Wind power coal closures = blackouts?

The mothballing and closure of a range of coal power stations is leading to claims that adding lots of renewable energy supply to an already oversupplied market could mean the lights will go out.

Yes, I know too much supply equals not enough supply doesn't really make much logical sense. But consider this statement from the Australian Energy Market Commission in its submission to the Climate Change Authority:

“Prices in the wholesale electricity spot market have been at historically low levels in recent years due to a relatively high level of generation, given recent falls in demand levels. Modelling undertaken for the AEMC suggested that the Large Scale Renewable Energy Target distorts the balance of supply and demand in the wholesale electricity market. This occurs as the additional revenue renewable generators have access to through the sale of certificates serves to increase the level of renewable generation beyond the quantity that would have been otherwise developed.

“This leads to lower prices in the wholesale electricity market than there would have otherwise been which results in lower revenues and profitability for all generators. This may affect incentives to invest in new generation and impact the longer-term reliability of the electricity supply.”

So the renewable energy target reduces wholesale prices, which then makes it unprofitable to build new generation, which then means we don't have enough supply and the lights go out. The head of the AEMC, John Pierce, repeated this concern in an article in the Sydney Morning Herald yesterday.

There's just one problem – if there's insufficient supply to meet demand and we need new generation plant, wouldn't wholesale prices rise, just like they would with a shortfall in supply even without the renewable energy target?

To which the response would probably be, ‘Oh but wind is intermittent so it doesn't really cover demand, even though it will depress wholesale prices.' But wouldn't that then mean that while on average wholesale prices are lower, when the wind isn't blowing wholesale prices will rise to reflect insufficient supply?

The reality is that we already have situations where gas peakers are built to meet relatively brief and infrequent peaks in demand as short as 40 hours per year. It doesn't take very long for electricity prices at the market cap of $12,500 per MWh to make it worth your while to buy a gas peaker or even a diesel generator.

However the AEMC's energy market modelling claims that in spite of a huge $12,500 per MWh on offer, the time at which these prices might be reached would be insufficient to justify a new power plant.

Yet in the end we have such a large oversupply of existing generators that what's more likely is that if a supply shortfall seems probable, companies will take their existing generator out of mothballs to be ready for high demand periods over summer, while keeping it out of operation for the rest of the year.  This is exactly what Alinta is doing with Northern power station. Energy Australia is also not proposing to shut, but rather mothball its 360MW unit at Yallourn, as is Stanwell with the 700MW at Tarong.

Also it's not as if a shortfall in supply is likely to suddenly come out of the blue.

In AEMO's latest Statement of Opportunities it didn't foresee a supply shortfall until around 2020 across most states. This was based on assumptions that wind would only contribute between 2.2-8.3 per cent of its installed capacity during peak times. While the recent coal plant mothball and closure announcements will bring this date forward, we still have plenty of time up our sleeve. 

Maximum electricity demand isn't likely to suddenly shoot up by 20 per cent greater than it was the year previously. At an extreme it might increase by 6 per cent in a year, but AEMO forecasts it to rise over the next 10 years by an average of between 1 per cent per annum for South Australia and up to 2.5 per cent for Queensland. We have the time and lots of surplus capacity that means we can afford to wait to see how the market responds to the addition of significant further renewable energy, before making judgements.

On top of this, there is a faint hope we might actually start to take demand management seriously, buying us further time. 

What predominantly worries government and their energy regulators, and quite rightly, is that there won't be enough generation to meet demand and the lights go out. But rash judgements based on excessive concern for shortfalls in supply capacity has cost us an incredible amount of money. 

It's the reason why we have way more coal-fired power stations in Queensland and NSW than what we need, and that was the case a long time before the RET was increased. State governments, in their anxiousness to ensure we were never caught short of supply, built power stations in the 70s, 80s and even as late as the early 2000s way before they were needed. In the case of NSW, they were built probably 25 years in advance of when they were genuinely required.

This mentality is also responsible for the huge spike we've just experienced in electricity prices. Governments in 2006 and 2007 put in place regulatory rules excessively biased towards encouraging new network capacity. This led to a five-year $40 billion binge in network capacity, based on forecasts of peak demand that have never materialised.

Whenever government energy policy officials and the associated industry start threatening that the lights are about to go out, look out for your wallet.