Transcript: Energy Insiders interview with ESB chair Kerry Schott

This is a lightly edited transcript of the Giles Parkinson and David Leitch interview with Energy Security Board chair Kerry Scott: You can listen to the interview here on the Energy Insiders podcast.

Giles Parkinson  00:00

Kerry Schott, thanks very much for joining the Energy Insiders podcast.

Kerry Schott  00:05

A pleasure.

Giles Parkinson  00:08

I’ve got two quick questions before I hand over to David. The first one is that you’ve said in the media release that it’s really important to get this new design or market rules right. Given that the pace of transition is accelerating, as underlined quite clearly by the paper, and given that the competing interests of customers, and utilities, and incumbents, and new players in the market, and state governments, and of course, the federal government, how hard has it been?

Kerry Schott  00:43

Look, I think we’re making progress. It’s true that the state of transition is fast and getting faster, I think the fact that we’ve got this far is testament that some things  are working. I think we’ve now got so many renewables in that it’s extremely important to get the market designed in a way that can integrate both small and large scale renewables properly.

Giles Parkinson  01:17

One of the big criticisms of the National Electricity Market created just over 20 years ago, and which this is designed to replace, was that it did not include an environmental element. I mean, there was one and then suddenly disappeared before the rules were actually put into place. Has the environmental factor, and I guess this sort of focuses on climate change, been factored into your considerations here? Because I’m guessing if it was, then the focus might be on how to get the coal generators out as quickly as possible. If it’s not, then it might be focused on how to keep them in as long as possible.

Kerry Schott  01:58

We’re certainly not focused on the latter. But while there is just criticism for us not having a national agenda and some sort of transition path mapped out to an emissions target, people in the NEM are well aware of the fact that each State has got exactly that. And most States have target of net zero by 2050. And some are a little more aggressive than others in both in terms of timing, and in terms of the speed of getting there. But every state and territory in the NEM has such a target. And that is taken into account in the work that we do. It’s government policy.

David Leitch  02:56

So Kerry, I might ask then, from that, one of the things that is discussed is the possibility of moving from a State based support scheme, underwriting scheme, for new generation of whatever kind to some kind of more coordinated or NEMwide approach. It seems to me that the State’s having gone their own way, it will be difficult to rope them all back into the corral, so to speak. I just wondered how the efforts on that were progressing.

Kerry Schott  03:32

I think the main, look, there’s many facets to this, but one of the principal issues is making sure that we get the changes in the transmission systems that we need, and the transmission system in the integrated system plan, and the rollout of that across the NEM is a nationwide NEM optimized system. And it’s very important that that gets done to enable the large scale renewables in particular, coming in through the renewable energy zones set out in the ISP. So it’s coordination between the States around that hasn’t been too bad. And it could, of course, be better. But what we allude to, in our comment about the various different government policies is that governments need to pay attention to, in particular, what their neighbors are doing because they do impact the NEM but also their near neighbors, particularly through the transmission links.

David Leitch  04:55

Yes, look, transmission is an interesting topic and we could talk on that I’m sure for 20 minutes alone, I’ll just make an observation though, you know, Energy Connect still hasn’t got its final investment decision done no matter how much preliminary work is done. And so it’s not clear to me that the transmission is proceeding really at the required speed. But I wanted to move on for that, because it seems to me that amongst the proposals that we’re looking at that are going to create the most interest in the larger generation side of thing,s in front of the meter if I can put it that way, is going to be these, both the process for managing coal exits that but at the same time, the possibility of a physical reserve reliability obligation, which looks somewhat like a capacity market, and might incentivize coal generators to actually stay in the system, I guess. How would you talk about that?

Kerry Schott  05:57

I’m very happy to talk about that, but just before we leave Energy Connect, I think, I feel confident that it will proceed. And it’s just simply at the moment in the regulatory approval stage. The issue there is actually one of market design, it’s being approved under the old arrangements, technically, and the benefits that you get from something like Energy Connect in today’s market are not being taken into account. And I’ve got, it’s quite clear, it’s going to be a very busy line because of all renewables going in along it. And it will also add to the resilience and system strength of South Australia. So these things are not part of the old assessment processes. So that needs to be taken into account I think.

