With electricity prices spiralling as South Australia struggles to digest a world-breaking build of wind farms without firm power backup, federal Environment and Energy Minister Josh Frydenberg is facing a challenge that defines the conflict and mixed signals of his new super portfolio.
The challenge was delivered on a windswept blustery paddock about 200km west of Melbourne where Victorian Premier Daniel Andrews announced state approval for the $65 million, 96-turbine Dundonnell wind farm.
What the Premier did not tell reporters was that the 300 megawatt project, claimed to be the state’s biggest, had yet to receive federal government approval under the Environmental Protection and Biodiversity Conservation Act.
If Frydenberg does not give EPBC approval for Dundonnell he can expect a fiery backlash and accusations of turning his back on renewables and new economy jobs.
If he does give EPBC approval Frydenberg will be accused of grand-scale environmental vandalism against the Victorian brolga, which is listed as threatened and nests at the proposed wind farm site.
The New Zealand wind farm developer, Trustpower, claims to have accommodated the brolga in its layout plans. But the planning process for Dundonnell has been long and tortured with accusations of hidden records and dodgy environmental investigations.
The complaints have not come from peak environment groups but local bird enthusiasts because – rather than endangered fauna – organised environmental activists such as Friends of the Earth have preferred to concentrate on the need for renewable energy and a long-running campaign to make permanent the existing moratorium on coal-seam gas exploration in the state.
In the great circle of energy and environmental politics it is all connected.
For Frydenberg, the gas ban is as significant as the brolgas and the windmills.
And it has all been supercharged by the parlous state of South Australia’s electricity network and what it may portend for the rest of the nation, under pressure to roll out of renewable power.
Frydenberg is clearly aware of the scale of the challenge. He argued for amalgamation of energy and environment portfolio responsibilities and he knows Australia must respond to a fundamentally changing energy world.
In an address to the Brookings Institution in the US earlier this year, Frydenberg said “technology will be the swing factor to achieving the world’s climate goals”.
“Home batteries, carbon capture and storage, high-efficiency, low-emissions coal-fired plants, large-scale solar, are all likely to feature going forward,” he said.
But, politically, Frydenberg’s task is to avoid becoming known as the minister for sky-high electricity prices.
Events in South Australia – where wholesale power prices have spiked, household electricity costs are the highest in the nation and industry is threatening to quit— provide a good opportunity for a reality check.
Wholesale prices are usually below $100 per megawatt hour but in South Australia they have repeatedly spiked past $10,000 and sometimes touching the $14,000 limit.
There are many reasons advanced for the unstable electricity situation in South Australia.
These include high demand for electricity and gas during a cold snap, restricted competition, limited interconnector capacity to the national grid and the high costs of transporting gas. The gas squeeze has been exacerbated by fierce objections to coal-seam gas exploration in NSW and Victoria as the giant liquefied natural gas export projects in Queensland suck vast quantities of what used to be domestic supplies.
Clean Energy Council network specialist Tom Butler says the reasons for South Australia’s high power prices compared with the rest of the country remain the same as they were before a single wind turbine or solar panel was installed.
A briefing paper released by the Australian Conservation Foundation says renewable energy wrongly is being blamed.
“In fact the problem is not a failure of renewable energy; it is a failure of the national electricity market,” the ACF says. This may be true. But it is disingenuous to suggest renewable energy is not having a leading impact.
The Australian Energy Market Operator conducted a survey of why wholesale prices spiked during the same period last year.
An analysis of the findings by Frontier Economics says the common denominator was a low level of wind generation at the time.
“As has been long predicted, increasing penetration of wind, and its inherent intermittency, appears to be primarily responsible for the (price spike) events,” the Frontier Economics report says.
“While the events have coincided with relatively high demand conditions in South Australia and some minor restrictions on imports of electricity from Victoria, low wind production levels are the key common feature of every event.
“The market response at such times has been to offer higher-priced capacity to the market, leading to high prices, just as the National Electricity Market was designed to do under conditions of scarcity.”
The Frontier report says the level of wind and solar penetration in South Australia presents a fascinating natural experiment in the impact of intermittent generation on wholesale prices.
“Unfortunately, this test is anything but academic and the people of South Australia are increasingly likely to bear increased electricity costs as wind makes up a greater proportion of South Australian generation,” Frontier says.
“While policymakers may be tempted to act to force thermal and/or wind to behave uneconomically, the likely outcome means South Australian consumers will bear more costs.”
Fast forward 12 months and the same weather conditions have produced the same outcomes in the wholesale market, with higher prices to consumers starting to flow through as well.
In the meantime, Alinta Energy has been forced to close its two coal-fired power stations in South Australia early because their business model has been wrecked by the introduction of low-cost, subsidised wind generation into the wholesale market.
