Renewables Influence on the Generation Mix and Gas Demand in Western Australia

Transcription

1 May 2017 Renewables Influence on the Generation Mix and Gas Demand in Western Australia Authors: A. Niklaus, L. Dowling. Acknowledgements: C. Wilson, J. Tan, K. Farnsworth, P. Malhi, R. Petchey.

2 EXECUTIVE SUMMARY This insights paper explores how increased renewable generation affects the generation mix and, in turn, domestic gas demand in Western Australia (WA). The impact of new renewable generation on gas generation is the key focus of this paper because gas is affected to a greater extent by new low marginal cost generation such as wind and solar than the other dominant form of thermal generation, coal. Gas generation generally has a higher short run marginal cost than coal, so is not dispatched as readily when lower-cost options are available. The paper explores changes to the generation mix and gas demand through two approaches, Firstly, by examining the broad range of variables that affect the market share of the various forms of generation in the South West Interconnected System (SWIS), since this ultimately affects gas demand. Secondly, a top-down analysis is presented. This analysis quantifies how increased renewable generation in the SWIS has influenced gas demand historically by estimating the average change to gas generation (in MWh) as additional renewable generation capacity (in MW) has been installed. This average change is used to evaluate the effect on gas generation of future levels of renewable generation up to a hypothetical SWIS-specific Large Scale Renewable Energy Target (LRET) of 23.5% 1. From this, efficiencies are applied to the estimated reduction in gas-fired generation to calculate an estimated reduction in gas demand. The effect of coal generation on gas generation is considered in parallel, as the commissioning of the Bluewaters power station and the recommissioning of Muja AB have also influenced the generation mix over the analysis period. However, as no new coal-fired power stations are anticipated in the SWIS, potential future effects of coal generation on gas generation are not evaluated. The paper is split into several sections. The intent of these sections and key points are detailed in Table 1: Table 1: Insights Paper intent and key messages Section Title Section Intent Key Points The Current Status of Generation in the SWIS Analysis Assumptions Provides a high level overview of the current generation mix in the SWIS and the Wholesale Energy Market (WEM). This is intended to provide readers with an understanding of how generation is dispatched in the SWIS and hence how changes to the generation mix influence which facilities are dispatched. Identifies the variables that influence the analysis in this paper and therefore gasfired generation in the SWIS. This is intended to give the reader a high-level understanding of how the SWIS and the WEM interact. In addition, this section identifies the assumptions related to these variables that are used in the analysis section. The WEM normally governs how each facility is dispatched, so the generation mix in the SWIS is primarily based on economic dispatch (lowest-cost generators are dispatched first). However, on occasion higher-cost facilities may be dispatched ahead of lower-cost ones for system security reasons. Because the WEM and the SWIS are complex and interrelated systems, there are many factors that influence any analysis of how changes to the generation mix, such as more renewables, affect gas generation and therefore gas demand. These include renewable generation location, geographical distribution, facility operating costs and technical capabilities, potential changes to the WEM, government policy, and emerging technologies such as battery storage. This makes building a bottom-up model to forecast how the changing generation mix affects gas generation challenging, as a number of assumptions would need to be made. Instead, a top-down analysis based on historical effects has been completed. 1 The SWIS-specific LRET is defined as 23.5% of total SWIS generation (MWh) sourced from renewables, minus specific industry exemptions for emissions intensive trade exposed industries connected to the SWIS

