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on the preliminary report into the future of the NEM – part 2

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Chapter 5 of the report focuses on the challenges to NEM system reliability caused by increasing VRE penetration, and on possible reforms to the system to accommodate these changes. Price signals, bidding, and market cap prices and floors, as well as many other terms dealt with in this chapter, are definitely outside my sphere of knowledge or interest, but I feel duty bound to try and make sense of them. For a useful beginner’s guide to the NEM, check out this ABC site, though it dates from 2010, and it’s fascinating to note how things have changed since then. The AEMO was only established in 2009.

The NEM is an ‘energy-only’ market, rather than a capacity market. An energy-only market is one in which the companies generating energy are paid for the electricity they sell. In a capacity market they would be paid for keeping generation capacity available to cover what might be a fluctuating demand. With an energy-only market, producers would presumably be focused on demand, not wishing to provide more of something they can’t sell when demand is down, as it has been in recent times. However, base load demand, which is intermittent and unpredictable, becomes a particular problem when investment in the kind of generators that provide base load power is low. The report has this to say on the matter:

The NEM relies on price signals (subject to market price caps and floors), performance standards and market information to incentivise the development and retirement of generation infrastructure. When there is sufficient baseload supply, average prices tend to be low, signalling that no new investment in base load generation is needed. When base load supply tightens, average prices increase, signalling that investment in base load generation is needed. Peaking generators respond to similar patterns but look to higher price periods associated with peak demand.

I don’t really understand this, especially the bit about peaking generators, which sounds as if there are separate generators for peak demand, but that can’t be right. In any case, what this chapter tells me is that the economics of electricity generation in a transforming and uncertain market are fiendishly difficult to comprehend and control. The review ends the chapter, and all other chapters, with consultation questions which help concentrate the mind on the issues at stake. These include questions about the NEM’s reliability settings, liquidity in the market for forward contracts to ensure supply for business and commercial enterprises (and the effect of increasing levels of VRE on forward contracts, and how this can be catered for), and other questions about creating or ensuring future investment.

Chapter 6 deals with the problem of the seemingly ever-increasing cost of electricity to the consumer. The chapter divides itself into sections on wholesale costs and retail pricing. It seems Australia no longer experiences low electricity costs by OECD standards. Network investments have recently driven prices up, and further rises are expected due to generator closures, the international price of gas, and constraints on gas supply. Again the report emphasises the role of gas, at least in the interim:

Gas has the potential to smooth the transition to a lower emissions electricity sector. Gas generation provides the synchronous operation that is key to maintaining technical operability with increased renewable generation until new technologies are available and cost-effective. Furthermore, gas is dispatchable when required.

It seems there’s an intergovernmental understanding that reform is desperately needed to develop and incentivise the local gas market. There are many roadblocks to successful reform, which are currently affecting wholesale costs which will lead to higher retail prices.

Some 43% of current residential electricity prices are made up of network charges, mostly for distribution. Many network renovations were necessary to meet revised standards. A 2013 Productivity Commission inquiry criticised ‘inefficiencies in the industry and flaws in the regulatory environment’ in respect of the planning of large transmission investments and management of demand. Consumer concern about rising prices is driving reform in this area, but we’re yet to see any clear results. Also, there is a difficult balance to be struck between system reliability and cost. A significant proportion of consumers have expressed a willingness to live with reduced reliability for reduced cost.

There has been a difficulty also in forecasting demand, and therefore the spread of cost. Reduced peak demand in the period 2008 to 2013 wasn’t foreseen. The reduction, likely driven increasing electricity costs, was a result of many factors, such as solar installations, energy efficiencies and reduced consumption. There’s a plan to introduce ‘cost reflective pricing’, which means ‘charging prices that accurately reflect the cost of providing network services to different consumer groups’. This is expected to reduce peak demand overall, as will increasing use of solar and, in the future, battery storage.

Retail pricing is another matter, and according to the report there is a lack of transparency in the retail market. Retailing electricity is obviously complex and involves covering wholesale costs as well as billing, connections, customer service, managing bad debts, marketing, return on investment, inter alia. We can only determine whether the retail market is operating fairly when these costs are open to scrutiny.

Chapter 7 deals with energy market governance from a national, whole-of-system perspective. The report stresses urgency on this, though given the complexity of the system and the divided views of policy-makers, it’s unlikely that decisions on integrating the system and making it more flexible will be forthcoming in the immediate future. The governance of the NEM is divided between policy-maker (the COAG Energy Council), rule-maker (AEMC), operator (AEMO) and regulator (AER, the Australian Energy Regulator). None of these bodies, the report notes, are integrated with bodies advising on emissions reduction. Again, the report doesn’t advance a plan for an improved governance system, but posts consultation questions for how improvements might be made. These include amendments to various rules and guidelines, methods for improving accountability and transparency, and expedited decision-making in a rapidly transforming market.

