An extraordinary spike in South Australia’s wholesale electricity price in July sounded an alarm across the five states that share the National Electricity Market, new data shows.
Research on the event by the Grattan Institute has argued that without a single nationwide climate plan, household power bills will rise unnecessarily and Australia will not hit its carbon cutting targets.
“So we end up not achieving our emissions targets or, if we do, we do it at even higher costs than is necessary and in the meantime there could even be a risk of blackouts,” report author Tony Wood said.
The report also cautioned the rise of intermittent wind generation poses risks in managing the stability and reliability of the power grid.
Federal Environment and Energy Minister Josh Frydenberg said he was working with states to harmonise policies, but agreed the July price spike highlighted the challenges for an energy market in transition from fossil fuel to renewables.
“We are taking what happened very seriously,” Mr Frydenberg said.
Price spikes from $60 MWh to $9,000 MWh
In the spotlight is a single winter’s night in South Australia, when the wholesale price leapt from a year-long average of $60 a megawatt hour to $9,000 MWh.
The causes are complex, but the Grattan Institute followed a trail that began with the Renewable Energy Target (RET), which mandated 23.5 per cent of electricity be drawn from renewables by 2020.
South Australia has gone further, faster with green power than any other jurisdiction in Australia and most other parts of the world.
Demand for power has fallen with the rise of 650 MWh in rooftop solar panels at the same time as wind has expanded to cover 40 per cent of the electricity market.
Although the long-run cost of paying for wind energy is $80 MWh (compared to $50 for coal), most of the cost is in construction and the marginal price of producing every unit of power thereafter is zero.
It has another advantage over traditional generators – the RET rewards green energy by making retailers buy renewable energy certificates.
So, when the wind is blowing generators can bid into the power market at next to nothing and still make a profit.
The combination of less demand and being underbid in the electricity market has driven coal out of business in South Australia.
The state’s energy mix is now wind, gas and two transmission lines that connect it to Victoria’s high-polluting brown coal plants.
On July 7, the main interconnector with Victoria was down for maintenance.
As the sun set and the wind faded, the state fell back on gas supplies to keep the lights on.
But gas was already in high demand for heating and export.
When demand peaked at 7:30pm so did the price of power, at a staggering $9,000 MWh.
The chair of the Australian Energy Regulator, Paula Conboy, said households were insulated from the price hike because electricity retailers hedged short-term prices with long-term contracts.
An investigation showed that there was no evidence of generators not playing by the rules.
“The market worked as expected,” Ms Conboy said.
“The system remains safe and reliable, albeit at higher prices.”
‘Canary in the coalmine’
Mr Wood warned that in the long run, higher wholesale prices would be passed on to consumers.
His report said the July event was a “canary in the coalmine, warning of the risks in Australia’s power future”.
It laid the blame for the price spike at the hotchpotch of state and federal climate change policies.
In the absence of a carbon price, “the RET is now the only national policy reducing emissions in the electricity sector”, the report stated.
It has produced a lot of wind power that can surge from covering 100 per cent of demand to nothing, and the unpredictable downtime has to be covered.
“The fact that renewable projects gain a substantial part of their revenue from outside the [National Electricity Market] can distort the market,” the report said.
“For example, negative prices should encourage generators to halt production.
“Yet renewables keep operating since any unit of energy they produce will generate RET certificates and, therefore, revenue.”
There was also significant uncertainty in market because, under current policy, no new renewable energy certificates would be created beyond 2030.
The report said there was no immediate crisis, but the July event demonstrated the consequences of a disconnection between climate change policy and energy markets.
“Imposing a set of new-century energy supply technologies on a market designed to work with a very different set of technologies,” the report stated.
“If it is not addressed, there is a real risk that the objectives of reliable, affordable and sustainable energy will not be achieved.”
Mr Wood said the lessons should be that the slated 2017 federal policy review had to deliver a bipartisan commitment to a stable, predictable and credible climate change plan that worked with, and not outside, the electricity market.
There should also be a separate review of the market that ensured that power flows reliably and affordably.
And all governments should confess that the transition to a low-emissions future would cost more.
“And pretending otherwise is a great mistake and people will not forgive our political leaders for making that mistake,” Mr Wood said.
There is a ‘national plan’
Mr Frydenberg said the Energy Minister’s meeting in August settled on a significant set of reforms to the domestic gas market, speeding the approval of interconnectors and reducing the burden of network costs on households.
He rejected the claim that the RET was doing all the heavy lifting in cutting carbon emissions in the electricity sector.
“There is also a national electricity productivity plan which boosts productivity and efficiency in the sector by 40 per cent by 2030,” he said.
His goal in working with state energy ministers was simple.
“To have a reliable energy supply, to have an affordable energy supply and at the same time to ensure that Australia transitions to a lower emissions future,” Mr Frydenberg said.