Policy and regulatory measures
Introduction
4.1
This chapter considers key policy and regulatory measures to hasten the
rollout of storage technologies and localised, distributed electricity generation
including:
-
a coherent and consistent long-term carbon price signal to drive
investment in both renewable generation and a diverse range of energy storage
technologies;
-
a consistent national renewable energy target including ways in
which Large-scale Generation Certificates could be used to incentivise the
deployment of pumped hydro and thermal storage systems; and
-
the reduction of the price settlement time in the NEM to five
minutes to incentivise the rapid deployment of storage technologies such as
batteries.
The business case for policy certainty on a carbon price signal
4.2
A consistent theme that ran through this inquiry was that a substantial majority
of Australia's generating capacity has already reached the end of its life-span
and urgently needs replacement.
4.3
For example, representatives from AGL told the committee that about 70
per cent of the electricity generation supply in Australia is now past its
designed technical end of life.[1]
Similar figures were provided by the Australian Solar Council, which stated
that 65 per cent of these generation assets need to be replaced by 2030 and
85 per cent by 2040.[2]
4.4
Despite the urgent need to replace ageing coal-fired (and some
gas-fired) electricity generation infrastructure, the committee heard striking
evidence that the lack of policy certainty over the last decade has prevented
investors from making efficient decisions to invest in any new generators. Mr
Danny Price, Managing Director of Frontier Economics, described this situation
to the committee:
[T]he power system...security and reliability [is] visibly
deteriorating. It is often said that this is the fault of the market—that there
is some form of market failure that is causing this. I am very confident that
it is not the market; it is a political failure to have a national plan for the
way in which the market should operate. Investors simply cannot respond to the
uncertainty that we see in the market. They cannot invest in conventional plant
because that could well be redundant in the future with a carbon price and they
cannot invest in high-cost and low-emission plant because at the moment it
would not be economic. They are basically caught between a rock and a hard
place. There is no investment that they can make that is going to be economic
at the moment, so they are doing what is completely rational and that is just
sitting on their hands, and as they sit on their hands the system gets worse.
That is our basic problem.[3]
4.5
Similarly, King & Wood Mallesons submitted that policy failure had
undermined investor and business confidence:
Policy stability and consistency is crucial for investment
confidence. For businesses to take risks on the future and invest, they need to
be confident that emissions reduction policies and the mechanisms to achieve
them...are stable. The lack of clarity and long-term direction with respect to
Australia's renewable energy policy has impacted the industry in a profound
way.[4]
4.6
The Australian Academy of Technology and Engineering observed that the
failure of government to provide a level playing field in electricity
generation was preventing the necessary deployment of innovative solutions:
Current market conditions mean that large-scale storage is
not economically viable in most cases. While carbon emissions remain a market
externality, cheap but greenhouse gas intensive resources (i.e. coal, gas)
dominate generation and the provision of inertia and other system services.
Correcting this market externality failure would provide a level playing field
for all generation technologies and incentivise development of innovative
supply – and demand-side solutions, which are likely to hasten the deployment
of significant quantities of energy storage.[5]
4.7
Professor Ross Garnaut explained how a failure to price carbon, and a
lack of political leadership at the national level, had caused such uncertainty
amongst business that it had paralysed investment in the energy sector:
While there is extreme uncertainty about policy, it raises
the supply price of investment to every form of generation and inhibits
investment in every form of generation. While there is such uncertainty there
will not be new investments.[6]
4.8
Describing the current political debate around climate and energy policy
as 'incoherent', Professor Garnaut warned that the failure to adopt a coherent
policy meant that Australia was missing the opportunity to secure a low-cost
path to the 'necessary low-emissions electricity system of the future'.[7]
4.9
Mr Price emphasised that the critical element in the energy policy
debate was what investors thought about carbon pricing:
It does not require a belief in climate science to accept
that carbon pricing is necessary. It does not matter what you or I think; what
really matters and the only thing that matters is what investors think. If they
think there is the possibility that a carbon price could come in place in the
lifetime of an investment, they will have to make investments with that as a
possibility. The argument about the climate science is neither here nor there
for us. It really comes down to what investors think.[8]
4.10
Along similar lines, Professor Garnaut advised the committee that the
removal of a carbon price had left business in the untenable position of
second-guessing government policy:
...the absence of a carbon price since the middle of 2014 has
contributed to the uncertainty about the investment environment. Business knows
that we have to move towards a low-emissions energy sector. A carbon price
provided very clear guidelines for making business decisions on how to proceed.
