The South Australian government is considering intervening in the National Electricity Market after its commitment to renewable energy has generated sharp spikes in power prices that threaten its economic development strategy.
South Australian Treasurer Tom Koutsantonis called a crisis meeting of energy users and suppliers today to deal with sharp rises and falls in wholesale electricity prices that threaten the redevelopment of a Port Pirie lead and zinc smelter to make metals for solar panels and mobile phones, even with a $291 million government subsidy.
The volatility in wholesale prices – caused mostly by the state’s reliance on wind power and the ability of coal and gas power stations to charge high prices when the wind drops – is creating havoc for industry in the state, which is one of the country’s most economically depressed.
“The state government recognises we must do more to address issues in the market as we transition to a low-carbon economy,” said Mr Koutsantonis, who also serves as Energy Minister.
Increased use of wind power is one way to meet the ambitious greenhouse gas emissions reduction targets embraced at the Paris climate talks.
South Australian Premier Jay Weatherill attended the talks – with a government-funded camera crew – and promised to make Adelaide the world’s first “carbon neutral” city by 2050.
The Paris agreement is likely to require the federal government to increase its emission reduction targets to between 45 and 65 per cent by 2030 compared with 2005, which is a far a bigger cut than its current pledge of 26 to 28 per cent, Bloomberg New Energy Finance estimated.
Snowy Hydro chief executive Paul Broad called for “rational argument” about what to do with coal-fired power stations, pointing to the absence of any realistic alternative for base-load power, and said more efficient coal power should be encouraged.
“What are they going to replace them with, what is it going to cost the community and who is going to pay?” he said.
Grid instability in South Australia and other countries with lots of wind power – such as Britain and Germany – shows the problems of the renewable energy sources.
Today’s meeting will include energy suppliers, the market operator and consumers. The meeting will canvas “potential responses by the market or government through regulatory processes and other interventions”.
That opens the possibility that the government may double down on its $291 million subsidy to Nyrstar, the Dutch metals-refining company redeveloping the ageing and polluting Port Pirie smelter.
Nyrstar is one of the worst-affected energy users.
It is in the market for electricity from mid-2016, the scheduled recommissioning date for the upgraded multimetals refining plant, and is attending the meeting in Adelaide.
Nyrstar faces prices of $87 to $90 per megawatt-hour for electricity delivered from 2016 to 2018, compared with less than $50/MWh when it confirmed the project in a ceremony with Mr Weatherill in May. Victorian industry pays $37-to-$41/MWh for the same contracts.
“Any increase in energy costs, in particular electricity costs, or a disruption in the supply of energy for Nyrstar’s operations, may significantly increase production costs or adversely affect production,” Bertus de Villiers, vice-president for metals refining at Port Pirie, told The Australian Financial Review in an email.
“We are currently in discussions with key stakeholders to identify opportunities to minimise the impact of any increase in electricity costs on the Port Pirie operations.”
RISING ELECTRICITY PRICES
South Australia has endured several episodes of sharply rising electricity prices, and prices for ancillary or grid-stabilising services, since July, with prices soaring above $2000/MWh and at times hitting the $13,800/MWh market limit. The total cost of Nyrstar’s Port Pirie smelter redevelopment has already blown out by 10 per cent to $563 million, with the company warning six weeks ago there would be an added $49million in costs. Nyrstar blamed the extra $49 million on adverse foreign exchange rate movements and what it called additional services requirements.
The South Australian government’s $291 million in third-party funding sits beside funds from forward sales agreements for the metals being produced from the smelter, and Nyrstar’s own financial contribution.
The final documents allowing Nyrstar to start accessing the $291 million in government funds were signed on November 27. The smelter, about 225 kilometres north of Adelaide, is in the electorate of Geoff Brock, an independent MP who was the kingmaker last year who helped install Mr Weatherill as premier after a cliffhanger election.
Mr Brock, who became regional development minister in Mr Weatherill’s cabinet, gave the Premier his support about a week after the state election after Mr Weatherill made a quick dash to Port Pirie by road to persuade Mr Brock over a pizza at a local restaurant that he was the better bet as leader.
Mr Weatherill’s grip on power expanded when former state Liberal leader Martin Hamilton-Smith switched sides in May 2014 and joined Mr Weatherill’s cabinet as defence industries minister.
A spokesman for AGL Energy, which has several wind farms and a gas-fired generator in South Australia, said: “As the state’s largest retailer, AGL is working closely with the SA government to discuss possible solutions to ensure flexibility in the market and security of supply for our customers.”
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