This is no time for energy ministers to panic over reliability standards

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An unlikely alliance of the federal minister and his Victoria counter-part pushes for Australia’s reliability standard to be tightened further. It makes no sense.

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A widespread loss of power is no small matter. Electricity underpins just about every element of our lives. Politicians are therefore quite right to worry about whether we have enough power station capacity to keep the lights on.

But sometimes worry can transform into panic. And when we’re panicked, we don’t think things through all that well.

Back in 2004, both Queensland and NSW suffered from significant network outages leading to blackouts. Both governments panicked and rushed in tighter standards for the reliability of the poles and wires that transport electricity.

The end result was that NSW and QLD network businesses went on a multi-billion dollar spending spree, almost doubling their network assets within 10 years, even though electricity demand barely grew. Electricity prices skyrocketed in response.

Australia’s state and federal energy ministers will be meet this Friday with the subject of tightening a system-wide reliability standard at the top of the agenda.

Victoria’s Energy Minister Lily D’Ambrosio and Federal Minister Angus Taylor are busy slinging insults at each other over whether more renewable energy is part of the problem or the solution to both high power prices and reliability. Yet underneath this public mud-slinging both of them have said they want to tighten the reliability standard.

So what is this reliability standard?

It is different to the one NSW and Queensland Governments changed that was solely to do with poles and wires. Instead, this standard is about ensuring we have sufficient power station capacity available to meet demand.

As it is currently defined it aims to ensure that the amount of power electricity consumers do without is on average no greater than 0.002% of overall annual demand.

Is this a weak and inadequate standard?

Well, it is equivalent to the average household doing without power for just ten and half minutes per year.

To put this into even better context, if we provided for incentives for households to actively and voluntarily reduce their demand, rather than just cutting off their supply, then to avoid this level of outages households would only need to switch off their air conditioners on a hot day for a total of three minutes.

This may be hard to reconcile with front page reports in the media screaming about imminent and disastrous blackouts with large numbers of households affected. Unfortunately, many in the media can be allergic to spreadsheets and often rely on the prose within reports or a verbal briefing.

And the prose within the Australian Energy Market Operator’s (AEMO) Statement of Opportunities could potentially be interpreted as alarming, which is rather unfortunate. But if you concentrate on the hard numbers within the report detailing the most likely outcome, it is far less concerning.

Below I’ve charted the average amount of minutes a household would go without power in each state across each year of AEMO’s forecasts.  The worst outcome is thirteen and half minutes for a Victorian household in this financial year and plummets after that.

NSW’s outage rate increases after the closure of Liddell but still remains below 10 minutes out until the very last year of 2028-29.  Plus keep in mind that we could roll-out a program of incentives for voluntary reduction in air conditioner demand that would eliminate these outage risks, at little inconvenience and discomfort for households while reducing power prices.

Interestingly, the outage risk for Victorians plummets after this financial year, even though there’s no major new coal, gas or hydro power stations under construction in the state. That’s partly because, contrary to the claims of Minister Taylor, extra wind and solar does make a contribution to enhancing reliability, even though it isn’t dispatchable.

These statistics don’t rule out the possibility that a more severe outage could take place, but the weight of probabilities suggest we are far from a major reliability crisis.

And the thing is that we already have a very structured and considered approach to evaluating whether the reliability settings for the electricity market are adequate via a group of experts, logically called the Reliability Panel. This is composed of representatives from electricity consumers as well as suppliers and regulatory bodies.

The panel’s assessment of reliability levels is informed by research that seeks to understand consumers’ desire for greater reliability relative to their willingness to pay. Their most recent survey indicated no substantial change in consumers’ preferences.

Just last year the Reliability Panel commissioned Ernst & Young to undertake an economic evaluation of future reliability levels. Ernst & Young’s analysis forecast that the level of unmet electricity demand over the next few years, “is very small in all regions across the Period” and well within the reliability standard.

