Renewable Energy in Competitive Electricity Markets A Three Act Play

Transcription

1 Renewable Energy in Competitive Electricity Markets A Three Act Play Stephen Wilson, Adjunct Professor, UQ Energy Initiative Managing Director, Cape Otway Associates

2 energy & resources economic analysis & strategy commercial & policy advice Renewable Energy in Competitive Electricity Markets A Three Act Play Stephen Wilson

3 Renewable Energy in Competitive Markets a three act play Act 1 Scene 1 Scene 2 Act 2 Scene 1 Scene 2 Act 3 Hooray: the Transition is Underway! a catalyst x10...and an adjustment old coal plants begin to fall of the perch Everything s under control! Is the market dead or just resting? worrying signs worst fears confirmed... is everything really under control...? A chaotic journey back to the future Q: Does variable renewable energy (VRE) really lead to lower prices? Q: Is any subsidised generation really compatible with competitive markets? July 2017 A Three Act Play 2

4 The cast of the play includes 5 prime ministers and various other characters John HOWARD PM: Kevin RUDD PM: , 2013 Julia GILLARD PM: Bob BROWN Senator Tony ABBOTT PM: Malcolm TURNBULL PM: 2015-present Alan FINKEL Chief Scientist Elon MUSK the battery guy Barnaby JOYCE Deputy PM Matt CANAVAN Resources Minister Jay WEATHERILL SA Premier Josh FRYDENBERG Energy Minister Bill SHORTEN Opposition leader June 2017 A Three Act Play 3

5 Act 1 Hooray: the transition is underway! SCENE 1 a catalyst x10...and an adjustment A RET scheme for 2% of GWh to support renewables is introduced alongside the NEM Zero marginal cost RE generation has dispatch priority The government changes and a carbon tax is introduced The RET is supercharged to 20% by 2020 but legislated as 41,000 GWh/y Demand growth falls short of AEMO projections again and again and again The government changes and the carbon tax is repealed Renewables capacity is surging: 41,000 GWh will clearly far exceed 20% Wind dominates large scale renewables and is proportionately concentrated in SA But no new capacity is required: the market has plenty of capacity The short-run marginal cost curve is shifted to the right Wholesale prices are pushed downwards: $30 to $50/MWh prices are typical The RET is reviewed, and the 2020 target revised down to 33,000 GWh/y July 2017 A Three Act Play 4

6 Act 1 Hooray: the transition is underway! SCENE 2 old coal plants begin to fall off the perch Network revenues double; network owners repeatedly defeat the regulator on appeal The LGC market tightens as RET uncertainty slows renewable investment LGC prices surge towards the tax-adjusted penalty for non-compliance (>$90/MWh) Capacity factors are pushed downwards on coal plants Some plants need to bid negative prices at times to avoid shutdown and restart costs Volatility increases, including extreme high prices, even as average prices decline Erosion of revenues eventually forces coal and gas plants to close in NSW, SA and Vic The SA government declines to provide $25M per year to keep Northern PS available SA has no coal plants left and relies on the Vic interconnector (supplied by brown coal) As VRE grows the need for ramping up and down to balance the system grows The need for open cycle gas (and small reciprocating engines) increases July 2017 A Three Act Play 5

7 What are the effects of wind and solar pushing down coal capacity factors? July 2017 A Three Act Play 6

8 South Australia as a Case Study AEMO data and McConnell & Sandiford Melbourne Energy Institute, August 2016 July 2017 A Three Act Play 7

9 The LOAD-DURATION CURVE shows at a glance annual energy, and peak demand PEAK HOUR: maximum coincident demand of 2870 MW Diesel Peak 1065 S A Gas Coal Minimum demand 690 MW 8760 hours Intermediate 1115 Baseload 690 Source: July 2017 McConnell & Sandiford (2016) Winds of change An analysis of recent changes in the South Australian electricity market, Melbourne Energy Institute, University of Melbourne, August A Three Act Play 8

10 The load-duration curve NET OF WIND generation shows the key issues FY15 wind contribution to peak hour: 65 MW 1215 Peak 1065 S A Intermediate 1115 Baseload Source: July 2017 McConnell & Sandiford (2016) Winds of change An analysis of recent changes in the South Australian electricity market, Melbourne Energy Institute, University of Melbourne, August A Three Act Play 9

