The politics of electricity reliability

by Tony Wood

Published by Australian Energy Daily, Tuesday 19 November

Australian summers now bring with them the twin concerns of bushfires and electricity shortages. Both concerns are linked to climate change and both bring big challenges for governments. The first is playing out so devastatingly and so early, while the second will be a topic for the upcoming COAG Energy Council meeting of energy and resources ministers.

Governments feel compelled to act when things go wrong or look bad. In January, Victoria’s Energy Minister, Lily D’Ambrosio, had the nasty experience of rolling blackouts in her state only hours after she had assured consumers that all would be well.  And in August, front-page newspaper stories read ‘Up to 1.3 million households in Victoria are at risk of blackouts during heatwaves this summer’.

It is hardly surprising that Minister D’Ambrosio believes the current electricity market is no longer adequate for our energy needs. She will propose a review to consider increasing reliability by giving the Australian Energy Market Operator (AEMO) greater flexibility to secure enough dispatchable resources to deal with the impact of worsening summer heat and ageing coal-fired power plants.

The Australian National Electricity Market uses a reliability standard as the test of whether supply will adequately meet demand. The existing standard requires that, in any region, there is enough generation capacity and transmission interconnections to ensure that 99.998 per cent of forecast demand in a financial year is expected to be supplied. The standard is calculated, and regularly reviewed, by a Reliability Panel of experts to reflect the value that consumers put on reliability.

The standard is used in two key ways. Each year, AEMO publishes a 10-year forecast that identifies possible shortfalls in supply where the standard would be breached if their best information for future demand and supply are correct. AEMO also uses the standard to determine if it needs to contract for additional reserves when a looming breach of the standard is identified up to one year ahead.

In the past few years, AEMO has become increasingly concerned that the current standard is no longer fit for its purpose of maintaining a satisfactorily reliable system. These concerns align with Minister D’Ambrosio’s.

Last year, AEMO proposed a different approach to managing reliability, to apply in time for the 2019-20 summer. AEMO wanted the power to purchase as much reserve as it thought was justified based on an economic assessment, without reference to an explicit reliability standard. The Australian Energy Market Commission (AEMC), as the rule maker, determined that, while some increased flexibility was justified, the existing reliability standard was appropriate. AEMO remained dissatisfied. Such disagreement is healthy; it reflects the natural tension between the two market agencies with differing priorities. In a healthy system, the agencies ultimately provide balanced advice to ministers.

AEMO has proposed a higher standard: to ensure there are enough dispatchable reserves available in each region such that unserved energy is forecast to be less than 0.002 per cent of total energy demanded in that region in 9 out of 10 years.

Yet a higher reliability standard will mean higher costs. It is therefore essential that the federal, state, and territory energy ministers fully appreciate the trade-off between this cost and the higher reliability it will deliver.

On the one hand, a lack of generation capacity on hot days caused only 0.1 per cent of all power outages over the past decade. Research indicates that more consumers are concerned about price than reliability, and that large consumers do not support a higher standard. No one should forget that households in NSW and Queensland are still paying for a decade-long, $16 billion over-investment on ‘gold-plated’ distribution networks that achieved only very small improvements in reliability.

On the other hand, voters see governments as being ultimately responsible for a reliable, affordable, and low-emissions electricity supply. Australian governments have managed this responsibility be creating a regulated energy market, with agencies to implement policies and manage the market. Through this structure, expert advice is provided to governments on market reforms, the Reliability Panel being one of these expert bodies. When circumstances compel governments to act, using these rules and processes also provides a predictable investment environment that is an essential element of an affordable supply.

Minister D’Ambrosio’s proposal is for a review by the Energy Security Board (ESB) based on the principle that power reliability should be maintained through a one-in-10-year Australian summer. Historically, changes to the market rules would be submitted to, and determined by, the AEMC.  Referring this review to the ESB, a body that includes the leaders of AEMO and AEMC, means that its report will need to resolve the views of those agencies while balancing the concerns of consumers and ministers.

On balance, the review should proceed, if only to crystallise the debate and clear the air on a complex and important issue. It will be critical that the review is dispassionate and based on the underlying principles of balancing benefits and costs in the long-term interest of consumers.

Setting an electricity reliability standard is ultimately a political decision. We should be confident that fully-informed ministers will make the right decision.