It also attributed part of the credit to extra supply of power from renewable energy saying that the low levels of unmet demand forecast were,

“somewhat due to market development in response to the Large Scale Renewable Energy Target and state based energy policy developments, very little growth in operational energy demand due to increasing uptake of behind-the-meter solar PV and domestic storage and low incentive for early retirement of existing generation based on operating cost data applied in the modelling”

In light of this economic analysis the Reliability Panel decided that changes to reliability settings were not necessary and observed that the “NEM performed well in terms of reliability”.

So why are ministers so keen to upgrade the reliability standard?

Back in October 2015 the main lobby group for incumbent electricity companies initiated a public relations campaign to generate fear about state and federal Labor Party policies to expand renewable energy. The campaign sought to paint South Australia as an “accidental experiment” in how too much renewable energy would drive up prices and cause blackouts.

The Energy Supply Council ultimately distanced themselves from this campaign once they realised that whipping up fears of blackouts was playing with fire, but by then it was too late. Many Liberal and National Party MPs at both a federal and state level, as well as a number of media commentators, wholeheartedly imbibed and then regurgitated the campaign’s messages in 2016.

The subsequent system black event in South Australia then turbo-charged the issue. This was even though the cause and duration of the SA blackout was a complex cocktail of several cascading and rare events, most of which are now resolved (with the notable exception of occasional tornadoes).

The naked politicisation of power system reliability has been comically obvious at times. For example, the Federal National Party seems to want us to believe that power reliability in Victoria and South Australia is at catastrophic levels (at least until the Liberals were elected in SA).

Yet strangely their proposed cure is to build a coal-fired power station at the very opposite end of the grid in Northern Queensland. This just co-incidentally happens to be nearby to the only seats the National Party is at any risk of losing to the Labor Party.

Queensland is also a state which AEMO finds has so much generating capacity already in place that it will have zero unmet electricity demand over the next decade.

Yet you can imagine the pressure Victoria’s Energy Minister D’Ambrosio must be under.  Things can go badly wrong and they did last summer, with parts of Victoria undergoing load shedding due to outages across not just Loy Yang A but also Yallourn power stations.

Angus Taylor rarely lets an opportunity slip to promote the idea that Victoria’s power system is in danger of blackouts, and the Victorian government’s emission reduction policies are to blame.

D’Ambrosio only has to look at the onslaught of criticism the prior South Australian Weatherill Government sustained as a result of blackouts, to see what awaits if Victoria was to suffer a significant black-out.

A report from Ernst & Young and the Reliability Panel that explains the probability of such an event occurring is low, won’t provide much of an effective shield to such a political onslaught.

So we now have two combatting sides in a battle to show who is more concerned and keen to do something about reliability, even though we don’t appear to have that big a problem with reliability.

What we do have a problem with however, is how we might ensure that the next withdrawal of a coal power plant isn’t as disruptive as the last one. This is the elephant in the room that the COAG meeting should really be discussing.

Tightening the reliability standard and forcing an obligation on electricity retailers to buy hedging contracts is not the best way to deal with this challenge. Unfortunately, many of Taylor’s Federal Party colleagues think we need more coal plants not less, so such a discussion is off the table.

Yet, as both the Grattan Institute and Frontier Economics have identified, the requirement for owners of generators to give three years advance notice of plant closure has no teeth and provides illusory protection for consumers. It doesn’t help that when AGL did give everyone plenty of notice it would close an old coal plant, it suffered vociferous and sustained attack from the government.

The Reliability Standard is not too weak and shouldn’t be tightened. But it would really help if Angus Taylor could acknowledge the reality that his State Liberal Party colleagues Matthew Kean, Dan van Holst Pellekaan and Guy Barnett have recognised.

This is the need to plan the system and structure energy policy on the basis that Australia’s electricity supply steadily moves to zero emissions by no later than 2050.

Tristan Edis is Director – Analysis and Advisory at Green Energy Markets. Green Energy Markets assists clients to make informed investment, trading and policy decisions regarding energy and carbon abatement.

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