3 Section Title Section Intent Key Points Analysis of the Effect of the LRET on Gas Demand in the SWIS Outlines the methodology and results of the three areas of analysis that cover this paper, the calculation of a hypothetical SWIS-specific LRET, analysis of the historical effect of new coal and renewable generation facilities on gas generation, and extrapolation of this historical effect to estimate the future effect of new renewables on gas generation. The hypothetical SWIS-specific LRET is used as an upper limit to this extrapolation. To achieve the 2020 LRET target of 23.5% renewables generation within the SWIS, approximately 3,770 GWh p.a. of generation from renewable sources is required. Based on the average 2016 capacity factor of renewables in the SWIS (36.5%), this would require an additional 703 MW of renewable nameplate capacity. However, since this is a federal target, the SWIS-specific value is an estimate only. There is no obligation for WA to install any set level of renewable generation within any timeframe. However, it is expected that the federal LRET will continue to drive investment in renewables in WA. The analysis of historical data focused on the change to the generation mix between 2011 and 2013 as this period saw significant growth in renewable capacity in the SWIS. This analysis indicated that for every 1 MW of new renewable nameplate capacity installed, a reduction of 2.76 GWh p.a. of gas generation can be expected. Higher demand growth over the analysis period may have reduced the apparent effect of renewables on gas generation to some extent, leading to a lower net effect seen in the analysis. The commissioning of Bluewaters and Muja AB over the analysis period may have had the opposite effect, increasing the net effect indicated by the analysis. However, these effects have not been removed from the values presented in this paper as it is not practicable to do so. Using the 2.76 GWh p.a. reduction, the change in gas generation and therefore gas demand can be estimated for various levels of renewable penetration. For the hypothetical SWIS-specific LRET this equates to a reduction in gas generation of 2,768.5 GWh p.a., equivalent to a reduction in gas demand of between 62.1 and 71.9 TJ per day 2 using gas generation efficiencies published in the 2016 WA GSOO. Extrapolation past the hypothetical SWIS-specific LRET was not attempted due to the greater uncertainty around analysis assumptions at higher levels of renewable generation. 2 Gas demand reductions are calculated using gas generation efficiencies published in the GSOO for baseload and mid-merit gas generation facilities.

4 1. INTRODUCTION This insights paper investigates how gas demand may be affected by changes to the generation mix in the South West Interconnected System (SWIS). Particular attention is paid to the effect of renewable generation on gas demand as this is anticipated to be a growing source of generation in the future. 1.1 Purpose Federal government policy and a continuing reduction in solar photovoltaic (PV) and wind generation capital costs are leading to increased renewable generation in the SWIS. This influences how traditional thermal generators are dispatched and will therefore influence the volume of domestic gas required for generation in the SWIS. Generation within the SWIS makes up approximately one-fifth of total gas demand in WA, so increased renewable generation may have a measurable effect on gas demand, with this effect being dependant on a number of variables. This paper aims to provide a better understanding of these variables and quantify how increasing renewable generation in the SWIS could affect gas demand in WA. 1.2 Scope This paper focuses on the effect that increasing renewable generation has on the generation mix in the SWIS and, in turn, how this may influence gas demand up to a hypothetical SWIS Large Scale Renewable Energy Target (LRET). This is subject to many variables, and to provide an understanding of how these may influence the generation mix, these are also discussed as part of this paper. An analysis of how new renewable generation capacity has influenced the generation mix historically is presented. This analysis is then extrapolated to investigate how an increased level of large scale renewable generation (up to the LRET of 23.5%) may affect the generation mix and hence gas demand from generators in the SWIS.

5 2. CURRENT STATUS OF GENERATION IN THE SWIS 2.1 The SWIS, WEM, Dispatch and Current Generation Mix The Wholesale Electricity Market (WEM) operates in the South Western Interconnected System (SWIS), which covers the majority of the Western Australian population, is made up of around 7,400 km of transmission lines, and services an area of over 260,000 square km. The SWIS is characterised by a strong summer peak driven primarily by weather. Unlike the East Coast, the SWIS is isolated from other networks and is therefore required to be self-sufficient. The SWIS has 5.7 GW of installed nameplate capacity. Figure 1 shows the fuel mix used for generation in the SWIS in Figure 1: Percentage generation by fuel type Percentage Generation by Fuel Type in % 8% 50% 41% wind gas coal other The Wholesale Electricity Market (WEM) The WEM is comprised of: A real-time dispatch market. A gross pool market where Market Generators must make all their certified capacity available to the market. Net settlement, which takes into consideration the net contract positions between Market Participants, and only settles for amounts that are not covered by Bilateral Contracts or day-ahead trades in the Short Term Energy Market. Load Following Ancillary Services (LFAS) which account for the difference between scheduled energy, actual load, and intermittent generation. Other Ancillary Services, such as System Restart and Spinning Reserve.

