Too much supply does not equal blackouts

Yet again we see this drivel of illogical reasoning from power generators, threatening that too much supply of power will mean not enough power. Page two of The Australian newspaper informs us:

Pressures in the electricity market – partly blamed on the Renewable Energy Target – could drive ageing power ­stations to slash their maintenance budgets in the future, leading to more blackouts, the chairman of one of Australia’s biggest energy companies warns.

Apparently AGL Energy's Jeremy Maycock is concerned that government policies are exacerbating an oversupply of power generation. This is depressing electricity prices which will tempt owners to cut back on maintenance and lead to unexpected failures of power plants.

Now, it is true that there is a large oversupply of power generation capacity. According to the Australian Energy Market Operator, there’s several thousand megawatts of generation capacity in excess of likely peak demand in each of Victoria, NSW and Queensland. It is also true that this is acting to depress prices.

But last time I looked blackouts – or brown-outs – were caused by precisely the opposite of excess capacity. If AEMO is right, we’re going to be stuck with more than 2000 megawatts of dispatchable capacity in excess of peak demand for the next decade. Therefore, for us to end up with blackouts you’d need not just one generating unit to fail but several to go simultaneously, because power stations in Australia tend to be built in units of around 250-500 megawatts. So, between four to eight units would need to fail during a peak-demand period to overwhelm a 2000MW excess of supply, and such a period is when power prices are likely to be really attractive.

What is the probability of this occurring, I wonder ...?

It might be probable that, over time, we do see some generating units drop offline as companies decide that keeping them maintained isn’t worth it.

But, guess what! That would mean the big oversupply, which is apparently such a problem, will start to actually disappear, prices will begin to rise and there will be a stronger incentive to keep up the maintenance on the remaining generators – which would reduce the likelihood of blackouts eventuating.

That’s the wonder of markets.