In the absence of those guidelines, business has to second-guess regulatory
decisions by government. They know they will come and it is a matter of
second-guessing them. That is a problem for the environment and for the cost of
energy.[9]
4.11
Professor Garnaut argued that a form of carbon pricing, including an
emissions intensity scheme, would increase business confidence. He told the
committee:
If, for example, we had bipartisan support for a form of
carbon pricing, which could be an emissions intensity scheme, and business had
confidence that was going to last for quite a long time, then it would be much
easier for business to calculate that there was going to be a role for gas for
a certain period of time, which would justify investment. In current
circumstances the extreme uncertainty about policy inhibits all investment.[10]
4.12
Mr John Bradley, Chief Executive Officer of Energy Networks Australia,
told the committee that policy uncertainty and blame would lead to higher costs
for consumers and 'a less secure transition to a lower carbon economy'.[11]
He argued that Australia 'cannot afford to have inconsistent or fragmented
policy frameworks across state and federal governments'.[12]
4.13
Mr Douglas Jackson, the AGL Energy Limited (AGL) Executive General
Manager, told the committee that policy certainty was critical because energy
assets are long-term 'bets' as they typically have a life-span of 20 to 40
years during which investors need to make a return on their money.[13]
4.14
Likewise, Mr Richard Wrightson, General Manager of Wholesale Markets at
AGL, told the committee that the Commonwealth government's failure to secure a
bipartisan national policy approach had crippled energy investment:
For any policy in this space, be it that or any other policy,
if you want to drive a 30-to-40-year investment, you need that bipartisan
support.[14]
4.15
Dr Noel Simento, Managing Director of Australian National Low Emissions
Coal Research and Development, told the committee that the electricity sector
needs policy certainty in order to create investment certainty
because of the risks involved in investing the substantial funds needed to
deploy low-emissions generation technologies.[15]
4.16
Mr John Pierce, Chairman of the Australian Energy Market Commission
(AEMC), responded to questions about an emissions intensity scheme with the
following observation about the need for policy certainty over the long-term
investment cycle:
...the main thing the sector needs to provide that sense of
certainty and security that will then enable the market participants to do what
they do—make investments and operate their businesses—is certainty around the
policy framework and the policy instruments that are going to be operating and
affecting the sector...
They need to know what investments are going to fly or not,
which means they need to know what is the policy framework that is going to
apply, not just today but in five years' time, 10 years' time and 15 years'
time. It is the confidence people have in the stability, not necessarily in the
specifics but of the framework, that underpins the confidence that people have
for an investment.[16]
4.17
Mr John Bradley, Chief Executive Officer of Energy Networks Australia,
was of the view that a national approach that incorporated 'an integrated,
outcome focused transition plan' was necessary to overcome the 'technical
economic and regulatory challenges' facing the industry. He warned the
committee:
...without a well-planned approach with timely action by
governments to create policy and regulatory cohesion, Australia's energy system
is unlikely to efficiently and securely integrate diverse technologies,
large-scale renewable energy sources and customer owned distributed energy
resources.[17]
4.18
Mr Oliver Yates, Chief Executive Officer of the Clean Energy Finance
Corporation, outlined why energy policy requires a coordinated national
approach and the reasons that the private market alone cannot solve the
problem:
The private market will not be able to
make long-term investment decisions in a highly volatile situation...People do
not quite know the direction of government policy. People do not know the
timing of the need to make adjustments in carbon emissions. People do not know
the speed with which that may or may not have to be made. In that environment
it is very hard for the private sector to make long-term investment decisions,
which are necessary if you are going to move from one type of asset to another
type of asset. It is incumbent on all governments to work together to come up
with a pathway and a framework, which has to be bound around a long-term
objective that is set around general scientific terms as to what we need to do,
and then they need to build an investment climate that facilitates the market
to go from A to B.[18]
4.19
Mr John Grimes, Chief Executive Officer of the Australian Solar Council
told the committee that the market had already moved and that what was required
from government was leadership and a national plan to manage the inevitable
transition to a clean energy future:
Most of all, we need a plan. We need a plan to get us from
where we are today to where the market is going to take us. Whether you believe
in this stuff or not, this is inevitable and it is unstoppable. It is the
market.[19]
4.20
Mr Price of Frontier Economics argued that the lack of national plan,
rather than market failure, is to blame for the deterioration of the power
system. He stated:
It is often said that this is the fault of the market—that
there is some form of market failure that is causing this. I am very confident
that it is not the market; it is a political failure to have a national plan
for the way in which the market should operate. Investors simply cannot respond
to the uncertainty that we see in the market.[20]
4.21
AGL emphasised that a staged transition would allow market participants
time to plan:
We support something that is transparent and creates a
transition plan that I think customers, the communities, the markets and
policymakers can respond to. The market participants need time to plan; there
are often five to 10 years in planning horizon, and we need some sort of
predictability of when to replace assets to avoid the disorderly transition we
are currently experiencing today.[21]
4.22
In terms of the Finkel Review, some witnesses expressed optimism that
the terms of reference and approach of the review could deliver a holistic
approach. Mr John Bradley, Chief Executive Officer of Energy Networks Australia
stated:
We would be optimistic that, if we take an evidence based
approach through that Finkel review, if it focuses on outcomes rather than
trying to pick technology winners or identify the most likely solutions and
instead creates resilient market frameworks within which a technology
competition can occur to get the outcome we want, whether it is
decarbonisation, security or energy affordability, that will be the right
model.[22]
4.23
However, other witnesses such as Mr Grimes expressed disappointment that
the Commonwealth government had pre-emptively ruled out certain options in
relation to energy policy:
Why the Finkel review is so important, in our estimation, is
that it has the ability to produce that plan, that blueprint for the future—to
recognise what technology is doing and to recommend the most efficient way
possible to transition to the new reality, which is coming, ready or not. So we
are very supportive of that process. We are disappointed when some things are pre-empted,
are already ruled out.[23]
Emissions intensity scheme
4.24
A number of witnesses expressed support for an emissions intensity
scheme. For example, AGL argued that it would enable a stable, predictable and
low-cost path to a lower emissions system.'[24]
4.25
Mr Price told the committee that an emissions intensity scheme would
allay the concerns of consumers who are 'very sensitive' to electricity prices
and might not favour carbon pricing. He outlined that:
One of the great features of the emissions intensity scheme
is that effectively the costs of that scheme fall on high-emission generators,
but the way that you introduce that can be easily managed by those
high-emission generators. In fact, only yesterday the two biggest emitters of
greenhouse gas—carbon dioxide—AGL and Energy Australia have called for an
emissions intensity scheme. That is how much they value the certainty that
comes with that type of scheme over the damage that it does to their business.
