Renewable Energy in the NEM

Presentation to the Australian Institute of Energy

May 16, 2016

Agenda Arial Bold 28pt

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• Global Renewable Energy Market

• Renewables in Australia

• South Australia

• NSW

• Progress towards meeting the LRET

• Future Energy/Climate policy options

• Conclusion

Presenter:

Jonathan Upson Senior Development & Government Affairs Manager

Agenda

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Location: New South Wales

Status: Operational January 2010

Installed Capacity: 140.7MW

Turbine: 67 Suzlon 2.1MW S88

Location: Western Australia

Status: Operational January 2006

Installed Capacity: 89.1MW

Turbine: 54 NEG Micon NM82

Location: South Australia

Status: Operational March 2005

Installed Capacity: 80.5MW

Turbine: 46 Vestas V66

Location: South Australia

Status: Operational September 2008

Installed Capacity: 159.0MW

Turbine: 53 Vestas V90

Location: South Australia

Status: Operational June 2010

Installed Capacity: 39.0MW

Turbine: 13 Vestas V90

Location: New South Wales

Status: Operational October 2011

Installed Capacity: 48.3MW

Turbine: Suzlon 2.1MW S88

Infigen - Australia’s leading wind energy business

ALINTA

LAKE BONNEY 2

LAKE BONNEY 1

LAKE BONNEY 3

WOODLAWN

CAPITAL

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Infigen Energy’s NSW Investment

• Operational

– $374 Million Capital Wind Farm near Bungendore, NSW

– $115 Million Woodlawn Wind Farm, near the Capital Wind Farm

– Capital East Solar PV Demo/Energy Storage Facility

• Planning Approved

– 70-100 MW Capital II Wind Farm

– 100 MW Bodangora Wind Farm

– 120 MW Flyers Creek Wind Farm

– 37 MW Capital Solar PV Project

– 40 MW Manildra Solar PV Project

Wind Energy was #1 for new build worldwide in 2015

5

More wind energy

capacity was

installed in 2015

than any other

electricity generation

technology

Renewable technologies made up over 60% of

electricity capacity additions worldwide in 2015

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Renewable Energy Investments: Major Milestones Reached New World Record Set

United Nations Environment Programme, Bloomberg New Energy Finance March 14, 2016

Is there another industry in the world with

such a high and sustained rate of growth?

7Global Wind Energy Outlook 2015 Global Wind Energy Council April 2016

Renewable energy is approaching 40% of SA’s

electricity generation

8South Australian Historical Market Information Report AEMO August 2015

Wind

Solar PV

Coal

Gas

Interconnector

Emissions have declined by 22% in the past four years

9South Australian Historical Market Information Report AEMO August 2015

Electricity emissions rising significantlyafter declining 16% in five years

10cedex Pitt & Sherry November 2015

Wind was the dominant source of SA electricity for

ten days last year

11

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

SA Generation by Fuel Type as % of SA Demand - 04/05/2015 to 13/05/2015Wind %

Gas %

Brown Coal %

Infigen graph of AEMO data

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Wind generation is very predictableNEM wind generation is forecast with 97-98% accuracy one hour ahead of time

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1-NMAE

(%)

Data from Figure 64, 100% Renewables Study – Draft Modelling Outcomes, AMEO April 2013

NMAE: Normalised Mean Absolute Error

AEMO Data: Wind energy lowers wholesale prices in SA

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2014 South Australian Electricity Market Economic Trends AEMO, September 2014

Simplified Wholesale Electricity Market Bid Stack

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Electricity

Demand

4,000

Electricty

Volume

(MW)

GAS (CCGT) - $60/MWh

2,500

2,000

1,500

1,000

500

6am 8am 10am Noon 2pm 4pm 6pm 8pm 10pm

GAS (OCGT) - $150/MWh

WIND - $5/MWh

COAL - $35/MWh

Average Electricity Price = ~ $70/MWh

Same Bid Stack with A Bit More Wind GenerationMore expensive generation not needed

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Electricity

Demand

4,000

Electricty

Volume GAS (CCGT) - $60/MWh

(MW)

2,500

2,000

1,500

1,000

500

6am 8am 10am Noon 2pm 4pm 6pm 8pm 10pm

GAS (OCGT) - $150/MWh

WIND - $5/MWh

COAL - $35/MWh

Average Electricity Price = ~ $45/MWh

Inverse relationship of wind generation to pool

prices clearly demonstrated earlier this month

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Infigen graph of AEMO data

Six independent electricity market modelling studies

have shown the LRET does not raise electricity prices

• ACIL Allen’s modelling for the Warburton Review confirmed the earlier results from

SKM (Jacobs), Schneider Electric, ROAM, IES, and Bloomberg

• All six studies generated similar results; reducing the LRET causes:

– Retail prices to decrease by a small amount in the short term

– Followed by retail prices increasing by a larger amount in the medium - long term

• The AiGroup, representing over 60,000 businesses, recognised this in their RET

Review submission, and in a more recent media release

– “Across the board, analysis of the RET has concluded that large reductions

in the target would leave energy users worse off.”