6 Generation facilities in the WEM are generally dispatched based on economic merit, where facilities that bid into the market at the lowest price are given priority over higher bidders. However, on occasion higher-cost facilities may be dispatched ahead of lower-cost ones for system security reasons The Reserve Capacity Mechanism In addition to the WEM, a Reserve Capacity Mechanism (RCM) is operated in the SWIS that ensures sufficient capacity is available during periods of peak demand to meet reliability targets set for the SWIS. Capacity can be provided by traditional scheduled generators, non-scheduled generators such as wind and solar, and Demand Side Programs (DSPs) that can curtail load when required. The RCM is intended to support the recovery of long-term capital costs associated with installing new capacity. As a result, maximum price caps in the WEM are much lower than in the NEM ($240/MWh or $413/MWh 3 in the WEM vs. $14,000/MWh in the NEM), since peaking generators can recover capital costs through the RCM rather than through high peak pricing. For a detailed overview of the WEM and the RCM refer to the Wholesale Electricity Market Design Summary 4. 3 $240 price cap for non-liquid fuelled FY2016/17 (updated yearly), $413 for liquid-fuelled May 2017 (updated monthly). 4 Available from:

7 3. ANALYSIS ASSUMPTIONS This section identifies the variables that influence the generation mix in the SWIS and, therefore, gas-fired generation and gas demand. A commentary around how each variable affects the generation mix is provided. This is intended to give the reader a high-level understanding of how changes to the variables may affect the generation mix. In addition, this section identifies the assumptions related to these variables that are used in the analysis section. 3.1 Renewable Generation Mix Different mixes of large scale PV, wind, biomass, landfill gas, and rooftop PV will affect the overall generation mix differently as their times corresponding to maximum output will differ. A high concentration of one type of renewable generation relative to others can result in large fluctuations of renewable generation output. Higher levels of LFAS (normally provided by gas-fired facilities) and dispatch of gas-fired facilities capable of responding to these fluctuations outside of economic merit order may be required at times to manage this. The analysis presented in Section 4.3 is an extrapolation of existing data. As such, the large scale renewable generation mix 5 assumed is as per the existing mix in the SWIS. The system load considered in this analysis is drawn from projections given in the base case of the 2015 deferred WEM ESOO 6. This considers rooftop PV growth in terms of both total sent out generation required and peak load. 3.2 Energy Storage Both large and small scale storage can have positive effects on system security by proving a buffer to steep ramp rates that may be associated with high levels of renewable generation, and smooth out system peaks. This can reduce the need for gas-fired peaking and load following generation. At present the WEM Rules are not designed to consider storage for ancillary services. Due to this and the lack of certainty associated with any uptake of utility scale storage, its potential effects on gas-fired generation are not considered in this paper s analysis. 3.3 Wind Generation Location The location of wind generation is a significant factor in how much of a contribution it makes to meeting peak demand. Wind farms near the coast generally have a higher capacity factor during the afternoon when demand is high, whereas wind farms located inland have a higher capacity factor overnight when demand is low. This influences the generation mix as where wind contributes significantly to peak demand, it can offset generation from gas-fired peaking plants. Conversely, where wind s output is highest during times of low demand, such as overnight, gas-fired and coal-fired baseload generation may be forced to either curtail generation or accept negative prices in the energy market to avoid shutting down. Additional fast response gas facilities may need to be dispatched as a result to manage variability in generation output during these times. The analysis in Section 4.3 assumes that the influence that geographic location of wind generation has on the generation mix remains constant. 3.4 Geographical Spread The spread of wind and solar generation across a network has an effect on how steeply total renewable generation output ramps up and down. A large concentration of generation in one area will be influenced by changes in weather conditions at the same time, resulting in steep ramps in generation. By contrast, a spread-out collection of generation resources will maintain a smoother generation output. Consequently, the relative geographical spread of renewable generators can have an effect on the amount of LFAS (typically provided by gas-fired generators) that needs to be maintained to smooth out this varying output. 5 For the purposes of this report, renewable generation mix is defined as the ratio of the various forms of renewable generation relative to each other. 6 The WEM ESOO is published yearly and provides forecasts of electricity consumption and peak demand. Refer to: Electricity-Market-WEM/Planning-and-forecasting/WEM-Electricity-Statement-of-Opportunities

