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The Finkel Review: Not Just a CET – It’s Actually About Keeping the Lights on

June 14, 2017 at 11:58 am Andrea Bunting 2 comments

On June 8, the much anticipated Finkel Review (Blueprint for the Future: Independent Review into the Future Security of the National Electricity Market) was released. Much has already been written about the merits of the proposed emission reduction mechanism (a “Clean Energy Target”) and whether this would satisfy the Coalition, why it didn’t advocate a stronger emission reduction target, nor a swift end to coal.

But this was not the aim of the Finkel Review. It was about fixing up the National Electricity Market (NEM). The alternative to fixing the NEM may well be a return to public ownership and control. Although this could be a good thing, it is not on the governments’ agenda right now. Agreement on an emission reduction mechanism was regarded as an important step in getting new private sector investment, mainly in gas-fired power stations, so the market would operate as intended.

Our electricity system is plagued with problems. Electricity prices have been rising steeply over the past decade. Wholesale electricity prices are volatile. Coal-fired power stations have closed at short notice, giving insufficient time to plan for new capacity. Gas-fired power stations have experienced fuel shortages. Customers were blacked out last summer, due to insufficient supply. And in September 2016, South Australia experienced a black system (a total blackout) – the event that led the Council of Australian Governments (COAG) to commission the Finkel Review.

Technological change and climate imperatives are changing our electricity systems. There has been significant growth in solar and wind power (variable renewable energy or VRE), with solar PV and increasingly battery storage distributed throughout the system. There are calls for customers to participate in the market by providing a demand response.

Despite these changes, we are still heavily dependent on coal-fired power, with electricity generation producing 35% of Australia’s carbon emissions. Under the Paris Agreement, Australia has undertaken to reduce emissions by 26-28% (from 2005 levels) by 2030. Given the clamour for an emission reduction mechanism, and our fraught history of carbon policy, commentators have placed great hope that the Review would lead to bipartisan agreement.

Because climate policy is so polarised, it is difficult to discuss the implications of the current transition underway in our electricity system. Fossil fuel supporters are quick to blame renewable energy for any problems. Renewable energy supporters rise quickly in defence. In between are the technical experts who understand that this transition has significant implications for how we run our electricity systems, and are grappling with how to make it work while keeping electricity affordable.

This has been represented as an energy trilemma: how do we achieve the three goals of (1) affordable electricity; (2) security and reliability (keeping the lights on); and (3) reduced carbon emissions. People differ in which goal they value more. But if we are to move forward, we need to achieve all three. And therein lies the challenge.

Finkel Review was mainly about keeping the lights on

The terms of reference (ToR) for the Finkel Review state: “The blueprint will outline national policy, legislative and rule changes required to maintain the security, reliability and affordability of the NEM in light of the transition taking place”, where the “transition” refers to “ rapid technological change, the increasing penetration of renewable energy, a more decentralised generation system, withdrawal of traditional baseload generation and changing consumer demand.”

Principally the intention was to recommend changes to the NEM to reduce the risk of power shortages and blackouts. This is what occupies the minds of governments the most, as they are held accountable for any problems – even though much electricity infrastructure has been privatised. The steep rise in electricity prices rises are also an issue for governments.

Clearly we need to be continuing to put pressure on governments to increase Australia’s emissions reduction targets, because governments will prioritise affordability and reliability. The Finkel Review was written in the context of the current emission reduction targets. From a climate perspective, perhaps the main concern is whether it helps or hinders a rapid transition towards zero carbon electricity.

So what do we mean by security and reliability?

Both are necessary to keep the lights on. Security refers to the ability of the electricity system to remain within specified technical limits (in particular, frequency and voltage) following a disruption (such as generator or transmission line failure). The September 2016 blackout in SA was a security incident, since the system collapsed.

Reliability is about having sufficient generating capacity to meet consumer demand. Load-shedding during heatwaves last summer, and concerns about power shortages during the coming summer are, in the main, reliability issues.

Security – Ensuring the system doesn’t collapse

The Review noted that the NEM is becoming less secure. It was designed for large conventional generators, but the generation mix has been changing (with more distributed generation such as solar PV and wind power). The rules of the market have not kept up with this transition.

While much focus is on the variability of solar and wind power (and hence storage), there are other (very technical) issues affecting power system security. Conventional generators (coal, gas, hydro, biomass – and also solar thermal) automatically provide other services (such as inertia and system strength). These services make our electricity system more resilient – better able to cope with serious disturbances. Higher penetrations of VRE reduces the availability of these services. These services may be provided by other means (which cost) – though this is an area that is technically developing.

SA’s energy mix has changed the most rapidly, and it is now home to much of Australia’s wind power. It has been known for many years that this made SA vulnerable to a system collapse: if the SA–Victoria interconnector tripped while SA was depending heavily on wind power, with little conventional generation, then the system could collapse. These conditions were met on September 28, 2016, and the predicted black system eventuated.

