The ghosts in the electricity grid

Energy policy uncertainty is forcing some electricity suppliers to keep unproductive power plants in operation. The economically inefficient practice is affecting investors as well as consumers.

There’s a world of difference between what is and what may be, as seen in the rowdy debating arenas of energy and carbon emission abatement. The big question -- with billions of dollars hanging on the outcome -- is when does one morph in to the other?

One of the most bothersome examples in electricity supply is the case of 'ghosts' in the machine.

The machine is the so-called national electricity grid, which isn’t really national because it doesn’t include Western Australia or the Northern Territory, but it’s still absolutely critical to life on the east coast.

Stretching from Cairns to Hobart and the South Australian western border, taking in Queensland, New South Wales and Victoria, this thin, 4,500 kilometre-long transmission system is a robust and reliable deliverer of electricity to 20 million Australians. It includes numerous power stations, ranging from the Macquarie Generation complex in the Hunter Valley (over which AGL Energy and the ACCC are scrapping at present) to ageing but still essential hydro operations to wind farms dotted across the countryside (like the pair that offend Joe Hockey on the outskirts of Canberra).

For all the greenie huffing and puffing, it is a grid that is also essential to the million Australians on the east coast who have installed solar panels on their roofs, but will freeze in the dark this winter without the big machine.

But let's get back to ghosts.

Let Pacific Hydro take up the story in its submission to the Warburton panel reviewing the renewable energy target.

“Some commentators estimate that there is an over-supply of many thousands of megawatts in the NEM,” the company says. “This includes a plant that is currently ‘ghosting’ the market rather than exiting.”

As the company points out, there is now some 2,500 megawatts of fossil-fuelled plant mothballed or in seasonal storage.

“This situation,” says Pacific Hydro, “is a function of increasing renewable energy combined with lower power demand, forcing existing generators to reduce output. The main reason these generators have not fully exited the market, or taken a long-term decision to do so, is ongoing policy uncertainty”.

The hiatus imposed by policy paralysis, it points out, is not cost-free, affecting investors in both the old and new plants as well as consumers. Without clear direction, it says, these plants will continue to be kept “on the shelf” with consequential impacts on economic efficiency and productive use of capital.

This is a problem also taken up by AGL Energy -- which has large feet in both renewable and fossil-fuelled shoes -- in its RET submission.

Thanks to the present policy and market uncertainty, says AGL, it is likely the RET 2020 target won’t be reached. It is “inconceivable” that there will be new green investment in present circumstances, it argues, while older, emissions-intensive generation is not permanently exiting the market despite declining demand and rising supply.

AGL says ‘ghosting’ is not irrational when you take into account policy uncertainty affecting climate change activity, tariff design and the RET.

All this boils down to what the Grattan Institute think tank describes as “a very messy story.” It says “traditional generators are in trouble and the future of renewable energy is highly uncertain”.

While it is not solely a federal responsibility, the role of ghostbuster is inherent in the tasks the Abbott government has imposed on itself through seeking to can the Gillard/Rudd “clean energy” policies, running a RET review with the obvious intention of scaling the scheme back and still scratching around in the cabinet shed on Direct Action.

The complexity of what it has taken on is underscored by a message the Department of Industry has sent round key stakeholders this week that suggests efforts to produce the energy green paper by the end of May have not worked out. “Late June” is now the target date.

Given that the federal government is committed to going through another consultation period before producing the white paper, that it has the RET review running as a separate process and that it has to trudge through the Senate swamp negotiating every step, it is a not unreasonable question to ask whether there is any real prospect of the uncertainty problems being resolved this year – or even by the end of the new financial year?

If the answer is “no” or “not much,” then it is a given that the ghosts will occupy the NEM haunted house for quite a while yet – at the cost of investors, consumers and eventually the economy.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of OnPower, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles