Today Malcolm Turnbull met with energy retailers to discuss high power prices, for the second time this month. The retailers agreed to try even harder to inform their customers of cheaper contracts, but they also took the opportunity to call yet again for urgent commitment to a Clean Energy Target (CET).
The prime minister hopes to deliver a CET by Christmas, but has not indicated what the target would actually be.
This is just one more step towards the elusive goal of certainty in the energy market, which politicians, the energy industry and businesses have been calling for with increasing frequency. But underlying the ongoing political scrimmage is the reality that certainty means something very different to each player. It’s particularly difficult to achieve in a time of disruptive change.
What is certainty?
For politicians, certainty means getting energy prices and policy out of the media, ensuring construction of a new coal-fired power station, or both.
On the other hand, incumbent energy companies want to protect profits by blocking emerging competitors and guaranteeing their revenue.
For emerging energy businesses that sell renewable energy, batteries and smart energy solutions, it’s about opening markets to fair competition and finding a role in a rapidly changing environment.
For business and industry, it’s about access to stable, reliable, reasonably priced energy, so they can get on with their core business.
Households (and voters) also want affordable and reliable energy bills (and some basic respect from energy companies and politicians) but that doesn’t necessarily mean low prices: it can mean low fixed charges, access to energy efficiency programs, and finance for rooftop solar and batteries. Then they can buy less energy while living in comfortable homes with efficient appliances.
The traditional energy system involves large capital investments and long timeframes. This doesn’t sit comfortably with the agendas of many of the people described above, who want quick solutions – which can be delivered by emerging alternatives.
New solutions create new challenges
Any inflexible baseload power station faces the growing problem of the “duck curve”. That is, solar power is reducing baseload demand for energy during the day, but leaving the evening peak-time demand untouched – creating an exaggerated upswing in demand after about 4pm.
This reduced daytime power use deprives a baseload plant of the demand it needs to keep running continuously. Excess electricity during the day also drives wholesale electricity prices down from traditionally high levels. Daytime sales have comprised a large proportion of revenue for base load generators.
Large scale wind and solar without storage are price takers: they’re paid the going wholesale price at the time they generate. They have benefited from the high daytime prices that solar is now undermining, and from high prices on tradeable certificates for renewable energy, driven by shortages caused by Tony Abbott’s “war on renewables”.
Certificate prices should moderate as more renewable energy capacity is built. Future investment depends heavily on decisions regarding national and state clean energy targets beyond 2020.
Batteries, pumped hydro and other storage rely on the gap between the lowest and highest price each day. Solar is reducing, and even reversing, this price gap in the daytime. But morning and evening demand offers some opportunity, as long as excess storage capacity doesn’t flood the market with electricity and depress prices at those times. In future, they will store cheap daytime excess power for use at other times. And storage will be increasingly important as variable renewable energy capacity grows.
Improving efficiency is ‘the first fuel’
Demand response, where consumers are paid to reduce demand at times of high wholesale electricity prices, is a serious threat to revenue for generators and energy storage. It usually involves smart management of consumption or use of existing backup generators, with little capital cost.
As the Australian Renewable Energy Agency has found, there is a lot of latent capacity. Its call for bids in May for its pilot scheme – originally aiming to provide 160 megawatts (MW) of reserve capacity – has unearthed almost 700MW available by December this year, and over 1900 MW by December 2018.
Our failure to properly manage demand for decades, despite the recommendations of many inquiries, has led to wasteful overinvestment in network and generation capacity that is now exposed to market forces. Now someone will pay for this policy failure: will it be shareholders or consumers?
Energy efficiency improvement adds another unpredictable factor. As shadow environment and energy minister Mark Butler commented at a recent conference, Australian governments have not performed well in this area. But the Finkel Review highlighted its substantial potential and called for governments to do better. The International Energy Agency calls energy efficiency “the first fuel” because it is so big and so cheap.
Our failure to capture energy efficiency is costly for the economy and consumers. When energy suppliers are prepared to invest in projects with risky annual rates of return of 8-15%, energy efficiency opportunities with returns of 20-100% are ignored.
Another complicating element is consumers, many of whom are no longer passively accepting energy market volatility and increasing prices. “Behind the meter” investment in energy efficiency, demand management, storage, on-site renewables and even diesel generators is making increasing sense. Indeed, social justice campaigners are increasingly calling for action to help vulnerable households be part of the future, not victims.
Lastly, there is the elephant in the room: climate change. Fossil-fuel-sourced electricity generation produces around a third of Australia’s emissions. And there is much more scope to cut emissions from electricity than from many other parts of our economy.
Where to now?
No government can provide certainty for all these competing players. Each face their own risks and opportunities, and powerful disruptive forces are at work. Trying to provide certainty for some involves propping up declining business models, at the expense of positioning the Australian economy for the future.
Despite criticism from the federal energy minister states are likely to continue setting their own clean energy targets.
Businesses and households are investing to insure themselves against the policy mess and, in doing so, are transforming the energy system. Local councils and community groups are coordinating action. Emerging businesses are taking risks to capture opportunities. Existing energy businesses are trying to juggle their existing assets while transforming. State governments are trying to win votes and capture jobs in emerging industries. Meanwhile, the federal government’s party room is split over a clean energy target.
The challenge for governments is to nudge this chaotic system in ways that deliver equitable, affordable and reliable energy services.