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Need for speed: How to power a new generation-Kerry Schott

The world is watching as Australia powers ahead with rooftop solar, but the pressure is on to get energy security and reliability right.

This is an edited transcript of a speech, Designing the next energy market, by Dr Kerry Schott AO, chair of the Energy Security Board, to The Australian Financial Review National Energy Summit in Sydney on Wednesday, October 9.

There are two major things going on in this industry that are driving everything. The first is the variable renewables of large scale entering the system. And the second is a huge increase in rooftop solar in this country, which is quite unprecedented, both on business roofs as well as our homes.

Customer bills have grown much faster than people’s wages, and much faster than CPI. In fact they have grown about 56 per cent over the last decade. The reason they went up was because of increases in regulatory standards in Queensland and NSW in the networks, which basically directed the networks to do that investment, which they did, but it led to a bill increase.

And the other reason bills went up towards the end of the decade was because of large increases in gas prices, and large increases in coal prices. And both of those things really hammered consumer bills.

What consumers are going to be paying for going forward is going to change over the next decade. And some of the changes that we’re going to see are quite favourable for bills, and some of them are going to be quite challenging. And I think in particular the new investment we need is going to be very challenging.

One of the things that does make it difficult is the lack of integration of emissions reduction with the energy market.

So the future bills won’t just be for power supply and investments. With the advent of distributed energy resources, which is rooftop solar and batteries and energy management systems and smart meters and smart appliances, people will be paying for services. And you can expect your consumer bill to look more like your telco bill, and you’ll choose what level of service and services you want to supply, and also which ones you want to buy.

So there’s much change coming, and the distribution networks are going to morph from being relatively dumb bits of infrastructure to basically service provision platforms.

Need for dispatchable investment

The big change has been the entry of large-scale renewables, and also the exit of ageing coal plants. Now, what’s driven this is two things really. So going forward in terms of market design, one of the things that does make it difficult is the lack of integration of emissions reduction with the energy market. And the world would be much easier if we knew, for example, a national target out at 2050, or some guide of where we’re going. And what we actually have is a lot of state targets and a national target, but they’re all different, and it does mean that designing in the national market gets quite challenging.

But the big question is how to get firm and flexible dispatchable power. And how best to design to get it. You could design a market, which is what we’ve got, where, as prices get very high with shortages, you would expect investment to happen, more supply, and everything would then revert back to normal.

The problem with that approach is that it may not work, or it may not wholly work. And the other problem with it is that consumers in the interim are copping some very large price increases while the investment is both encouraged and then sort of comes.

The alternative, which happens in some overseas markets, is what’s called a capacity market, and in that sort of market you basically recognise you’ve got a shortage of capacity, and you go into the market and you have an option, and that is how you meet the additional supply you need. It means that your prices aren’t so volatile and they may not go up so much, but there’s also a big danger that you’re going to end up with more capacity than you need, and again that will cost consumers more than perhaps it should have.

This debate is something that the Energy Security Board and the Energy Council are going to have to resolve in the very near future. It is often characterised as the market lovers versus people who want to be centralisers. It’s actually more sophisticated than that, and I think in a transition we may find ourselves trying to leave as much room for the market as possible, but needing to step in with some short-term transitional arrangements.

One of the things that has surprised me personally recently is that the reliability obligation hasn’t been triggered, and a recent study by the Australian Energy Market Operator (AEMO) found that the reliability standard was being met in all jurisdictions, South Australia and Victoria and NSW. You would think that in South Australia and Victoria it could have been triggered – those markets are very tight – and NSW is also very tight, particularly in summer.

Government interventions and investment in Snowy 2.0, and underwriting certain generators … are not encouraging of investment overall.

Either the reliability standard has been met and is expected to be met over the next few years, or alternatively there’s something awry in AEMO’s rather sophisticated calculations. Either way, where there seems to be particular tightness is over the peak periods in the summer, and that’s something that at the moment in terms of market design we’re paying very close attention to.