There had nothing to do with wind power’s variability. The main problem was low system inertia (i.e. one of these resilience services). Conventional generators automatically provide inertia, slowing down the impact of a serious disturbance to give sufficient time for load-shedding. Wind power was displacing coal and gas generators under the Renewable Energy Target (RET), but there was no mechanism to replace the lost inertia. (Large-scale batteries can help with a “fast frequency response” – hence the recent interest by the SA government.)

That a predicted (and quite disastrous) system collapse occurred is a sad indictment on the state of our electricity market. The transition to renewable energy is being badly managed. This was mainly missed in the polarised debate about whether or not wind power was to blame.

The current proliferation of institutions within the NEM means that it is never clear who is accountable when things go wrong. The Finkel Review seeks to correct this by establishing a new body: an Energy Security Board. This Board would have a whole-of-system view and would facilitate planning and coordination. It would also deliver an annual report on the “Health of the National Electricity Market”. The Review also calls for the strengthening of the current energy market institutions (AEMO, AEMC and AER). These changes are welcome given the current crisis in the governance of the sector.

Specific changes have been recommended to address SA’s vulnerability. The Review proposes that each state always maintain a certain level of inertia. This could come from conventional generators or from alternative sources (such as batteries). This means that in SA, there must be enough conventional generation. This may put the brakes on solar and wind power in SA, or may reduce their ability to import cheap brown coal power from Victoria until alternative sources of inertia are installed. It may increase the cost of electricity, as SA will be required to depend more on their gas generators.

New generators will have “security obligations”. This means that VRE generators will need to offer more of the benefits that conventional generators automatically possess, so VRE can also contribute to keeping the grid stable when there are voltage disturbances or the loss of a generator or transmission line. This will impose costs on VRE generators. But it seems like a reasonable requirement.

Much of the new VRE comes from household solar PV, which will increasingly be accompanied by battery systems. This creates new challenges for the Australian Energy Market Operator (AEMO). The Review recommends that the AEMO be able to collect real-time data on what these systems are doing and have the ability to “orchestrate” their operation.

Reliability – Meeting consumer demand

The threat of power shortages this summer due to insufficient demand has hit the headlines, and the Review discusses this in the first chapter.

The most critical times are during heatwaves, when electricity demand peaks. During heatwaves earlier this year, the market operator directed load shedding in NSW and SA. The Review makes recommendations on how the NEM can meet electricity demand this coming summer, including that all generators and networks be available, with sufficient fuel, and that large electricity users be paid to shut down or shift their load during times of peak demand.

More generally, concerns about reliability have arisen because several large power stations have shut down, and business is unwilling to invest in new gas or coal generators. One reason is uncertainty about future carbon pricing. Another relates to the wholesale price of electricity. Wind farms tend to bid at zero, which lowers the wholesale price. When there is little wind, prices are high. Increased volatility in wholesale prices increases uncertainty for potential new investors.

The NEM is an “energy only” market: generators are paid only for what they generate. Some have called for an additional “capacity market”: paying generators to be available if required. Many other jurisdictions have introduced capacity markets to give an incentive for new generators, which may improve reliability. The Review opposes it, claiming that this would be too disruptive a change to the market. Instead it expresses hope that investor confidence will return if governments will provide certainty about the emission reduction mechanism and target – that is, that the Clean Energy Target will stimulate investment in new generators. Indeed, if a capacity market were to be introduced, it would probably benefit fossil fuel generators. This has been the experience in the UK.

Much variable renewable energy generation (VRE) is being built under the Renewable Energy Target. However, unless these generators are accompanied by sufficient storage to ensure they are dispatchable (i.e. where the output can be adjusted up or down to match demand), then VRE is not equivalent to the generation capacity being shut down.

The Review has therefore recommended Generator Reliability Obligations on new generators. This may require new VRE to pair with storage or a gas-fired plant, to increase the amount of dispatchable generation. Again this will raise the cost of renewables. Critics have argued that this is unfair on renewable energy, and that we need a system-wide approach to reliability. On the other hand, we do need to get a substantial amount of grid-scale storage into our electricity system, and these obligations represent one form of incentive.

The energy transition must be planned

A key idea in the Finkel Review is that we cannot depend on the “market” to drive the transition of our electricity systems. We need planning.

When the NEM was established, we went from a highly planned system consisting of state-owned utilities to a market system, where the market would supposedly provide “investment signals” for new generators. There has been a separate mechanism to encourage new renewable energy generators – the Renewable Energy Target (RET).

However, electricity is not like any other commodity. Electricity supply and demand must remain balanced every second (or stored such as in batteries), and standards (such as frequency and voltage) must be maintained. We are now so dependent on electricity that disruptions can have significant adverse impacts throughout our society and economy. Electricity supply is too important to be left solely to the market.

The Review noted that many jurisdictions have developed a strategic energy plan to help manage the transition of their electricity systems, and that Australia was lagging. It recommends that Australia develop such a plan by mid 2018.