8 The analysis in this paper assumes that the influence that geographic spread of renewable generation has on the generation mix remains constant. 3.5 Electricity Market Review Outcomes Reforms to the energy and ancillary service markets are being considered as part of the WA government s Electricity Market Review. In July 2016, the Public Utilities Office (PUO) released a final report 7 on the high-level design of the reforms. The outcomes of these reforms may influence the future generation mix in the SWIS. However, because the reforms are ongoing they have not been considered in the analysis. 3.6 Government Policy Assumption Of the federal mechanisms, targets and schemes outlined in this section, the LRET is specifically considered in the analysis presented in this paper. The reason for focusing on the LRET is because while other schemes support lower emitting generation, efficiency improvements, and small scale behind-the-meter generation, the LRET is set specifically to achieve a greater level of renewables in the electricity sector. Discussion The Federal Government has committed to a 26% to 28% reduction in carbon dioxide equivalent (CO2-e) emissions by 2030 relative to 2005 levels. A number of schemes and mechanisms have been put in place to support this, most notably the LRET and the Small-scale Renewable Energy Scheme (SRES). The LRET is an Australian-wide target aiming to achieve 33,000 GWh of sent out generation from renewable sources by 2020 (expected to be 23.5% of total 2020 demand). The effect of the LRET in the SWIS is the focus of the analysis in this report and is discussed in detail in Section 4.1. The SRES provides an incentive to consumers to install small generation units (classified as no more than 100 kw of solar PV, 10 kw of wind or 6.4 kw of hydro generation) 8. This scheme has supported the significant growth in rooftop PV in the SWIS and is expected to continue to do so. In 2014 an Emissions Reduction Fund (ERF) was implemented with an associated Safeguard Mechanism in This fund pays businesses to reduce their carbon emissions in a variety of ways including energy efficiency improvements in transport and electricity use, so is expected to play a part in reducing electricity demand. However, as of November 2016, energy efficiency was only a small percentage (2.5%) of the fund s contracted emissions, with initiatives to minimise vegetation clearing and planting making up the bulk of the fund 10. The Safeguard Mechanism 11 associated with the ERF is a cap and trade mechanism that sets an emissions baseline for large emitters (over 100,000 t CO2-e), based on their highest level of reported emissions between 2009/10 and 2013/14 for existing facilities. For new facilities, emissions will be capped according to best practice guidelines. The mechanism also applies to electricity networks (the SWIS and NWIS (North West Interconnected System) in WA), but unlike other industries the cap covers the sector as a whole rather individual facilities. The cap is set at 198 (Mt CO2-e). If this is exceeded, caps will be introduced for individual facilities, who would then be required to purchase carbon credits to make up for any emissions in excess of their baseline values. Emissions for the electricity sector for the latest reporting period ( ) were 178 MT CO2-e. This represents a small increase of 0.9% on the previous reporting period Available at: 8 Refer to the Clean Energy Regulator website for further information: For more information refer to: 12 The 0.9 % increase was predominantly due to an increase in coal-fired generation. For further information refer to the Clean Energy Regulator website:

