higher wholesale prices are prevailing in the afternoon.

There are also key windfarm developments underway that have identified wind resources that follow a daily pattern that better matches demand even though total generation may not be as high as others. If these offer better correlation with higher price periods they would also receive preferential support.

The RET has in the past had a mechanism of multipliers, where small solar systems in particular were for a time awarded certificates that were a multiple of their actual deemed generation. The administrative methods for this clearly exist. Even though the ‘currency’ of the market is MWh, the volume of certificates earned does not have to equal actual generation.

Some dispatchable RE is good for everyone

Some significant fraction of generating capacity in the system needs to be dispatchable in nature. To date, the added VRE in the system has been balanced largely by existing dispatchable fossil fuel generation (ie coal and gas).

However around 15GWe of coal plants are expected to retire by 2040.

Examples of all the new technologies that are likely to substantially impact the electricity system over the next 20 years already exist. What is unknown is the mix that will emerge and what an ideal least cost mix should be.

There are passionate advocates telling us that their particular favoured technologies must be the answer, however to paraphrase an old saying; for every complex problem there is a simple answer that’s probably wrong.

Australia should adjust market signals to maximise the probability of achieving a least cost zero emissions mix without trying to pick winners. We can say with strong confidence, that given the right signals, industry will step up and deliver, with different groups pursing combinations that make most sense to them.

Last year ITP lead a team that carried out a comprehensive study for the Australian Renewable Energy Agency (ARENA) on a “Comparison of Dispatchable Renewable Electricity Options” (https://arena.gov.au/assets/2018/10/Comparison-Of-Dispatchable-Renewable-Electricity-Options-ITP-et-al-for-ARENA-2018.pdf).

Among other things this study finds:

    • There are multiple affordable options for firm dispatchable renewable electricity generation over all timescales at around one and a half to two times the cost of variable renewable energy (VRE).

The dispatchable renewable options of; PV or wind driven batteries, pumped hydro energy storage (PHES) or hydrogen; concentrating solar thermal with thermal storage; bioenergy and geothermal all have a role to play. There is no single winner, and at each timescale there are multiple options that fall within a general least-cost band.

The likely least-cost future electricity system solution is a mix of both variable and dispatchable renewable technologies, durations and locations with an average cost of electricity considerably lower than dispatchable generation alone.

The cost of electricity from dispatchable renewable generation is comparable with estimates for new build gas while avoiding the associated fuel and carbon price risks.

Readily achievable compound growth rates of around 25% per year in dispatchable renewables could keep pace with coal retirements and enable an orderly transition to a large share of renewable energy.

We do not need to talk about the dispatchable options as a difficult expense to be minimised. The question is not what is the minimum we need, but rather how much is economically optimal. And it is not just what is most cost effective in any given year, but that combination that maximises our chance of reaching the overall zero emissions goal in a least cost manner.

Early progress with dispatchable renewables offers the benefits of building industry capability and community confidence that will bring us smoothly to the end goal.

Keith Lovegrove is the Managing Director of ITP Thermal (www.itpthermal.com), one of the companies in the ITP Energised Group.

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