Tuesday, September 15, 2020

More confusion in energy land

Phil Coorey in the AFR told us the PM's tactic (it isn't big enough to call it a strategy) is to use 'energy week' to reset focus on the recovery Today he rocked up to Newcastle for the second element of this with some very confused messages about electricity and gas. 

To ensure affordable, reliable power, we need the market to deliver 1,000 MW of new dispatchable capacity by the summer of 2023-24, with final investment decisions by the end of April 2021. Now that’s less than eight months - and we’re counting. Each day.

So, this is the plan. If the energy companies choose to step up and make these investments to create that capacity, great, we will step back. If not, my Government will step up and we will fill the gap. 
And to this end, Snowy Hydro is already developing options to build a gas generator in the Hunter Valley should the market not deliver.

The problem is, Snowy Hydro is just one of the companies. Indeed, despite its name, Snowy Hydro does more than just hydro - it already owns and operates three gas-fired power stations, with a total generating capacity of 1,290 MW and it also owns 136 MW of reciprocating diesel engine peaking generation in South Australia, located at three facilities. So Snowy Hydro can go make that investment. And for those who don't know Snowy Hydro is one of those 'gentailers' the 'big stick' legislation was designed for. It runs those outrageous jingoistic - if not xenophobic - 100% Australia Red energy ads. 

At the same time the PM seems greatly worried about gas prices. Gas is an essential feedstock in a number of chemical processes, especially for making fertiliser. It is also the best fuel if you want industrial heat. As pointed out here it makes more sense to stop burning gas for elerctricity. 

What the NEM needs is storage, and it isn't getting as much as it needs because of the market overhang from Snowy 2.0. For the historically inclined, Liddell has previously been responsible for power shortages in NSW. In 1981 stator winding faults took out three of the 500MW generators with some power restrictions in June and further power restrictions imposed for twenty days in December 1981, and twenty-six days in March-April 1982. The situation was temporarily relieved by additional power provided by 12 25MW gas generators purchased by Elcom and permanently once the first 660MW generator at Eraring came on line. 

The PM's announcement (or threat) continues the shambolic governance in the sector. The Australian Energy Council and Energy Networks Australia have commissioned a report from CEPA that has questioned the adequacy of the governance arrangements for the Australian Energy Market Operator, saying:

Given AEMO’s crucial, and growing, role in the NEM, we suggest it is timely to
revisit the existing governance framework. We consider that there is a case for reconsidering the strength of the accountability mechanisms that apply to AEMO, consistent with the level of scrutiny that is applied to system and market operators in other markets. 

This is a significant concern given the centrality of AEMO's work to the conclusions being drawn by Ministers. The simple facts are that AEMO has the incentive to 'catastrophise' the state of energy supply. But its own Integrated System Plan still saw value in new gas generation only if the price of gas is significantly lower than it is today.

The CEPA report also suggested that, in keeping with other global models, AEMO as a monopoly market operator should be subject to economic regulation by the AER. But the AER came in for its own scrutiny from the Australian National Audit Office that found it only 'partially effective.'

The PM in his statement also said:

We must also though, modernise the way the electricity market operates to take account of technological change and to put more power into the hands of consumers. Now 21st Century electricity market needs 21st Century rules. A package of market reforms will come forward next year as part of the biggest shake-up of the National Electricity Market since it was created in 1998. New rules will take account of the increasingly distributed nature of generation and better recognise the critical stabilising role played by dispatchable generation.

The immediate focus will be on security measures, better integrating different generation technologies and a reliability framework. Longer term reforms will focus on rules for a two-sided market, revised investment programs and a framework for the exit of ageing thermal generators. 
These reforms, to be developed and agreed through National Cabinet’s new Energy Reform Committee, which tasked this work at our last meeting in fact just over a week ago. 

This of course is a reference to the Energy Security Board's Post 2025 project. This is a most curious project that began as an aside after discussion of summer readiness plans at the COAG Energy Council's October 2018 meeting. The Communique noted:

Ministers discussed the ongoing work by market bodies to implement Finkel recommendations on reliability and system security in the NEM. Ministers also asked the ESB to provide advice on a longterm, fit-for-purpose market framework to support reliability that could apply from the mid 2020’s as the market transitions. The ESB will report back to Council in December 2018 on a forward work program for endorsement. 

