Briefing paper 1: Current state of play

Transcription

1 The rise of renewables in South Australia Briefing paper 1: Current state of play CLEAN ENERGY COUNCIL JULY 216 1

2 TABLE OF CONTENTS EXECUTIVE SUMMARY POWER PRICE DRIVERS SOUTH AUSTRALIAN WHOLESALE POWER PRICES THE INFLUENCE OF GAS ON WHOLESALE POWER PRICES THE IMPACT OF RENEWABLE ENERGY ON WHOLESALE POWER PRICES THE IMPACT OF RENEWABLE ENERGY ON RESIDENTIAL POWER PRICES RELIABILITY AND SECURITY RETIREMENT OF AGEING GENERATION ASSETS POWER SUPPLY RELIABILITY POWER SYSTEM SECURITY

3 EXECUTIVE SUMMARY South Australia has high quality wind and solar resources giving it an advantage in attracting renewable energy investment and helping it deliver more than 4 per cent of its power from solar and wind. The state has been at the forefront of the shift towards a low-emissions economy, and its success in this area shows that clean energy technologies can be deployed faster and at lower cost than expected. The complexity of the electricity market makes is prone to misunderstanding. This briefing paper is the first of two Clean Energy Council papers providing an in-depth look at the South Australian electricity market, its current status and future challenges and solutions. This paper analyses the impact of increasing renewable energy on electricity prices and system reliability. It finds that higher-than-average electricity prices in South Australia have very limited correlation with the increased uptake of renewable energy. It is clear that electricity prices in South Australia are largely determined by wholesale gas prices. South Australia has had a heavy and long-standing reliance on gas-fired electricity generation. With gas prices continuing to increase so too have electricity prices. There is also limited competition in both the electricity and gas markets in South Australia. This has further consequences in terms of the interaction of different market drivers and the overall pursuit of a diverse and competitive energy system in the state. While there has been much speculation about the impact of increasing renewable energy on system stability and reliability, evidence shows that the electricity system is as reliable now as it was prior to the closure of South Australia s coal generators. The Australian Energy Market Operator (AEMO) has stated that the system will meet its generation reliability standards over the short and medium term meaning well above per cent of power demand will be supplied. South Australia has always had a high dependence on interconnection with Victoria and the level of reliability remains unchanged over recent years. With a reduction in the level of coal-fired synchronous generation in the state however, the availability and extent of interconnection will obviously become more important to the state s energy system. Clearly the energy system is undergoing substantial change and requires ongoing reform in order to facilitate even higher levels of renewable energy deployment. These necessary reforms are summarised in Briefing Paper 2: Reforms for a 21 st century electricity system. This paper shows that a modern South Australian electricity system can accelerate renewable energy deployment while remaining reliable and introducing highly competitive renewable energy to reduce the states reliance on gas-fired electricity (and the increasing and volatile gas prices) and place downward pressure on power prices. 3

4 1. POWER PRICE DRIVERS The relationship between renewable energy, consumer bills and the wholesale electricity market received considerable attention during the Federal Government s Review of the national Renewable Energy Target. This relationship continues to be demonstrated as the level of renewable energy increases in different jurisdictions. Focusing on South Australia, this section explores a range of electricity price drivers and the ways in which renewable energy interacts with them. The state has experienced high wholesale power prices over the long term and this was the case before a single wind turbine or solar panel was installed in the state. There is a very strong correlation between wholesale electricity and gas prices in South Australia. The cost of fuel for gas generators (which is being driven upwards by short supply in the east coast of Australia) is the primary influence on wholesale electricity prices and electricity futures prices. Contrary to some public commentary, renewable energy generation does not have a clear correlation with increased power prices. 1.1 SOUTH AUSTRALIAN WHOLESALE POWER PRICES Wholesale prices are set in the competitive National Electricity Market (NEM), where electricity generators bid to supply electricity at a rate that will allow them to recover their operating costs. The market operator then dispatches generators every five minutes to meet electricity demand using the lowest bids first, which leads to the lowest cost of electricity overall. Consumers of wholesale electricity include large commercial and industrial customers that contract with retailers under forward-looking futures contracts, and retailers who on-sell power to households and smaller businesses through their bills. Of course some large South Australian energy users have chosen to take a greater amount of market risk and therefore have a greater exposure to the volatility of the wholesale energy market. South Australia has a history of higher wholesale power prices compared to most other Australian states and territories, as illustrated in Figure 1 below. The main drivers for this include: 1. Gas prices: South Australia s conventional thermal generator fleet is heavily reliant on gas as its fuel source. As discussed in more detail below, tight gas supplies are driving South Australian wholesale electricity prices upwards. 4