11 Wind provides only the marginal value of displaced energy and negative capacity value Source: July 2017 a bit more DIESEL more GAS? COAL from Vic (& NSW?) McConnell & Sandiford (2016) Winds of change An analysis of recent changes in the South Australian electricity market, Melbourne Energy Institute, University of Melbourne, August A Three Act Play MW more peak 475 MW more inter-mediate 900 MW less baseload = negative baseload S A 10

12 Illustrative fuel prices: $ /GJ Source: Cape Otway Associates calculations using raw capital and operating cost data consistent with the CO2CRC APGT report July 2017 A Three Act Play 11

13 MW Peak Inter. Base Illustrative fuel prices: $ /GJ Source: Cape Otway Associates calculations using raw capital and operating cost data consistent with the CO2CRC APGT report July 2017 A Three Act Play 12

14 Illustrative fuel prices: $ /GJ Source: Cape Otway Associates calculations using raw capital and operating cost data consistent with the CO2CRC APGT report July 2017 A Three Act Play 13

15 Act 2 Is the market dead or just resting? SCENE 1 worrying signs Meanwhile, a gas crisis in Eastern Australia has driven gas prices above LNG netback SA prices surge and regularly spike to the market price cap of $14,000 /MWh Plant closures tighten the market (exacerbated by high gas prices) Physical system balancing becomes increasingly challenging Sub-optimal dispatch schedules reflect VRE balancing needs and reliability constraints The underlying increasing cost structure starts to be reflected in high prices NEM-wide SA suffers the first state-wide blackout since NSW in 1964 damage: $ M The market is clearly unable to resolve reliability, affordability and sustainability CALL FOR THE DOCTOR! Dr Alan Finkel, the Chief Scientist The Prime Minister starts talking about the need for new coal plants July 2017 A Three Act Play 14

16 July 2017 A Three Act Play 15

17 The Energy Policy Trilemma competing objectives require difficult trade-offs maximise Security TENSION Cost minimise Emissions minimise July 2017 A Three Act Play 16

18 The three -abilities of electricity trading off reliability, affordability and sustainability Reliability COAL GAS Affordability NUCLEAR Sustainability WIND SOLAR July 2017 A Three Act Play 17

19 What gives? Most fuels only have two abilities Reliability COAL GAS Affordability HYDRO Sustainability WIND SOLAR July 2017 A Three Act Play 18

20 What about the demand side? Energy efficiency and time-of-use strategies COAL Reliability GAS HYDRO Affordability Sustainability SMART METERS SOLAR WIND July 2017 A Three Act Play 19

21 Is this scenario politically plausible? Reliability GAS COAL NUCLEAR HYDRO Affordability Sustainability SMART METERS SOLAR WIND July 2017 A Three Act Play 20

22 Is this scenario socially acceptable? Reliability GAS COAL NUCLEAR HYDRO Affordability Sustainability SMART METERS SOLAR WIND July 2017 A Three Act Play 21

23 Resolving the Trilemma We reviewed all energy sources and we found that no energy source is superior in every aspect Mr Koji Inoue, Director-General, Natural Resources and Energy Policy, Ministry of Economy, Trade and Industry, Japan July 2017 A Three Act Play 22

24 Most other countries use a mix Because most fuels only have two abilities COAL Affordability Reliability SMART METERS HYDRO GAS NUCLEAR Sustainability WIND SOLAR July 2017 A Three Act Play 23

25 Act 2 Is the market dead or just resting? SCENE 2 worst fears confirmed Engie closes the ageing Hazelwood coal plant in Victoria; wholesale prices double Generators start to reap large profits for the first time in years No-one is able to produce a bankable price forecast No bank will lend to any new generation without a full PPA for 15 years Levelised energy costs for wind and solar continue to fall New renewable energy continues to secure financing driven by certificate revenues Prices continue to rise and reliability continues to fall Forward prices double, wholesale prices double, the wholesale revenue pool doubles The public demands governments to intervene, which they begin to do Private investors cancel power generation investment plans Is the competitive electricity market dead? July 2017 A Three Act Play 24