They have already accepted that this is going to come into place, as most
investors have.[25]
4.26
Amidst calls by the National Farmers Federation,[26]
AGL[27]
and Energy Australia[28]
for an emissions intensity scheme, Mr Price informed the committee that
'[p]eople are already making decisions as if there was a carbon price in
place'.[29]
4.27
Professor Garnaut told the committee that despite its limitations, 'an
emissions intensity scheme in the electricity sector would do the job',
advising that:
...an emissions intensity scheme would serve the purpose of
providing appropriate incentives for investment in lower emissions
technologies. In fact, as far as the climate change objectives, the emissions
reduction objectives, and also the energy investment efficiency objectives are
concerned, the emissions intensity scheme is very similar in its merits to
carbon pricing.[30]
Committee view
4.28
Evidence received by the committee makes it clear that the debilitating
investment strike in some sections of the electricity sector has been caused by
the abolition of a price on carbon and changes to the renewable energy target.
Witnesses were very clear that political failure at the Commonwealth level to
agree on a carbon price had caused such extreme uncertainty in sections of the
energy sector that investors and energy companies were unwilling to invest in new
electricity infrastructure.
4.29
Contrary to the evidence provided to the committee by Mr Price and a
number of incumbent operators, the committee does not accept the assertion that
investment in generation capacity is stalled, across the entire energy sector,
due to uncertainty.
4.30
While it is certainly the case that investment in new fossil fuel
generation is stalled because of the uncertainty around future carbon
scenarios, the committee notes that investment in new renewable energy
capacity, either under construction or due to commence construction in 2017, equates
to an enormous 2.2GWs.[31]
4.31
Far from there being a poor investment climate for electricity
generation, the evidence of actual projects being built demonstrates that there
is a thriving renewable energy sector at the moment despite the impediments of
an outdated regulatory framework and the Commonwealth government's refusal to
give the sector long-term carbon policy certainty.
4.32
The committee further notes that, in addition to the 2.2GWs of generation
referred to above, there have been a further series of enormous renewable
energy projects announced in just the last two months. These include:
-
Riverland Solar Storage in Morgan, South Australia that will add
330MW plus significant storage which is aimed to be constructed and operational
during 2017;
-
Kingfisher Solar Storage in Roxby Downs, South Australia which
will add 120MW plus significant storage in 2018;
-
Bodangora wind farm near Wellington in NSW which will add 113MW;
and
-
a potential expansion of the Snowy Hydro system, which is
estimated to add 2GW of capacity to the NEM.
4.33
Discussions also continue around the construction of a 100MW solar
thermal power generator at Port Augusta, South Australia. While a long term
purchase agreement and confirmation of any grant or loan funding are still
required before this project can proceed, it will ultimately contribute
significant generation and storage capacity to the market.
4.34
The committee urges the Commonwealth government to reconsider its
approach to carbon policy. A carbon price is so clearly in the national
interest and so clearly required for stable investment in the electricity
sector that the committee is strongly of the view that a mechanism for
signalling a price on carbon be considered and implemented as a matter of
priority.
4.35
There is much to be gained from a carbon price. The weight of evidence
over at least the last decade has indicated that a carbon price will drive the
necessary investment in renewable energy technologies required to reduce
greenhouse gas emissions. Furthermore, the evidence going back to both the Stern
Review (2006) and the Garnaut Review (2008) indicates that the costs
of mitigating climate change are significantly less than the costs of doing
nothing. The intervening years since those two reviews have shown that
Australia is uniquely placed to become a renewable energy superpower, a
position that will bring enormous economic benefits in a carbon constrained
world and one that will create many tens of thousands of new jobs in the clean
energy sector.
4.36
Beyond the investment in renewable energy that a carbon price would help
deliver, the committee also received a wealth of evidence (see chapter 3) that
a range of storage technologies are available to help successfully integrate
intermittent renewable energy sources such as wind and solar PV into grid
networks. Furthermore, a diverse range of storage technologies that will offer
the full range of ancillary services required for the grid security are capable
of being deployed now.
4.37
However, the NEM contains antiquated rules that act as a barrier to the
uptake of storage technologies. These matters are discussed in a later section
of this chapter.
The renewable energy target
4.38
Just as with carbon pricing, the committee heard that a failure to secure
a consistent political approach at the national level to the renewable energy
target (RET) had plagued investment in renewable energy projects because of the
massive uncertainty it created for business. Mr Wrightson, AGL, told the
committee:
A renewable scheme that has a review of its targets every
three years creates such a huge political uncertainty. I know the option is
that those targets could be increased, and, as we discovered, they could also
be decreased.[32]
4.39
AGL described how the three-year reviews of the renewable energy targets
held back investment in long-term renewable energy generation:
When you are looking at building a wind farm that hopefully
has something like a 20-year life, bearing in mind that the bulk of the
earnings from a wind farm actually comes from the renewable energy
certificates, a three-year cycle for reviewing targets is difficult and has
hindered investment up until now.[33]
4.40
The committee also received evidence that changes to the RET could be
used to incentivise the deployment of macro scale renewable energy storage
projects such as pumped hydro.[34]
4.41
Genex noted that pumped hydro storage is currently ineligible for
Large-scale Generation Certificates under the RET because the amount of 'auxiliary
loss', that is, the amount of electricity consumed in pumping, always exceeds the
total electricity generated. Genex argued that pumped hydro storage should be
recognised as an eligible Large-scale Generation Certificates under the Renewable
Energy (Electricity) Regulations 2001 and proposed that the definition of auxiliary
loss be redefined in the Regulations:
3B Definition of auxiliary loss
- For a power station, auxiliary loss means the amount of
electricity used in generating electricity, and operating and maintaining the
power station, but does not include any electricity used for network control
ancillary services.