On the issue that you raised about renewables coming in and coal generation, the report makes the point that with so much large scale renewables coming into the system, and indeed small scale, the coal plants are under, in coal fired plants, are under increasing pressure. And not only are they getting old and less reliable, and near the end of their technical lives, they’re also under increasing commercial pressure. And I was just wanting to make a point that everyone needs to really be clear that the commercial viability of coal fired generation is under immense threat. And these plants are not going to stay around for any number of reasons, but the main one is that they are going to be losing money.

And the simple fact of the matter is that coal fired generators have to run all the time, you can’t turn them off and on. And that means that for many hours of the day, they are burning coal, and not making power that can be dispatched. It’s too expensive compared to wind and solar, and pumped hydro indeed, and batteries. And until everything that’s cheaper in front of them in the dispatch line up is dispatched, they will not be dispatched and they will not earn money. And this on its own means that coal generation is going to retire from the NEM. So those people that are worried about coal generators retiring, should stop worrying about it. It is simply a matter of time. And I’ve said before, the coal fired generation is going broke. And it will continue to do that as more renewables come in.

David Leitch  09:15

I accept that completely. We do our own price forecasting here at ITK and our own half hourly modeling and I agree with every word you say. But nevertheless, you are proposing, or the ESB is contemplating a physical, renewable energy certificate, which to me looks something like a capacity credit. Perhaps you could just talk about, do you expect that to incentivize new generation, even as the old firming generation is going away?

Kerry Schott  09:46

I expect it to basically allow more renewables in the system because they will have firm backup and the renewables coming in will get constrained off at some point. And by AEMO, I’ll talk about what point that might be. But we do have to have enough firm to not only meet reliability, but also to make sure that systems strength and frequency is, and the physics of the system, can be maintained in a stable state. So what we’re intending to do is to first of all consult with everybody for six weeks. There is no underlying policy within the ESB to do one thing or another. We’ve put a physical RRO out there for discussion. And the way that that would work, if it’s preceded with, and I say if, and while some people seem to think it’s okay, there’s a lot of other people that don’t.

So we’ll hear everybody’s views on that and think about them. If you’ve got a firm, there’ll be certificates issued for the megawatts that you’ve got, and the megawatt availability that you’ve got, and it will mean that retailers and large users will be asked under that obligation to cover their load with those certificates. But then beside that certificate market, so you will get some payments for having firm if, if it’s in short supply, and I must say only if it’s in short supply. So if you’ve got a lot of firm a place like Tassie, or Queensland where there’s plenty of it, then your certificates will not be worth very much. But if you are somewhere like South Australia, or in due course, New South Wales and Victoria, then if you own pumped hydro or a gas plant, you would have a little bit of extra value added to it.

So it really is designed to make sure that there is some dispatchable and firm power around that’s needed. And that’s the way that it’s envisaged. It would work. Whether or not it actually works that way to bring new firm dispatchable into the system is arguable I think, because contract markets, you know, goes out about three years at most. So having demand out there  for some firm for three years may or may not be enough to get more firm in order and in fact, may or may not be enough to keep the firm we have got in. So I think there’s a lot of consideration to be to be undertaken with this.

David Leitch  13:19

I agree with that. And I’m going to hand back to Giles. But I’ve got two quick questions. One relates to exactly this firm. There’s a time duration to firms. So the studies I do and read suggests that, you know, there’s a daily firm, which happens, you know, when the sun goes down for want of a better phrase. And there’s also a winter firm, if I can put it that way, which might go for a week or two? Would they be the same certificate?

Kerry Schott  13:49

No, the way, AEMO would have the job of working out what people’s certificates, what certificates you would be granted as a plant. So if you are a battery for large scale battery, you would get one certificate per megawatt, say. But you would only have those certificates for say four hours if that’s your running time. If you’re a gas plant, you would have them for longer. And if you were a wind or solar plant, you would have them for whatever percentage of time you tend to run.

