Most Australians don’t spend much time thinking about the electricity system, as long as the lights turn on. But the National Energy Market (NEM) is going through big changes as it moves away from coal generation towards renewables. And Australia’s future prosperity depends on governments getting this transformation right.
On this podcast, Grattan energy experts Tony Wood, Alison Reeve, and Richard Yan, discuss their latest report, Keeping the lights on: How Australia should navigate the era of coal closures and prepare for what comes next.
Transcript
Alison Reeve: Most of us don’t spend much time thinking about the electricity system that underpins our economy and our lifestyles. As long as the light switch works when we flick it on, we tend to assume that everything’s fine. But this electricity system, the National Energy Market or NEM, is going through big changes and challenges as it moves away from coal generation and towards using mostly solar and wind.
And keeping the lights on while all this happens is becoming an increasing concern. My name is Alison Reeve and I’m the Deputy Program Director of Energy and Climate Change here at Grattan. And with me today are two of my colleagues, Tony Wood and Richard Yan. We’re here to talk about our latest report, Keeping the Lights On. Now, before we jump into the detail of the report, I thought it would be useful for Tony to define for us what actually is the National Energy Market.
Tony Wood: Thanks, Alison. I guess the first thing to do is clear up the geography. This is not a national energy market at all, it actually covers the eastern states, and broadly that means from the north of Queensland to the south of Tasmania and to the west of South Australia. And the reason it does that is because they’re all physically connected these days.
That happened over the last couple of decades the system is connected, and all the states benefit from that.
So it’s a physical system, that means that the generation of electricity, coal, gas, hydro, wind, sun, are all feeding into a system. And it’s supplying customers through a very complex set of transmission lines, power systems, transformers, and so on. That’s what’s called the physical system. It’s also a financial system because the businesses that sell electricity into that market are trying to make some money to justify their investment. And the retailers who sell the electricity to us, they buy from that market before they sell electricity to us.
So it’s also a financial system. And because energy is, so political, it’s also a political system.Energy ministers across the country have a significant overriding role in how this whole system works. So that’s the NEM, and it’s a complex animal going through some very challenging times.
Alison Reeve: So given that it’s made up of all of these different bits, how do we know whether it’s actually working well?
Tony Wood: Well I guess the first test is do the lights come on when you flick on the switch? But of course, we assume that’s the case because we’ve been used to getting a level of reliability that is, is it there when you want it?
What we’ve also taken for granted, generally, is the price. And we’ve taken the reliability for granted, we also then get worried when prices go up. And electricity prices have been going up, because there’s been a lot of changes in the system over the last little while, which have created some degree of volatility or fluctuations in price.
And then finally, the thing that’s really been behind a lot of the changes we’ve been seeing over the last decade or two, is the need to address climate change. And the electricity system has been for many, years, the major, about a third, of all the greenhouse gas emissions we have in this country.
So that’s a big deal. And changing from one system of high emissions to a system of low, if not zero emissions, is a huge transformation.
Alison Reeve: So we’ve talked a lot on the podcast about affordability in the past, and there’s a lot of podcasts in our back catalogue for anyone who wants to go and dig that out. But I’d like to just come back to this idea about the reliability and whether there’s a problem around reliability. Could you set out for us what do we mean when we say reliability? And how do we measure whether it’s whether the system is actually reliable or not?
Tony Wood: Well, for the consumer, it’s, is the electricity there when I want it? That’s where it starts and sometimes where it also finishes. But behind all that, things can get very complicated quite quickly. We know that whenever there is an interruption to our electricity supply, local blackouts, more widespread blackouts, most of that occurs because of local network problems.
That is, power lines go down because of storms, trucks running in lines, possums playing around on the power lines and that sort of stuff. That’s where 95 percent or more of all the outages or blackouts we experience are seen. The second one is what’s called the security of the system, and that was, is the system robust to withstand shocks, for example, major storms, those sorts of things.
The third one, which most of the history of this system we’ve taken for granted and still do, is that we are building enough.
There’s enough there, in place, generation in particular, to ensure that we can meet demand, provided the system doesn’t get disrupted by those other two factors. Historically that’s never been a problem, but what’s happening is we’re starting to see some changes on the supply side.