- Subject to clause 3B(iii), for a hydro-electric power
station, auxiliary loss also includes the amount of electricity that is used to
pump or to raise water before its release for hydro-electric generation.
- For a pumped storage hydro-electric power station that
is accredited under section 15 of the Act on or after [a nominated future date]
auxiliary loss does not include the amount of electricity used to pump or to
raise water before its release for hydro-electric generation.[35]
Committee view
4.42
The committee is aware that the future of the renewable energy target is
shrouded in uncertainty beyond 2020. The committee notes that in the absence of
a carbon price, the renewable energy target has been a necessary mechanism to
drive new investment in renewable energy generation. The committee is of the
view that the renewable energy target has performed a vital function in
encouraging investment in renewable energy, particularly in the absence of a
carbon price, and for this reason alone, it should be maintained and expanded
beyond 2020.
4.43
The committee is also aware that aspects of the renewable energy target
could be modified to incentivise investment in macro scale energy storage
systems. Given the importance of macro scale energy storage, the committee is
of the view that such proposals should be given careful consideration as part
of a detailed review to examine whether there are any policy and regulatory
barriers to the implementation of energy storage technologies to facilitate the
operation and resilience of Australia's electricity networks.
Recommendation 4
4.44
The committee recommends that the Commonwealth government continue
and expand the Renewable Energy Target beyond 2020.
Market rule and regulatory changes to incentivise the deployment of storage
technologies
4.45
This section considers a proposition put forward throughout the inquiry
that the key to the rapid deployment of storage technologies is a change to economic
and regulatory requirements that would allow storage technology providers to
better capture the value that storage offers.
4.46
The NEM rules currently provide for different dispatch and settlement
periods. That is, bids to supply electricity into the market are made every
five minutes, whereas payments for supplying that electricity are averaged from
the prices over a 30 minute period.[36]
4.47
Dr Matt Wenham, Executive Manager of Policy and Projects at the
Australian Academy of Technology and Engineering (ATSE) told the committee that
ATSE had spoken to over 80 organisations and stakeholders involved in the
energy sector and the need to change the settlement rules was mentioned
repeatedly by stakeholders. Dr Wenham stated that feedback from stakeholders
indicated that storage providers would be much more able to enter the market if
the settlement period was changed to five minutes to align with the dispatch
period because they would be able to access a clearer revenue stream.[37]
4.48
In response to questions from the committee, Dr Wenham explained that
the current settlement rules were a hangover from the days of coal and
gas-fired electricity generation and the rules were no longer adequate to deal
with large fluctuations over short timeframes.[38]
4.49
Dr Evan Franklin, from the Energy Change Institute, ANU, told the
committee that a key advantage of battery storage was the ability of a battery
to provide one element of system resilience, namely responding rapidly to
dynamic system disturbances that occur over a matter of seconds.[39]
4.50
Dr Franklin explained that under the current rules, if prices spike
dramatically for a five minute period, a supplier of electricity for that
period may only get a fraction of the value of that electricity supplied to the
system because it is averaged over a 30 minute price:
If there is one five-minute period where you need a lot of
extra generation to meet demand, it will come in at a very high price, but the
average price over that 30-minute period may not reflect the need over that
five-minute period. So if you are a generator who supplies much-needed
electricity during that five-minute period, you get paid for the five minutes
but you get paid on the 30-minute price. You may get paid a fraction of the
value of that electricity for that period of time.[40]
4.51
Similarly, Mr Bruce Mountain, Director of CME, explained that his
research revealed the market is flawed because it fails to adequately reward
batteries for the value they can contribute by putting power into the system at
very short notice:
The market we operate sets prices in five-minutes trading
intervals or auctions. The trading period, the settlement period price—the price
that the generators receive and that the consumer pays in the mandatory
wholesale market—is the average of those five-minute trading prices. So
batteries, which can actually respond in very short intervals and can adjust
either the demand that they are taking from the grid or the exports back into
the grid at a very rapid pace, are not getting their full compensation for that
because the value they offer is very high in that five-minute interval but the
price they get is the average over the half-hour. Essentially, the market is
not reflecting that very short transient value that batteries, first and
foremost, and hydro, secondly, have the greatest value in actually producing.