Australia also needs a stronger, more interconnected grid to integrate more renewable energy. The Review called for a NEM-wide integrated grid plan, and that governments intervene if necessary to ensure that transmission lines were built to enable further development of renewable energy.

An orderly transition. No penalty for coal

The Review recommends that existing generators give three years notice of their intention to close, giving more time for affected communities to plan for new jobs, and for new generators to be built.

Currently, decisions to close are made on commercial ground by private companies, with little consideration on how this affects the local community and the electricity system. Constraining how these private companies make decisions is a good thing. On the other hand, the decision still rests with the owner. (The climate movement has been calling for a plan for the orderly retirement of coal fired power stations.) Three years is also a long time for an electricity system that is transforming quite rapidly. Wind, solar and battery projects can be installed quite quickly.

One of the more controversial recommendations is that there be no penalty for coal (and thus, no explicit price on carbon). Under an Emissions Intensity (or Trading) Scheme, coal would be penalised. However, the Finkel Review’s proposed Clean Energy Target would not impose any cost on high emission generators (i.e. coal). The reported reason was that system security and reliability would benefit if coal generators remain in the market. But, it is likely that no penalty for coal was required to get Coalition support.

Indeed, the modelling for the report suggests that coal will provide over 53% of our electricity in 2030, and 24% in 2050. These predictions have angered environmentalists, while some Coalition MPs are angry that coal won’t qualify as clean energy.

The review cites the often heard argument that investors are unlikely to invest in new coal-fired power (so there is no need to explicitly prevent it). The climate movement would want a stronger statement guaranteeing no new coal-fired power, rather than depending on current claims that coal is “uninvestable”. However, we are unlikely to get such guarantees under the current government.

Emissions reduction trajectory

Finkel proposes that state and federal governments agree on a trajectory to reduce Australia’s emissions, along with a “credible and durable mechanism”, to ensure investor confidence. Modelling for the Review was based on a reduction of 28% by 2030, and a continued reduction to zero by 2070.

An agreed trajectory and mechanism sound appealing if it breaks the current impasse. But it will probably mean that we end up with a low emissions reduction target. Labor’s current target (45% reduction by 2030), is higher than the Coalition’s, and the science requires us to slash emissions even faster. Arguably, having state governments with higher ambition is useful in driving stronger responses. The climate movement will certainly be continuing its push for much higher targets, and as climate impacts start to bite, public demands are likely to increase. So while agreeing on an emissions reduction trajectory helps investor confidence, it seems like a recipe for slowing down.

Reducing and shifting energy demand. Keeping consumers on the grid

Many have criticised our electricity market for focusing on the supply side. Neglected is how to reduce consumer demand, or enable consumers to shift their demand to better match supply.

The Review recommends that consumers be rewarded for managing their demand, and for allowing the benefits of solar PV and batteries to be shared. This is a welcome recommendation, particularly given concerns about consumers going “off-grid”, and predictions of a “death spiral”.  Keeping people on the grid and sharing electricity storage means lower costs for other consumers by reducing the poles and wires needed for peak demand.

The Review also recommends that governments accelerate energy efficient measures, including providing programs and funding to help low income households become more energy efficient and to install solar PV systems.

Is the electricity sector pulling its weight?

The Review assumed that the electricity sector will reduce emissions by 28% by 2030 – i.e. its share of the Paris Agreement. Critics have said that the electricity industry needs to do more than this, as it is easier to reduce emissions from electricity compared with other sectors.

This may well be true. However, we also need to be decarbonising other sectors rapidly. Should we delay the decarbonisation of transport and agriculture just because electricity is easier?

Clean Energy Target

The proposed Clean Energy Target was clearly selected (as opposed to an Emissions Trading (or Intensity) Scheme because it was more likely to satisfy the Coalition. It is similar to the current Renewable Energy Target (RET) – that is, retailers will be required to buy certificates produced by eligible generators. The eligibility criteria have been expanded, such that generators with an emissions intensity below a specified benchmark would qualify. This would probably include gas-fired generation and coal with carbon capture and storage. However, since the amount paid per MWh would depend on the emissions intensity, it is likely that renewable energy would be the main beneficiary – though the cost of renewables will increase due to the new security and reliability obligations.

This mechanism was reportedly favoured because it just requires that the existing framework for the RET be adapted, rather than a completely new framework being established. Given that the current RET is due to finish in 2020 (with certificates able to be produced until 2030), this is good news for renewable energy.

Where to now?

The Finkel Review is quite a comprehensive report, and also includes detailed discussion on areas such as fixing the gas market, cybersecurity and rewarding consumers. Despite uncertainty about the emissions reduction mechanism, our electricity system is certainly in for a shake-up. Our electricity system is in crisis, and it is likely that many recommendations of this report will be heeded. Watch this space!

Entry filed under: Energy efficiency, National Electricity Market, renewable energy, Uncategorized.