And that’s now showing evidence that’s the area that’s not going so well.
Alison Reeve: So we’ve got three, three parts to it. We’ve got, are the poles and wires there to bring the electricity to us? We’ve got that sort of technical operation side is the whole system in balance so that it’s staying on. And but then there’s this third part about, do we even have the right amount of generation in the first place?
Now, the way that the whole system is set up is that this is a market, right? That’s what the M stands for in, in NEM. So the thing about markets is usually they self correct and they fix things. So why hasn’t this been happening with the National Energy Market?
Tony Wood: Well, it does go to the fundamental hub of what you described. To have the market operating, prices go up and down. And when prices go up, more supply comes in and the opposite also occurs. The problem has been that it’s becoming more difficult for those who have to invest in new supply to have confidence in what sort of demand they’re going to be facing and what sort of constraints that might apply both in the short term and the longer term about what sort of investments make sense.
Now what that all means from the investment perspective is risk. And when we start seeing risks that investors see becoming increasingly unmanageable, they tend to hesitate on what they’re going to invest in. They tend to look for ways of covering those risks, and life becomes much more unpredictable.
So it’s this change in the nature of what’s required, and the risks that investors face, and also the energy retailers in the middle of the system. All those risks are changing, that’s what makes it more difficult for the market, because some of the risks, Let’s call it carbon market risk, for example, for a start, where we don’t really know yet.
We don’t have a clear economy wide or energy wide carbon price or carbon constraint or carbon policy to drive all this thing. It’s that uncertainty from a policy perspective that started to allow concerns about not having enough credit to the system because investors are finding it more difficult. To think about how do they invest, what do they invest in?
Do they invest in more coal, more gas, more hydro, more solar, more wind, more storage? All those sorts of things have become much, much more complicated.
Alison Reeve: I think a large part of this, isn’t it, is that the coal fired power stations are getting old and deciding to leave the system because they’re either no longer technically capable of operating or they’re no longer economic. Richard, that actually forms a big part of this problem around reliability and this problem of is there enough generation, doesn’t it?
Richard Yan: That’s right. I think it’s probably easiest to think about this problem as a whole, as one of around coordination. So there isn’t enough coordination being done around Having coal leave the system, but also at the same time, ensuring that enough renewables are entering the system to replace all that coal capacity that we’ve lost.
So, on the coal exit side of things, you’ve already said, Alison, that one of the coal plants that are in the national electricity market are getting old. A lot of them are experiencing unplanned outages. And at the same time, they’re less and less competitive with the new renewables that are entering the system.
So what that means is coal can exit quite suddenly. most famous example of that international electricity market is Hazelwood, which exited the market in 2017 with only five months notice. And that just means there wasn’t enough time for renewables investors to prepare the business case for new renewables investments in solar and wind and build those investments in time for the exit of Hazelwood.
On the flip side of that, what’s happening on the renewable side of things is that community opposition is ramping up around transmission and renewables. And what that is doing is that it’s slowing down the build out of renewables that you need to replace the coal in the system. And we think that’s a pretty big issue, especially in the next decade.
According to the Australian Energy Market Operator, in their central step change scenario, where they look at the future. 50 percent of the transmission build out required by 2050 will need to occur in the next decade or so up until about 2030. So what that does is it allows these transmission lines to connect to renewable energy zones where there are great renewable resources and unlock those zones for new solar and wind generators to be built.
To the extent that’s happening really quickly in the next decade or so, community opposition will be a big factor to look into to ensure that there remains a system that is reliable in the face of coal closures. At the same time, what’s happening is transmission isn’t also being coordinated with the build out of renewables very well.
So what’s happening is that a lot of the spots on transmission lines that were previously available for renewables to connect to have already been taken up by the renewables that have entered the system. What that means is new renewables entering the system are competing for fewer spots along the transmission network to connect to, and that’s leading to congestion in the system.
And what’s happening there is there’s uncertainty for investors because they’re unsure if they’re able to, when they invest in a renewable generator, to dispatch their energy into the market and receive a return for that. So that’s a big issue also, in the National Electricity Market.
