Archive for June, 2017

While you’re waiting

As you twiddle your thumbs while waiting for Dr Finkel’s remedy for what ails us in electricity supply to be delivered, you may care to visit a lawyer.

The one I have in mind is Gilbert + Tobin. On the firm’s website you will find a “white paper” entitled “Wrestling with the electricity market transformation,” a 52-page treatise written by its energy partners after after an overseas tour in January by two of them, Simon Muys and Geoff Petersen.

I was led to it this week by a commentary on the Australian Energy Council website reviewing both it and the new “Powering through” paper from the Grattan Institute. The lobbying group says that the two have a common thread: “increased politicisation of energy with government interventions and uncoordinated responses (are) leading to less than ideal outcomes.”

Gilbert + Tobin itself points to this and five other key themes in its “white paper,” namely the dismantling of a political consensus around the NEM, the importance of overcoming a political aversion to an emissions intensity scheme, the need for a regulatory regime to incentivize grid investment and innovation, what other jurisdictions overseas are doing to incentivize distributed energy and the implications longer term of market transformation for regulators, networks, users and funders.

The firm warns that it may be too late to hope for coherent national energy policy in Australia, given today’s “politically-charged, impatient and fractured” environment, a lamentable thought but one they are not alone in harboring at this time. G+T believes energy politics are here to stay, a perspective that, again, is hard to dismiss as is the firm’s additional point that politics is the art of the possible and energy solutions, therefore, must be shaped to the current climate.

It also throws a line from Socrates at us: “The secret of change is to focus all your energy not on fighting the old but on building the new.”

Having said this, Gilbert + Tobin acknowledges that, both here and some places overseas, there is a sense of panic about energy markets associated with high, and still rising, prices and fears about system security. Today’s Australian Financial Review story about our metal smelters being “sunk” by the rising tide of local energy prices is an example of current angst.

Not surprisingly, quite a lot of the “white paper” is focused on the rise of intermittent renewable resources and the implications this poses for both the grid network and the wholesale energy market, the NEM. One of the points  G+T makes that resonates with me is “a critical question is whether the cost trends seen over the past decade in PVs and storage will slow down as economies of scale are slowly exhausted, subsidies are removed and silicone prices stabilize — or will the rise of electric vehicles trigger a fresh wave of cost reduction, particularly in storage?”

As it happens, this week I have also been reading an economic paper on electricity market design in a decarbonized world sent to me by Tim Nelson, AGL Energy chief economist. Nelson and two AGL colleagues, Fiona Orton and Tony Chappel, mount an argument that the current “energy only” market can work in this environment but extreme pricing volatility is likely to be required to ensure system reliability. The fact that the media and politicians react to extreme pricing volatility as if stung by a horse fly is not the least of the issues leading to the policy stress G+T discuss.

Nelson & Co, in a 20-page paper, see the key question for politicians being “how best to enable an orderly, affordable and reliable transition to a low-carbon energy system” and argue for the introduction of incentives to ensure that intermittent generation can become “firm” and dispatchable, a rule-based mechanism for ensuring advance warning of coal and gas plant closures and the use of supplementary markets to improve NEM resilience. These are all points I wouldn’t hugely surprised to see as ingredients of Dr Finkel’s remedy.

The G+T paper contributes to this aspect the thought that, in fact, we are part of a long-standing and at times fierce debate internationally between proponents of “all energy” markets (which only compensate for dispatched power) and capacity markets (which also compensate for firm capacity, i.e. “security of supply”). The lawyers think a renewed debate about a capacity payment mechanism in the NEM is “inevitable.” They add their view that exploring this step to resolve political concerns about system security is preferable to the direct intervention in generation that is a feature of current South Australian and federal plans. “If politics will not allow an all-energy market to work,” they say, “some form of capacity payment mechanism is preferable to crowding out private investment through direct State intervention.”

The firm suggests that a middle-ground alternative, and one (it says) appears likely to be explored in the Finkel report next week, is to impose additional requirements on new renewable generation to include some form of firm or dispatchable capacity, either through requiring it to be paired with gas generation or via storage.

With respect to the overall environment, the worm in the apple as perceived by Gilbert + Tobin is the possibility, perhaps probability, that Australia will shift away from a coherent national policy towards “competitive federalism,” frustrating the purpose, the firm says, of the Finkel review.

As I have written in This is Power several times this year, I think the critical issue of the weeks and months ahead is not what the Finkel task force recommends but how much of a pig’s breakfast the body politic can make of dealing with the report, not forgetting for a moment that we are moving in to an election period between now and early 2019 for Victoria, Queensland, New South Wales (by far the major entities in the NEM) and the federal government.