5 2. Limited competition: South Australia relies on interstate trade from one state (Victoria) and has a lower number of large competitors. This contrasts to other states with more interconnection and market participants Energy consumption and peak demand: Peak electricity demand is largely driven by extreme temperature events and South Australia has one of the peakiest demand profiles in Australia. As a result, a substantial level of investment in generation and network infrastructure is required to meet short periods of peak demand. These costs are generally recovered over a long time and result in higher overall electricity prices. The good news is that growth forecasts for both energy consumption and peak demand are flat or declining in the coming years 2. FIGURE 1: AVERAGE WHOLESALE PRICES FOR MAIN NEM STATES 3 $8 Comparison of annual average wholesale prices $7 Price ($/MWh) $6 $5 $4 $3 $2 $1 SA VIC NSW QLD $ 1 AER, State of the energy market 215, January 216, page AEMO, National Electricity Forecasting Report, June 215, page 7. 3 AEMO, Average annual wholesale price data, June

6 1.2 THE INFLUENCE OF GAS ON WHOLESALE POWER PRICES Following the shutdown of South Australia s coal-fired power plants, 9 per cent of South Australia s dispatchable generation now relies on gas as a fuel source. As a result, wholesale power prices are strongly tied to wholesale gas prices. Figures 2 and 3 show that gas prices are the most dominant influence on South Australian wholesale power prices (noting that carbon pricing also influenced the 212/13 and 213/14 prices). FIGURE 2: HISTORIC AND FUTURE WHOLESALE GAS AND POWER PRICES IN SOUTH AUSTRALIA 4,5,6 Electricity ($/MWh) Comparison of wholesale gas and electricty price trends in South Australia Electricity Gas 21/11 211/12 212/13 213/14 214/15 215/16 216/17 217/18 218/ Gas ($/GJ) Figure 2 also shows the correlation between wholesale gas and electricity prices to date and expected future trends. These trends include: Expected sharp increases in gas prices resulting from increasing LNG exports in the absence of significant new gas supply being realised. This outcome was forecast by AEMO s 216 Gas Statement of Opportunities 7 and more recently by the Australian 4 AEMO, Average annual wholesale price data, June Department of Industry & Bureau of Resources and Energy Economics, Eastern Australian Domestic Gas Market Study, January 214, page AEMO, Gas Statement of Opportunities, December

7 Competition and Consumer Commission s 216 inquiry into the east coast gas market 8. ASX electricity futures prices for reflect how anticipated gas price increases are being passed through to large commercial and industrial businesses seeking futures contracts over the medium term. The growing influence of gas prices on wholesale power prices can be seen in more detail below in Figure 3, where recent gas price increases are having a material impact on the wholesale electricity price. On an average weekly basis there is clearly a very strong positive correlation between high gas prices and elevated wholesale power prices. Conversely, as discussed in more detail in the next section, periods of high generation from South Australia s wind farms are correlated with periods of low wholesale prices. FIGURE 3: GAS PRICES INFLUENCE WHOLESALE POWER PRICES 9 Gas Price ($/MJ) rolling average weekly wholesale gas and electricty prices and wind energy Adelaide Gas Hub Price SA Wholesale Electricity Price SA Wind Energy Wholesale Price ($/MWh) & Wind Energy (GWh) 8 ACCC, Inquiry into the east coast gas market, April CEC analysis of AEMO data. 7