Ministers also agreed a work program for the ESB to develop advice on a long-term, fit-forpurpose market framework to support reliability that could apply from the mid-2020s. 

 In March 2019 the work program for the project was posted on the Energy Council website with the following commentary:

The COAG Energy Council has tasked the Energy Security Board with developing advice on a long-term, fit-for-purpose market framework to support reliability that could apply from the mid-2020s. By the end of 2020, the ESB needs to recommend any changes to the existing market design or recommend an alternative market design to enable the provision of the full range of services to customers necessary to deliver a secure, reliable and lower emissions electricity system at least-cost. Any changes to the existing design or recommendation to adopt a new market design would need to satisfy the National Electricity Objective. This forward work plan was approved by the COAG Energy Council at its December 2018 meeting.

Any significant changes to the electricity market design would need to be well considered, including substantial input from stakeholders and detailed consideration of alternative market designs, and telegraphed well in advance of any change to ensure there is minimal disruption to the forward contract markets for electricity.

If changes are required to deliver a long-term, fit-for-purpose market framework by the mid-2020s, then consideration of any required changes should be concluded by the end of 2020 to enable sufficient time for the market to transition to the new market framework.

The very clear expectation was a full consideration of changes considered by the end of 2020. 

There is only one aspect of this project that needs to be highlighted here, which is the question of scenarios. The work plan stated:

Market design options will be informed by reasonable expectations of the generation mix in 2025 and beyond, the extent of take-up of distributed resources, the ways consumers interact with the system, the configuration of the transmission network, external policy settings, future technology price paths, the potential development of a hydrogen industry, and the way these factors could all evolve over time (several of which of course will be influenced by market design options). Clearly there are various ways in which these factors can diverge from where we are today. Well-developed scenarios are also necessary for testing expected outcomes from the alternate market designs. This does not mean that the alternate market designs will or should be tailored to the scenarios, given that they represent only a handful of possible futures. 

Various parties, including the energy market bodies have developed and are developing multiple scenarios to inform their own analysis. However, scenarios are always to some extent designed for the particular use to which they are being put, and so this project will need to develop its own set of scenarios to be an appropriate tool for analysis. In doing so, it will undoubtedly draw on other similar exercises for input.

The work plan also listed scenario development as an activity in March-May 2019. When the ESB published its Issues Paper in September 2019, the accompanying website post said "The ESB is seeking feedback on the possible future scenarios that will be used when assessing options for change." The paper itself said:

The most comprehensive future scenarios of the NEM are set out in the Integrated System Plan (ISP). It is likely that the post-2025 project will use the ISP scenarios as the starting point for investigating possible future market designs across different technological scenarios.

How the ESB went from the belief that it needed to develop its own scenarios to a proposition that it should adopt the ISP scenarios has never really been explained. A particular weakness of the ESB scenarios as used for the 2020 ISP is that none of them - including Step Change - is consistent with a patrhway to net-zero emissions by 2050.

The April 2020 Design Paper advised the focus of the project had now changed to three phases of program development and would constitute seven 'market design initiatives.' It also announced that initiatives would be assessed against a 'balanced scorecard' of the strategic priorities identified by the ESB in its Strategic Energy Plan. 

The intent of Energy Council in initiating the Post 2025 project was clearly on a 'longterm, fit-for-purpose market framework.' The different alternative future pathways of system development - the scenarios - are a critical element for ensuring a longterm design is fit for purpose. All the indicators are that the combined efforts of the Eneregy Council, the ESB and other market bodies will not be a market design for the full transition, but will be another instance of The Fifth Risk referred to in Michael Lewis's book of that name...pursuing short-term solutions to long-term problems.

Or as Fiona Simon so succinctly described it in her book Metaregulation in Practice, the need of politicians to be seen to be doing something. 

Life is what happens while you are busy making other plans JWL

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