Alison Reeve: It’s a bit of a sort of chicken and egg problem really, isn’t it? That you, no one wants to build a new generator if they don’t think the transmission line is going to be there, but no one wants to build a new transmission line if they don’t know that the generation is going to be there. And so getting that coordination exactly right.
So that everything happens at the same time. And then coordinating that with the coal is a pretty knotty problem, particularly when we have a system that we’ve built to allow all those decisions to be taken by the private market where people won’t necessarily act in that coordinated way.
Now, when we talk about having enough generation, governments have been encouraging more and more renewables for the last at least 20 years. Why isn’t that the solution to replacing the coal, just encourage more renewable generation to get built.
Richard Yan: So what we think is happening there, Allison, is that the policies that governments have been using to push renewables into the system, while they’ve been good to bring up renewables and ensure that they are a viable and economic part of the system, they’re also creating some problems in the system now.
So, for example, the key federal government, policy in this space, the Large Scale Renewable Energy Target, I’ll call that the LRET, there’s some issues with the design of the LRET that mean that it’s not playing the role that it needs to ensure that we can get a lowest cost system that also is highly reliable.
For example, some of the things that are wrong with it, potentially, are that the LRET doesn’t actually include a role for storage. And that’s going to be increasingly important because we need to balance intermittent renewables, which depend on the sun shining and the wind blowing with storage as well to ensure that during the periods where that’s not happening, we still get reliable electricity.
At the same time, also the LRET, makes renewables more competitive against fossil fuels, but it doesn’t leave a space or a role potentially for gas to play a role in the future. that. We know that gas, according to some work that we did previously here at Grattan, will probably have a very large role in the future national electricity market to ensure that there is electricity that can be supplied to the market during those deep dark periods during winter when the wind isn’t blowing and the sun isn’t shining.
Alison Reeve: And just to be clear, when we say gas is playing a large role, that doesn’t mean we’ll be using a lot of gas, and it doesn’t mean there will be a lot of gas generators. But it means that the role that they play is really critical because they’re there for the last 10 to 5 percent of the energy demand that we need.
So that’s actually really important because that’s the bit that keeps the lights on, particularly on those really cold, dark days during winter. Richard, we talked a little bit in the report about the way that things like rooftop solar and so on integrated into the system. Do you want to unpack that a little bit?
Richard Yan: So rooftop solar and things like household batteries, things that households installing behind the meter on their side of the house on their side of the divide. Those, distributed energy resources are actually potentially creating some unintended consequences in the system.
So what’s happening there is some of the incentives that we’ve built into the system to encourage people to take up these solar panels on the rooftops and household batteries are actually benefiting owners, but they aren’t designed to help people make the right investment decisions to benefit the system as a whole.
So we think there’s room there definitely for distributed energy resources, rooftop solar and household batteries and whatnot to be integrated more thoughtfully into the system to ensure that it benefits everyone.
Alison Reeve: All of this new renewable generation kind of changes the way that risk works within this market as well, doesn’t it? Because Tony was talking earlier about investors seeing different risks, but there’s a whole extra set of risks there about moving to a system that’s more weather dependent rather than being dependent on securing stockpiles of coal and gas.
Richard Yan: Yeah. So in a system that has more intermittent renewables in it the nature of risks to resource adequacy or reliability changes as a result. So what we’ll see actually is that the periods that are most at risk for resource adequacy will become those that are more dependent on weather. And when resource adequacy risks do arise, they’ll also be potentially longer and deeper so affecting more customers. And also those risks will tend to shift from summer when people are turning on their air con on a hot afternoon to more being in winter, when the issue is there are those cold, dark and still days where wind and solar won’t be generating as much. So we need to ensure that the system plans for that potential future and incentivizes the right investments to deal with those new risks.
Alison Reeve: We’ve got coal exit timing, which is uncertain. We need to build a lot of renewables, but we need to coordinate that not just with the coal leaving, but also with building new transmission. We’ve got the nature of how we incentivise where renewable generation goes and when it’s used.
And then we’ve also got this changing nature of risk as well. And one other thing I might just throw on top of that is if it wasn’t complicated enough already is that the way that we’ve set the national energy market up was not designed for this sort of situation. It was very much designed around a nice, predictable, steady state market.