8 1.3 THE IMPACT OF RENEWABLE ENERGY ON WHOLESALE POWER PRICES Generators typically bid into the wholesale market at a price just above how much it costs to generate each megawatt-hour (MWh) of power (their short-run marginal cost). This price is heavily influenced by their fuel costs. As the short-run cost of generation for solar and wind power is very low (their fuel is essentially free once the plant is built), they generally bid at prices lower than fossil fuel generators and are dispatched first as a result. Downward pressure is placed on the wholesale market because higher cost generators are prevented from being dispatched by lower cost renewable energy generators. An example of this merit order effect is shown in Figure 4. FIGURE 4: WIND MERIT ORDER EFFECT IN ACTION 1 The merit order effect phenomenon has been well documented 11,12,13. It has recently been identified by the Australian Energy Market Commission as a significant factor in overcoming the wholesale price increases anticipated in the current and medium term Infigen Energy analysis of AEMO data. 11 J Gilmore and C Giacomantonio, ROAM Consulting, RET Policy Analysis, April 214, page ACIL Allen, RET Review Modelling: Market modelling of various RET policy options, August 214, page ix. 13 Bloomberg New Energy Finance, Modelling options for Australia s RET review, May 214, page AEMC, 215 Residential Electricity Price Trends, Final report, December 215, page 66. 8

9 The NEM is an energy-only market where five-minute generator dispatch prices are inherently volatile. Analysis of historic dispatch prices in South Australia finds step changes in price volatility that are closely related to tight supply conditions 15 and fluctuations in gas price. The removal of high emission cheap coal has increased South Australia s reliance on higher priced gas peaking generation. In turn, higher gas prices make short-term high price events more pronounced. The Australian Energy Market Operator significantly reduces dispatch price volatility through a procedure to settle the market every half hour by averaging the last six dispatch prices. This settlement price sets the wholesale price that generators receive and customers pay for the previous half hour. Investigation of settlement prices finds they are no more volatile now than they have been historically in South Australia. It is not a mistake that reducing supply tends to increased dispatch price volatility. This is a deliberate design characteristic of the electricity market. The gradual shut-down of ageing coal-fired power stations is something that will need to be actively managed in the coming decades, given Australia s commitments to cutting carbon emissions. Volatile dispatch prices are best managed by increasing competition in fast-acting generation technologies including small renewable energy and storage systems. To date the electricity market has largely ignored these smaller actors and energy market reform now must focus on enabling them to contribute to the broader electricity market s needs. 1.4 THE IMPACT OF RENEWABLE ENERGY ON RESIDENTIAL POWER PRICES The impact of the wholesale electricity price is relatively minor in terms of overall consumer electricity costs. The price consumers pay for electricity bundles each component of the supply chain into a single unit price. It is well documented that the majority of consumer bills are made up of poles and wires infrastructure costs, along with retail electricity charges and wholesale power costs (as discussed above). Figure 5 shows that renewable energy costs make up only a fraction of the average electricity bill. The Australian Energy Market Commission projects that from 215/16 to 217/18 the national Renewable Energy Target will continue to make up less than 4 per cent of bills, or around $5 per month in coming years. These contributions pale in comparison to the costs of transmission and distribution grids, wholesale electricity costs and retailer margins, which make up the remaining 91 per cent of the bill (around $12 per month in coming years). 15 AER, State of the energy market 215, January 216, page 47. 9

10 FIGURE 5: SOUTH AUSTRALIAN RESIDENTIAL POWER PRICE COMPONENTS AND TRENDS 16 Price is an outcome of an electricity system that relies on reliable and secure supply to deliver power to homes and businesses. The interaction between renewable energy and supply reliability and security is explored in the next section. 16 CEC analysis of AEMC Price Trends Reports

11 2. RELIABILITY AND SECURITY A secure and reliable electricity system underpins every modern economy. Robust grids ensure power is delivered to homes and businesses reliably, while refined techniques are applied to balance supply and demand at all times to keep the system secure. South Australia is no exception. The state s significant progress in deploying renewable energy means these factors now need to be considered in light of the changing generation technology mix, as well as changes in the patterns of electricity use by homes and businesses. This section explores supply reliability and security in more detail. It finds that: Reliability measures for customer supply show that the South Australian electricity grid remains as resilient as it was prior to wind and solar being deployed. As with other states there is no evidence to suggest that power supply reliability has been impacted as a result of increasing reliance on renewable energy. The Australian Energy Market Operator has stated that the system will meet its generation reliability standards over the short and medium term meaning well above per cent of power demand will be supplied. Although power system security requires ongoing attention in light of the changing technology mix, there are procedures in place to analyse and adapt the market to the continued growth of renewable energy. The South Australian electricity system has always relied heavily on its interconnection with Victoria. The state relied more heavily on the interconnector prior to significant renewable energy being deployed. 2.1 RETIREMENT OF AGEING GENERATION ASSETS Approximately 7 per cent of Australia s coal generation fleet is operating beyond its intended design life 17. Gradual closure of generation reflects the inevitable modernisation of the nation s electricity generation fleet. South Australia s last coal power plant at Port Augusta (Northern Power Station) was shut down in May 216. Although the neighbouring Playford B power station had already been 17 AGL, Submission to the 214 Review of the Renewable Energy Target, May,