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Causes of South Australia’s high wholesale

electricity prices

• Lack of effective competition in generation

• Over 95% of dispatchable generation relies on increasingly expensive gas

– Rising, volatile gas prices resulting from LNG exports

• SA is interconnected to only one State

– NSW and Victoria are connected to multiple States which is beneficial

• SA has the highest peak to average load ratio of any State

– Resulting in ‘additional’ peaking plants and power lines that are rarely used

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There is significant competition in the Australian

Wind Energy Market

Australian Wind Farm Owners (operating MW)1

Ecogeneration and company websites (2015).

Infigen Energy14% China State Power

Investment10%

Trustpower9%

Shenhua/ Hydro Tas8%

Acciona6%

Malakoff5%

Morrison5%

UBS IIF/REST5%

Meridian5%

Goldwind/Jingeng4%

Infrastructure Capital Group

4%

Energy Infrastructure Investments

3%

AGL3%

Wind Prospects3%

Mitsui3%

20 Others13%

South Australian thermal generation market

is not very competitive

20Generation capacity and retail offtake data from State of the Energy Market 2015 AER December, 2015

EUAA recognises a lack of competition in SA

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Queensland – another less than competitive

electricity market

• Queensland had the highest wholesale electricity prices in the NEM for FY15

– $52.18 (vs $39.38 for SA)

• Similar situation to SA---two dominant generators (Stanwell and CS Energy)

– These state owned generators own almost 2/3 of the State’s generation capacity

• AER states “generators including Stanwell, CS Energy and Callide periodically rebid

large volumes of capacity from low to very high prices late in a trading interval.”

– Ernst & Young estimated late re-bidding added $7-8/MWh to Queensland price cap

contracts in the six months up to March 2015 (AER)

• Queensland had the highest prices in FY15, but they have negligible wind

generation

– Wind farms did not cause Queensland to have the highest wholesale prices last FY

22Source for AER statements: State of the Energy Market 2015 AER December, 2015

Expensive peaking plant generation in SA has

declined as wind energy penetration increased

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Peaking Capacity, CO2-e Emissions and Pricing in the South Australian Electricity Grid with High Wind Penetration 2005-2013

Dr David Osmond, Luke Osborne Windlab Systems May 2014

SA was much more reliant on interconnectors

before wind farms

24Plotted from AEMO data

-500

0

500

1000

1500

2000

2500

3000

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Wind Capacity (MW) Net Interconnector Imports (GWh)

SA Electricity System Reliability

• “…about 95 per cent of reliability issues in the NEM originate in the distribution

network sector.”1

– Only 5% of outages are caused by issues in the high voltage transmission network or

electricity generation plants

• While AEMO continues to evaluate potential future SA electricity market issues,

– “AEMO has not identified any system security challenges that cannot be

managed through existing processes and procedures” in conjunction with

the closure of the Norther Power Station2

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1 State of the Energy Market 2015 AER December 20152 Update to Renewable Energy Integration in South Australia AEMO and Electranet February 2016

Frequency Control & Ancillary Services (FCAS)

• The FCAS market procures services to maintain electricity network frequency at 50Hz

– Normal FCAS charges for all of SA are typically less than $35/hour

• FCAS can be ‘imported’ via interconnectors; therefore, provision of FCAS is a non-issue when

the Heywood interconnector is operational

• Likewise, system inertia (which reduces the rate of frequency change) can be supplied over an

interconnector

– Historically, the Heywood interconnector has tripped about once every two years

• For several weeks in Q4 of last year, SA FCAS charges exceeded $25 Million during scheduled

outages of one circuit of the Heywood interconnector

– These charges were shared roughly 50/50 between electricity customers and SA generators

• The Australian Energy Regulator in their report1 made it clear the two primary causes for the

excessive FCAS prices were:

– AEMO implemented changes to established FCAS protocols with little warning to market

participants and customers

– Late rebidding of capacity from low to very high prices by two market participants

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1 Report into Market ancillary service prices above $5000 South Australia, 11, 12 and 25 October 2015 AER December 2015

Power outage in SA on November 1st

• Line two of the Heywood interconnector was off-line for scheduled work as part of

the interconnector upgrade

• Line one of the interconnector “tripped when an automated test signal was

unexpectedly interpreted by the new relay as a trip signal.”