And that’s not the world that we’re in at the moment. And I think that’s what sort of where a lot of the nervousness by politicians comes from is that they have this system that was built for a different world. And they’re really worried about not being able to make that system work in this new world.
And one of the things that happens when governments get nervous is that they start to pile policies on top of it, of policies to try and fix the problem. So Tony, we’ve got this kind of patchwork, different ways of trying to deal with all of these different parts of the problem. Do you think it works?
And if not, which bits do you think have been done and which ones haven’t?
Tony Wood: It’s an interesting question to think about what works and what people think might work and they’re not necessarily the same thing in this area of building patchworks on patchworks. Well, we saw this beginning in Australia I think after the blackout the statewide blackout in South Australia in 2016. And Minister, at the time, Minister Koutsantonis, who was once again the Energy Minister in South Australia. His first action, I’m out of here, I’m going to leave this system because it’s not giving me what I want.
And over time, Richard mentioned the closure of Hazelwood. We saw what happened when the owners of the Liddell Power Station in New South Wales said they were going to close it. Malcolm Turnbull was Prime Minister. Governments get very nervous about this because even though they do, in a steady state, worry about prices, they know that if the lights go out, they’re the ones who are gonna be having to front the cameras to explain what happened and what went wrong and why they didn’t fix it.
So that becomes a really big deal. And so their, risk appetite or their, the value they put on having a high level of reliability, often there’s even more than we’re prepared to pay for as consumers. So what they do is several things. Richard’s mentioned the Renewable Energy Target.
That’s been in place since about 2002. It’s gradually and steadily been increasing the amount of renewables in the system. We’re now well over 35 percent renewable in the system, which is an amazing outcome. But alongside that, the concerns started to rise. Well what happens when the wind isn’t blowing and the sun isn’t shining, as Richard said?
What happens when those old coal fired power stations are not being replaced by new coal fired power stations? What happens if we have a gas system which is there to help support that system, but the gas prices go up and gas demand’s gone crazy because of the Ukraine war? All of those things meant ministers started to introduce some more policy, so we had states individually, introducing their own renewable energy targets. We have the Commonwealth Government building Snowy Hydro 2. 0. We have the Commonwealth Government also worrying about building a gas fired power station in New South Wales. And we’ve now got the Victorian Government reinventing the State Electricity Commission of the state.
So, all those things do one thing which is in common. And that is, they create more of those risks you were talking about, and more uncertainty for investment and less predictability. And while we continue on that path, state governments, sovereign states as they are, will continue to make those sorts of decisions.
But what’s missing is that degree of coordination that Richard introduced into this conversation before and it’s while that exists one, one is therefore uncertain as to whether we were going to go next. Now, we could settle all this down but ministers are uncomfortable about settling this down. So how we get agreement on what do we do next?
I think becomes really important because right now the lights are on. Prices are more or less not too bad. And emissions have been coming out in electricity, but it’s this concern that we may not have enough tomorrow, or next year, or the next decade. That’s where the concern arises.
Alison Reeve: I think if we, were to list off all of the policies, we could give you acronym city, but we shouldn’t do that to, to our lovely listeners. But I think just to summarize it, Richard spoke about the Renewable Energy Target before. We’ve also had the federal government announce this thing called the capacity investment scheme, which is going to underwrite new generation and new storage.
They also have something called rewiring the nation, which underwrites transmission. In each of the the major East Coast States there’s also initiatives like often called renewable energy zones, where governments try and take a role in coordinating between building the new transmission and giving access to it for new generators.
And then on the reliability side, we’ve had obligations placed on electricity retailers to have a role in managing it. We’ve had an interim reliability standard which asked the system to achieve a much higher level of reliability. And then there’s also the capacity investment scheme, which I mentioned before, is also meant to have a role in reliability because it will also help to underwrite storage. It also gets really complicated to see what all of this is going to cost let alone, what it actually means for investment. And some of it, to be honest, I think remains to be seen how well it’s going to work and how it works all together. That’s one of the problems when you’ve got a patchwork of policies is we don’t know how these policies are all going to interact with each other either.That’s, a lot of problems to deal with. In the report, what advice did we give to governments for dealing with this situation? Because when you look at it you feel like it’s an absolute unholy mess and it’s not really going to be possible to deal with.
