16
Mar
2017

An energy slanging match is not a hopeful sign

by Tony Wood


High voltage power linesPublished by the Australian Financial Review, Thursday 16 March

Two electricity storage announcements have been overshadowed by an unedifying, public stoush between South Australian Premier Jay Weatherill and the federal Minister for Energy, Josh Frydenberg. Australia’s energy system is surely too important for this petty politicking.

On Wednesday, the Prime Minister announced a feasibility study into a major expansion of the Snowy scheme to provide 2000 megawatts of electricity storage. The study will test the economic feasibility of very large-scale storage in the national electricity market (NEM).

On Tuesday, the South Australian government announced a plan to take charge of the state’s energy future. The government said it had to act because the NEM had failed its state. The big question now is if this response signals the end of national, integrated energy policy, or the start of the much-heralded transition to reliable, affordable, low-emissions energy.

The security and affordability of South Australia’s electricity system have been undermined over the past year by several external events, mostly weather related. The consequences of these events were amplified by the shutdown of coal-fired power, the market power of gas generators, a thin interconnection with Victoria, and South Australia’s globally high adoption of intermittent wind power. The federal government blamed South Australia’s renewable energy target, while the state government blamed the NEM.

Going it alone

After the state-wide blackout last September, Mr Frydenberg led the COAG Energy Council to appoint Australia’s Chief Scientist Alan Finkel to deliver a blueprint by mid-2017 to fix the security of the NEM. Yet, despite being a party to this decision, the South Australian government has decided to go it alone with a set of actions that need to be unpicked to be properly assessed.

First, to balance intermittent wind generation, the South Australian government will spend $150 million on 100 megawatts of battery storage and $360 million to build its own 250-megawatt gas-fired generator. And it will require energy retailers to get more than 36 per cent of their electricity from synchronous generators in South Australia, including gas, pumped storage and concentrated solar power.

Partial funding of new technologies to drive down their cost can be a good use of public money. It is not yet clear if this proposal for battery storage will provide value. A gas plant that operates only at times of emergency is likely to be an expensive investment that may, despite the best intentions of the government, distort the electricity market. And the energy security target will create a complex subsidy to be paid by South Australian consumers. It also risks replicating the problems created by the current federal Renewable Energy Target that works outside, rather than with, the NEM. The saving grace of the new proposal is that it is intended to merge with a future national climate change policy.

A blueprint for Australia

Second, the South Australian government will spent $24 million more on gas exploration, and distribute 10 per cent of the royalties to owners of land that overlies a new production field. Both actions seem sensible, and the latter could be a blueprint for the rest of Australia.

Thirdly, South Australia’s Minister for Energy will be given strong new powers to direct the national market in the case of an electricity supply shortfall. These powers include directing generators to operate and directing the Australian Energy Market Operator (AEMO) to control the flow on the interconnector with Victoria. Mr Frydenberg says this move may breach the national electricity law, and there is a possibility it can lead to a complete breakdown of the NEM if copied by other states. The South Australian government argues it simply wants to ensure AEMO does a better job in future, and that the change is just a faster alternative to existing state powers to intervene by declaring a state of emergency.

Assessed darkly, the South Australian government’s actions pre-empt the Finkel review and represent a threat to the national approach to integrated energy policy to which the COAG Energy Council’s ministers had committed. It may drive up power prices and further threaten existing gas-fired generators, while not fixing South Australia’s energy “crisis”. This is the view of Mr Frydenberg.

No political choice

Assessed positively, the South Australian government had no political choice but to act on its energy crisis, especially given that the federal government has no credible climate change policy. If handled with care, South Australia’s actions may even contribute to reinforcement of the NEM.

A far better outcome from this messy situation is for the federal government to move on from its incessant and unproductive battle with the state and territory governments. Mr Frydenberg has the opportunity, indeed the responsibility, to return to the positive leadership model that he adopted in mid-2016 and forge a national energy policy consensus. Australian industry, consumers and his fellow energy ministers would surely embrace this model.

Yesterday’s slanging match with Mr Weatherill is not a hopeful sign.