9 To finance new renewable generation and support the development of new technology, there are several other initiatives in place, including the Clean Energy Finance Corporation (CEFC), the Australian Renewable Energy Agency (ARENA), and the Clean Energy Innovation Fund (CEIF). 3.7 The Removal of Synergy Capacity On 5 May 2017, Synergy announced the retirement of some generation capacity by 1 October 2018.The retirements affect the following facilities: Muja AB units 1 to 4 (240MW) Mungarra gas turbine units 1, 2 and 3 (113MW) West Kalgoorlie gas turbine units 2 and 3 (62MW) Kwinana gas turbine unit 1 (21MW) Due to the recent timing of this announcement, the removal of Synergy capacity has not been considered in this paper s analysis. 3.8 Operating Costs and Performance Specifications of Existing Thermal Generators As the analysis in this paper is based on an extrapolation of existing data, generator performance, operating costs and how these influence Market Generators participation in the WEM are assumed to be constant. The influence of the cost of fuel is assumed to be constant across the analysis horizon. Fuel costs are discussed further in Section Start-up costs are higher for baseload facilities, such as coal-fired and combined cycle gas turbines, than for open cycle gas turbines. The time required to synchronise with the network is also generally greater. Because of this, at times of low demand and high renewable generation, baseload gas and coal facilities may be forced to either shut down or accept negative prices to ensure they remain online. Where gas-fired baseload facilities choose to shut down or operate at a reduced output, this will influence gas demand as baseload gas generation consumes a larger proportion of gas than peaking or mid-merit generation.

10 4. ANALYSIS OF THE EFFECT OF THE LRET ON GAS DEMAND IN THE SWIS 4.1 The Large Scale Renewable Energy Target The LRET was introduced in 2001 and revised in 2015 to 33,000 GWh per annum of renewable generation by 2020, anticipated to be 23.5% of total sent out electricity generation in The LRET is funded by requiring Liable Entities 13 to surrender large scale generation certificates (LGC) to the Clean Energy Regulator (CER). LGCs are purchased from approved renewable generators, with one MWh of renewable generation equal to one LGC. Liable Entities pass the cost of LCGs on to electricity consumers. Emissions Intensive Trade Exposed (EITE) industries are provided with exemption certificates that can be traded with liable entities to offset the additional cost imposed by the LRET scheme Required Renewable Generation to Achieve the LRET in the SWIS To provide an understanding of the amount of renewable generation required in the SWIS to meet the 2020 federal LRET, an estimate of the SWIS contribution (the hypothetical SWIS-specific LRET) has been calculated. Methodology To calculate the hypothetical SWIS LRET, an estimate of generation in 2020 and expected LRET Exemption Certificates awarded to industries connected to the SWIS were calculated. Because the LRET is a national scheme, these exemptions are estimates only. As such the hypothetical SWIS LRET is an approximation. The process for obtaining this (in terms of GWh) is detailed below. It should be noted that there is no obligation to meet this target and the incoming WA Labour Government has ruled out a state based LRET 14. However, it does provide a useful baseline to understand WA s contribution to the federal target. The methodology for estimating the hypothetical SWIS-specific LRET is as follows: 1. The amount of sent out generation in 2020 was estimated using known generation data between 1 October 2015 and 1 October 2016 factored up by a growth rate of 0.9% per annum 15 to This was multiplied by the LRET percentage (23.5%) to give a SWIS LRET without taking exemptions into account. 3. The MWh value of exemption certificates issued to industries in the SWIS was estimated using industry and company specific data provided on the Clean Energy Regulator s website Weightings were applied to the exemptions based on an estimate of the percentage of industry share in the SWIS relative to Australia Exemptions were then summed and as exemption certificates are based on 2016 data, the growth rate of 0.9% p.a. was applied to achieve a 2020 estimate. 6. The WA specific exemption data calculated in steps 3 through 5 was subtracted from the value calculated in step 2 to give the hypothetical SWIS LRET. 13 Liable Entities are defined as the first receivers of electricity in a network with an install capacity of over 100MW As forecast in the 2015 Deferred WEM ESOO 16 mation/2015-exemptions-for-emissions-intensive-trade-exposed-activities.aspx Where production data was available, this weighting was based on the ratio of production relative to the SWIS, where this was not available a weighting of 7.4% was applied (the percentage of SWIS electricity generation relative to Australia)

