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Renewable Energy in Competitive Electricity Markets
A Three Act Play
Stephen Wilson, Adjunct Professor, UQ Energy Initiative
Managing Director, Cape Otway Associates
Renewable Energy in Competitive Electricity Markets
A Three Act Play
Stephen Wilson
energy & resources | economic analysis & strategy | commercial & policy advice
Renewable Energy in Competitive Markets —a three act play
Act 1 Hooray: the Transition is Underway!
Scene 1 a catalyst…x10...and an adjustment
Scene 2 old coal plants begin to fall of the perch
Everything’s under control…!
Act 2 Is the market dead…or just resting?
Scene 1 worrying signs
Scene 2 worst fears confirmed
... is everything really under control...?
Act 3 A chaotic journey…back to the future
Q: Does variable renewable energy (VRE) really lead to lower prices?
Q: Is any subsidised generation really compatible with competitive markets?
July 2017 A Three Act Play 2
The cast of the play includes 5 prime ministers and various other characters
June 2017 A Three Act Play 3
John HOWARD PM: 1996-2007
Kevin RUDD PM: 2007-10, 2013
Julia GILLARD PM: 2010-13
Bob BROWN Senator 1996-2012
Tony ABBOTT PM: 2013-15
Malcolm TURNBULL PM: 2015-present
Alan FINKEL Chief Scientist
Bill SHORTEN Opposition leader
Jay WEATHERILL SA Premier
Josh FRYDENBERG Energy Minister
Elon MUSK the battery guy
Barnaby JOYCE Deputy PM
Matt CANAVAN Resources Minister
• A RET scheme for 2% of GWh to support renewables is introduced alongside the NEM
• Zero marginal cost RE generation has dispatch priority
• The government changes and a carbon tax is introduced
• The RET is supercharged to 20% by 2020 but legislated as 41,000 GWh/y
• Demand growth falls short of AEMO projections…again…and again…and again
• The government changes and the carbon tax is repealed
• Renewables capacity is surging: 41,000 GWh will clearly far exceed 20%
• Wind dominates large scale renewables and is proportionately concentrated in SA
• But no new capacity is required: the market has plenty of capacity
• The short-run marginal cost curve is shifted to the right
• Wholesale prices are pushed downwards: $30 to $50/MWh prices are typical
• The RET is reviewed, and the 2020 target revised down to 33,000 GWh/y
July 2017 A Three Act Play 4
Act 1 Hooray: the transition is underway!
SCENE 1 a catalyst… x10 ...and an adjustment
• Network revenues double; network owners repeatedly defeat the regulator on appeal
• The LGC market tightens as RET uncertainty slows renewable investment
• LGC prices surge towards the tax-adjusted penalty for non-compliance (>$90/MWh)
• Capacity factors are pushed downwards on coal plants
• Some plants need to bid negative prices at times to avoid shutdown and restart costs
• Volatility increases, including extreme high prices, even as average prices decline
• Erosion of revenues eventually forces coal and gas plants to close in NSW, SA and Vic
• The SA government declines to provide $25M per year to keep Northern PS available
• SA has no coal plants left and relies on the Vic interconnector (supplied by brown coal)
• As VRE grows the need for ramping up and down to balance the system grows
• The need for open cycle gas (and small reciprocating engines) increases
July 2017 A Three Act Play 5
Act 1 Hooray: the transition is underway!
SCENE 2 old coal plants begin to fall off the perch
July 2017 A Three Act Play 6
What are the effects of wind and solar
pushing down coal capacity factors?
South Australia as a Case Study
July 2017 A Three Act Play 7
AEMO data and McConnell & Sandiford
Melbourne Energy Institute, August 2016
The LOAD-DURATION CURVE shows at a glance
annual energy, and peak demand
8 July 2017 A Three Act Play
PEAK HOUR: maximum coincident demand of 2870 MW
Minimum demand 690 MW
8760 hours
Source: McConnell & Sandiford (2016) Winds of change An analysis of recent changes in the South Australian electricity market,
Melbourne Energy Institute, University of Melbourne, August
Inter-
med
iate
11
15
Ba
se-lo
ad
69
0
Pea
k
10
65
S A
Coal
Gas
Diesel
The load-duration curve NET OF WIND generation
shows the key issues
9 July 2017 A Three Act Play
FY15 wind contribution to peak hour: 65 MW
Source: McConnell & Sandiford (2016) Winds of change An analysis of recent changes in the South
Australian electricity market, Melbourne Energy Institute, University of Melbourne, August
15
90
–2
10
1
21
5
S A
Inter-
med
iate
11
15
Ba
se-lo
ad
69
0
Pea
k
10
65
Wind provides only the marginal value of
displaced energy and negative capacity value
10 July 2017 A Three Act Play
Source: McConnell & Sandiford (2016) Winds of change An analysis of recent changes in the South
Australian electricity market, Melbourne Energy Institute, University of Melbourne, August
11
15
6
90
1
06
5
15
90
1
21
5
150 MW more peak 475 MW more
inter-mediate
= negative baseload
900 MW less baseload
S A
COAL from Vic (& NSW?)
more GAS ?
a bit more DIESEL –2
10
July 2017 A Three Act Play 11
Source: Cape Otway Associates calculations
using raw capital and operating cost data
consistent with the CO2CRC APGT report
18.50
Illustrative fuel prices: $ /GJ
10.00
10.00
3.00
0.75
July 2017 A Three Act Play 12
Peak
Inter.
