9
Sep
2019

How to keep the lights on in Victoria

by Tony Wood


Published by  The Sunday Age, Sunday 8 September

Recent media coverage has raised already high concerns that Victoria’s energy system is in a parlous state. The threat of more than a million households suffering late-summer blackouts has only raised the volume of rancorous blame shifting between the state and Commonwealth governments. There are better choices.

In mid-2015, average annual wholesale electricity prices in Victoria were the lowest in the national electricity market. They are now the highest.

In 2018, Victoria, with about 25 per cent of the nation’s population, contributed 44 per cent of the nation’s electricity sector emissions. It had the highest emissions intensity (1.03 tonnes of CO2 per megawatt hour) even after the closure of the Hazelwood power station.

Victoria is the only state in the National Electricity Market where the Australian Energy Market Operator (AEMO) has identified a “reliability gap” for the 2019-2020 summer.

It is more than disappointing that, in response, Angus Taylor, the Federal Minister for Energy and Emissions Reduction, blames Victoria’s renewable energy targets when the Commonwealth has contributed through its failure to articulate a coherent national climate and energy policy. And Lily D’Ambrosio, Victoria’s Minister for Energy, Environment and Climate Change, is happy to accept credit for renewable investment but not the responsibility for the consequences for coal and gas generators, and the wider energy market. Any form of mutual responsibility is sadly absent.

Both ministers are grappling with a range of circumstances, some beyond their control. Short of donning a hard hat themselves, neither Taylor nor D’Ambrosio can do much about the broken coal and gas generators that threaten Victoria’s power supply for this coming summer. AEMO will procure back-up reserves to manage this situation and take the headline-grabbing, worst-case scenarios out of play. Once the currently broken units return to service, Victoria’s supply will be tight but manageable, indicating that we are dealing with an unfortunate set of circumstances, not an irretrievably broken market.

Similarly, there is little Taylor or D’Ambrosio can do to bring prices down in the short term. The closure of ageing, low-cost generation in the form of Hazelwood, combined with rising gas costs, unhelped by Victoria’s current moratorium on onshore gas development, would have pushed up electricity prices regardless of policy. A wave of large-scale renewable generation projects has been delayed due to challenges with grid connection, and weaknesses in the transmission system constrain the timely flow of power when summer challenges emerge.

Both governments must accept that resolving this situation will take time, and that quick fixes will fail. Victoria’s energy market needs two things: fewer ad hoc government interventions that harm investment and more strategic focus on the big factors shaping the electricity market.

The federal government should abandon or severely restrict its program to underwrite new generation investment. The Victorian government should resist any temptation to follow a similar path and should reconsider the form of its renewable energy support. Hand-picked projects are not well suited to the market’s current needs and are only likely to impede efficient investment.

As well as abandoning poor policies, the federal and Victorian governments should take four positive steps.

First, they should provide funding to accelerate some modest upgrades to interstate transmission. This would enable networks to plan and deliver large-scale renewable projects more quickly. The result would be lower prices and stabilised reliability in the medium term.

Second, the states and the Commonwealth must find a way to a stable and credible emissions reduction policy. If the Commonwealth is unable or unwilling to participate, then the states and territories should go ahead without the Commonwealth.

Third, there remains the question of whether the structure of the existing electricity market is fit for delivering the energy transition that Australia needs in the longer term. The Energy Security Board has been asked to work with the industry and the market agencies to answer this question. It must be given every support in doing so.

Finally, governments must re-examine the future of coal-fired generators. Policies such as Victoria’s renewable energy target put pressure on existing coal-fired power plants, particularly inflexible ones such as the ageing Yallourn power plant. Existing market rules require generators to provide three years’ notice of closure but do not impose strong penalties for non-compliance. The impact on price and reliability of sudden and unexpected coal closures must be avoided, and governments should consider better ways to guard against this outcome.

These policies would allow the protagonists to return to their corners and focus on constructive actions that will deliver the electricity system their constituents sorely want and need. Over to you, ministers Taylor and D’Ambrosio.