Blaming renewables and state governments for all that is wrong with our electricity market might look like good political strategy, but it is not going to fix the underlying problems that caused last summer’s blackouts or the rising price of energy.
An open letter from energy and industry experts to the Prime Minister, published today in The Australian Financial Review, has called for practical solutions that can be implemented this year to drive new market rules and energy efficiency policies that could achieve results — on price and reliability — before next summer.
The “rules” that govern Australia’s electricity markets were written last century to regulate power stations using technology from the century before that. Fixing these rules so that they accommodate new ways of generating and storing electricity would unleash innovation in demand management, battery storage and new consumer services that will disrupt incumbent coal and gas players and deliver cheaper more reliable and clean power. It’s why the owners of the old technologies — coal and gas — like the old rules.
But the times, they are a changing. In the last month we have seen Elon Musk and Mike Cannon-Brookes attempt to reshape the SA energy market by Twitter, we have seen the SA Premier and the federal Energy Minister hold the most remarkable press conference in living memory, and we’ve seen the Prime Minister pivot from “coal is great” to proposing Snowy Hydro 2.0 without skipping a beat.
[Wonder why the Coalition dislikes renewables so much?]
But regardless of who wins the next election, or which storage technology winds up the cheapest, the one thing we can say with certainty is that a 21st century electricity market needs 21st century market rules. And one of the first rules we need to change is the speed at which the market price is allowed to move.
The so-called proposed “5-minute settlement rule” has the potential to simultaneously address the cause of price spikes and the reliability of the grid, and it would reduce emissions. And it could do all of this without a budget allocation or even passing legislation through Parliament. It could be in place well before next summer’s peak demand arrives just by changing how we “settle” electricity contracts.
Like when you sell something — whether it is shares or a house — the moment of sale in the electricity market is called a “settlement”. If you own some shares in a company, or a house, and you see that the price of your asset has gone up, you “settle on a price” and proceed with the exchange. But that’s not how it works for electricity in Australia.
While electricity is supplied in five-minute blocks, the price is “settled” in half-hour blocks based on the average price of electricity over half an hour. If you were selling shares on the ASX it would be like instead of getting the price of the moment, waiting to find out what the average price for those shares was over the day before you knew how much money you would get. For coal-fired power stations that pump out the same amount of electricity all day it does not matter much if they get paid in five-minute or 30-minute blocks, but for batteries that can respond instantly to peaks in demand it would make a huge difference. That is why the fossil fuel generators are opposed to any change.
We already know batteries soak up excess energy when it is cheap, or even free, and send it back into the grid when it is needed. Hooked up to solar panels, batteries allow consumers and communities to meet peak demand locally. They can be used also reduce the scale and cost of required “poles and wires” in new and growing areas.
Critically, batteries are also uniquely well suited to jumping into the market on a short-term basis, smoothing price spikes and reducing the capacity of incumbents to use strategic bidding to push up prices.
[How One Nation has hijacked the government’s energy policy]
Faster trading of wholesale electricity would also bring new competition from new entrants such as energy conservation technology, which can respond very quickly to short term changes in the market, if there is a price signal. In turn that would smooth out volatility, undercut ‘Enron’ style strategic bidding to push up prices, and deliver security in a renewable-powered grid.
An Australian invention also means that air conditioners and other consumer devices can be remotely controlled to reduce their load for a few minutes just before a demand peak hits.
Despite all these possibilities our regulators, cheered on by the old incumbent coal and gas generators, refuse to act. The Australian Energy Market Commission, which sets the rules, has repeatedly delayed making a decision. And energy companies are busy lobbying — directly or through their lobby group, the Australian Energy Council– to prevent the five-minute rule change going through.
The Australian Energy Council actually submits as an argument against competition: that it would “change the economic sustainability of some generators”. In other words: the rule change would be effective.
All of the loud voices with all of their solutions to the “energy crisis” have agreed on one thing. The energy market is not working in the national interest. A five-minute rule might not compete with the Punch and Judy show that makes up so much of the energy debate. But it is a straightforward regulatory change can than improve the energy market. If we cannot even do that then we really are in trouble.
* Ben Oquist is the executive director of The Australia Institute
The current AEMC rules affecting the Australian Energy Council are written on parchment with quills, stepping into the 21st century is a major challenge for such organs.
The pesky new-fangled batteries are cruelling their pitch.
If such batteries were cheap enough, intermittent generators could install enough battery to store up a 5-minute block of power, and sell it in the boring old auction system. With supply thus smoothed out, they would not be at war with conventional generators. Lacking fuel costs, the operators could get rich and be praised for their token non-carbon power.
However, the batteries are not cheap enough for the scale required. Until then, wind farms will fight furiously to ensure that somebody else pays to store their excess generation. And they will fight to continue injection of intermittent power because it is disruptive. Requiring them to store their power before injection requires legislation.
Roger – I’ll buy you a new calculator. Your nuclear powered one is missing some digits.
As always.
Given batteries are going to take a while to build to a significant, market altering level, the most immediate beneficiaries will be hydro, including the existing pumped storage. But the rule change would no doubt provide bankability for future pumped storage, given the high cost of gas.
Excellent exposition Ben.
May I suggest, for the foreseeable future, that you avoid dark streets and over amorous new acquaintances?
Some truths are dangerous to vested interests.
Sorry Ben,
This five minute thing is rubbish.
Our current wholesale energy market whether 5 seconds, 30 seconds five minutes or 30 minutes rewards operation, not investment. This market pays for the minute to minute cost of production and only offers real incentives to invest when demand is in balance or exceeds supply. In such situations the price goes to ($10,000 per MWhr) the Value of Lost Load or whatever buzzword AEMO are using now. Trouble with this is it’s a bit hard to predict and it is fairly transient and you aren’t going to build any sort of capacity fast enough to bring the price down within the five minute period unless you have a magic wand.
