By PHILIP HOPKINS
GAS-FIRED power generation is integral to the energy transition, which will cost an estimated $320 billion and require 10,000 kilometres of new transmission, as the coal-based power system comes to an end, according to Energy Australia chief Mark Collette.
“It’s the biggest engineering project in our history. Australians are beginning to understand the physical and technological challenges of the energy transition. Australia must sort out supply chain constraints, planning challenges and community support… and has no option but to work through all these issues,” Mr Collette said, speaking at an Energy Week conference earlier this month.
He spoke a week before the Coalition’s announcement of its nuclear policy.
Mr Collette, an aerospace engineer and economist, said Australia was near the top of the table per capita in renewables investment, and the world leader in rooftop solar, but was not building the new system fast enough.
“Transmission projects are delayed. The rate of new renewable projects has not accelerated enough to meet the Commonwealth’s 2030 targets,” he said.
“The rate of investment and delivery required to meet national energy targets by 2030 is getting steeper and steeper. Without the new system accelerating, inevitably more is asked of the old system.
“The existing coal fired electricity system is… increasingly fragile. Investment cases to maintain coal power stations in the face of policy pushing rapid transition are tough. There is a limit to extending the life of old power stations, particularly at short notice.”
Mr Collette said customers want predictability in energy prices and bills.
“Customers expect prices to move something in the range of flat to inflation levels, and when this does not happen, they are unhappy. Customers expect when they reduce usage that their bills will go down and feel trapped when this does not happen,” he said.
Mr Collette said customers spent money on solar, an investment for the next 20 years, because they expect it will reduce their energy usage and value the predictability they see from this action.
“Predictability is not a feature of Australia’s energy system today. The long-term interests of consumers of energy are not being met. Consumers want efficiency to deliver predictability not volatility,” he said.
Network and transmission costs were predictable drivers of every bill but were rising fast.
“The wholesale part is less predictable. The reason is that the wholesale market is fundamentally designed around volatility, around scarcity driving investment,” he said.
In the 1990s to early 2010s, the national energy market (NEM) was efficient and predictable, with some of the lowest energy costs anywhere.
“But as Australia embarks on transforming its energy supply… Australia is seeing insufficient investment in the new system on top of a rapidly aging installed system. This is a market primed for unpredictability. Of course, there are solutions. The challenges are exacerbated by policy, regulatory and commercial decisions and these can be changed.”
For example, today’s regulated prices – the Victorian Default Offer and Default Market Offer – were set and based on retailers buying energy for next year.
“Imagine if instead, the VDO and DMO were recast as multi-year price paths which effectively required that retailers secure energy today over multiple years, seeking predictability in the process,” he said.
Mr Collette said this was feasible. Already, EnergyAustralia had one product – the Solar Home Bundle – that comes with solar and a battery.
“It’s based on a seven-year fixed energy price contract,” he said.
The company was also working with authorities on network tariff design. The aim was to recast the way tariffs work so they were simple and predictable for customers while having the right economic and engineering framework for retailers and networks behind the scenes.
“And of course, we already offer multi-year contracts to commercial and industrial customers,” he said.
Mr Collette said more predictability for energy consumers required more investment. Some capital-intensive businesses like Tesla or Google had no trouble attracting capital and making investments because the potential returns were big.
“The energy transition is different. Energy is one of the basic foundations of Australia’s economy and governments and consumers seek the lowest possible returns on investment to keep prices as low as possible,” he said.
Retail margins were about two per cent, while renewable project developers typically had returns of five to seven per cent.
“Investors can get higher returns from private debt at the moment. This is not an industry with returns that will drive investment today at the scale needed. And in many cases prevailing wholesale prices are not even enough to deliver these return levels,” he said.
“Over the past two decades, returns from wholesale markets have been augmented by a progression of climate-based schemes. The practical effect of these schemes was to kick enough money into each energy project to keep delivering new investment.” Government’s directly or indirectly funding energy infrastructure, particularly generation, has become the new normal in the 21st century.
“You can count on one hand the energy projects built this century without any government support. This is a second-best policy outcome, made necessary by Australia’s inability to land enduring national climate policy.” Mr Collette said.
Mr Collette said government was now shifting from market-based schemes to project-based schemes.
“The risk is these schemes are too focused on efficiency at the expense of predictability and speed. The basic premise of these schemes is that government will pick winners from a series of bespoke tenders. Every tenderer bids a subsidy package for a different project, they all look different and are not directly comparable,” he said.
“It’s a difficult job to decide what the best ones are and inevitably things will take time.
“It’s a process that has brakes inbuilt. Beyond the process, one downside of similar schemes internationally is that the winners do not always commit to the projects promised. To win a project, bids often require very aggressive assumptions such that sometimes the final investment decision cannot later be achieved, meaning no new generation is built.
“Not building projects slows the transition, meaning coal generators are more likely to be required to run longer to fill the gap – the exact opposite of what these policies are intending to achieve. The good intent of efficiency can land in unpredictability.”
Mr Collette said tweaks were needed to these schemes. A government that wants 1000 MW of wind and was willing to subsidise its entry, could reward the first 1000 MW onto the grid on a $/MW basis, rather than take a bespoke project-by-project approach.
“Governments can always adjust the subsidy to manage speed and efficiency. This would be a fast mechanism that rewarded delivery. Couple the reward with a requirement that customers or retailers buy the output and this could start to look more predictable for customers,” he said.
Avoiding delays, and the costs of potential future of multiple deals to prolong coal power station lives, was valuable.
“Blunt market signals are the most effective tool of all to catalyse speedy whole of system investment,” Mr Collette said.
Mr Collette said gas-fired power generation was needed to protect reliability.
In April/May, solar output was diminished as summer ended and there were a few weeks where wind dropped to an average of 5-10 per cent production versus capacity.
“Storage is one way to deal with no wind or sun. However, there still needs to be enough wind and sun to charge the batteries and hydro. A low-sun, low-wind week just does not have enough energy to charge the batteries or pumped hydro,” he said.
“This is why Australia’s renewables-based energy system needs lots of solar, lots of wind, lots of storage and gas fired generation in reserve. Gas generation will predominantly play a reserve role. While gas generation will run infrequently, gas generation will be essential for reliability in those days and weeks when it does run. Without the gas, there is no way through other than coal.”
EnergyAustralia has just invested in Tallawarra B, a 315 MW gas turbine near Wollongong in NSW, as well as underpinning batteries and pumped hydro.
“We need both. We were able to invest in Tallawarra B because of project support from NSW and the Commonwealth,” Mr Collette said.
“Given gas is required for reliability, I hope to see current policies extend to provide the support required for investment. Of course, there needs to be a path to a zero-carbon future and this technology gap needs solving.”
Mr Collette said the basic problem to solve was to develop a zero-carbon form of energy that can provide weeks’ worth of electricity on short notice with effectively no limitation on volume.
“Hydrogen is one potential solution to this problem,” he said.
In the interim, EnergyAustralia was taking action on all three fronts – predictability for customers, accelerating investment and protecting reliability – to make as much progress as possible.
“We have invested $400m in recent years at Yallourn, our brown coal power station, to get the best possible performance through the transition to retirement. We have invested in all our assets to keep them effective in the roles they will play to support a more renewables dominated system,” Mr Collette said.
This included backing for batteries, pumped hydro, gas and wind.
“So, while we are in the hard phase of the energy transition where the road ahead looks uphill, I’m optimistic that there are ways to accelerate investment and protect reliability,” he said.
“I’m optimistic that we can deliver more predictable outcomes for customers, evolving regulation away from single year volatile price resets.”