So a lot of the economic value that batteries has is not captured by that particular
market flaw.[41]
4.52
In effect, therefore, the current rules which provide for a 30 minute
settlement period for prices may have a perverse effect because they act as a
disincentive to the provision of batteries that are able to provide resources
within milliseconds for periods of one, five or ten minutes.[42]
4.53
Even worse, the committee heard very forceful arguments made by some
witnesses that the current rules allow, and possibly encourage, perverse
behaviours in the market during times of extreme stress in the system. These
behaviours, while within the rules, do not benefit the system, but rather
benefit particular operators.[43]
4.54
For example, Dr Matthew Stocks, from the College of Engineering and
Computer Science, ANU, explained that not only are operators such as storage
providers being deprived of the full value of the services that they supply,
but other generators are encouraged to make negative bids merely in order to
participate during periods of high stress when they will also reap a share of
the rewards provided by storage operators:
Dr Stocks: I will certainly take a much stronger
position on the settlements. One of the challenges with having a different
dispatch and a different settlement period is that you have people who come in
and support the system at times of very high stress and then, when that stress
disappears, people who continue to generate get rewarded for the very high
prices in that period. One of the things that are happening, particularly with
storage, is that people will be able to respond faster—we are talking seconds
for batteries and less than a minute for pumped hydro. People can respond to
the needs of the system much more rapidly, so if the price heads to a price gap
of $14,000 a megawatt hour then everyone, for that 30-minute period, benefits
from that divided by six for that entire half-hour. So if you are just idling
along through that entire period then you get rewarded for somebody coming in
and helping out, at a very high price, for a short period of time, and it then
drives behaviour like what we have seen recently in South Australia, where
operators will bid at negative prices to ensure that they get that average
price for that entire period. There were examples where people bid at minus—
CHAIR: Isn't that price gouging?
Dr Stocks: No, it is working within the market that
exists. If you have a set of market rules then everyone will behave to optimise
their outcome within those rules. So what we have is a difference between
settlement and dispatch which rewards particular behaviours, and they are not
necessarily behaviours that are best for the resilience of the system; they are
best for those particular operators. The technology and the ability to respond
are changing, and to some extent this has really come out of old established
rules where things did happen much more slowly, and it really did not matter
that there was this five-minute period, because everyone had to ramp up, ramp
down and take much longer periods of time. The challenge there is that, if
storage is going to come into that, if you really want it to develop that very
fast instantaneous response, it needs to be rewarded for filling in that gap
and not end up being paid six times less than what that was deemed to be worth
because whoever supplies in that six-minute period only gets about $2,000 a
megawatt hour rather than the $14,000 that they bid. So it drives different
behaviours in the system, and not necessarily those that best balance out the
overall system.[44]
4.55
The committee heard from a number of witnesses that changing interval
pricing to allow payment for short-term storage and discharge would incentivise
battery storage.[45]
4.56
Mr Oliver Yates, Chief Executive Officer of the Clean Energy Finance
Corporation, told the committee that:
Currently you only get paid on 30-minute interval pricing.
Five-minute interval pricing, from our own analysis on battery projects, would
change the revenue profile significantly and would then encourage batteries to
come into the market and be available for short-term supply. This is exactly
what you want: a very fast response.[46]
4.57
Dr Franklin pointed out that a change in the market rules could
encourage batteries to be installed at the household level and that this would
make that stored energy 'available to provide fast-frequency response in the
case of supply-demand imbalance in the wider system'.[47]
4.58
Dr Stocks observed that a change to the market rules could also
incentivise macro solutions to energy storage such as pumped hydro.[48]
4.59
The Australia Institute explained that 'fully rewarding demand side
market participants for 5 or 10 minute entries to the market' would not only encourage
them to participate in the market but would have the added benefit of
'moderating overall price levels'.[49]
4.60
Mr John Pierce, Chairman of AEMC told the committee that the AEMC had
already received a proposal to change the settlement time within the spot
market from 30 minutes to five minutes. Mr Pierce advised that the AEMC was
currently assessing the proposal against the National Electricity Objective. The assessment includes a consultation
process, a directions paper containing options for implementation, and the
publication of draft rules 'akin to exposure drafts of legislation' on
6 July 2017.[50]
4.61
The committee also heard that the design of the electricity tariff paid
at the household level also acts to undermine the full value that customers
could receive from installing a battery:
Around one-third of the residential price to a household
consumer or a small business consumer is a fixed charge, which does not vary as
a consequence of how much the customer consumes. Batteries and solar, which are
a fixed cost outlay to a household, do not capture that value because the
household or the business is still exposed to the fixed charge, so the economic
value that it has is actually diminished to the householder or the small
business that puts in a battery by virtue of the tariff structure.[51]
4.62
Mr Bruce Mountain, director of CME, also explained to the committee that,
in many instances, high prices were not necessarily the result of any genuine
shortage of electricity. Rather, many generators exploit the current rules to
game the system by forcing prices higher and therefore maximising their profits
at consumers' expense:
It is my view that in many trading intervals and half-hour
settlement periods, most notably in South Australia and in Queensland, the
prices we see do not reflect a genuine scarcity in the market; they reflect the
exercise of market power. Generators through their actions can withdraw
capacity from the market by either not making it available to the market at all
or, alternatively, only making it available at extremely high priced bands and
as a consequence, although they lose production through the smaller volume that
they are dispatched to, they gain a price which is a multiple of the lost
production. This is a straightforward exercise in market power. In my opinion
it is well documented by the regulators and noted duly. I think the enforcement
regime we have in Australia is inadequate in dealing with that. I think prices
would be lower if those issues were adequately addressed.
...
The maximum price that a generator can receive in a half-hour
is $14,000 per unit that they produce. The typical annual average price is in
the range of $50 per megawatt hour to $100. So by withdrawing capacity and
achieving extremely high prices in a number of these half-hourly periods they
can obtain two orders of magnitude or three orders of magnitude more revenue
than they otherwise would. It is impossible to say how much they actually get
because the amount they get is a function of their contracts in the market. The
wholesale market is a mandatory spot market. They have to produce and sell into
that market but they can hedge around it by entering into contracts.