Renewable energy champions have always argued the so-called merit order effect, in which abundant cheap renewable energy suppresses the wholesale market, is a positive for consumers. But the evidence is that there are limits.
South Australia is being watched closely by traditional energy companies and renewable energy specialists worldwide as a test case for what happens when high levels of intermittent energy, such as wind and solar, are introduced into a system that is not fully covered by other sources of readily available power.
Elsewhere, such as Denmark, where there is a high percentage of wind power in a national market there is also access to sufficient baseload power from hydro, nuclear or coal from neighbouring countries available to cover the fluctuations.
In South Australia the backup from the Victorian interconnection is 23 per cent.
Modelling by Deloitte Access Economics suggests that by 2019 the interconnector will be importing all the Victorian electricity it can handle into South Australia for almost 23 hours a day. It does not leave much margin for error if things go wrong.
“The last few weeks in South Australia have been a perfect storm but it shows that we have to be very careful how we design markets and policies to decarbonise,’’ Australian Energy Council policy specialist Kieran Donoghue says.
This is the real challenge for Frydenberg in his new portfolio.
The ACF wants a national plan to manage the transition to clean energy. It says this plan should “deal with intermittent generation and energy security, appropriate interconnections, careful placement of renewable facilities to maximise flexibility, an orderly closure of coal-fired power plants and detailed strategies to help affected communities with the transition”.
“The benefits of renewable energy are numerous, but without national leadership and a national plan to transition our energy sector we are certain to see a rocky transition with more price fluctuations,” the ACF says.
Powerful South Australian senator Nick Xenophon has said he will support a Senate inquiry to examine the mix of renewable energy in Australia.
Australian energy ministers are due to meet soon to consider exactly these issues. But no one has yet put forward a credible plan of how this should be done or what the cost would be.
At best, there will be a Band-Aid solution to the immediate problems in South Australia.
Industry specialists say the Council of Australian Governments certainly will look at options for additional interconnectors to deepen ties between states in the national electricity market.
The cheapest option will be to expand the connection to Victoria, but that is unlikely to give South Australia the sort of diversity of supply it is seeking.
It is further complicated by Victoria’s own plans to lift renewables – through projects such as Dundonnell – and the desire of environment groups nationally that Victoria’s big baseload brown coal generators, which underpin the system, be forcibly retired as soon as possible.
Another option would be to connect to NSW or Tasmania.
The cost of a new interconnector is high, with estimates of up to $3.75 billion for a connection between NSW and South Australia. Experience shows costs can blow out by almost double.
Meanwhile, rapid advances in technology, particularly in battery storage and grid management, make it uncertain whether expensive interconnectors are the right solution for the long term.
South Australian Energy Minister Tom Koutsantonis wants the ability to ship his state’s wind power to other states, something coal-fired generators in NSW and Queensland would resist.
The challenge is to stop what is happening in South Australia from occurring elsewhere as the amount of intermittent power is expanded nationally to meet the state-based and federal renewable energy targets.
Already, existing generators are arguing for greater payment for the ancillary services they provide to keep the electricity network stable.
Payments for standby reserve power and voltage regulation that cannot be provided by wind and solar would lessen the dependence of baseload plants on the spot electricity market.
But is this not a Band-Aid solution rather than long-term vision?
Central planning can be a slippery slope.
“It is important to be clearer that this transition is not costless,” Donoghue says.
“Instead of thinking that the wind and sun are free, it would be better to give a more realistic understanding of what the costs will be.”
The more governments mandate things such as the amount of renewable energy in the market, the likelier they are to find themselves having to also support remaining dispatchable generators.
“If they (governments) want to direct the transition they are going to be on the hook for all the infrastructure as well,” Donoghue says.
And under the pathways put forward by the ALP and Greens they are also going to be on the hook for the heavy social transition costs as well.
It remains uncertain what pathway Frydenberg intends to take.
In his Brookings Institution address in February, Frydenberg said it was clear the global energy supply dynamic was moving to lower emission energy sources.
He said country comparisons showed that lowering emissions from the energy sector could not be one-dimensional because countries were starting from different positions and faced different challenges.
“One such challenge will be the need to question traditional energy supply” and “such a discussion is currently taking place in South Australia”, he said.
He was talking about the South Australian royal commission into nuclear energy, which he said had “revived the discussion about the role nuclear power could play in a low carbon economy”.
“Given South Australia has 78 per cent of Australia’s uranium reserves and the stable geology to store high-level waste, this debate is shifting community attitudes and has some way to run,” he said.
The Environment and Energy Minister has a substantial challenge ahead.
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