Base
MW
Source: Cape Otway Associates calculations
using raw capital and operating cost data
consistent with the CO2CRC APGT report
18.50
Illustrative fuel prices: $ /GJ
10.00
10.00
3.00
0.75
July 2017 A Three Act Play 13
Source: Cape Otway Associates calculations
using raw capital and operating cost data
consistent with the CO2CRC APGT report
18.50
Illustrative fuel prices: $ /GJ
10.00
10.00
3.00
0.75
• Meanwhile, a gas crisis in Eastern Australia has driven gas prices above LNG netback
• SA prices surge and regularly spike to the market price cap of $14,000 /MWh
• Plant closures tighten the market (exacerbated by high gas prices)
• Physical system balancing becomes increasingly challenging
• Sub-optimal dispatch schedules reflect VRE balancing needs and reliability constraints
• The underlying increasing cost structure starts to be reflected in high prices NEM-wide
• SA suffers the first state-wide blackout since NSW in 1964…damage: $350-450M
• The market is clearly unable to resolve reliability, affordability and sustainability
• CALL FOR THE DOCTOR ! …Dr Alan Finkel, the Chief Scientist
• The Prime Minister starts talking about the need for new coal plants…
July 2017 A Three Act Play 14
Act 2 ‘Is the market dead…or just resting?’
SCENE 1 worrying signs
July 2017 A Three Act Play 15
The ‘Energy Policy Trilemma’ competing objectives require difficult trade-offs
July 2017 16 A Three Act Play
Emissions
minimise
Cost
minimise
Security
maximise
TENSION
WIND SOLAR
NUCLEAR
The three ‘-abilities’ of electricity trading off reliability, affordability and sustainability
July 2017 17 A Three Act Play
COAL GAS
Sustainability Affordability
Reliability
COAL SEAM GAS STINKS
NO GAS
WIND SOLAR
What gives ? Most fuels only have two ‘–abilities’
July 2017 18 A Three Act Play
COAL GAS
Sustainability Affordability
Reliability
COAL SEAM GAS STINKS
NO GAS
HYDRO
WIND
WIND SOLAR
What about the demand side ? Energy efficiency and time-of-use strategies
July 2017 19 A Three Act Play
COAL GAS
Sustainability Affordability
Reliability
COAL SEAM GAS STINKS
NO GAS
HYDRO
WIND SMART METERS
WIND SOLAR
Is this scenario politically plausible ?
July 2017 20 A Three Act Play
GAS COAL
NUCLEAR
SMART METERS
HYDRO Sustainability Affordability
Reliability
WIND SOLAR
Is this scenario socially acceptable ?
July 2017 21 A Three Act Play
GAS COAL
NUCLEAR
SMART METERS
HYDRO Sustainability Affordability
Reliability
Resolving the Trilemma
July 2017 A Three Act Play 22
‘We reviewed all energy sources and we found that no energy source is superior in every aspect’ — Mr Koji Inoue, Director-General, Natural Resources and Energy Policy, Ministry of Economy, Trade and Industry, Japan
SOLAR WIND
Most other countries use a mix Because most fuels only have two ‘–abilities’
July 2017 23 A Three Act Play
COAL NUCLEAR
SMART METERS
HYDRO Sustainability Affordability
Reliability
COAL GAS
Act 2 ‘Is the market dead…or just resting?’
SCENE 2 worst fears confirmed…
• Engie closes the ageing Hazelwood coal plant in Victoria; wholesale prices double
• Generators start to reap large profits for the first time in years
• No-one is able to produce a bankable price forecast
• No bank will lend to any new generation without a full PPA for 15 years
• Levelised energy costs for wind and solar continue to fall
• New renewable energy continues to secure financing driven by certificate revenues
• Prices continue to rise and reliability continues to fall
• Forward prices double, wholesale prices double, the wholesale revenue pool doubles
• The public demands governments to intervene, which they begin to do
• Private investors cancel power generation investment plans
• Is the competitive electricity market dead…?
July 2017 A Three Act Play 24
Is the electricity market dead ?