Not knowing the contract position, I cannot identify how much
any individual market participant gets, but I know that they can affect spot
market outcomes and hence contract market outcomes and hence enforce their own
competitive position in the wholesale market and most notably in the retail
market, where they can drive out competitors who can otherwise not get access
to contracted positions that will hedge this extreme volatility.[52]
4.63
Mr Mountain did not agree with the proposition put forward by regulators
that this type of behaviour was reasonable. Instead, he argued that it
indicated the exercise of market power by generators who were able to 'make the
price' at certain times:
But I am of the view that that sort of picture and that
pattern of behaviour is consistent over time, and is a form of capacity
withdrawal. It is a market, and the regulators will say: 'This is reasonable
market behaviour; there is a capacity shortfall, or a prospect of one, and so
we do not have to make our plant available.' In market economics, that is pure
and simple the exercise of market power. You are not taking the price in the
market, you are making the price in the market.[53]
4.64
Mr Mountain also warned that the concentration of market power after the
closure of Hazelwood brown coal-fired power station in Victoria would intensify
the problems arising from the vertical integration of the incumbent power
generators:
I think there is a vertical integration and incumbency
problem, and I think it is particularly acute in South Australia. I think it is
also a problem in Queensland and then New South Wales and Victoria, in that
order. I think the loss of Hazelwood will probably introduce the problem into
Victoria because Hazelwood has been a largely uncontracted trader. It has had
excess capacity compared to the retail generation that its owner, ENGIE, had
through its retailer, called Simply. And as a consequence, the loss of that
generation will put greater contractual authority and power in the hands of the
incumbent generators. This evidence is quite visible, simply looking at the
number of contracts traded in the contracts markets, for which there is good
data; there are almost none traded on the SA market and, as a consequence, if
you are seeking to compete in that market you are at a disadvantage.[54]
4.65
Mr Mountain was of the view that the only way to tackle the perverse
incentives within the energy market that currently incentivise the exercise of
market power was to institute 'a combination of a capacity payment, a payment
to be available, and a payment to actually produce'.[55]
Committee view
4.66
A recurrent theme throughout the inquiry was the need to align the time
periods for price bids and price settlements in the NEM. Currently, the bid
period is at five minute intervals, but the payment settlement period is set at
30 minute intervals.
4.67
The committee heard that the rules in the NEM are now outdated and
merely serve to privilege the old fossil-fuel generators. The committee also
heard evidence that the current rules allow the larger players to game the system.
4.68
The committee is aware that the current market rules may engender
perverse unintended outcomes where suppliers may choose not to bid into the
market to deliberately create a price spike and then only bid at the peak of
the spike.
4.69
The evidence provided to the committee concerning the five minute rule
issue and the capacity for other rules to produce perverse and unintended
outcomes demonstrate a deeper problem: The outdated regulatory framework and
the reluctance of the rule maker to embrace any change in a timely manner, proves
the need for reform in this area.
4.70
The committee has received evidence from a number of witnesses
indicating the surprising ignorance of both the AEMC and the Australian Energy
Market Operator (AEMO) concerning new technology.
4.71
The fact that AEMO was not even aware of the proper technical settings
to enable windfarms to 'ride through' certain disturbances on the grid in the
South Australian 'blackout' event in 2016, even though these had been in
operation for many years overseas, demonstrates a blatant lack of competence.
4.72
It betrays a culture of both astounding ignorance and of an attitude
completely averse to change. The committee considers that this is unacceptable
and requires immediate substantial reform.
4.73
The AEMC is in need of fundamental reform. It is clearly both captive to
the incumbent industry and hostile to the inevitable transition away from the
current status quo. It is mired in pointless process and delay in any matters
that threaten the revenue streams of the incumbent generators. The committee
considers that this method of operation is completely contrary to the statutory
duty and obligations of the AEMC which is to pursue the long term interests of
consumers.
4.74
A case study on the five minute rule in this context demonstrates the
counterproductive model we have now — and the immediate need for comprehensive
reform.
Case Study – the 5 Minute rule
4.75
The AEMC operates by examining and ruling on requests for amendments to
the rules of the electricity market. It can change rules or it can reject them —
so it is the key regulatory body.[56]
4.76
A major electricity user, Sun Metals, operates a zinc smelter in
northern Queensland. It has requested the AEMC to amend the rules to introduce the
so-called 5 minute rule.[57]
4.77
The primary result of not introducing the 5 minute rule to this point
has been to the long-term detriment of the consumer—effectively the generators
are being allowed to rip them off. One would expect that the AEMC would be keen
to fulfil its statutory duty but, unfortunately, the opposite has happened.
4.78
Sun Metals made their application for a rule change to the AEMC on
4 December 2015.[58].
Then, a full six months later, the AEMC formally initiated the review process.[59]
That is, it took the AEMC six months to issue a consultation paper of about thirty
pages on an issue that it had examined in the context of an earlier rule change
process.[60]
4.79
The rule change decision is supposed to be made within six months, but
this did not happen. On 25 August 2016 the AEMC gave notice that it was
extending the date for its draft determination from November 2016 to 30 March
2017.[61]
4.80
Then, on 2 February 2017, the AEMC gave further notice that it was
extending the time for the draft decision to 6 July 2017 with a final determination
date of 14 September 2017. It made the point in the announcement that it had
only convened two stakeholder meetings on this issue during 2016.[62]
Clearly where there is a threat to the revenue of incumbents the AEMC does not
work efficiently to protect consumers. There is a culture of appeasing the
status quo by glacial process with no accountability at all.