26 Is the electricity market dead? July 2017 A Three Act Play 25

27 Are we returning to central planning? and also to renationalisaton? Private MARKET Snowy Mountains Hydro Electric Scheme Existing coal fleet Victorian Power Exchange (VPX) NEMMCO & The NEM 1998 an INTERCONNECTED grid in Eastern Australia off-market mandates, MRET, LRET, SRES 2001? A state-owned and centrally PLANNED electricity sector Competitive MARKET with both private and state ownership Less competitive MARKET with more private ownership Back to central PLANNING? July 2017 A Three Act Play 26

28 Act 3 A chaotic journey back to the future The broad 1990s consensus on competitive electricity markets (state-federal, left-right) is abandoned by default without any public debate that it should be Politicians continue to talk about reliable, affordable, sustainable electricity No-one is willing to admit that the magic combination simply doesn't exist Politicians fight left and right, the states fight the Feds, inquiries multiply like rabbits Finkel initially considered putting the consumer centre-stage in the trilemma Political and industry leaders fail to find a way to discover a publicly acceptable trade-off between reliability, affordability and sustainability Public debates and recriminations continue The government finds itself as the investor of last resort for power generation Meanwhile July 2017 A Three Act Play 27

29 Eastern Australia s coal and gas fleet is FALLING OFF A CLIFF The Guardian, North Head, Sydney July 2017 A Three Act Play 28

30 Thermal plant retirement schedule in Victoria Full life retirement dates shown here based on technical design life, as published in ACIL 2013 Source: ACIL (2013) data Author s chart July 2017 A Three Act Play 29

31 Thermal plant retirement schedule in NSW Full life retirement dates shown here based on technical design life, as published in ACIL 2013 Source: ACIL (2013) data Author s chart July 2017 A Three Act Play 30

32 Thermal plant retirement schedule in Queensland Full life retirement dates shown here based on technical design life, as published in ACIL 2013 Source: ACIL (2013) data Author s chart July 2017 A Three Act Play 31

33 After the cliff, what is the outlook for SUN- & WIND-POWERED DECARBONISATION? North Head, Sydney Hobart race start July 2017 A Three Act Play Photo: abc.net.au 32

34 Where is the efficient frontier for emissions reduction? CCS gas HELE coal July 2017 A Three Act Play 33

35 wind + pumped hydro CCS NGCC & wind gas HELE coal 1970s & 80s brown coal plants 1990s & 2000s black coal plants X Hazelwood retired

36 energy & resources economic analysis & strategy commercial & policy advice Renewable Energy in Competitive Electricity Markets A Three Act Play Stephen Wilson

37 Recent EPIA papers July 2017 A Three Act Play 36

38 Conflicting design principles National Electricity Market does not vary with the source: all MWh get the same price in each halfhour period The value of electricity: Renewable Energy Target varies with the source: renewable energy receives a large premium over electricity from other sources can vary enormously by time, lead-time and location: throughout the day and year, with the leadtime before delivery and from location to location the premium does not vary with time, lead-time or location renewable energy certificates can be generated anywhere and at any time July 2017 A Three Act Play 37

39 A policy paradox The highest effective price is paid to the energy source with the lowest economic value July 2017 A Three Act Play 38

40 Competition and renewables policy are ultimately incompatible Thermal Large fuel and variable costs Moderate capacity costs The basis of market design Renewable Zero fuel and negligible variable O&M costs High capacity costs Incompatible with markets July 2017 A Three Act Play 39

41 A market design paradox The NEM is an energy-only market Even the network component of network charges are biased to energy Prices will become increasingly disconnected from costs Markets will become increasingly disconnected from economics July 2017 A Three Act Play 40

42 An economic paradox Cost: ~100% capacity Capacity value: < 0 July 2017 A Three Act Play 41

43 July 2017 A Three Act Play 42

44 Source: AEMO data courtesy of McConnell, Melbourne Energy Institute peak demand minimum demand maximum wind output installed capacity MW July 2017 A Three Act Play 43

45 Summary of the numbers South Australia FY Installed capacity 4960 MW Withdrawn capacity 1225 (Playford B, Northern, Pelican Point) Available capacity = 3735 of which: Wind capacity 1364 which reduced demand by 65 but increased peak need by 150 and intermediate need by 475 (Peak + int. need increased by 625) S A Peak demand 2870 MW Peak demand 2805 net of wind Dispatchable capacity 2351 from gas and diesel Heywood interconnector 650 Margin 131 to 196 (5% to 7% of peak and less than the largest unit) July 2017 A Three Act Play 44