July 2017 A Three Act Play 25
Snowy Mountains Hydro Electric Scheme 1949 – 1974
Existing coal fleet 1970 – 2007
…Victorian Power Exchange (VPX) 1995 – 1998
NEMMCO & ‘The NEM’ 1998 –
an INTERCONNECTED grid in Eastern Australia 2001 – 2005
…off-market mandates, MRET, LRET, SRES 2001 – …?
July 2017 A Three Act Play 26
Are we returning to central planning? … and also to renationalisaton?
Private MARKET
A state-owned and centrally PLANNED electricity sector
Competitive MARKET with both private and state
ownership
Less competitive MARKET with more private ownership
Back to central PLANNING?
Act 3 ‘A chaotic journey back to the future’
• The broad 1990s consensus on competitive electricity markets (state-federal, left-right) is
abandoned by default without any public debate that it should be
• Politicians continue to talk about reliable, affordable, sustainable electricity
• No-one is willing to admit that the magic combination simply doesn't exist
• Politicians fight left and right, the states fight the Feds, inquiries multiply like rabbits
• Finkel initially considered putting the consumer centre-stage in the trilemma
• Political and industry leaders fail to find a way to discover a publicly acceptable trade-off
between reliability, affordability and sustainability
• Public debates and recriminations continue
• The government finds itself as the investor of last resort for power generation
• Meanwhile…
July 2017 A Three Act Play 27
July 2017 A Three Act Play 28
Eastern Australia’s coal and gas fleet
is FALLING OFF A CLIFF
The Guardian, North Head, Sydney
July 2017 A Three Act Play 29
Source: ACIL (2013) data
Author’s chart
Thermal plant retirement schedule in Victoria
Full life retirement dates shown here based on technical design life, as published in ACIL 2013
July 2017 A Three Act Play 30
Thermal plant retirement schedule in NSW
Source: ACIL (2013) data
Author’s chart
Full life retirement dates shown here based on technical design life, as published in ACIL 2013
July 2017 A Three Act Play 31
Thermal plant retirement schedule in Queensland
Source: ACIL (2013) data
Author’s chart
Full life retirement dates shown here based on technical design life, as published in ACIL 2013
July 2017 A Three Act Play 32
After the cliff, what is the outlook for
SUN- & WIND-POWERED DECARBONISATION?
North Head, Sydney Hobart race start
Photo: abc.net.au
July 2017 A Three Act Play 33
Where is the efficient frontier
for emissions reduction?
HELE coal
CCS
gas
HELE coal
CCS
1990s & 2000s black coal plants
1970s & 80s brown coal plants
gas
X Hazelwood retired
NGCC & wind
wind + pumped hydro
Renewable Energy in Competitive Electricity Markets
A Three Act Play
Stephen Wilson
energy & resources | economic analysis & strategy | commercial & policy advice
Recent EPIA papers
July 2017 A Three Act Play 36
Conflicting design principles
National Electricity Market
…does not vary with the source: all MWh get the same price in each half-
hour period
…can vary enormously by time,
lead-time and location: throughout the day and year, with the lead-
time before delivery and from location to
location
Renewable Energy Target
…varies with the source: renewable energy receives a large
premium over electricity from other
sources
…the premium does not vary with
time, lead-time or location renewable energy certificates can be
generated anywhere and at any time
July 2017 A Three Act Play 37
The value of electricity:
A policy paradox
The highest effective price
is paid to the
energy source with the
lowest economic value July 2017 A Three Act Play 38
Competition and renewables policy
are ultimately incompatible
Thermal
Large fuel and variable costs
Moderate capacity costs
The basis of market design
Renewable
Zero fuel and negligible variable O&M costs
High capacity costs
Incompatible with markets
July 2017 A Three Act Play 39
A market design paradox
The NEM is an energy-only market Even the network component of network charges are biased to energy
Prices will become increasingly
disconnected from costs
Markets will become increasingly
disconnected from economics July 2017 A Three Act Play 40
An economic paradox
Cost: ~100% capacity
Capacity value:
< 0
July 2017 A Three Act Play 41
July 2017 A Three Act Play 42
July 2017 A Three Act Play 43
peak demand
installed capacity MW
maximum wind output
minimum demand
Source: AEMO data courtesy of McConnell, Melbourne Energy Institute
Summary of the numbers South Australia FY 2015-16
Installed capacity 4960 MW
Withdrawn capacity – 1225 (Playford B, Northern, Pelican Point)
Available capacity = 3735
…of which: Wind capacity 1364
which reduced demand by 65
but increased peak need by 150
…and intermediate need by 475 (Peak + int. need increased by 625)
Peak demand 2870 MW
Peak demand 2805 net of wind
Dispatchable capacity 2351 from gas and diesel
Heywood interconnector 650
Margin 131 to 196 (5% to 7% of peak …and less than the largest unit)
July 2017 A Three Act Play 44
S A
AEMO reserve shortfall projections summer 2017 & 2018
July 2017 A Three Act Play 45
S A
Wind power:
• makes the load shape less economic
• displaces base load plant to intermediate
• increases the need for intermediate capacity
• increases the need for peaking capacity
• requires 100% backup
Accounting for the backup would make wind power uneconomic
Adding wind capacity erodes the economics of other generation
• In the absence of large scale storage wind power degrades: – system economics
– system reliability
• With large scale storage to maintain reliability, wind power degrades: – system economics
July 2017 A Three Act Play 46
Challenges for wind power
Renewable Energy in Competitive Electricity Markets
A Three Act Play
Stephen Wilson
energy & resources | economic analysis & strategy | commercial & policy advice
How to get a Minister to Accept or Reject a Proposal
July 2017 A Three Act Play 48
Sir Humphrey: There are four words you have to work into a proposal
if you want a Minister to accept it.