So, you know if you’re a wind farm who’s got a capacity of 65% a year then you’d anticipate that you get certificates that were 65% of your capacity say. That’s the sort of way it would work and it’s a bit like the French capacity market. which also has certificates behind it. It’s not a centralized case to the market, because the the retailers and the power users are all bidding in the market for their certificates so you should get the least cost outcome for consumers. And if if you don’t need the firm, then your certificates are going to be as I mentioned, like if you’re Tasmania, or you’ve got hydro everywhere, and the worth of a certificate of firm is zero.

David Leitch  15:37

Yep, I must say I’ve looked at so many firming market capacity markets, but I haven’t looked at the French one but I will. And before I hand back to Giles, I just wanted to ask the other sort of really big theme is obviously the integration of the behind the meter sector within front of the meter. And the associated theme, if I can put it that way, of moving from centralized spinning reserve, spinning control of the system, inertia driven, physical inertia to an inverter based system of one kind or another. Do you think the proposals that you have here will take us along that journey in the right way?

Kerry Schott  16:23

Look, I think it’s early days on that, David, we’ve got to get the technical standards, right. And we’ve got to make sure that we’ve got some more efficient way of managing minimum demand rather than simply curtailing people’s solar power, basically. And we are on a journey with this. And I think over the course of the next 12 months or so considerable progress will be made. But we do need to do it. Not necessarily orderly, but stage by stage. And in the paper, we have a go at just talking about what some of the more immediate priority areas might be. But this is a very fast moving area. And I think the road forward will emerge as we, as you know, once you’re down at a little bit, you’ll get more clarity about what to do next.

Giles Parkinson  17:37

It’s fascinating to see how the sort of the conversation around particularly distributed energy has changed over the last couple of years from being a potential problem to being, as outlined in this report, a notable asset, and even though not everyone may have rooftop solar batteries or electric vehicles that the assumption is that everyone will benefit if it’s actually sort of done properly and all the standards are met, and the right things are in place. Can I just slip back to the coal capacity or with this sort of, this physical RRO, because this is going to be one of the focuses, I think of discussion on this. You’ve talked about how that might work. What are the options then? Because a lot of people favor what they would describe as a flexibility market. And they argue that this might be more forward looking in terms of the technologies that may be on their way, or are already here and growing, such as battery storage and things like that. Do  you have any thoughts on that?

Kerry Schott  18:28

Well, the physical RRO does actually work like a ramping market, because of the way that the certificates are managed. We were just talking about, you know, batteries which have a limited time life before they get recharged again. And the way they would be rated is different. But they’re also extraordinarily important for ramping because gives everybody four hours to be able to, you know, get a gas plant up and running or get their pumped hydro switched on. And it’s that, it’s that that’s very important. And we see it working alongside probably what we’ve called an operating reserve, which is really aimed at making sure that we’ve got sufficient frequency and inertia. So AEMO would be able to know what it’s got in reserve that it could reach out for if it’s needed. So when it’s scheduling it needs to know what it’s actually got. At that shedule point.

Giles Parkinson  19:50

It sounds like you’re reasonably attached to this idea, are you….

Kerry Schott  19:54

What idea is that?

Giles Parkinson  19:55

The physical one?

Kerry Schott  19:57

No, I’m not particularly. I made it clear early on, this is a consultation paper. And there are arguments both for and against the RRO. I think, on the against side, I think it’s transaction costs are quite high for small retailers and just the setting up as a certificate market is administratively expensive and all of the compliance that needs to be put in place. And you need to be clear that the costs of that exceed, weLL, are less than the benefits you’re going to get from the firm. And I think, if you don’t have an RRO then the alternative is not an operating reserve of the kind we’re just talking about, it is actually more of a jurisdictions intervening in the market as they’re currently doing, to get new plants built or to get plants to stay in that you know, that the system or you think that the system needs. So it’s really quite direct intervention in the market, through subsidy or underwriting or something. And we see that occurring now.

Giles Parkinson  21:29

I’m going to let David, have another couple of questions, I’m going to come back with two quick ones at the end, and then we’ll be wrapped up, David?