4.81
Disturbingly it appears that the AEMC has missed the next deadline in
this process. When announcing the delay from March to July it promised the
release of another issues paper by 30 March 2017. At the time of
publication there is no such document on the AEMC website.
4.82
Apart from the consumer and competition issues relevant to the five
minute rule another interesting point was raised in submissions by Zen
Energy. It makes the point that the 5 minute rule would improve the
stability of the electricity system as well.[63]
4.83
For the above reasons the committee strongly supports moving to a five
minute settlement process as soon as possible. It does not consider the conduct
of the AEMC on this matter to be acceptable, and does not accept the need for a
further delay through a protracted phasing in of the new rule.
4.84
The committee is strongly of the view that the NEM rules more broadly
currently incentivise the gaming of the system by generators with substantial
market power. Such outcomes have seriously adverse consequences for the
electricity prices paid by electricity consumers. The committee therefore
recommends that an urgent review be undertake of the payment systems operating
within the NEM including careful consideration of the merits of instituting two
payments, namely a payment to be available and a payment to generate.
Recommendation 5
4.85
The committee recommends that the settlement time in the spot
market be reduced from 30 minutes to 5 minutes, with
phase-in of this rule change to be completed before 1 November 2017, and
for the reliability of electricity frequency to be supported by new markets for
additional services to support the grid.
Recommendation 6
4.86
The Committee recommends wholesale reform of the Australian
Energy Market Commission (AEMC), to guarantee faster decision making and a
prioritisation of the long term interests of the consumer over the interests of
incumbent power generators, and a much tighter supervisory role over the
Commission for the Commonwealth Energy Minister.
Recommendation 7
4.87
The committee recommends that the Finkel Review identifies other
major rule impediments to assist in the full integration of renewable energy
and storage with a view to speeding up the Australian Energy Market Commission
(AEMC) processes in regards to their reform. These should then be
presented to the AEMC as an urgent agenda of reform work to be prioritised and
completed within six months.
Recommendation 8
4.88
The committee recommends that investment in the renewable energy
sector be further encouraged through the introduction of a market-based carbon
trading scheme.
Frequency Control Default Settings
4.89
The committee has also become aware of an emerging debate occurring in
the context of the resilience of the electricity network due to the relaxation
of control settings concerning the frequency of dispatches.
4.90
Put simply the standards which govern the rules by which generators
contribute to the NEM were relaxed in 2001 to allow greater variation in
frequency around the control frequency of 50 hertz (Hz).
4.91
Previously generation equipment was regulated to only be allowed to
submit electricity onto the NEM if its frequency was between 49.9Hz and 50.1Hz.
Most often it was considerably closer to 50Hz.
4.92
However, in order to create a larger frequency control market this
standard was relaxed. What this means is that the electricity going into the
NEM is now less 'reliable' than was previously the case.
4.93
In the context of concerns around system stability, having an
electricity system that is deliberately less frequency-stable than it could be
is a matter that should be reviewed immediately.
4.94
The committee understands that the former tighter frequency control
range could be re-imposed on most if not all existing synchronous generators in
a very short period of time and at essentially no cost. This would then improve
the resilience of the NEM by lessening the frequency variations that ordinarily
occur, thereby minimizing the likelihood of failure in parts of the system.
4.95
The committee has not had sufficient time to examine the issue in detail,
but suggests that the Finkel Review should examine this issue as a priority. Whilst
this is a difficult technical issue on the face of it, it could provide a
significant boost to the resilience of the system whilst the transition to
renewable energy proceeds.
4.96
The committee notes a submission to an inquiry by the South Australian
regulator, the Essential Services Commission of South Australia which deals
with this issue, inter alia, which contends:
A re-assessment of the NEM frequency control ancillary
services (FCAS) markets should be undertaken. The governor control that was
required prior to the start of the ancillary services (FCAS) markets
illustrates why there appears to be a serious decline in the ability of the
power system to withstand significant events. The introduction of a market
structure and the separation of various ancillary services has brought with it
a level of risk which has been highlighted by the system black that occurred in
South Australia on 28th September 2016.
It is time to re-examine the technical risk and
inefficiencies introduced by a culmination of more than a decade of decision
making (and flow-on regulatory changes) which have led to a significant decline
in the primary frequency control systems on the synchronous units within the
NEM. Many other markets treat ancillary services that are necessary to support
the energy trade as part of the mandatory requirements, this is in contrast to
the NEM in which the frequency control is optional and economically sourced.[64]
4.97
Most other countries simply regulate this issue, as Australia used to,
whereas deregulation in our system has contributed to instability and a lack of
resilience.
4.98
The issue is highlighted by Ms Summers in Figure 4.1 below.
Figure 4.1: Frequency distribution 8 May 2016 vs 8 May
2001
Source: Kate Summers, Fast
Frequency Service – Treating the symptom not the cause?, Submission to the
ESCOSA Inquiry into licensing arrangements under the Electricity Act 1996 for
inverter-connected generators, p. 4.
4.99
Figure 4.1 demonstrates the significant increase in variability of
frequency levels over the last 15 years. Given that this is an indication of a
lessening of the total system resilience, this issue should be examined
immediately to determine if corrective action is desirable.
