Why investor input is needed as Australian grid reliability concerns increase

The Australian Energy Market Operator has warned of risks to supply in coming months but the federal government is still not stepping up.

The level of culpability that National Grid will face for the recent electricity blackouts in the UK is up for debate, with Ofgem still assessing the situation at the time of writing.

But the saga will have reminded the regulator that the decommissioning of legacy power assets combined with ambitious renewable energy targets can lead to a more volatile grid, and a greater risk of incidents like these, if the transition is not managed properly.

One country where public policy has been lacking on energy is Australia. But renewable energy development has continued at a strong pace, despite the death of the National Energy Guarantee and the ongoing uncertainty provided by the Marginal Loss Factors regime.

The Clean Energy Council trade body said A$26 billion ($17.6 billion; €16.0 billion) of renewables projects were underway at the end of 2018, double the number of projects that were underway the previous year.

State governments have pushed ahead, with most setting emissions targets that outpace those of the federal government. The Victorian government just last month introduced a new bill to enshrine its target of 50 percent renewable energy generation by 2030 into law, making good on a promise it made at the state election in November 2018.

But it’s not all good news. The Australian Energy Market Operator, the body responsible for the operation of the country’s National Electricity Market (covering the eastern and southern states), sounded an alarm last month.

The organisation warned of the need for additional reserve capacity in light of major generation outages in Victoria and the deterioration in reliability of ageing thermal generators – and said the situation would worsen after the closure of the Liddell coal-fired power station in 2022, leaving Victoria and New South Wales “exposed to significant supply gaps”.

AEMO chief executive Audrey Zibelman said it had already been working with industry and governments to secure additional resources for the coming summer but added that this kind of “reactive action” was leading to higher costs and “risks to reliability”.

Zibelman called for more investment in dispatchable energy and transmission infrastructure to “address the challenges of our ageing coal fleet […] whilst also taking advantage of Australia’s natural resources”. Private investors will have to step up to the plate here in the absence of government policy to guide them.

The tensions at play were highlighted the following week by the chief executive of EnergyAustralia, one of Australia’s biggest energy retailers and the owner of the Yallourn coal-fired power station in Victoria.

The firm was reported to have described the state’s energy policy, including the 50 percent renewable energy generation target, as “a leap of faith, the risk of which will be borne by all Victorians”.

Australian Energy Market Commission senior economist Oliver Nunn wrote last week in a blog post about the “glimpses of a new market dynamic in Queensland”, too, with the increased amount of solar generation contributing to negative wholesale prices there in the middle of the day for five consecutive days – previously unheard of.

The Australian energy market continues to be extremely volatile, and despite levels of renewable energy investment flattening globally last year, the situation may get worse before it gets better, raising the risks for both investors and consumers.

The federal government has essentially abdicated its responsibility for guiding the transition, leading to a situation where AEMO has called for action but it is unclear who will take the lead on delivering it.

It’s clear that investors will have to play a major role in helping to navigate this process if they do not want to be left out of pocket or with stranded assets. The stakes are only getting higher.

Write to the author at daniel.k@peimedia.com

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