46 AEMO reserve shortfall projections summer 2017 & 2018 S A July 2017 A Three Act Play 45

47 Challenges for wind power Wind power: makes the load shape less economic displaces base load plant to intermediate increases the need for intermediate capacity increases the need for peaking capacity requires 100% backup Accounting for the backup would make wind power uneconomic Adding wind capacity erodes the economics of other generation In the absence of large scale storage wind power degrades: system economics system reliability With large scale storage to maintain reliability, wind power degrades: system economics July 2017 A Three Act Play 46

48 energy & resources economic analysis & strategy commercial & policy advice Renewable Energy in Competitive Electricity Markets A Three Act Play Stephen Wilson

49 How to get a Minister to Accept or Reject a Proposal Sir Humphrey: Sir Frank: Sir Humphrey: Bernard: Sir Humphrey: There are four words you have to work into a proposal if you want a Minister to accept it. Quick, simple, popular, cheap. And equally there are four words to be included in a proposal if you want it thrown out. Complicated, lengthy, expensive, controversial. And if you want to be really sure that the Minister doesn't accept it you must say the decision is courageous. And that's worse than controversial? (laughs) Controversial only means this will lose you votes, courageous means this will lose you the election. Yes, Minister The Right to Know by Antony Jay and Jonathan Lynn, BBC TV 1980 July 2017 A Three Act Play 48

50 Contributing factors include: energy efficiency price elasticity industrial closures structural economic change behind-the-meter solar PV Source: Alan Finkel, Independent Review into the Future Security of the National Electricity Market: Blueprint for the Future, June 2017, Canberra AEMO, Forecast accuracy report 2016, 2016, p.12 49

51 6.6 kv cables Hazelwood Coal-fired Power Station Latrobe Valley, Victoria Wednesday 12 th April 2017 July 2017 A Three Act Play 50

52 Regional price duration curve by price-setting fuel compared with Source: AEMO, Gas Statement of Opportunities for Eastern and South- Eastern Australia, March 2017 July 2017 A Three Act Play 51

53 up to $ /MWh Regional price duration curve by price-setting fuel compared with Source: AEMO, Gas Statement of Opportunities for Eastern and South- Eastern Australia, March 2017 July 2017 A Three Act Play 52

54 up to $ /MWh Regional price duration curve by price-setting fuel compared with Source: AEMO, Gas Statement of Opportunities for Eastern and South- Eastern Australia, March 2017 July 2017 A Three Act Play 53

55 up to $ /MWh Regional price duration curve by price-setting fuel compared with Source: AEMO, Gas Statement of Opportunities for Eastern and South- Eastern Australia, March 2017 July 2017 A Three Act Play 54

56 up to $ /MWh Regional price duration curve by price-setting fuel compared with Source: AEMO, Gas Statement of Opportunities for Eastern and South- Eastern Australia, March 2017 July 2017 A Three Act Play 55

57 AEMO s two gas-fired power generation forecasts 500 PJ Uncertainty in coal plant retirements = 10 GW uncertainty by 2036 = 300 PJ 200 PJ July 2017 A Three Act Play 56

58 Total annual gas consumption by sector Eastern Australia only Queensland coal seam gas (CSG) to LNG exports have been an enormous demand shock to the market 1500 PJ LNG export capacity 600 PJ total domestic market July 2017 A Three Act Play 57

59 45 seconds to system BLACK Storm, 28 Sep 2016 Adelaide city centre, 28 Sep 2016 Transmission north of Adelaide, 28 Sep 2016 July 2017 A Three Act Play 58

60 Source: AEMO, Update Report: Report on Black System Event in South Australia on 28 September 2016, 19 October sec July 2017 A Three Act Play 59

61 275 kv bus voltages across South Australia prior to separation 41 sec sec system black July 2017 A Three Act Play 60

62 Transmission faults were all north of the Adelaide load centre Transmission from Victoria was unable to support the system Adelaide load centre July 2017 A Three Act Play 61

63 Evolution of wholesale base load futures prices Source: data for ASX Base Futures Contract Closing Daily Prices Jan 2012 to Apr 2017 chart courtesy of Solstice Development Services $60 70 Act 1 Act 2 $30 50 $ Queensland NSW Vic SA Base load FUTURES contracts for the past 5 years, up to 3 years ahead in AU$ /MWh July 2017 A Three Act Play 62