by Holly Tancredi, Assistant Editor, Energy Magazine

2022 has held major problems for not just Australia’s energy providers, but everyday people. In hindsight, as the East Coast continued to export gas without domestic reserves, major flooding damaged coal generators, and a global gas shortage arose due to the Russian-Ukraine conflict, a crisis seemed inevitable. As the new Federal Government was elected in May, work needed to be done to protect and provide Australia’s energy needs – and fast.

Australia was the biggest exporter of liquefied natural gas (LNG) in 2021, so why is the nation’s energy market now struggling to provide for its own consumers? Following the impact of global shutdowns amidst COVID-19, the rate of LNG gas export in Australia dropped, but did continue to maintain significantly high numbers – enough to keep a global top five export position and a yearly average of over 80 million tonnes.

On the other side of the world, when Russian military forces began their attack and invasion of Ukraine on 24 February 2022, a new problem arose. Russia, at the time of the first invasion, exported about 40 per cent of Europe’s total gas, and about a quarter of that flowed across Ukraine to the rest of mainland Europe. When these resources became difficult to access as the conflict grew, former Prime Minister, Scott Morrison, offered to help by exporting more of Australia’s resources.

The problem with doing this is the fact that Australia already exports over 75 per cent of its gas – and offering to sell more led to Australia’s energy providers attempting to buy back our own resources from Japanese contracts.

Costing more, supplying less

At the same time, the global gas shortage and restrictions caused the price of gas to increase dramatically, with some contracts receiving four times more than market average for their gas. As domestic energy costs still rely on market demand and supplies, the cost of energy for everyday Australians began to rise.

Western Australia is currently the only state with a mandatory domestic gas reserve of 15 per cent, and previous Federal Governments shot down policies that would instil this in other states and territories. The eastern and southern Australian states and territories, controlled by the Australian Energy Market Operator (AEMO), have been the worst affected by the crisis through fluctuating gas prices and huge export levels.

Adding in the fact that Australia’s coal generators are ageing and failing at a disproportionate rate – around 30 per cent – the country’s available energy hit an all time low, and the cost to supply reached an all time high.

“Australia doesn’t have a gas supply problem; it has a gas export problem.” – Richie Merzian, Climate and Energy Program Director, The Australia Institute

The politics surrounding the crisis

Newly-elected Federal Energy Minister, Chris Bowen, promised to take action on the gas supply issues based on expert advice and not “knee-jerk reactions”. Mr Bowen refuted comments regarding the speed of action in the Federal Government, and instead maintained that “denial and delay” of the previous Coalition Federal Government, and a significant number of unfinished energy policies, are what has left Australia so ill-prepared this winter.

“The previous government did not do the work necessary to increase renewables, to increase storage,” Mr Bowen said. “If we had more storage and more renewables and better transmission, we would be much better placed to deal with the current challenges.”

AEMO also published statements confirming that energy supplies were tight, with high gas demand being further driven by domestic household heating needs as the eastern side of the country experienced cold snaps earlier than anticipated in 2022. For the 2019-20 period, the Australian Energy Regulator (AER) posted the wholesale price of gas as about $6-7/GJ. Currently it sits at almost $11/GJ across all states.

Gas supply guarantee mechanism triggered

Extreme weather and flooding in 2022 also had a role to play in the current crisis. Across locations in New South Wales and Queensland, major flooding occurred from late January, damaging and causing the shutdown of significant Queensland coal mines. The production of coal would have reduced the reliance on gas, and provided an alternative form of energy. With these now out of action, the cost of gas continued to rise substantially.

AEMO activated the Gas Supply Guarantee mechanism (GSM) in July and implemented a price cap of $40/GJ, after predictions the cost would rise to $800/GJ. The GSM was implemented to show improvement in overall gas supply for the southeastern states and attempted to keep energy prices low for Australia’s domestic consumers. Mr Bowen said the situation highlighted the “importance and urgency of new investment in renewables, storage and the transmission that is needed to ensure affordable and reliable energy supply”.

Critical supply shortfalls

The constant energy shortfalls led to the AEMO announcing price caps in Queensland, New South Wales, Victoria and South Australia on 13 June 2022, after the state’s energy reached a cumulative high price threshold of $1,359,100 over seven days. This triggered an administered price cap of $300/MWh in accordance with the National Electricity Rules.

Further energy unreliability led to AEMO announcing a “critical electricity supply shortfall” forecasted for the evening of 13 June, and ordered the direct generations to alleviate lack of reserve (LOR) conditions as it reached a LOR 3 operational reality. LOR conditions are called in the face of significant unplanned events, such as major flooding, cold weather snaps and the Russian-Ukraine conflict, all of which can impact available resources.

The LOR 3 announcement signified there were no reserve supplies available in Australia and AEMO had to act. As such, on 15 June, the AEMO suspended the spot market. The spot market details the changeable wholesale price of electricity at any given time. Through the AEMO suspension, a new fixed price replaced the changeable price. The spot price is generally most expensive when households and businesses are using the most power, but often changes throughout the day.