The report includes a number of appendices, the first and most important being a comparison of the NEM with other energy systems and markets worldwide, including those with a large market share of VRE, such as Denmark and Ireland. It is noted that the transformation of these markets, as well as larger markets in Spain and Germany, is being managed apparently without compromising energy security. However, the variety and complexity of many overseas markets and systems makes comparisons well-nigh impossible for someone as uninitiated as myself. Suffice to say that the role of interconnectors for system security is very important in many European regions, and support from governments for a more flexible system to accommodate VRE is more widespread.

Written by stewart henderson

January 2, 2017 at 9:09 am

South Australia and electricity revisited

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Canto: So what’s the latest on SA’s statewide blackout of September 28 last year, who’s to blame, who’s blaming who, and what solutions are in the offing, if any?

Jacinta: Well the preliminary report on the NEM, which we’ve been reading and writing about, has a few things to say about this, and they’re based on the findings of the Australian Energy Market Operator (AEMO) in its own preliminary report.

Canto: He said she said.

Jacinta: Well maybe sort of. So the SA blackout is presented as a case study. Here in SA we have a very high proportion of VRE (variable renewable energy) generation – one of the highest in the world. Our peak demand as a region is 3300 MW, and our supply capacity is almost 2900 MW of gas, almost 1600 MW of wind, and 700 MW of installed solar. We’re connected to the rest of the NEM by two interconnectors, an AC connector with a capacity of 600-650 MW, and a DC connector with a capacity of 220 MW. With electricity demand here declining, or at least not growing, synchronous generation and supply have reduced, with a resultant reduction in system inertia.

Canto: I presume by system inertia you mean the tendency for a machine, a vehicle, or a generator, whatever, a system to keep going once the power’s switched off. Like the QE2 has a lot of system inertia.

Jacinta: Right, but it’s a particularly important term in reference to power generation. There are some neat explanations of this online, but I’ll give a summary here. Coal-fired power stations work through the burning of coal which generates steam to turn a turbine, putting energy into the grid, and being massive, it has a lot of spinning inertia. Slow to fire up, slow to wind down. Solar, though, doesn’t work that way. It has no spinning or even moving parts. When the sun’s off, it’s off, but when it’s on it’s on. There’s really no inertia at all in a conventional solar PV system.

Canto: And wind? That’s the principal renewable energy here.

Jacinta: Yes that has inertia, certainly, but it’s variable and not as significant as perhaps it could be. So anyway on the morning of the blackout weather forecasts were grim, but not enough for AEMO to put out alerts for a ‘credible contingency event’. As it turned out there were at least seven tornadoes in the north of the state that day, as well as numerous lightning strikes and high winds which caused structural damage to transmission lines. At blackout time electricity demand in the state was a little over 1800 MW, with nearly half of it being supplied by wind farms, and of the rest about a third came from gas-fired generators, and the other 600 or so megawatts came through the interconnectors from Victoria. The main Heywood connector was approaching its operating limit. Short circuits to the transmission lines, caused by lightning, were the probable proximal cause of the blackout. Thirteen wind farms were in operation at the time, and eleven of them experienced ‘voltage dips’. What happens in these circumstances is that ‘fault ride-though’ responses are invoked. However, nine of the eleven farms had a lower pre-set limit for the ride-through response to proceed, and after a number of dips those nine wind farms cut their connection. The other two had higher pre-set limits and continued operation.

Canto: Ahh, so those preset limits were set too low?

Jacinta: Maybe – that’s one for further investigation. So the lack of generation from the wind farms caused an overload on the Heywood interconnector, and it was disconnected as per protection systems, resulting in frequency failure on the grid, and blackness fell upon all the land.

Canto: Right, so how did things get restarted? What’s the normal procedure?

Jacinta: Well, there’s this contracted service, called the System Restart Ancillary Service, which in SA is contracted to two major electricity generators (unnamed in the report), who can supposedly restart regardless of the grid situation, and provide power to the transmission network, but these servers failed for unexplained reasons, and power was finally restored through the Heywood interconnector together with the Torrens Island power station.

Canto: Okay, so now the fallout. How could things have been done differently?

Jacinta: Some near-term fixes have been implemented already. Firstly, having to do with frequency rates which I won’t go into here, and secondly in relation to wind farms. Five of them have made changes to their fault ride-through settings, and AEMO is looking at this issue for wind farms across the NEM. The Australian Energy Regulator, another bureaucratic body, will have completed a full analysis of the blackout by early next year to determine if there were any breaches of regulations. Obviously it’ll be looking at the conduct of AEMO throughout, as well as that of the transmission operator, ElectaNet. It’ll also look at these fault ride-though settings of wind farms and the failures of the System Restart Ancillary Service. It all sounds as if everything’s being done that can be done, but the major problem is that grid security as it stands can only be provided by large generators. The report again mentions gas-fired generators as the best solution, at least in the short to medium term.

Canto: So, as the grid, and the general provision of electricity, undergo these transformations, we’ll no doubt experience a few more of these hopefully minor setbacks, which we can learn from as we develop security for a more diverse but more integrated system…

Jacinta: Greater integration might require less squabbling about the future of energy. I can’t see that happening in the near future, unfortunately.

Written by stewart henderson

December 25, 2016 at 4:04 pm