Renewable Energy in Competitive Electricity Markets A ... · Renewable Energy in Competitive Electricity Markets A Three Act Play Stephen Wilson, Adjunct Professor, ... Elon MUSK

Renewable Energy in Competitive Electricity Markets

A Three Act Play

Stephen Wilson, Adjunct Professor, UQ Energy Initiative

Managing Director, Cape Otway Associates


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• The government changes and the carbon tax is repealed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


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


Act 1 Hooray: the transition is underway!

SCENE 2 old coal plants begin to fall off the perch


What are the effects of wind and solar

pushing down coal capacity factors?

South Australia as a Case Study


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


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


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


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


Peak

Inter.

Base

MW




18.50


10.00

10.00

3.00

0.75





18.50


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…


Act 2 ‘Is the market dead…or just resting?’

SCENE 1 worrying signs


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


COAL GAS

Sustainability Affordability

Reliability

COAL SEAM GAS STINKS

NO GAS

WIND SOLAR

What gives ? Most fuels only have two ‘–abilities’


COAL GAS


Reliability


NO GAS

HYDRO

WIND

WIND SOLAR

What about the demand side ? Energy efficiency and time-of-use strategies


COAL GAS


Reliability


NO GAS

HYDRO

WIND SMART METERS

WIND SOLAR

Is this scenario politically plausible ?


GAS COAL

NUCLEAR

SMART METERS

HYDRO Sustainability Affordability

Reliability

WIND SOLAR

Is this scenario socially acceptable ?


GAS COAL

NUCLEAR

SMART METERS


Reliability

Resolving the Trilemma


‘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’


COAL NUCLEAR

SMART METERS


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…?


Is the electricity market dead ?


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 – …?


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…



Eastern Australia’s coal and gas fleet

is FALLING OFF A CLIFF

The Guardian, North Head, Sydney


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


Thermal plant retirement schedule in NSW


Author’s chart



Thermal plant retirement schedule in Queensland


Author’s chart



After the cliff, what is the outlook for

SUN- & WIND-POWERED DECARBONISATION?

North Head, Sydney Hobart race start

Photo: abc.net.au


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


A Three Act Play

Stephen Wilson


Recent EPIA papers


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


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


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




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)


S A

AEMO reserve shortfall projections summer 2017 & 2018


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


Challenges for wind power


A Three Act Play

Stephen Wilson


How to get a Minister to Accept or Reject a Proposal


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


6.6 kV cables Hazelwood Coal-fired Power Station Latrobe Valley, Victoria Wednesday 12th April 2017


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


up to $14 000 /MWh




2015-16



Eastern and South-

Eastern Australia,

March 2017


up to $14 000 /MWh




2015-16



Eastern and South-

Eastern Australia,

March 2017


up to $14 000 /MWh




2015-16



Eastern and South-

Eastern Australia,

March 2017


up to $14 000 /MWh




2015-16



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


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


45 seconds to system BLACK


Transmission north of Adelaide, 28 Sep 2016

Adelaide city centre, 28 Sep 2016 Storm, 28 Sep 2016


Source: AEMO, Update Report: Report on Black System Event in South Australia

on 28 September 2016, 19 October 2016

41 sec


275 kV bus voltages across South Australia prior to separation

…41 sec …42 …43 …44 …45 sec system black


• Transmission faults were all

north of the Adelaide load centre

• Transmission from Victoria was

unable to support the system

Adelaide load centre


• 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

Documents

Renewable Energy in Competitive Electricity Markets A ... · Renewable Energy in Competitive Electricity Markets A Three Act Play Stephen Wilson, Adjunct Professor, ... Elon MUSK