AEMO CEO, Daniel Westerman, said the market operator was forced to direct 5GW of generation through direct interventions on 14 June, and it was no longer possible to reliably operate the spot market or the power system this way. Mr Westerman said price caps coupled with significant unplanned outages and supply chain challenges for coal and gas, led to generators removing capacity from the market.

He said this was understandable, but with the high number of units that were out of service and the early onset of winter, the reliance on directions made it impossible to continue normal operation. Mr Bowen confirmed the Federal Government’s support of AEMO’s spot market decision and said the action would “help the National Energy Market (NEM) alleviate the unplanned withdrawal of generators from the wholesale market”.

By 17 June, AEMO confirmed sufficient energy supply was available across all regions in the NEM, and there was overall greater energy generation availability. In order to resume the spot market, AEMO held an industry briefing on 21 June to provide assessment criteria and processes needed. The process included checks and validation to reinstall confidence of operability under normal dispatch and pricing rules, and the monitoring of normal dispatch pricing within the suspension period over at least 24 hours.

As AEMO became confident the criteria was met, it formally announced the removal of the market suspension on 22 June, and the spot market suspension ended at 2pm on 24 June. AEMO’s actions successfully evaded the threats of blackouts, but the critical changes created constant conversations around the decisions that led to the crisis and what needs to be done in the future to prevent it happening again.

Australia’s energy trading markets have been in turmoil in recent months.

Where it all went wrong

Repeating mistakes

Richie Merzian, Climate and Energy Program Director at The Australia Institute, said the Government needs to do everything possible to “speed up electrification”, stop relying on gas and stop the energy export problem the former Coalition Government allowed.

“Australia doesn’t have a gas supply problem; it has a gas export problem. As long as Australia remains dependent on gas and coal, Australian consumers will be over the barrel of global fuel prices influenced by events beyond our control,” Mr Merzian said. “Allowing global coal and gas companies to export vast quantities of our resources may have seemed like a good idea at the time, but it has locked us into exposure to volatile global prices, making Australians vulnerable to price shocks from global circumstances beyond our control.”

Mr Merzian said Mr Bowen needed to curtail gas exports to safeguard a sufficient affordable gas supply for Australians in the short term. He argued that the only long term solution was to stop using fossil fuels and that “requires political leadership”. Greg Bourne, former President of BP Australasia and current Climate Councillor, said the current crisis was geopolitical.

“We knew this was coming. The oil and gas market has always been geopolitical, with inherent extreme price volatility, which rocks the world in times of crisis,” Mr Bourne said. “Previous responses have been to explore and develop more oil and gas, setting ourselves up for the next crisis in which the oil and gas companies reap super profits, while consumers reap the misery. “When will we learn?”

“When will we learn?” – Greg Bourne, former President of BP Australasia

Ageing infrastructure and policy

Mr Bowen said the energy crisis was “driven by and large by unexpected outages in coal fired power stations” due to the ageing fleet and the aforementioned flooding across several the country.

“There hasn’t been that investment in new technology, in new transmission, in new storage to come forward because the previous government just played around with it for nine years and had 23 different energy policies,” Mr Bowen said. Director of the Monash Energy Institute, Professor Ariel Liebman, said the crisis is a “policy failure a long time in the making” and the remedy will be difficult to fix quickly.

“We have huge amounts of coal seam gas which was allowed to be exported with none reserved for Australia which has ultimately led to a situation where Australians are paying for gas prices at global parity,” Mr Liebman said.

The national transition plan

During the first week of June, Mr Bowen brought together the territory and state energy ministers to create, and agree upon, eleven actions to move Australia ahead to a clean energy future, known as the National Transition Plan.

Mr Bowen said the steps outlined are “no silver bullet, no magic answers, but material steps forward in a very positive fashion”. Mr Bowen outlined three key steps from the meeting, which included:

» Developing a capacity mechanism, which prioritises storage and renewable energy
» A gas procurement and storage plan to be coordinated by the AEMO
» A National Transition Plan, which has consensus from the Federal Government and all states and territories

The Federal Government tasked the Energy Security Board (ESB) with developing the draft Capacity Mechanism, which will ensure there is adequate dispatchable capacity in the system and ensure demand is always met.

The mechanism will be expert led and focused on renewable energy and storage, remain within the bounds of net zero by 2050, and include open consultation. The National Transition Plan, in line with AEMO’s Integrated System Plan (ISP), lays out the necessary transmission and generation infrastructure necessary to meet future demand in the NEM.

Future-proofing energy

Australia’s first Gas Substitution Roadmap was announced by the Victorian Government in July, as an outline to reduce energy bills and further reliable energy supply for the state. The roadmap has outlined how Victoria will reduce reliance on gas and fossil fuels and transition instead to hydrogen and biomethane.

Victoria’s gas roadmap represents one step towards solving the NEM’s gas crisis, but Australia needs leaps and bounds to make real, lasting change. Whilst there are other state roadmaps being drafted, it’s important to note that these roadmaps will not represent the singular solution to the culmination of energy problems that have arisen across Australia and the NEM.

The future of Australia’s energy will require continued significant, domestic and global industry collaboration, and policies to cement renewable energy as a secure way forward.

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