11 Results and Discussion This analysis indicates that the total renewable sent out generation in the SWIS required to meet the 2020 LRET is 3,773 GWh. For comparison, sent out renewable generation in the SWIS for the capacity year was 1,587 GWh. 3,773 GWh equates to a total nameplate capacity of approximately 1.2 GW, or 0.7 GW more large scale renewable capacity than what is currently installed, assuming a capacity factor of 35.5% Analysis of the Historical Effect of New Renewable Generation Facilities This section provides an analysis of how new renewable capacity has influenced gas-fired generation in the SWIS historically. The results of this analysis are used in Section 4.3 as the basis for estimating the effect of new renewable capacity in the future Methodology To complete this analysis, a table of renewable facility nameplate capacities and commissioning dates was developed; refer to Appendix A. This table was distilled down into four time periods, as shown in Table 2, to provide an insight into the period where the majority of current renewable capacity was installed in the SWIS, between March 2011 and October In that period an additional 299 MW of renewable capacity was installed. Table 2: Renewable installation by time period Facility Installation Time Period In the three years directly before and after this (start 2008 end 2010, and start 2014 end 2016) there was very little new renewable capacity installed. This allowed the historical values for gas generation before and after this large addition of renewable capacity to be compared to gauge the effect this additional renewable capacity had on gas-fired generation. To make the comparison, average monthly gas generation values for the periods looking back three years (2008 through to 2010) and looking forward three years (2014 through to 2016) were calculated. Averages across the three year periods were used to minimise the influence of year-on-year weather fluctuations on the analysis. Table 3 displays these averages and gives an indication of the change in gas generation between the two periods. 211 MW of renewable capacity was installed prior to However, analysis of its effect was not included because of limited data availability and a different dispatch methodology post market start (the WEM commenced operation in 2006). Table 3: Three-Yearly Averaged Monthly Gas Generation New Renewable Nameplate Capacity Installed (MW) Inclusive Inclusive Inclusive Inclusive 2.6 Time Period Three-Yearly Averaged Monthly Gas Generation (GWh) Inclusive Inclusive Figure 2 displays yearly averaged monthly generation to give an indication of the change in gas and renewable (solar, wind and biomass) generation over the analysis period. A clear decrease at an increasing rate can be observed in gas generation over the period and, conversely, a sharp increase in renewable generation % is the average capacity factor for all large scale renewables in the SWIS in 2016.

12 GWh Per Month Renewables Influence on the Generation Mix Figure 2: Historical Monthly Gas and Renewable Generation, Averaged Yearly across Yearly Averaged Gas and Renewable Generation +299MW (0.3GW) of New Renewable Nameplate Capacity between Gas Renewable In addition to renewable generation, this change in gas generation may have been influenced by changes in gas price, growth in electricity consumption and the commissioning of two coal-fired power stations over the analysis period. The Bluewaters power station was commissioned in 2009, Muja B was recommissioned in 2013 and Muja A in The influence of the commissioning of Bluewaters likely contributed to the decrease in gas generation prior to 2010 seen in Figure 2. The influence of Muja AB is less clear, most likely because Muja AB operates less often, so has a smaller impact on the generation mix. Figure 3 below illustrates the dispatch quantities by month of gas, coal and renewable generation in greater detail, plotting the change in generation levels of these over time. This shows a trend towards increasing renewable and coal-fired generation and decreasing gas-fired generation. The trendline of gas and coal indicate that coal is increasing 60% faster than gas generation is decreasing over the same time period. The sum of the slope of gas and renewable almost perfectly cancels each other out, which could suggest that greater renewable generation is having a larger effect on gas demand than competition between gas-fired and coal-fired baseload generation. However it is more likely that both new renewable and coal-fired generation have had an impact on gas generation.