• AEMO makes it clear in their report that there was no relationship between

the power outage and wind farms in SA

• There were delays reconnecting SA to the NEM caused by difficulties stabilising the

SA electricity network frequency at 50Hz

– However, AEMO also makes it clear in their report that these difficulties were caused

by issues with thermal generators---not wind farms

27Source: Load Shedding in South Australia on Sunday 1 November 2015 AEMO February 2016

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Installed Wind Energy Capacity by State

Clean Energy Report 2014.,CEC June 2015

NSW currently ranks

4th for wind farm

investment and jobs

NSW

NSWNSW

NSW forecast to achieve the largest share of

renewable investment over the next decade

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RET Review Modelling ACIL Allen August 2014

Renewables in NSW

• NSW has 660 MW of wind energy installed today

– Two large wind farms committed to be built in the New England region of NSW

– Goldwind’s 175 MW White Rock and CWP’s 260MW Sapphire wind farm

• NSW is leading the country with 175MW of installed large-scale solar projects

– Together, wind and large scale solar make up about 5% of NSW’s generation

• In 2014, about 11% of NSW’s electricity came from renewable sources

– NSW REAP calls for 20% of electricity to come from renewables by 2020

• In order to meet the bi-partisan 33TWh LRET target, the CEC estimates that about 6000MW

of new generation capacity worth $10 Billion and creating 6500 jobs are required by 2020

– NSW should capture about half of these new jobs and investment

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Retailers have only 4 options to meet their legislated

LRET obligations

1. Build large-scale renewable developments they own (as AGL has

largely done)

2. Purchase, and then build, developments from other companies

3. Negotiate Power Purchase Agreements (PPAs) with developers

enabling them to finance and build projects

4. Purchase LGCs from the spot market

– The Clean Energy Regulator, and energy analysts, have made it clear

that this is not a viable option for the three large retailers

The first three options have a 18-24 month lead time

Clean Energy Regulator’s RET Annual Statement

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Clean Energy Regulator’s view

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Renewables penetration by State in 2014

34Clean Energy Report 2015 CEC June 2015

Can the rest of the NEM accommodate SA’s market

share of renewables?

• South Australia accommodates 40% variable RE market share today

without significant issues

• Current LRET target of 33TWh (~23% RE) can also be achieved without

significant technical issues or economic impact for customers

• Other States will not approach SA’s variable RE market share for at least

10 years without very significant changes to current policies

• In less than 10 years, higher levels of renewables will be facilitated by

– Solar Thermal which will be more cost competitive

– ‘Baseload’ renewables automatically providing FCAS and inertia

– Large-scale battery storage which will almost certainly be cost competitive

– Other technologies will also contribute

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Facilitating the energy transformation/modernisation

• There are significant disincentives for older, more polluting generators

exiting the market

– First mover disadvantage

– Significant redundancy/remediation costs

– Lose ability to realise higher prices/payouts which they hope might occur

• Several proposals on the table to ‘encourage’ high emitting power stations

past their use-by-date to close

– Brown Coal generator paid to close from levy on remaining coal generators

(Frank Jotzo, ANU)

– Change Safeguard mechanism to reduce electricity emissions (Grattan)

– Emissions Intensity Scheme (AEMC)

– Regulatory Closure (based on age?, emissions?)

• It is more important that effective bi-partisan action is taken that will survive the

next election(s) than which mechanism is selected

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Preliminary CCA modelling of electricity

abatement options

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Report urging carbon tax on power withheld Peter Hannam www.smh.com.au May 6, 2016

LRET found to be the most efficient wind energy

support scheme in the world

38International support for onshore wind Frontier Economics (UK) June 2013. PPP: purchasing power parity

In summary

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Consumer Price Index and Retail Electricity Prices

Conclusion

• It’s clear there is serious momentum to decarbonise electricity generation

around the world

• South Australia is not an experiment that has gone wrong

– Renewables apply downward pressure on wholesale electricity prices

– There is no threat to the security of supply today (AEMO)

– Electricity emissions have declined dramatically

• There are no technical issues, or significant economic impacts of,

achieving the LRET target of 33TWh in 2020

• Higher levels of renewables penetration will be facilitated by new

technologies (solar thermal, batteries, etc.)

– Modernisation of Australia’s electricity generation fleet will occur

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QuestionsQuestions