Sir Frank: Quick, simple, popular, cheap. And equally there are
four words to be included in a proposal if you want it thrown out.
Sir Humphrey: Complicated, lengthy, expensive, controversial.
And if you want to be really sure that the Minister doesn't accept
it you must say the decision is courageous.
Bernard: And that's worse than controversial?
Sir Humphrey: (laughs) Controversial only means this will lose you votes,
courageous means this will lose you the election.
Yes, Minister – “The Right to Know” by Antony Jay and Jonathan Lynn, BBC TV 1980
49
Source: Alan Finkel, Independent Review into the Future
Security of the National Electricity Market: Blueprint
for the Future, June 2017, Canberra
AEMO, Forecast accuracy report 2016, 2016, p.12
Contributing factors include:
• energy efficiency
• price elasticity
• industrial closures
• structural economic change
• behind-the-meter solar PV
July 2017 A Three Act Play 50
6.6 kV cables Hazelwood Coal-fired Power Station Latrobe Valley, Victoria Wednesday 12th April 2017
July 2017 A Three Act Play 51
Regional price duration
curve by price-setting fuel
2014-15 compared with
2015-16
Source: AEMO, Gas Statement
of Opportunities for
Eastern and South-
Eastern Australia,
March 2017
July 2017 A Three Act Play 52
up to $14 000 /MWh
Regional price duration
curve by price-setting fuel
2014-15 compared with
2015-16
Source: AEMO, Gas Statement
of Opportunities for
Eastern and South-
Eastern Australia,
March 2017
July 2017 A Three Act Play 53
up to $14 000 /MWh
Regional price duration
curve by price-setting fuel
2014-15 compared with
2015-16
Source: AEMO, Gas Statement
of Opportunities for
Eastern and South-
Eastern Australia,
March 2017
July 2017 A Three Act Play 54
up to $14 000 /MWh
Regional price duration
curve by price-setting fuel
2014-15 compared with
2015-16
Source: AEMO, Gas Statement
of Opportunities for
Eastern and South-
Eastern Australia,
March 2017
July 2017 A Three Act Play 55
up to $14 000 /MWh
Regional price duration
curve by price-setting fuel
2014-15 compared with
2015-16
Source: AEMO, Gas Statement
of Opportunities for
Eastern and South-
Eastern Australia,
March 2017
AEMO’s two gas-fired power generation forecasts
500 PJ
200 PJ
Uncertainty in coal plant retirements = 10 GW uncertainty by 2036 = 300 PJ
July 2017 A Three Act Play 56
Total annual gas consumption by sector 2011-2036
Eastern Australia only
1500 PJ LNG export capacity
600 PJ total domestic market
Queensland coal seam gas (CSG) to LNG exports have been an enormous demand shock to the market
July 2017 A Three Act Play 57
45 seconds to system BLACK
July 2017 A Three Act Play 58
Transmission north of Adelaide, 28 Sep 2016
Adelaide city centre, 28 Sep 2016 Storm, 28 Sep 2016
July 2017 A Three Act Play 59
Source: AEMO, Update Report: Report on Black System Event in South Australia
on 28 September 2016, 19 October 2016
41 sec
July 2017 A Three Act Play 60
275 kV bus voltages across South Australia prior to separation
…41 sec …42 …43 …44 …45 sec system black
July 2017 A Three Act Play 61
• Transmission faults were all
north of the Adelaide load centre
• Transmission from Victoria was
unable to support the system
Adelaide load centre
July 2017 A Three Act Play 62
• Queensland
• NSW
• Vic
• SA
Base load FUTURES
contracts for the past 5
years, up to 3 years
ahead in AU$ /MWh
$30 – 50
$60 – 70
$80 – 140
Evolution of wholesale base load futures prices
Act 1 Act 2
Source: data for ASX Base Futures Contract Closing Daily Prices Jan 2012 to Apr 2017
chart courtesy of Solstice Development Services