by Franklin Liu, Senior Policy and Regulatory Consultant, Cornwall Insight Group

As Australia’s energy market transitions, many state governments have stepped up with more progressive policies than those offered by the Federal Government. However, Franklin Liu warns that unless our state governments can work together to utilise their comparative advantages, we may be facing a number of key challenges across the National Electricity Market.

When announcing popular infrastructure policies, governments can often get caught up in the idea that the policy might not be big enough.

Another concern might be that someone else will be announcing an even bigger policy or project. Recently, this mentality seems to be driving state governments as they try to outbid each other with ever more ambitious renewable energy targets.

As of November 2020, all eastern state governments have committed to a headlong charge towards their renewable targets by 2030.

Here’s a quick summary of where the states are at:

» Victoria and Queensland have committed to a 50 per cent renewable target, including distributed and utility-scale renewable generation
» Tasmania will produce 150 per cent renewable energy relative to its demand, an interim step to its 200 per cent target in 2040
» South Australia will deliver net 100 per cent renewable generation by 2030
» NSW announced its Electricity Infrastructure Roadmap, which will build 12GW renewable capacity, in addition to projects that have already been committed

In the absence of any meaningful climate change policy at the federal level, it is admirable that both Liberal and Labor state governments have stepped forward and answered the call from their respective electorates.

However, it must be remembered that all eastern Australian states belong to an interconnected system called the National Electricity Market (NEM). Policies announced by one state will inevitably affect all other NEM participants as electrical flows respect no artificial state boundaries.

Unfortunately, it appears that the states have not examined the overall impact of their policies. Without coordinated planning, they might inadvertently run in each other’s way when racing towards their 2030 renewable targets.

Figure 1 examines the impact of the states’ renewable policies on the overall NEM demand-supply profile in 2030. We start with the 2020 time-of-day average generation profile by fuel type in each state.

We then increase the renewable profiles proportionally in each state to meet its renewable target and subtract coal and gas that are projected to retire based on the system operator’s (AEMO) data or confirmed announcements (such as Yallourn).

Figure 1. Source: Cornwall Insight Australia.

It is currently unclear how South Australia will achieve its net 100 per cent renewable target. This is because AEMO currently requires at least two thermal units in the region to be online at any time for system security reasons.

Therefore, we have not incorporated the impact of its net 100 per cent renewable target in the chart, but only included its committed new renewable projects and announced retirement.

To illustrate the challenges as well as opportunities, the chart starts with a static view by keeping the average shape for each fuel type constant, but we will discuss the impact of market responses, including storage investment and thermal retirement later.

As households install more rooftop PV and battery, the future demand pattern will continue to change. The red traces, based on AEMO’s estimate, shows the 2030 demand pattern.

The starkest pattern in 2030 is that every region will have excess energy in the middle of the day. As all NEM states are more or less located along the same longitude, all solar devices (rooftop and utility-scale) will reach their peak output at around the same time.

The result is that across the whole NEM, there will be close to 12,000MW excess energy on average waiting to go somewhere. And unfortunately, interconnections are of no help if all regions are trying to export to their neighbours. The importance of the average qualifier should not be overlooked here, as it means for roughly half of the year, the actual midday excess supply will be even more than 12GW.

What’s the solution?

Before we go any further, let us be crystal clear here. This article is not trying to sell a doomsday, anti-renewable prophecy. Various solutions can be found at different timeframes to manage the excess supply, which we will discuss below.

First, if this does happen, the system operator (AEMO) will act as the last line of defence. Its dispatch engine balances the market every five minutes by ensuring supply exactly equals demand.

When there is too much supply, it will ask some generators, including renewable units, to reduce their output. This is normally done via the more orderly market process to reduce output from generators with the most expensive offers first.

However, AEMO could constrain certain units out of the merit order for various system security reasons, often presenting an “un-hedgeable” risk to affected participants.  AEMO could also turn off rooftop PV to increase demand in a region (as the affected households have to source their energy from the grid).

While this is a rather blunt measure, AEMO has already been forced to use it recently to manage record minimum demand in South Australia caused by continuous strong rooftop PV uptake.

However, curtailment of renewable energy is wasteful in terms of both the lost green energy on the day and the massive upfront capital cost spent to build these assets. If such curtailment were to happen regularly, the states would effectively be blocking each other’s path in their individual pursuits for bigger renewable energy targets. So, could things be done earlier to prevent this?

The invisible hand of the market could be relied upon to an extent. Excess supply at midday will suppress wholesale energy price during that time, which creates a powerful incentive for investment in storage assets. Storage can soak up the cheap energy at midday and sell it later when prices are higher.

While battery and pumped storage are proven technologies, recent developments in hydrogen offer even more options. Excess energy can now be packed up and transported to a different location to be consumed later. With more storage, the midday generation peak will be flattened as more green energy is transported to late evening or overnight.

However, the several gigawatts of storage projects currently in the pipeline (the exact number depends on the counting criteria) will still face the mountainous challenge of moving the average 12GW excess energy in the whole NEM.

Renewable energy will also push out coal and gas. It is now widely agreed that the exit of thermal plant will be faster than initially expected, and the survivors will be forced to find different operating patterns. The retreat of fossil fuels will likely shrink the dark and yellow stacks in the chart to make more room for renewable energy.

However, as of now, the mainstream forecast (including that of the system operator) still expects the majority of thermal retirement (which is more than just coal) to occur after 2030. Therefore, there will likely be a few years where the thermal fleet will struggle to stay online and compete with renewables for the limited dispatch room.

Finally, while purist economists or market designers sometimes hate to acknowledge this, governments will not leave the energy market alone for various reasons. We will continue to see government policies change the course of the NEM over time.

Therefore, it is upon the states to plan things better by taking a more holistic, NEM-wide view together whenever they decide to influence the electricity market. For example, states could build less grid solar in favour of more wind, as the former would inevitably compete with rooftop PV for limited midday demand.

The latter’s flatter shape might be a better substitute for retired baseload plant. And when planning renewable energy zones, the states should not solely focus on building more transmission to connect more renewable capacity.

Instead, more effort should be spent on managing the renewable output and reducing their curtailment risk, which could be done by building storage and installing appropriate grid support equipment.

The states also need to be awakened to the fact that the NEM is an interconnected market for regions to trade. This means specialising in things one has a comparative advantage in, instead of just building everything bigger than one’s neighbours.

For example, rather than focusing on delivering more green energy within their borders, some states could build more pumped storage, and others might focus on hydrogen facility development.

(Although it looks like there is a risk that all states might rush to develop bigger hydrogen plans given it is the buzzword of the day.) This would help them manage not just their own but also their neighbours’ excess energy, which could support more renewable generation across the whole NEM by reducing wasteful curtailment.

Trade and coordination via the market allow states to save capital expenditure on their marginal, less gainful projects and divert them towards more productive purposes. This will likely lead to Australia achieving the same overall emission reduction objective at a much lower cost.

When it comes to electricity market design, the idea that “the whole is greater than the sum of its parts” should be the ultimate pursuit of not just engineers, but policymakers as well.

Franklin Liu is a Senior Policy and Regulatory Consultant in Cornwall Insight’s Australia office. He has close to ten years’ experience in the Australian electricity market and has worked both in the consulting and public sectors. Franklin’s current role focuses on regulation, policy and market insights across the Australian energy supply chain, including wholesale, network and retail sectors. He leads Cornwall Insight Australia’s regulatory and market insight products such as Energy Market Perspective, Market Alerts, Energy Spectrum Australia and Energy Market Executive Summary.

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