Keeping our climate commitments and the lights on

by Tony Wood

Published by the Australian Financial Review, Monday 10 October

Australia’s energy ministers, acting on the South Australian blackout, have appointed a review to develop a national energy reform blueprint to maintain electricity reliability and security.

Viewed in a pessimistic light, the can has been kicked down the road and process wins over outcomes. Looked at in an optimistic one, the review will provide an overdue, unifying framework for energy market reform. Its terms of reference leaves out critical issues, yet right now, it’s our best bet.

In August, federal Environment and Energy Minister Josh Frydenberg led the ministers of the COAG Energy Council to commit to an extensive range of market reforms. South Australia’s blackout provided the catalyst for Friday’s emergency meeting to go further. The review, chaired by Chief Scientist Dr Alan Finkel, will develop a reform blueprint by early next year.

The three issues

Three overarching issues frame the potential for success of the Finkel Review.

First will be the outcome of reviews into the South Australian “system black” event. Their focus should be technical not political: what happened and what should be done to reduce the likelihood and consequences of a recurrence.

As always, a hard-headed benefit-cost analysis of technical and process alternatives will be central. Issues will include the design of transmission towers, whether they should be underground and how various generation plants respond to system disruptions. The Finkel Review will draw on these analyses and their recommendations.

Second is climate change policy. While technology developments and consumer choices are rapidly transforming global energy systems, they would not be happening at their current scale and pace without the underlying need to address climate change. The review will consider the impact of federal and state carbon mitigation policies on energy markets. This is essential.

Federal policy a must

Sadly, the review’s terms of reference fail to recognise the elephant in the room – the absence of a federal policy to reduce electricity emissions in line with Australia’s committed 2030 target. Frydenberg’s challenge is to use the planned 2017 review of climate change policy to deliver a policy that can both credibly meet the current target and be scaled up to meet future targets.

The recent shocks in South Australia give him an opportunity to persuade his cabinet colleagues that change is imperative: the absence of credible, scalable climate change policy creates unmanageable investment uncertainty and a real threat to energy reliability and security.

Third is to ensure that the design of the national electricity market (NEM) continues to support reliability and supply security in the context of such a climate policy. The Australian Energy Market Commission, the market rule maker, and the Australian Electricity Market Operator are undertaking an overdue review of system security that will address technical issues such as frequency control and stability. This review and implementation of its recommendations must be expedited.

Beware expensive short-term options

Inter-system transmission lines promote reliability and security. Such lines are being built to connect wind-rich Germany with hydro-rich Sweden and nuclear-rich UK with hydro-rich Norway. Basslink connects wind-rich Tasmania and coal-rich Victoria. Recent outages of the connection between South Australia and Victoria highlighted the problem of dependence on single connections.

Linking wind and solar-rich states with other states similarly reliant on intermittent renewables will raise new questions. A link between NSW and SA may be justified at present. But if the generation supply in the former changes, or if flexible, low-emission generation or large-scale storage is built in the latter, such transmission investment may be an expensive waste of consumer money.  A review of the planning and decision-making processes for such investments is a critical element of the Finkel Review.

Coal and gas power plants produce greenhouse gas emissions; wind and solar plants are intermittent. For the NEM these are not moral values, but characteristics to manage. The best way to do that is to explicitly price them in the market. Ensuring that the NEM can provide flexible responses to intermittency appears to be a major omission from the review’s terms of reference.

The council recognises the need to integrate climate change and energy policy. The publication of the Finkel Review before the climate policy review will make such integration harder than it might have been.

Much political posturing preceded the emergency Energy Council meeting. The tone afterwards was more of common commitment. The Finkel Review’s fate depends, at least in part, on maintaining this approach.