In the case of a brown coal power station the current wholesale market pays for the cost of fuel and maintenance and only by vertical integration with retail or by entering into hedge contracts with retail can the investment in brown coal be paid off.
Wind turbines cost virtually nothing to run, so their wholesale energy price is zero. The problem with wind turbines is that they must be geographically dispersed to capture our geographically dispersed wind velocities and because the have very low capacity factors at any one site you must provide around five to ten times the wind turbine capacity that a fossil station requires. ie. a 500 MW fossil unit will require say 2,000 to 5’000 MW of wind capacity geographically dispersed to provide the same high service factors that the fossil units in combination provide. Solar PV is in much the same position because of cloud and seasonal variations.
It can be seen that the complete replacement of fossil with wind and solar requires huge investment of technologies with almost zero operating cost. An incremental energy cost market such as ours will simply not work. If everyone bids in at zero then they will get zero and go broke.
The reason that wind and solar bid into our current market at zero, but do not go broke is because their capital costs do not have to be recovered in the wholesale market. They get their money through capacity payments cross subsidized by the fossil segment of the market though opaque retail market mechanisms. If all generation in the market had zero operating costs then there would be no non zero operators to set the price.
What we need to do is move away completely from this silly short term energy (really short term power ) wholesale market. It has never worked and in the face of zero operating costs will be rendered obsolete.
Our current retail market operates on an entirely different basis. It’s got capacity payments to cover the poles and wires capex and operating costs. Nobody suggests that this part of the system be paid for by a five minute market. If they did the Singapore Government who own half of this nice little monopoly in Victoria, would be selling out pretty quick. The Government would be in the electricity business again after paying out to the Singapore Government whatever egregious, secret compensation deal they made when they sold the system to them back in the nineties.
Reliable electricity capacity of ANY type requires large capital investments regardless of whether it takes the form of large centralised grid interconnected facilities or local point of use equipment. (e.g. rooftop solar and batteries) A market that is based on instantaneous power is as an economist would say – incongruent with this reality.
Batteries also require a mention.
I live in a house made of solid brick including the internal walls. All external walls are insulated, the roof is insulated and the slab is insulated from the ground by special 30 mm high compressive strength polystyrene foam. The house is of passive solar design and has shutters and some double glazing.
However we don’t have natural gas and and are all electric. As such rely we on efficient reverse cycle heat pumps for home heating in winter and a bit of cooling in summer. We have solar, but no batteries and as we use around 40 KWhrs per day in winter to heat this house to 20 degC. At present a Tesla Powerwall battery system of 14 kWhr capacity costs $11,000 excluding the revision costs of any existing grid connect inverter. So I would expect the all-up cost to be $12,000 + Howard/Lee’s $1,200 GST. I would need at least three of them. Total cost just for the batteries would be $40,000. I would then have to quadruple the size of my current 3,600 watt solar array to provide the energy for charging the batteries ready for night time heating cooling lighting. Total cost $60,000 to $70,000.
Now the lithium ion batteries have a life of anywhere from 1,000 to 5,000 discharge cycles with 2,000 cycles being typical. This translates to around 5 to 10 years life being typical depending on quality and usage of the batteries. Very hard to predict, but lets say a battery replacement every seven years. That’s a cost of $40,000 every seven years or $5,700 per year.
Of course for the majority of Australian homes who have natural gas, their electricity usage could easily be met by a single 14 kWHr battery installation providing they double the size of their solar arrays to charge them and don’t use air conditioning.
This sounds like a shed load of capex investment to me. Sadly any bank which loans me the money to do all this won’t structure repayments on the basis of how much of this capacity I would actually use. They will insist on their and my money. I will probably need another shed to put all this stuff in.
As an aside; if a modern 500 coal fire unit is not running flat out then it is quite capable of adding another 100 MW into the market in a five minute period. I know because I work in one. In fact I’ve worked in them for over forty years. Our station at Loy Yang can do a single step change of 100 MW up or down within 1 minute. It can also reduce output power from full load to zero and then recover to full load within a few hundred milliseconds to protect the grid in the case of a large faults. What people don’t ever appreciate is that our modern power plants use advanced technology from all fields of human endeavor. The controls technology, metallurgy, process engineering, mechanical, chemical and civil engineering is as advanced or in may cases more advanced than renewable technology. Problem is modern fossil plants produce CO2 which is wrecking the eco-system. But don’t think their is nothing to be learned from them.
I acknowledge that batteries can “jump in” to the market at a moments notice, but that’s only if they are charged, there is enough of them and they are not currently outputting there maximum power. Much the same criteria as a fossil station. The most reliable batteries are the ones you never use! In any event the current market does not prevent batteries from entering into the market for five minutes, they will still get paid. If they don’t go flat before the half hour is up then they will get paid for that half hour at the average half hour price as well. Of course they may not be charged during periods of VOLL which invariably occur in the day time, because their base load is at night time, it’s in the day they get charged up!
I can’t quite see how a five minute wholesale market is at all relevant to any of this or our transitioning electrical supply system to a fully renewables system. What is needed is some clear goernment policy based on the reality of climate change AND the reality of current technology and costs as well as the potential future technology and costs.
Only when we have such a policy with cross party commitment will we be able to come up with a rational electricity market. Fiddling with the settlement period is like fiddling while Rome burned.
Regards
Rob Garnett
Toongabbie Light & Power.