On June 9, the much anticipated Finkel report on the future stability of Australia’s National Electricity Market was released. This was an independent committee inquiry lead by Australia’s Chief Scientist, Dr Alan Finkel.
The Finkel report’s gestation and birth have been accompanied by very high expectations within the
renewables and energy sectors, as well as energy consumers and politicians.
The report contains many detailed recommendations. A lot of them are concerned with regulation and the minutiae of maintaining electricity system security. These are not politically controversial, most of them seem reasonably common-sense.
Arguably, the Big Ticket items are the proposal for a Clean Energy Target post 2020 and the recommendation that new renewable energy generators be subject to a reliability obligation, whereby they must simultaneously bring forward a level of dispatchable capacity in proportion to their overall generation capacity.
In the last few days, the Federal government has stated that it supports 49 of the 50 recommendations, but is still considering its response to the critical one; the CET itself.
It seems that everyone has an opinion on energy policy in Australia these days. The one thing that there seems to be a strong consensus on is that to provide investment certainty, there needs to be a reasonable level of political bi-partisanship around the at least some common principles of the way forward.
The Chief Scientist and the expert panel are clearly acutely aware of this and their report and recommendations implicitly seek to try to achieve such an outcome. The document is political as much as it is technical.
Based on the public pronouncements since its release, there seems to be similar levels of criticism of the report from a pro-coal anti renewable section of the governing conservative parties and mining lobby groups as there is from many pro-renewable energy voices. Maybe this could be seen as an indication that the political balance of the report is about right for its recommendations to progress in some form.
The Prime Minister, Malcolm Turnbull, and the Environment Minister, Josh Frydenberg, seem to be genuinely personally supportive of Finkel’s analysis and recommendations.
Ultimately, the success or otherwise seems to now hinge on whether they are able to bring the ‘climate sceptic’ elements of their back bench parliamentarians along with them in moving to implement the recommendations.
Interestingly, the companies that own most of the generating assets in Australia including the coal fired power stations, have publicly stated that they have no interest in the construction of new coal fired power stations irrespective of the immediate policy settings. This includes in particular; Energy Australia, AGL and Origin Energy.
These companies have accepted the view that the world expects electricity generation to keep decarbonising and even if a case could be made for a coal station under near term policy settings, the risk of a stranded asset before full cost recovery on an asset with a 50 year lifetime would preclude any rational investment.
It is also the case that these companies, most commentators and the Finkel review all suggest that wind and photovoltaic systems now offer the lowest levelised cost of energy of any new build electricity generation option.
The Finkel review suggests that its findings and recommendations are built around the three pillars of “Orderly transition, System Planning and Stronger Governance” all have which have been lacking in Australia in recent years.
Australia has been pursuing a Renewable Energy Target (RET) with considerable success. This will see around 20% of generation being provided by new renewable energy sources when the current target is reached in 2020. It rewards generators with tradeable certificates for actual MWhs generated and obligates electricity retailers to buy certificates in proportion to their wholesale energy purchases and the current year’s target.
The technology winners in the RET market have been wind and rooftop Photovoltaics, with utility scale photovoltaics systems now increasingly significant. Ie it is variable renewable energy (VRE) that is cheapest when all MWhs are treated as equal.
I and others have argued for some time that such a simplistic policy was a good way to start a renewable industry but it becomes perverse as the share of generation grows. It is perverse because it rewards generation irrespective of the instantaneous demand or wholesale spot price of electricity.
It partially shields the renewable generators (via around 50% of their revenue) from the main supply and demand market signals and so favours the cheapest variable renewable energy over the more costly, but also more valuable (per MWh) dispatchable renewable generators.
The strong growth in VRE is one of the major factors that has led to the current energy debates and the commissioning of the Finkel review. The review clearly identifies the issues associated with over encouragement of VRE without considering the consequences for the whole electrical system.
The review seeks to find approaches that prevent major electricity system failures (maintain security) and minimise unscheduled load shedding (maximise reliability) as well as lowering emissions and achieving it all in an optimal least cost manner.
Key observations include:
“Increased penetration of VRE generators and the withdrawal of synchronous generators is reducing the supply of essential security services, such as physical inertia, which historically have been supplied by synchronous generators.”
“Synchronous generators ……. have a heavy spinning rotor that provides synchronous inertia that slows down the rate of change of frequency. Hydro generators, thermal generators such as coal, gas and biomass, and solar thermal generators are synchronous. Synchronous generators help in voltage control by producing and absorbing reactive power and also provide high fault current to improve system strength.”
“…..a certain amount of dispatchable capacity is required to maintain system reliability. Capacity is dispatchable if it can respond to electricity demand on call. Dispatchable capacity can be provided by a range of sources, including dispatchable generation (for example, coal, gas, hydro, solar thermal, and biomass), interconnectors, storage and demand response mechanisms.”
These are important messages for all stakeholders to absorb.
For better or worse the review does not make any major recommendations to change the underlying structure of the Australian National Energy Market mechanisms. The concept of adding a ‘Capacity Market’ to the existing ‘Energy only’ market is discussed and rejected. The recommendations instead look at tweaks and regulation plus what should follow the RET post 2020.
The proposed clean energy target would take over from the RET in 2020 and use the same tradeable certificate based mechanism. The key difference is it would be open to any technology, but certificates would be awarded in proportion to the reduction of CO2 emissions below a threshold.
The report does not recommend a threshold value but leaves it to the political process to determine one. This will no doubt be the biggest political football. If the threshold were set very high, then the scheme would become a mechanism for ensuring new generating capacity enters the market irrespective of technology.
It would then still work to force out the older coal generating plants from the system. On the other hand if the threshold is set at or below the emissions intensity of gas generation, it will likely act as an extension of the RET by default.
If it is set at some level above the emission intensity of gas fired generation, it could well work to drive investment in gas over renewables. This would give some near term emissions reductions, but it would lock in new gas generation assets and work against the progress of zero emissions dispatchable technologies.
The other key initiative is the recommendation for a reliability obligation on new renewable energy generators, which is described as:
“In regions where dispatchable capacity approaches the determined minimum acceptable level, new generation projects should be obliged to also bring forward new (i.e. not contracting existing) dispatchable capacity to that region. This obligation should be expressed in terms of a percentage of the new VRE generator’s nameplate capacity, able to be dispatched for a required time period. The new capacity should not need to be located onsite, and could utilise economies of scale.”
Again, the devil is in the detail as there is no specific recommendation on the percentage of name plate capacity or the dispatch time to be required.
If these are both set at high levels they could combine with settings in the CET to drive gas generation exclusively over any renewables. On the other hand setting them at a low minimum to maintain security standards could see only short duration batteries working together with VRE.
I would argue that optimal settings combined with the CET threshold should be those that encourage a good mix of zero emissions dispatchable solutions including solar thermal and biomass, and little if any new gas fired generation.
Others have argued that the goals of the generator reliability obligation would be better achieved with a market mechanism of some sort. I am inclined to agree. Including a demand or reliability linked multiplier in the CET would be one way that could be considered.
Overall, I think this inquiry lead by Australia’s chief scientist has done a constructive job under the current political environment. Those of us who wish to see a zero emissions world sooner rather than later should not let the perfect be the enemy of the good.
As long as Australia avoids the absurdity of a direct taxpayer funded new coal fired power station, or unnecessarily locking in more new gas fired generation, then I think our trajectory to the final outcome will improve.
The combination of market forces, international diplomatic pressure, and local community pressure will work to accelerate that trajectory in the coming years ahead.
Keith Lovegrove is head of Solar Thermal, ITP Energised Group, and managing director ITP Thermal.