12 mothballed it is now 53 years old. Both power stations relied on brown coal fuel supplies from the Leigh Creek coal mine, which can no longer extract coal economically 18. Although plans to mothball the Torrens Island A gas generator in 217 were recently extended, this plant is 49 years old and closure should be anticipated in the medium term. Like older motor vehicles, ageing power stations have higher operating and maintenance costs which make them increasingly unprofitable. At some point closure is inevitable. Shutting down the Port Augusta power stations removes 74 MW of generation capacity from South Australia while leaving adequate generation capacity and delivering a substantial reduction to both the state and national carbon footprint. 2.2 POWER SUPPLY RELIABILITY With the planned shutdown of South Australia s two remaining coal-fired power stations complete and decommissioning underway, renewable energy has provided a higher share of its electricity. When considering these closures, the Australian Energy Market Operator has stated that it has not identified any system security challenges that cannot be managed through existing processes and procedures 19. The Australian Energy Market Operator has also stated that the system will meet its generation reliability standards over the short and medium term meaning well above per cent of power demand will be supplied 2, as is the case with all east coast states. The market operator s assessments demonstrate that system reliability has not been threatened by the power station closing, or increasing the share of renewable energy. While future power system design needs to be considered, mechanisms are in place to work through and do just this. Supply reliability across the power grid is measured by the System Average Interruption Duration Indices a measure of the duration of unplanned power outages across a year for each customer. Figure 6 shows that the increase in wind and solar generation in South Australia has not had any identifiable impact on the reliability of the power grid. 18 AEMO & ElectraNet, South Australia Fuel and Technology Report, January AEMO & ElectraNet, Updating Renewable Energy Integration in South Australia, February 216, page AEMO, Update: Electricity Statement of Opportunities, October 215, page 2. 12

13 FIGURE 6: RENEWABLE ENERGY DEPLOYMENT AND POWER SUPPLY RELIABILITY IN SOUTH AUSTRALIA 21 Installed Renewable Capacity (MW) 2,4 2, 1,6 1,2 8 4 South Australia renewable energy growth and power supply interruptions Wind PV SAIDI (RHS) System Average Interruption Duration Index (minutes out per customer) Figure 7 examines the same relationship in Queensland where, as with South Australia, nearly 3 per cent of households have installed solar PV. The NEM average is also displayed below. These comparisons show that consumers have not experienced more outages with increasing renewable generation. FIGURE 7: RENEWABLE ENERGY DEPLOYMENT AND POWER SUPPLY RELIABILITY IN THE NEM AND QUEENSLAND 22 Installed Renewable Capacity (MW) Queensland Solar PV growth and power supply interruptions PV SAIDI (RHS) System Average Interruption Duration Index (minutes out per customer) Installed Renewable Capacity (MW) 8, 7, 6, 5, 4, 3, 2, 1, NEM-wide renewable energy growth and power supply interruptions Wind PV SAIDI (RHS) System Average Interruption Duration Index (minutes out per customer) These indicators do not imply that the electricity system is perfect. As always, it requires constant attention and refinement. The following section highlights the clear need to reform and refine the electricity market to respond to growing consumer expectations for a low-carbon electricity system which makes use of increasingly higher levels of renewable energy. 21 CEC, Analysis of AER distribution network performance data, Ibid. 13

