Why fossil fuel industry needs South Australia "experiment" to fail | RenewEconomy

Why fossil fuel industry needs South Australia “experiment” to fail

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The sharp spike in SA electricity prices this month certainly put the wind up renewable energy critics. But the really scary thing for the fossil fuel industry is that the price spikes don’t happen often enough. The media appears to have forgotten they used to occur every second day.

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The sharp spike in electricity prices in South Australia earlier this month certainly put the wind up some large energy users, and some long-time critics of renewable energy. But the really scary thing for the fossil fuel industry is that these price spikes don’t happen often enough any more.

You only have to go back a few years to find that such price spikes were so common they used to happen once every two days in the National Electricity Market, particularly in summer months. South Australia – because it was at the end of the grid and relied heavily on gas – was the worst afflicted. (See graph below on spikes above $5,000/MWh).

aer price spikes above 5,000:mwh

In fact, these price spikes used to be an important part of the business model for coal and gas generators. Spikes in demand, such as from air conditioners, would require more and more gas generation to be used to make sure the lights stayed on.

These spikes were so prevalent that about one-quarter of the annual revenue for the fossil fuel generators came from these demand and price spikes, because even the “cheap” coal generators used to get paid up to $14,000/MWh on these occasions. Their business models, and for some of them their ability to service debt repayments, banked on it.

(The networks also cashed in, using the surge in demand, and forecasts for a further increase in demand – that later proved to be completely wrong – as justification for a $45 billion spend on grid upgrades).

The proliferation of wind and solar has pretty much put an end to that particular lurk. Rooftop solar PV – there is now 5GW of it on home and business rooftops around the country – took out the demand and price peaks, making them smaller and pushing them later in the day.

Wind energy pulled down average prices too, including at night time when the industry had shifted most of the electric hot water service to underpin the market price for coal generators, with little else to power at that time of night. (Some of those hot water services are now being moved to the middle of the day).

The influx of renewable energy such as wind and solar is just the first stage of what is now universally described as the inevitable clean energy transition, replacing a business model based around large, mostly dirty, centralised generators to a new smarter, cleaner, more localised and faster responding grid.

The next stage will come with storage – be it built into the network, in homes and businesses, or attached to large-scale plants such as solar towers (with molten salt storage) or solar PV and wind farms with battery storage.

This will flatten out the process even further, removing much of the fuel price volatility and ushering in a new way of delivering electricity. And then more and more homes and businesses will use solar and storage to manage much, if not all, of their energy use. Half of all energy demand will be sourced locally, rather than from a central plant.

South Australia is at the forefront of this transition in Australia, and in some respects the world. Success here – and remember even the Australian Energy Market Operator says 100 per cent renewable energy is perfectly feasible – will have a cascading impact on the energy sector.

Little wonder, then, that the fossil fuel industry is pissed off. They can see the transition coming, and while some are making efforts to adapt, few can see how they can protect their traditional revenue base in a system that will likely be dominated by new players, new technologies and a new “energy democracy”.

Best, they reason, to slow it down. Protecting their existing revenue flows is the most obvious business strategy while they try to wrap their minds around what the future holds for them.

For that reason, the recent price spikes in South Australia and the rest of the country could not have happened at a more fortuitous time.

The fossil fuel industry and their supporters in the Coalition have taken advantage of a compliant, ignorant and/or lazy media to demonise wind and solar, and seek to stop the rollout of more wind farms in South Australia, while also discouraging other states from following the path of the South Australian government.

They have also been pushing for increased subsidies to protect the revenues of their gas plants, and fighting against rule changes that could accelerate the uptake of the competition, even if it does mean lower prices for consumers.

The real causes of the recent electricity price spikes, according to the Australian Energy Regulator, the South Australian government and independent analysts, have not been wind and solar at all, but the huge jumps in gas prices to record highs, cold weather in the eastern states, and supply constraints in the network.

The main interconnector between Victoria and South Australia has been constrained, gas prices in South Australia have been at record highs, double the price elsewhere and up to six times last year’s average, and as this occurred a large amounts of fossil fuel capacity was also not available.

Indeed, eight of the biggest coal plants in the country have had units offline recently, because of maintenance and repair at various times. In the industry, this is known as “outage season”. In the case of Loy Yang A and Loy Yang B, capacity was lost, sometimes at short notice, because of unexpected fuel supply and quality issues.