It’s quite difficult at the moment to estimate demand in this market. Cities are becoming more electrified; both Sydney and Melbourne are putting metro systems in which are completely electrified. Electric vehicles are coming, we don’t really know how fast, and it’s clearly going to depend on the cost of new vehicles. So the shape of demand going forward is quite unclear, which doesn’t help very much. And what is happening in the market, in the wholesale market, is a lot of volatility, and that is very good for batteries, encourages batteries to go in, and that’s happening apace.

And what is a bit of a problem in the market is the government interventions and investment in Snowy 2.0, and the underwriting of certain generators. All of these things, while perhaps necessary in the short term, are not encouraging of investment overall.

Security

So where Australia is at, in terms of the share of variable renewables, is right up there. In South Australia, we are running at 50 per cent renewables, sometimes more, and the only other countries that are anywhere near that are Ireland and Denmark. And the rest of us, the rest of Australia, is much closer to the 20 to 30 per cent range now, and once you get into that sort of range, the need for dispatchable power to complement your renewables becomes increasingly important.

What that means is a need for storage. Snowy 2.0 will help, Marinus Link with Tasmania would help, more batteries are going in, and there is also more investment happening in gas peakers. Those things are very important. What is likely to happen going forward with coal plants, which the board worries about, is because they have to basically technically run all the time, they’re basically running many hours of the day and not making any money, because wind and solar’s getting dispatched well ahead of them.

So they’re going to find it very difficult to be viable over the long term. So some of our coal generators, whatever their age, are going to want to shut down, because they’re just not making any money. And that’s something that really does mean that the demand for flexible and firm power is going to be increasingly great.

What not being in voltage limits means among other things is that people’s appliances are going to blow up.

While everybody I think is across that sort of issue, the main problem in the market is actually one of security. From about the first quarter in 2017, AEMO has been intervening in the market fairly regularly, and this compares very starkly with what has happened with interventions before, which is they didn’t happen.

Now, the reason for those interventions is not because of short supply, it’s because of security issues. So we’ve got situations in the market where we are not within the limits of frequency that have been set, and nor are we within voltage limits. And what not being in voltage limits means among other things is that people’s appliances are going to blow up.

In certain places there’ll be more people having trouble with their fridges and other appliances, because of voltage changes. But more importantly, the system becomes uncontrollable. And the other problem apart from voltage and frequency is just simply system strength or inertia. And South Australia has had difficulties with that, largely because of the enormous amount of renewables that they have in their system, and particularly solar.

Now, the way that you need to address this in terms of designing the market is to have markets for each of those services, or to have contracts for each of those services. And some of those services are currently provided by large coal plants, who just because of their mechanical characteristics are sitting there and turning turbines around, and lots of metal, and they provide inertia into the system, and allow the system to just ride through shocks that happen from time to time. Without that big plant there we need other things, and it’s those other things that we need markets for.

Already we’re running markets for frequency control, and the big Hornsdale battery in South Australia is doing very well providing that service. And the other market sort of is for inertia. And the transmission companies are basically bound to be running their systems with particular levels of inertia, and they are currently putting in equipment called synchronous condensers to control inertia through their systems, and South Australia has recently put in a couple of synchronous condensers to address their inertia issues.

Grid not fit for purpose

We’ve got a grid at the moment that’s not fit for purpose. And the reason that it’s not fit for purpose is it was developed many decades ago to take power from large coal generators to the cities, and those coal-fired generators are in places like the Latrobe Valley and the Hunter. And news just in – the new intermittent renewables are not in the Hunter or the Latrobe Valley. They happen to be out in rural areas, and we need to change the grid so we can get from that new generation source to the cities. At the moment what we’ve got in the grid is a very long, skinny string from those generators into town. And Australia is well known for having probably the largest geographic grid in the world, but it’s also the skinniest. And that is really plaguing us at the moment.

To address this, AEMO has done an integrated system plan of, among other things, what needs to happen to the grid. At the moment, the investments that are going on are basically no regrets, and frankly not extraordinarily expensive investments in the grid scheme of things. But we’re upgrading the interconnect with Queensland, upgrading the interconnect between NSW and Victoria, putting the synchronous condensers in South Australia, as I’ve just mentioned, and increasing the link in Victoria out to the north-west to connect to a lot of renewable energy out there.