14 2.3 POWER SYSTEM SECURITY The security of the power system relies on the supply-demand balance and the ability of balancing mechanisms to ensure the system reacts safely when an incident or outage occurs. The introduction of renewable energy is changing the technologies that make up the electricity system. Although a careful transition is needed to ensure the system remains secure this paper has already shown that the introduction of renewable energy has not had a significant impact to date. As shown by the failure of the Tasmania-Victoria Basslink interconnection cable for six months in 215 and 216, no component of the system (large or small) is 1 per cent reliable. The South Australian region has always relied heavily on interconnection with Victoria. Withdrawing generators like Northern Power Station from the South Australian market naturally increases the reliance on interconnection. This is not a new situation for the state, which was more reliant on the interconnector when there were lower levels of renewable generation capacity (Figure 8). FIGURE 8: HISTORIC IMPORTS FROM VICTORIA AS COMPARED TO RENEWABLE ENERGY CAPACITY Net imported energy and South Australian RE capacity Net Imports (GWh) Renewable capacity (MW) /3 3/4 4/5 5/6 6/7 7/8 8/9 9/1 1/11 11/12 12/13 13/14 14/15 23 AEMO, South Australian historical Market Information Report, July 214 & August 215, page 2. 14

15 The interconnection failed on 1 November 215, and South Australia was separated from the rest of the NEM for 35 minutes. This event has been analysed in detail, with AEMO decisively concluding that renewable energy played no role 24. The market operator also noted that it had some difficulty stabilising the frequency in the South Australian network while the interconnector was down. Analysis of the event provided by the market operator 25, and verified by the Australian Energy Regulator 26 (AER), shows that the South Australian power system operated as expected initially (Figure 9). A long-standing load-shedding response restored frequency to an acceptable level within seconds of the line tripping but South Australia was not able to reconnect to Victoria at this time. The interconnector was being worked on at the time and AEMO procured Regulation Frequency Control Ancillary Services (FCAS) from a very thin market in South Australia in order to ensure they were prepared in case such an outage occurred. Frequency varied significantly during the 35 minute event leading to the South Australian power system operating outside of a satisfactory operating state for around 1 minute 27 (where the black line moves outside the grey area in Figure 9). The detailed analysis undertaken by AEMO and the AER found that although long-standing frequency control techniques were deployed, the South Australian power system was pushed outside of the normal operating margins by some of the fossil fuel generators which were online at the time. Figure 9 also shows that, while these dramatic changes were occurring wind generation (the yellow line) remained stable during these disturbances. 24 AEMO, Load shedding in South Australia in Sunday 1 st November 215, February Ibid. 26 AER, Report into market ancillary service prices above $5: South Australia 1 November 215, February AEMO, Load shedding in South Australia in Sunday 1st November 215, pages 7-,

16 FIGURE 9: SOUTH AUSTRALIAN FREQUENCY DURING THE NOVEMBER 1 ST 215 SEPARATION EVENT Frequency (Hz) 5. MW acceptable frequency band Heywood Trip Heywood reconnection SA Frequency Wind Non Scheduled thermal generation Frequency (Hz) PM 9.51 PM 9.52 PM 9.53 PM 9.54 PM 9.55 PM 9.56 PM 9.57 PM Separation event 6 sec 6 sec 5 min Frequency PM 1.4 PM 1.35 PM 1.3 PM 1.25 PM 1.2 PM 1.15 PM 1.1 PM 1.5 PM 1. PM 9.55 PM 9.5 PM 9.45 PM 9.4 PM 9.35 PM Time of day (1 november 215) Analysis of the changing technology mix in South Australia by AEMO and ElectraNet (South Australia s transmission operator) has found that: AEMO has not identified any issues with the management of power system security in SA, provided that SA remains connected to the remainder of the NEM via the Heywood Interconnector and sufficient synchronous generation is connected in the SA power system. This statement along with the above analysis of the recent interconnector outage highlights that, while South Australia s electricity system is at its weakest when the interconnector is out of service, the mechanisms that have been in place to balance the system are due for reconsideration. There are clearly opportunities for improvement. As detailed in Briefing Paper 2: Reforms for a 21 st century electricity system, there remains plenty of scope to reform and refine the South Australian energy market and systems to ensure they remain robust, reliable and secure in a low-carbon future. 28 AER, Report into market ancillary service prices above $5: South Australia, 1 November 215, February