David Leitch  21:33

So this is the sort of central planning argument. One of the things I think about in firming is that it’s really the job of the system, not a retailer, to ensure there’s enough dispatchable capacity in the system. And, you know, if every retailer is responsible for having enough firm capacity for its own load, there may be too much firm capacity in the overall system, because of the kind of portfolio sort of benefits. Let me ask a better question. How much planning do we need? And a sort of related question, the market at the moment is,  or the system is designed around separating market facing businesses from perceived monopolies. But it seems to me that networks with so much distributed electricity have such a big coordinating role in the system, well potentially, that maybe it’s not appropriate to think of them as just separate from everything else. And a regulated monopoly.

Kerry Schott  22:46

There were a few things in what you’ve just said, I’m not sure where you’d want me to start. I think the role of networks is changing, particularly of distribution networks are changing rapidly. And they certainly have a role in, I can see them having batteries within their network, and the regulator is starting to change approaches to allow that to happen. They’re going to basically become, like service companies and being regulated for services not as asset owners really.

So I think the role of networks as all of them, distribution networks, in particular, as all of them will tell you, is about to change drastically, to make sure that we’ve got the rooftop solar integrated as well as we can, and we value it and use it as best we can, for everybody. Just in terms of retailers that don’t have a role in providing firm capacity. They’re just the other side of the market if they’ve got a demand for firm capacity at particular times, so and indeed at all times if they’re, at all times they’re, you know, they’re buying power, and they want it to be there. So they’re really just the other side. That just the other side of the equation.

Giles Parkinson  24:36

Maybe just a couple of final questions, then Kerry. Your own views of the market in the last couple of years. How to dramatically have they changed in the sense of your understanding of the clean energy transition and what it might be actually be able to present and offer and both consumers and the grid as a whole? I suspect it’s sort of evolved quite quickly?

Kerry Schott  24:58

I think the markets evolved quite quickly. I don’t think my view on the market changed that much, although I am amazed at how quickly the renewables have come in. And the impact that they’re having right throughout the market is really profound. And we see it in the fall in emissions, and we see it in the fall in wholesale prices. But we also see it in the need for changes to transmission and distribution networks. And I think we will, and we will see it in the way that retail is conducted. And the role of aggregators and what can be done digitally within households and businesses to basically shape loads and be far more efficient than we ever dreamed I think.

Giles Parkinson  25:56

Are you’re looking forward to having sort of communication controls on your air conditioning and things like that? Do you have set up solar and storage at your house? I have no idea whether you have a separate house or in an apartment or whatever.

Kerry Schott  26:09

Yes, but look, what people I think don’t realize is that the appliances that they now buy, actually come retrofitted with that stuff. So it used to be the case, of course, that water heaters were put on to run in the middle of the night when it was, when power was at its cheapest. But they are now set up to run in the middle of the day when power is cheapest. So there’s just been a complete upending of things.

Giles Parkinson  26:42

Absolutely. And one final question. This reports been sitting on Angus Taylor’s desk for the last month, have you had any feedback from the Energy Minister?

Kerry Schott  26:52

I have. To be fair, it’s been sitting on all ministers desks. We sent it off to the Secretariat to distribute at the end of March, as we were asked to do. It’s a pretty dense and heavy report. And ministers agreed to release it for consultation this week. So we’ll now have six weeks of consultation on it. And I think it’s important that everybody has a look at the four major parts of the report because the system is not just changing in one facet, it’s changing in, you know, a whole number of ways, all of which are quite major. So, where minister Taylor is at with this report, he’s supportive of the ESB work. He’s supportive of the six week consultation. He’s very keen on making sure that we get the integrated system plan in place and the Commonwealth Government has been putting serious money on the table to assist with the development of that transmission. And we’ll see where the rest of it goes

David Leitch  28:22

Kerry. I’d like to say thanks, as I’m sure Giles will. But I really appreciate you taking this opportunity to talk about a very big piece of work that’s going to drive a lot of people’s future to our audience of stakeholders who I’m sure will be following it very closely.

Kerry Schott  28:40

Good. Thank you. Thanks.