Only clear policy can give us power supply certainty

by Guy Dundas

Published by the Herald Sun, Tuesday 12 February

More than 200,000 Victorian households and businesses lost power on 25 January. Temperatures in Melbourne peaked at almost 43C and drove electricity demand through the roof. With three major coal units out of action, there simply was not enough generating capacity to meet demand.

Immediately the cry went up: we need more power stations! But the obvious ‘solution’ is not always right, and could be very expensive. Higher electricity bills, anyone?

Many Victorians, especially those who lost power that sweltering Friday, are demanding answers from the Premier and Energy Minister: how could this happen? But the answer cannot be that this will never happen again. Rather, people deserve honesty about how likely a lack of power supply really is, and what it would cost to prevent it happening again.

Victorians are frustrated. Some of us are angry. But here’s the harsh truth: a complete guarantee that Victoria will never run short of power under any circumstances would cost many hundreds of millions of dollars – and we’d pay for it through higher taxes or electricity bills.

We’ve seen this play out in South Australia. After 85,000 customers lost power in February 2017, the SA Government spent more than $100 million of taxpayers’ money to lease back-up diesel generators for two years. These were used for the first time on 24 January this year, for about four hours. This insurance cost more than $100 for every South Australian household.

It is far from clear that Victorians would want their government to follow the lead of the South Australians.

The last time an event like this occurred in Victoria was almost exactly ten years ago, during the exceptional heatwave of January 2009 (and just before Black Saturday). The danger is that if governments panic and over-react, we’ll build a white-elephant power station that sits idle for another decade.

An even worse idea would be for governments to build or subsidise a new `baseload’ power station. These power stations need to run continuously to cover their high upfront cost. And a new, government-funded or subsidised power station would most likely just force the closure of an existing plant, leaving us back where we started. A new 24/7 power station is a poor solution to such a brief and infrequent problem.

But governments, particularly the federal government, do need to act. They need to make life easier for investors in new power stations. Supply in the electricity market has been tight since the sudden closure of the Hazelwood power station in the Latrobe Valley in 2017, and only investment can solve this.

There is investment in wind and solar, as their costs plunge. But power companies are reluctant to invest in the flexible dispatchable generation such as gas or hydro that’s needed to balance solar and wind. Why? Because investors are getting confusing signals – or no signals at all – about government policy on climate change and greenhouse gas emissions.

Investors know that greenhouse gas emissions will have to decrease over time to meet Australia’s commitments under the Paris treaty, but do not know how fast or by what mechanism.

The best thing the federal government can do for Victorians worried about electricity reliability is to end the policy uncertainty. It should revive and implement the discarded National Energy Guarantee. Policy clarity will enable smooth replacement of our ageing coal power stations with new, flexible generation.

Electricity reliability is not a reason to invest in new coal power stations, or an excuse to ignore greenhouse gas emissions. Grattan Institute’s new report on electricity reliability, Keep calm and carry on, shows that less than 0.1 per cent of all power outages occur due to a lack of generating capacity. Rapid growth in wind and solar power will not result in more outages – provided governments give investors clear, sensible and stable policies.

And they should avoid the temptation to take matters into their own hands. Panicked government interventions will leave consumers and taxpayers with a nasty electricity bill.