On top of this, the most efficient gas plant in South Australian was withdrawn from service just weeks before the Northern power station closed, and other gas plants were withdrawn at various times because either they were “not economic to run”, or because they “tripped” due to faults in their equipment.

The combined capacity of the unavailable fossil fuels was twice that of the total capacity of the wind farms. The AER, in the reports it has done to date, has been clear that the unexpected outages at coal and gas-fired power stations, along with the surging gas prices, have been responsible for the biggest spikes in power prices.

The South Australian government called it a “perfect storm”. Indeed, if someone was trying to manufacture a crisis (and we are not suggesting for a moment that anyone was) they couldn’t have organised it any better, failing having the actual lights go out (which they didn’t).

The critics, however,  were relentless, and used the media to demonise South Australia’s “electricity experiment” as pure folly and a recipe for financial disaster.

The ideologues in the Murdoch press need little encouragement, but they got it anyway from the conservative Coalition, the fossil fuel lobby, and other vested interests that would prefer to protect the status quo of a heavily centralised grid controlled by just a few powerful players.

But far from being a sign of failure, the events of the past few weeks simply highlight the limits to fossil fuel generation, the danger of relying on variable cost fuels, and explains exactly why the South Australian government is pushing so hard to break its reliance on expensive gas and shake the market dominance of a few powerful energy incumbents.

South Australia energy minister Tom Koutsantonis says the national energy market is a train-wreck, not because of its growing reliance on renewables, but because it has refused to keep pace with new technologies, and takes no account of environmental outcomes.

He wants to break the market dominance, by reframing market rules, adding new interconnections, and introducing yet more renewable energy technologies.

Crescent dunes tonopah

He may get the chance to do so in the next few weeks, when he announces the results of the government’s low emissions tender. The hope is that the government will pick a solar tower and storage project in Port Augusta, but they may also choose a short-term bandaid and contract with the mothballed Pelican Point gas generator, if for no other reason than to bring more competition into the market in the short term. A second round of bidding may then offer opportunity for solar and storage, which is likely to take at least two years to be built.

Storage combined with renewable energy certainly signals the end game for fossil fuels. The gas lobby is seeking to lock in “capacity payments” to guarantee revenues into the future. But gas generators, even peaking plants, are slow compared to battery storage, and they are more expensive.

Storage also has the advantage of being able to deliver savings on network spending. Many want to introduce it to the grid now, but the rules are tilted against them. Proposed changes to the rules, such as the 5 minute settlement period, would encourage more battery storage and smart software and lower prices.

Even the regulators and market operators concede that the current structure results in “perverse” outcomes, but the incumbents are fighting the changes all the same.

Worse than that, the incumbents want the ambitious renewable energy targets of South Australia, and those of Victoria, Queensland and elsewhere to be cut short, and brought in line with the less ambitious national target.

And they appear to have strong support in the ruling federal Coalition, which has ridiculed state Labor targets of 50 per cent renewable energy or more as a “diabolical” idea. There is new talk that the generators will push for the current federal target to be further weakened.

But the market needs certainty, some sort of long-term vision that takes into account climate goals, as well as the reality that most of Australia’s fossil fuel fleet needs replacing, and that the obvious and cheapest substitute is solar and wind energy, and various forms of storage.

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  1. Brian Tehan 4 years ago

    This is a story that Four Corners should be all over. Why aren’t they?

    • Chris Jones 4 years ago

      Or at least Media Watch… The Australian’s reporting has been rather zealous of late.

      • Alastair Leith 4 years ago

        MediaWatch don’t even pull Tony Jones and Virginia Trioli into line when they parrot FF propaganda. And yes, I have let them know at the time…

    • lin 4 years ago

      Checked who is running the ABC recently?

  2. Chris Fraser 4 years ago

    Of course they’re pissed. Otherwise they wouldn’t be trying to engineer the “perfect shitstorm” of stirring up their political lapdogs, and subsequently feeding dodgy figures to a non fact-checking media.

