Photo: More than 40,000 kilometres of transmission lines provide electricity to 9.6 million customers.
Like it or not, we all are dependent on electricity.The National Electricity Market is a complex beast. Stretching from Port Douglas in north Queensland to Port Lincoln in South Australia, more than 40,000 kilometres of transmission lines provide electricity to 9.6 million customers.
Few of us ever take the time to understand how it works. But chief scientist Alan Finkel, along with an expert panel, has spent the past eight months doing just that — to try to fix some major problems: soaring prices, declining reliability and falling energy security.
Why is the report required?The way we receive and use electricity is changing rapidly. The past year has seen the closure of two ageing coal-fired power stations at Hazelwood in Victoria and Port Augusta in South Australia.
Households are getting more efficient at using energy and are increasingly turning to solar panels and batteries to help meet their own energy needs.
Power companies are being encouraged to invest in large-scale renewable energy, through a federal subsidy known as the Renewable Energy Target (RET).
But so far, the energy produced by the new solar and wind farms built using the RET has not been despatchable.
That is — if the wind doesn't blow or the sun doesn't shine, the electricity isn't available.
While there has been new investment in renewables, investment in new coal and gas plants has ground to a halt.
The energy companies blame climate policy uncertainty. A new power station is a major investment, and nobody is willing to risk their money unless they know what the rules of engagement will be.
The decade-long political fight Australia has endured over emissions targets and carbon pricing have left a damaging legacy.
The supply and demand balance is much tighter across the National Electricity Market than it once was.
In the face of uncertainty, electricity wholesale retailers are pricing large amounts of risk in their future contracts.
This is evident in the announcements today, which will see average retail prices for some customers in South Australian and New South Wales soar by more than $5 a week.
Making matters worse, with coal closing and renewables on the rise, it is often being left to gas generators to fill the void, and set the price of power.
Australia is now in the grips of a domestic gas shortage, due to a range of reasons including the advent of LNG exports out of Queensland.
Then there's the problem of energy security. With fewer traditional coal and gas generators, and more wind and solar, the very nature of the grid has changed.
Variable renewable energy interacts with the system in different ways, and doesn't necessarily provide the same stability of frequency and voltage.
To get a sense of what that means — look no further than the statewide blackout which gripped South Australia last September.
What does Finkel recommend?There is plenty of detail in the chief scientist's report. But there are some key findings:
- a clean energy target — backed by a national emissions reduction trajectory — to stimulate new investment in power generation
- a requirement for existing big power stations to give three years' notice of closure
- obligations on all new generators to support and maintain voltage and frequency
What is a clean energy target?A clean energy target (CET) is a market mechanism that encourages investment in new low-emission power generation.
The mechanism works in a very similar way to the renewable energy target, which Dr Finkel recommends be discontinued when it expires in 2020.
Under the CET, government would set an emissions intensity target, which could be reduced over time to meet Australia's international climate change obligations.
Electricity generators would be issued certificates for the electricity they produce in proportion to how far their emissions intensity is below the threshold.
Importantly, the scheme would be technology neutral — that is, all forms of electricity generation would be eligible, including coal with carbon capture and storage or gas — provided they are below the emissions intensity threshold.
Electricity retailers would be obliged to purchase certificates to demonstrate to the Government that a pre-determined share of their electricity came from low emissions generators.
Is it a price on carbon?Effectively, yes. Retailers will pass the cost of their certificates on to consumers.
What are the other options?The chief scientist and his expert panel also investigated an emissions intensity scheme (EIS) — a different market mechanism.
But the Federal Government had already ruled out implementing such a scheme before Dr Finkel delivered his preliminary report.
An EIS works in a similar way to a CET to stimulate new investment in low emissions technology.
But it also penalises higher-emitting technology, thus hastening the departure of coal.
An EIS is a baseline and credit scheme. The Government sets a baseline of emissions intensity.
Any power generator above that intensity effectively cross-subsidises generators below it.
In contrast, a CET is all carrot, no stick. In the words of Dr Finkel: "There are no prohibitions, just incentives."
The Finkel review panel modelled the schemes and found both would result in lower power prices than under a business-as-usual scenario.
It found the CET scenario resulted in lower consumer prices than the EIS scenario.
The CET resulted in more electricity produced by brown coal, because there is no penalty for high emission generators.
However, more renewable capacity was built under the CET that led to slightly higher resource costs.
Why did Finkel choose a clean energy target?Given the Federal Government's steadfast refusal to contemplate an emissions intensity scheme, it's clear the panel has tried to stay clear of the politics.
In fact, the panel makes the point that the design of the scheme could be less important than how it is implemented and stuck to:
"The panel is hesitant to argue definitively that one mechanism, between the EIS and the CET, is superior to the other.
"The differences in theory may be less significant than how well the chosen scheme is implemented and aspects of its detailed design, such as a predictable process for parameter changes and a robust and proportionate compliance and enforcement regime.
"The panel notes that many stakeholders have expressed strong support for an EIS.
"The panel also notes that to date the Australian Government has ruled out implementing an EIS.
"The panel does not seek to offer a political resolution of these opposing points of view. However, in the panel's view a CET, though less widely canvassed than an EIS, has similar ability to achieve the required level of emissions reduction in the electricity sector securely and reliably, with price benefits to consumers relative to business as usual."
Why should power stations give notice for closure?The report makes clear one of the biggest challenges facing the National Electricity Market is managing the retirement of old coal-fired generators.
Last financial year, 76 per cent of the power produced in the grid came from coal.
By 2035, about two-thirds of all of the country's coal plants will have reached 50 years of age.
The lack of notice given for the closure of the Hazelwood and Port Augusta generators has left market operators with a very big short-term problem.
Both South Australia and Victoria face the prospect of load-shedding blackouts on hot days from this coming summer.
The Australian Energy Market Operator is looking at bringing on short-term generation to fill the gap, and will be offering payment for big power users to curtail their energy use if required.
Will it work?So far, a working consensus on energy and climate policy has proved elusive. Carbon pricing failures helped kill the political leadership of Kevin Rudd, Julia Gillard and Malcolm Turnbull mark I.
But there is a general will from industry, electricity generators — both fossil fuel and renewable — and customers to come up with a policy setting which is lasting.
The Finkel review has been carefully crafted with political consideration in mind. The choice of a market mechanism which doesn't penalise existing coal generators gives Federal Energy Minister Josh Frydenberg a vehicle to help win over the Nationals and the coal proponents within his own party.
But he will also have to win support from Labor across the aisle.
Without the prospect of a policy that will last more than one term of government, the whole exercise is pointless.