Richard, what advice did we give to governments in this report about how they should think about this problem?
Richard Yan: So That’s one of the key insights actually in our report, that it’s very important and useful to be thinking about this problem in two distinct periods. So you’ve got the coal closure era, as well as the post coal era. So what’s going to happen in the cold closure era is you’ll be seeing a lot of that coal that we were just talking about exiting, often in a lumpy fashion, suddenly from the market.
At the same time, they’ll be replaced by decentralized intermittent renewable energy generators such as wind farms and solar, we think that this period will also be bound by the fact that the federal government has put forward a renewable energy target and emissions reduction target for 2030.
The post coal era, what we’ll see is we’ll have less coal in the system and more renewables. And the role of balancing those renewables will be played by things like storage and gas. And during that period as well, we’ll probably also see the growth in electricity consumption as more sectors of the economy move away from fossil fuels onto clean electricity to meet their emissions reduction targets as well.
So that’s one of the key insights that we had in the report, that it’s easiest to think about this problem in two parts, because you’ve got the current time pressure on the one hand, as well as political realities during the pre-coal closure, period but you also need to do the work of designing the market for the future as soon as you can.
Alison Reeve: So we were saying, look, you’ve got this eight year period where things are going to be quite messy and a little bit unpredictable, and that maybe the frame of mind that governments should have during this period is risk management doing doing what we said in the title of the report, Keeping the Lights On.
And just accepting that they may have to do a fair number of like tweaks and fixes and so on to get through that period, but that it is possible to do. And that the reason we’re happy to make that trade off is because once the coal’s out of the system and we’re in this new world, we can focus on designing a market that will work really well to encourage investment and to encourage safe and reliable operation of the network during that period of time.Tony, what are some of the things that government should be thinking about now for getting ready for that reality of the post coal market, given that it’s probably going to arrive on us in about eight years time?
Tony Wood: Well, I think what comes out of the description Rich has just given us is that it’s very difficult to do these two things at the same time, and it’s very difficult when you’ve got multiple governments all worried about both the short term and the long term. It demonstrably hasn’t worked to date. So what we need to do as Richard described is make sure we deal with all the band aids we’ve got in place now.
They’ll probably get us through. It’ll most likely be okay. But as you said, manage the risks in the short term. Don’t try and do big stuff at the same time. Separately, create a new approach in which we start planning for this future. There’s so many uncertainties about what this will look like. It won’t be quick, and it won’t be easy.
We’re going to have to think about what sort of reliability framework will be appropriate when we have 90 and 95 and even 100 percent of our system coming from zero or near zero sources of generation. How do we think about a carbon policy in this process? What sort of carbon reduction pathway, emissions reduction pathway, do we have over the next 20 years to get to net zero by 2050?
How do we unlock the value in those distributed resources, the rooftop solar, the local grids in towns and communities that can be connected to the grid? And finally, how should all this be stuck together? What is going to be the role of markets? What is the role of government? Because energy is political, governments will have a role.
It’s got very messy recently. But if we can see some real confidence emerging that look, we are on track to get to 2030 without blowing this whole damn thing up. It looks like what we’ve done so far is okay, maybe then we can start to think about a different sort of a future, and maybe then we can also go back to the way the world was when ministers did have confidence that the market that they designed. The market that they have an overarching responsibility for is actually working and will get us beyond 2030, 2035 and towards net zero by 2050 without any way interfering with affordability or reliability.
Alison Reeve: It’s really important that we’ve got that long term vision of that 90, 95, 100% emissions free energy market in mind, because that kind of gives us something to aim for. But it also means that the trade offs that we make in the short term, we can understand that they are short term trade offs, and that’s not the way that we’re going to organise this market long term.
And I think in terms of what that means for investor confidence, for market confidence and for consumer confidence as well. It makes everyone feel, I think, a little bit more secure, particularly the energy ministers, that we will get through this difficult point and that there is a brighter future there when we get through it. If this piques your interest, you can read the report for free on our website. And while you’re there, why not consider making a tax deductible donation to Grattan and help support our work? We’re very grateful for all the support we get from donors, whether big or small, and every donation helps us with our mission to change Australian policy for the better.
Thank you for listening today.