  3. Don McMillan 4 years ago

    Is the current problems in SA the renewables fault – No. Simple blame sells papers and is not helpful as these issues are very complex. How to solve the short term issues I do not have an answer but for the long-term the renewable industry should consider taking small engineering steps rather than giant leaps. If the industry abandons the immediate goal of replacing fossil fuels outright with a more moderate goal of creating a reliable energy source this would silence the critics. Unfortunately this would require a Joint Venture or purchase of gas assets. This is not a bad idea as once they have ironed out all the engineering issues merging renewables and natural gas they can slowly introduce battery technology without the threat of market disruption.
    “Slow and steady wins the race”

    • lin 4 years ago

      We have had the FF industries slowing renewables progress for several decades. We now have 3 years of record breaking temperatures in a row, record low arctic ice, 25 percent of the GBR is dead, kelp dying in SW WA and Tassie, ocean acidification, unprecedented collapse in north pacific marine ecosystems, unprecedented wildfires on multiple continents, droughts, floods, accelerating sea level rise etc. Climate change is happening, and accelerating. The slower our transition to zero emissions, the worse our situation will be in the long run. Slow and steady may well result in the next major extinction event being humans.

      • Malcolm M 4 years ago

        When Cape Grim started its measurements in 1976, the CO2 level was 329 ppm. Now it is 401 ppm. That’s a massive change within the lifetime of many of those attempting to down-play its effects in the mainstream media.

      • Don McMillan 4 years ago

        Correct so there is not time to lose. Endeavouring to replace fossil fuels rather than focusing on reducing emissions we end up with the mess we are experiencing today. The big industries in SA end up having two choices, they move or revert back to coal. The former is just shifting the deck chairs, the latter is taking a step back. Also making electricity expensive can entrench poverty on the poor creating another set of unintended consequences. The problem is non-linear so we need good engineering practices to reach our goals.

        • lin 4 years ago

          Using government regulation to prevent the current operators rorting power prices and screwing consumers would be a good start. Also creating policy settings to encourage a coordinated approach, so storage and renewables are developed together, rather than cheapest generation only. A few turkey nest pumped hydro schemes in SA could solve a few problems in the short term. This is all a bit difficult with a LNP Federal government that sees renewables as satans child, and use every dirty trick at their disposal to put a spanner in the works. Thank goodness there are some progressive and sensible policies coming from the states.

          • Leslie Nicholson 4 years ago

            that is the irony of all this, SA is trying to fix it’s problems.

          • Don McMillan 4 years ago

            The engineering steps you propose are very large. There is a lot of investment money available for power projects. Design the project you envisage, develop a business model and economic model. If you demonstrate you can make money the investment community will throw money at the project.

          • Alastair Leith 4 years ago

            That’s not how it works. Banks will fund almost any FF extraction project that can project potential ROI, but renewables? not unless there is a PPA. Hence Victorian Government’s decision to start signing PPAs like ACT has been. Abbott, Hunt et al in apparent collusion with the gentailers who went on what Giles calls a capital strike have completely white-anted confidence in the RET mechanism as far as financing RE developments goes. Finance industry is still scared of RE projects, otherwise some of the dozens of environmentally approved, shovel-ready projects in Victoria alone would have gone ahead in the last three years.

            Perhaps you can expand your thoughts on what ‘business model’ and ‘economic model’ work these RE project developers for wind farms need to do?!

          • Don McMillan 4 years ago

            Banks lend money to establish companies/projects. New ventures require equity and this come from Private equity, funds [incl pension] etc. No-one invests unless they are confident of a return. If you have any project FF or renewable or manufacturing any business, they’ll fund it.
            Government subsidises do form part of the economic model.
            So you want to build a windfarm/Solar Firstly you’ll have to spend some of your own money or get seed capital. Find a place where wind blows or sun shines, do all the necessary [wind/sun] science studies. If OK, get all government approvals for a wind farm / solar farm [land permission]. Design [engineering] the wind/solar farm. Cost the infrastructure and installation. Capital, operating expenses and revenue = economic model. Then convince the investors they’ll make a return. It is difficult and a lot of work especially the engineering.
            This website keeps informing me that renewables are economic so funding will not be a problem.

        • Alastair Leith 4 years ago

          Are you suggesting RE deployment increases the cost of power to consumers? Because the evidence would seem to be against you. Why else the penetration of rooftopPV?

