SA power plan: Why so much gas, when storage is so cheap?

Of all the great initiatives that came out of South Australia’s energy plan on Tuesday, one thing doesn’t appear to make sense: why spend so much money on a peaking gas generator when storage options are clearly cheaper?

The big question was over these two sums: The $360 million in government monies set aside for a 250MW gas plant that might rarely be switched on, and the $20 million that treasurer Tom Koutsantonis says could be enough to get a 100MW battery storage facility built by the private sector before summer.

Surely, analysts and pundits say, spending more on battery storage is going to give a bigger and more immediate bang for the buck than the gas generator. And they won’t become a redundant asset as the gas peaker threatens to be in as little as five years time.

In theory, those sums suggest, South Australia could cause some 1.8GW of battery storage to be built for the same taxpayer funds as a gas generator. Of course, it is much, much more complex than that.

The reality is that the $150 million set aside in the new Renewable Technology Fund is probably going to support more battery storage than can be sustained under current market rules. (Indeed, some of it is earmarked for solar thermal, pumped hydro or even hydrogen).

Battery storage – in current market rules – will trade only on energy market volatility and the arbitrage between high and low prices (fill it up with cheap excess wind and solar and sell it at high, peak demand prices).

The more storage that is added, then the less volatile the market will become, and the less money that can be made.

So storage will probably not be fully economic and widespread until the overall market rules are changed and battery storage technologies can access its multiple value streams.

This will come from rule changes such as dumping the 30 minute settlement in favour of a 5 minute settlement, and the introduction of a new ancillary service market, and maybe for grid augmentation.

Then there will be nothing stopping it, although longer-dated storage such as solar thermal, pumped hydro or even hydrogen will also be needed at various points in the transition to 100 per cent renewable energy.

But it is the volatility that the South Australia government wants to kill as soon as it can. The state has always had a volatile electricity market, courtesy of its stringy network, daytime manufacturing and high air con use.

It has actually moderated some of those issues with the introduction of wind and solar, but it remains victim to just a few powerful players who can pretty much set the price in the market.

It is estimated that South Australia is paying around $400 million more than it should, thanks to the jump in wholesale prices. Separate estimates put the extra annual cost of ancillary services at more than $100 million alone. This has jumped in South Australia (see below) and also in other coal states such as Queensland and NSW.

With no competition, the incumbent generators can name their price, just as the oligopoly in Queensland are now doing. (As David Leitch points out, the extra costs now amount to around $11 billion across the nation, mostly due to that lack of competition).

Morgan Stanley analysts believe the combination of South Australia’s proposed gas plant and battery storage could reduce the number of price spikes in South Australia by around half.

In 2015, they say, there were 96 thirty-minute intervals where prices exceeded $300/MWh, and in 2016 there were 402, even though average demand had fallen to 1.7GW from 1.95GW.

Morgan Stanley’s Rob Koh says the new entrants could “theoretically” meet about half the current high price and demand events and bring average prices down by around one-quarter to 2016 levels of around $90/MWh.

That suggests a quick payback for the government-owned gas plant, even if it is never switched on.

Energy minister Koutsantonis says the gas plant won’t be a market player, but it doesn’t have to be. Its mere presence could have a moderating effect on wholesale prices.

It also acts as a form of insurance, given that the biggest generator in the state, Torrens Island, is – in the words of premier Jay Weatherill – an old “clunker”, and the three generators near Port Lincoln are, suggested one politician at the recent Senate hearings – “a piece of crap.”

That means the government is looking to kill two market failures – the lack of competition, and the threat that one of the private generators simply won’t switch on their plant when needed, as occurred on February 8, or others retire from age – with two stones (gas and storage).

On those numbers above, the South Australian government probably feels that the $360 million invested in a new gas plant is justified, even if the plant itself never makes a profit.

But the chances are that the government won’t have to pay anything like the $360 million it is quoting for the new gas generator.

As various commentators on this site and elsewhere have suggested – why build a new gas plant when there is apparently a gas shortage. The new royalty arrangements and exploration incentives aren’t likely to help the  “shortage” anytime soon. Deutsche Bank analysts say it will have a “negligible impact” in the short-term.

And why spend $360 million on a new plant when one can probably be rented at a fraction of the price. You could even ship one big one, or several small ones, in on a barge, as the government appears determined to do for next summer in any case.

The chances are that this emergency measure will only be needed for a few years, until storage is well entrenched and the ransom note written by the incumbents has been shredded by long-awaited rule changes.

The gas market will take years to fix, and even then it will be outrun by new technologies and the combination of wind, solar and storage. No one believes for a moment that gas prices will fall, but wind, solar and storage costs most certainly will.

It is telling that gas major Santos has teamed up with Ross Garnaut’s Zen Energy to build solar plants and storage. Santos says it will help free up more gas for use elsewhere.

What does this tell us? One of the biggest gas producers in the country says the cheapest way to free up gas is not to drill for more, but to build a solar plant.

In the same way that leading zinc producer Sun Metals has responded to soaring wholesale electricity prices in Queensland by deciding to build its own 116MW solar plant.

As one energy market CEO told me on Tuesday, building baseload – as the Coalition would want us to do in Queensland, with a fantasy product called “clean coal” – is the “worst idea in the world.”

And it’s important to point out that South Australia’s government is not building a baseload generator. Its peaking gas plant is there only as an emergency back-up and as a tactical player to keep price hikes in check. It is not the so-called “renewable problem” it is responding to, but a market failure.

In the very near future, nearly all generation in South Australia will be “dispatchable” – either with built-in storage such as solar tower and molten salt storage, or with a battery array accompanying a wind or solar farm.

The SA energy security target, although lacking in details, is designed to ensure that. And it is also designed, by mandating local dispatchable generation, that the big players don’t just pack up and leave, and close down facilities, because the gas pricing party is over.

One important factor though, and one that will surely play a role in the upcoming government battery storage tender, is the need for new competitors.

There is little point awarding a battery storage contract to one of the existing players, however much they would like it. AGL and Origin already control 80 per cent of the local gas generation, and that is equivalent to 80 per cent of the dispatchable market.

As Leitch has pointed out in his analysis of the Queensland market, the Wivenhoe pumped storage facility is rarely used, because it would dampen the profits of its owners, which also own coal and gas generation.

This is the result of the nation’s failure to provide a truly inter-connected market. That leaves outlying states like South Australia and Queensland at the mercy of the powerful incumbents. It’s not so much as a Brexit equivalent, as the AFR described it today, as a Balkanisation.

That’s the market failure that South Australia is responding to.  SA Premier Jay Weatherill has already hit out at the generator companies for putting profits before people. That won’t change if its initiatives simply entrench that power.