The next integrated system plan is due out by the end of this year, and again I would anticipate that having got those projects under way, we’ll have another stream of projects to commence. And all of that is fine, but the investment in all of these things will find its way onto customer bills. And it’s fair to say that the consumer groups are extremely concerned about what this may mean, so what we need to be very careful about is not going too fast, but going fast enough.

And it is quite an urgent issue to get the transmission grid right, because we’ve got renewable energy plants going in that are having trouble connecting into the grid because of congestion.

Australia leads the world in rooftop solar

The final thing I want to talk about is where Australia, through no great fault of its own really, is leading the world. There’s a special Australian characteristic, which is solar panels on roofs. And on warehouse roofs. And on anything that’s flat, we’ve got solar panels.

In Adelaide and in Brisbane, and also in Perth – which doesn’t happen to be part of the national electricity market, but it does have plenty of solar panels – over 30 per cent of homes now have solar panels. And in the last year, as they went in, every one in eight of them had a battery. And if you’ve got a battery that can be connected into the system, you’ve got the opportunity to be able to export power as well as import power into your business or home.

So the distribution companies, the Ausgrids of the world, are not typically the most agile companies in the world, and they are now coping with bi-directional flows, or trying to cope with them. They’ve also got customers who can, if they save demand, want to be able to basically offer demand savings to the operator instead of power.

There are also people called aggregators running around doing retail type things by aggregating things like all the pool pumps on the north shore [of Sydney], and putting them on and off at particular times to suit the operator, which in turn saves energy when it needs to be saved. All of these sorts of services are possible to be offered, and basically the distribution networks are turning into trading platforms.

We’re actually at a stage where we don’t even know where this equipment is, let alone have it uniformly specified.

But what’s happening during the day in Perth, Brisbane and Adelaide, is that in the middle of the day the demand for power from the grid is effectively zero, or very close to it. So you have a situation where the demand that you’re looking at from the grid is normal, and then at about 10 or 11am it falls drastically, and it stays down near the zero level until three or four, and then it jumps back up to what’s normal again.

And this so-called duck curve of demand is really creating security issues for the distribution networks. What needs to happen is the distribution networks have got a lot of technical things to cope with. All the equipment going in needs to have technical specs so that the operator can basically co-ordinate things.

We’re actually at a stage where we don’t even know where this equipment is, let alone have it uniformly specified so that an aggregator or the operator can use it to control demand and supply.

At the moment, the networks are regulated on a building-block approach, and they get a set regulated rate of return. That sort of model does not fit this world. What is going to happen with the distribution networks, and what must happen, is the regulator will need to – they are monopolies, they need to be regulated, but they’re now going to be providing services, so there needs to be a move to regulation about the cost of services that they’re providing.

And we need to be very careful that as our cities grow, the distribution networks don’t just blindly keep building out networks and more physical equipment than they need to. With this sort of technology, there’s a chance to save a lot of money in these networks, if we get the incentives right.

So at the moment, the regulators actually constrain what the distribution companies can do, and I think that that’s likely to alter. And the role of the retailers at the moment is likely to change. And if I was a big retailer, I’d be really quite concerned about what my business model was like going forward. I’m in a world where my customers don’t like me, and I have been offering very opaque bills, and very difficult to understand bills, bills that are almost meant to be confusing, and bills that have made offers that were basically well over what they needed to be. So not surprisingly, customers are very browned off with the existing retailers.

Nipping at their heels

There are new retailers entering the system offering many different services of the kind that I’ve just mentioned. And the big retailers need to be mindful of the competition that’s at the moment doing nothing more than nipping at their heels. But it’s there, and it’s based on software and IT matters, and it’s likely to get much more intense, so long as the regulator permits. And if the distribution companies start getting into this act, the retailers are going to get very challenged, I think.

So the other thing that I’ll mention just on rooftop solar before I leave it, there’s no other country in the world that’s anywhere near our rooftop solar penetration, and it’s fair to say everybody is watching us with great interest about how we manage this.

Source: Financial Review