          • Don McMillan 4 years ago

            The SA problem mainly steams from the windfarms. The product they are delivering does not match what the market requirements [demand]. These windfarms are suppling the electrical market inconsistently. This inconsistency creates disruption and to complain that their competitors [FF] should help them out exposes a faulty business plan. Adversaries exploit this and this publicity may set the industry back. [This is a bad thing] The suggestion I proposed previously answers the critics and by taking small engineering steps lessons the investment risks. Successful businesses take destiny into their own hands.

          • Alastair Leith 4 years ago

            It’s obvious you have failed to read this article closely or any of the many others that aren’t Murdochracy propaganda if this is your considered view.

  4. JIm 4 years ago

    Fear campaigns can work, but with a public that essentially likes renewables, whether or not there’s perceived additional cost, what hard evidence is there all this wilfully-ignorant criticism is effective in souring the public’s support for solar, and also, though less so, wind? Can the Coalition claim any mandate for supporting fossil-fuel and other interests in a war against renewables – I think not!

  5. Leslie Nicholson 4 years ago

    i am not sure where the problem with CST is, the fact of the matter is there is a CST running in australia. it is based in Port Augusta and runs many systems. if any business wants to see if it can work. talk to sundrop farms.

  6. Cooma Doug 4 years ago

    Ironic fact is that the market origionally had carbon emmission surcharges imposed on plant based on emmission ratings. The resulting constraints and market responses would have been more realistic as it will eventually have to be.
    Another fact is that the constaints imposing on the major interconnectors during peaks, plant failures and maintenance are a key weakness in the design of this HV grid market. We have the technology overwhelmingly capable of eliminating the need for such constaints and instead adopt response on the loadside.
    The only things that dont line up well in the adoption of these solutions are large fossil base load generators.

  7. Ian 4 years ago

    Could this fossil fuel back-lash in South Australia be a response to the Ceres wind farm? 600MW of fossil fuel generation displacement. Ouch.

    The question is: can the FF lobby stop the massive Ceres project?

    Hornsdale, 100MW FF displacement , is already being constructed. That battle is decided . There are many other wind projects waiting in the wings. Once these wind farms are standing and connected to the grid there is no way that any type of FF can compete. After the initial capacity capital outlay, there is negligible additional cost to actually produce electricity from wind farms or from solar arrays.

    The more wind farms are built, the more gas generation is relegated to back-up and peaking status. Besides taking the wind from the gas generator’s sails, Renewables are adding insult to injury basically saying , ‘we don’t want your product , but we still want you around when there is no wind and no sunshine ‘ . Whereas before gas generation enjoyed a constant revenue stream, now increasingly they have to rely on capacity payments and the lucrative peaks for profitability.

    The gas generators are obviously not taking this transition very well and with enough lobbying and Media attention they could derail further wind farm development.

    To maximise renewables development in South Australia the government will have to address the back-up power issues. The existing gas generation can certainly fill this role, but how viable would that be? How expensive would capacity payments be to maintain this fleet of gas generators purely in a standby mode? The other question is , what sort of guarantee can gas generators be given of future capacity payments when inter connectors and battery storage take away their last remaining standby power function? The government would not want to be stuck with obsolete capacity payment obligations ( such as has been the case with WA ), but they wouldn’t want to discourage gas generators too quickly whilst this form of back-up supply is still required.

    • Don McMillan 4 years ago

      Like any business if you are uncompetitive you go broke. The SA windfarms have out competed gas generation when the wind is blowing. What happens when the wind stops blowing and there is no back-up. You get the bazaar situation where the SA Gov asks Engie to restart its mothball Pelican Pt gas power station. Re-commissioning is extremely expensive and I bet they’ll demand compensation which means the Gov is effectively subsidising FF. This is not well thought-out or good engineering practice.

  8. Geoff 4 years ago

    Always wondered who has the contract to clean the mirrors each week…..?

    • Tom 4 years ago

      Rain usually suffices.

  9. Gyrogordini 4 years ago

    Well researched and encapsulated, Giles. Thank goodness someone is balancing the FF-dependent Murdross press zealots, fanboying the COALition. Bring on CST at Port Augusta, and strengthen the interstate interconnectors, and voila, 5050 by 2020…

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