Recommendation 9
4.100
The committee recommends that the Finkel review specifically
examine the market rule change introduced in 2001 redefining of the normal
operating band from 49.9Hz to 50.1Hz to 49.85Hz to 50.15Hz, as well as the
impact that change had on total system reliability and whether it should be
reversed.
Economic opportunities arising from deployment of renewable energy and
energy storage technologies
4.101
This section briefly outlines the evidence that Australia is well placed
to capture substantial economic value from implementing measures such as a
carbon price and changes to the NEM rules that would incentivise the rapid
deployment of renewable energy including distributed generation and a panoply
of storage technologies.
4.102
Professor Ross Garnaut reminded the committee that Australia possessed a
huge advantage in a world that was moving to low-emissions energy:
Of all the developed countries in the world, Australia has by
far the richest endowment of renewable energy resources. The exact combination
of resources that makes greatest sense varies across the continent. In
Queensland it will be a combination of solar and biomass, usually; in southern
Australia it will be a combination of solar and wind. Later on, with the
development of new technologies, there will be other renewable energies in that
mix.[65]
4.103
Given the huge advantages outlined above, Professor Garnaut was of the
view that Australia could supply 'low-emissions energy-intensive goods' to the
global market. Such an outcome would secure substantial economic benefits for
Australia in terms of both employment and income.[66]
4.104
Similarly, Mr John Grimes, Chief Executive Officer of the Australian
Solar Council emphasised the value that would accrue to Australia positioning
itself as a global leader in the new economy:
Our message for regulators and legislators is that it is
better for Australia to identify what is going to happen and position Australia
so we can win a disproportionate value of that change—skills development,
training and providing consulting advice to the rest of the world. We are
actually leading the world in this stuff, so there are huge economic
opportunities.[67]
4.105
Both Professor Garnaut and Mr Steve Blume, President of the Australian
Solar Council, warned the committee that policy incoherence was a grave threat
to Australia's ability to take full advantage of the global transition to a low
emissions future. Mr Blume noted that the government's energy policy was
reactive rather than properly considered, and as such, was a poor foundation on
which to develop good 'long-term policy in the public interest'.[68]
Jobs created by deployment of
energy storage technologies
4.106
The committee heard that as well as providing an economic benefit to
households and increasing system resilience, increased uptake of energy storage
systems would create jobs in the industries that support them.[69]
The Australia Institute observed that:
If Australia is smart then we can create local jobs and
generate export opportunities right across the value chain, from the storage
hardware, to control software and in creative new finance and business models
that can power the smart grid of the future.[70]
4.107
The School of Photovoltaic and Renewable Energy Engineering at the
University of New South Wales pointed out that job creation in the renewable
and distributed energy market is likely to be concentrated in installation:
Renewable and distributed energy technologies, due to their
relative small scale, modularity and distributed deployment are more employment
intensive than conventional large scale generation...[t]he key driver of job
creation will...likely be the level of local deployment, rather than just seeking
to develop and sell distributed energy systems into international markets.[71]
4.108
Nexergy was of the view that the cost savings that would accrue to
participants engaged in distributed energy trading would lead to a virtuous
cycle of increased jobs in new fields:
By improving the return on investment of energy storage
systems, local energy trading would increase the frequency of purchase and
installation of systems, thereby improving overall system resilience.
Consequently, greater funding will be available for storage system installation
and supply, research and development, and manufacturing. Further, peripheral
industries which support energy storage systems such as control devices,
Internet of Things solutions and smart-grid offerings would also benefit. The
result is the creation of new jobs in each of these fields.[72]
4.109
Meanwhile, the Australian Academy of Technology and Engineering argued
that manufacturing jobs associated with battery technology are unlikely to
arise without some form of government assistance:
Significant local job creation in energy storage
manufacturing would be unlikely without government support to attract
international partners...it will be next to impossible to compete with
established battery manufacturers that all are located overseas...Even the more
successful products developed from Australian intellectual property...are
manufactured internationally.[73]
Committee view
4.110
The committee consider that Australia is uniquely placed to capture
substantial economic value from becoming a renewable energy superpower. It is
clear from the evidence received by this committee that energy companies, both
locally and globally, are moving out of coal. Coal is in structural decline and
investors have now shunned any new investment in coal-fired electricity
generation (see chapters two and three). As a consequence, there is an urgent
need to replace Australia's ageing fleet of coal-fired power stations with
electricity generated from renewable energy and with electricity storage.
4.111
The committee recognises that jobs will be lost in coal communities and
therefore the transition to a clean energy economy requires careful planning
that needs to begin immediately in order to avoid a chaotic and painful
transition that would damage livelihoods and communities. The committee is of
the view that a well-planned transition will lead to far more jobs in the clean
energy economy than are currently available in the coal economy, and that many
of the skills that workers in the old energy economy possess will be valuable
in the new energy economy.
Recommendation 10
4.112
The committee recommends that the Commonwealth government
undertake a detailed review of policy and regulatory barriers to, or tariff
structures that hinder the implementation of, energy storage technologies.
Recommendation 11
4.113
The committee notes that, despite the Prime Minister's rhetoric
on battery storage, the Commonwealth government has failed to put in place any policies
that support businesses or households to invest in energy storage. The
committee recommends the Commonwealth government put in place policies to
support businesses and households to invest in energy storage, new software
services and encourage grid decentralisation, resilience and greater energy
security.
Senator Sarah
Hanson-Young
Chair
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