13 GWh Per Month Renewables Influence on the Generation Mix Figure 3: Levels of Gas, Coal and Renewables over time Aggregate Monthly Dispatch 1, Coal Renewable (Solar, Wind, Biomass) Gas Between 2008 and 2016 electricity consumption has grown by approximately 1.5% per annum. This corresponds to an increase in monthly generation from 2008 to 2016 of approximately 180 GWh. This growth may have reduced the impact of new coal and renewable generation on gas generation over the analysis period. Future growth in consumption is expected to be slower, approximately 0.9% per annum 20. This higher demand growth over the analysis period may have reduced the apparent effect of renewables on gas generation to some extent, leading to a lower net effect being seen in the analysis. The commissioning of Bluewaters and Muja AB over the analysis period may have had the opposite effect, increasing the net effect indicated by the analysis. However, these effects have not been removed from the values presented in this paper as it is not practicable to accurately do so. Instead, this analysis assumes that the counter effects of load growth and new coal-fired generators on the analysis cancel out. To consider the influence of gas price over the analysis period the maximum non-liquid bid price for the STEM 21 is used as a proxy for gas price, as individual gas contracts by facility are not available. The maximum non-liquid bid price is based on Market Generators estimated short run marginal cost of operation (closely tied to fuel price). Figure 4 plots the maximum STEM price between 2008 and The most relevant years are 2008 to 2010 and 2014 to 2016 as these are the two three-year periods that the analysis uses to calculate a percentage change to gas generation based on renewables nameplate capacity increases. 20 Refer to Appendix G of the 2015 Deferred WEM ESOO 21 For more information on the maximum STEM price refer to:

14 Figure 4: Maximum STEM Price based on AEMO s estimate of the SRMC of the highest-cost generating works in the SWIS fuelled by gas by Financial Year $350 $336 Maximum STEM Price $330 $323 $330 $310 $314 $305 Decrease in oil price and repeal of carbon price. $290 $286 $270 $276 $250 $253 $240 $230 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 As the averaged prices are relatively consistent between the two periods ($299 for the 2008 to 2010 period and $274 for the 2014 to 2016 period) changes to gas prices are assumed to have a relatively small influence on the change to gas generation. As a majority of gas contracts span longer terms than one year, actual price variation for gas supplied to gas generators is most likely less than the variation suggested by Figure Results and Discussion Figure 3 illustrates that the increased level of renewables coincides with reduced gas generation rather than coal. This is expected because gas generation usually has a higher cost per MWh than coal. Although the variability of renewables can lead to greater use of open cycle gas turbines to respond quickly to load variations, this accounts for only a small amount of total gas generation. Base load gas generation facilities make up the bulk of dispatched gas fired generation, and these are generally priced out of the economic dispatch model by renewable generation before coal-fired generation. The reduction in monthly average gas generation seen between the two three-year periods defined in Table 3 of section is GWh per month (826.2 GWh p.a.). Dividing this value by the increase in renewable nameplate capacity between the two three-year periods (299 MW) gives a historical gas generation reduction of 2.76 GWh p.a. for every MW of new renewable nameplate capacity installed. The historical effect of renewable and coal generation on gas generation is further illustrated in Figure 5. This show the percentage change in the generation fuel mix between 2010 and 2016.

15 Figure 5: Dispatch by fuel type 2010 vs Percentage Generation by Fuel Type in % 4% Percentage Generation by Fuel Type in % 8% 48% 48% 50% 41% wind gas coal other wind gas coal other 4.3 Potential Future Effect of Renewables Penetration on Gas Demand Methodology The analysis in this paper adopts a top-down approach when projecting the potential effects of increased renewable generation on gas demand in the SWIS. It is expected that the level of large scale renewables, particularly wind and solar, will continue to increase in the future. To gain an understanding of how this may affect gas-fired generation and gas consumption, the historical reduction calculated in section 4.2.2, 2.76 GWh p.a. of gas generation per MW (0.001 GW) of new renewable capacity installed, is used. Applying this to various levels of renewable generation, up to the nameplate capacity required to reach the hypothetical LRET for the SWIS, provides an estimate of how future increases in renewable generation will affect gas consumption in the SWIS. The assumptions around gas price, new coal-fired generation, and load growth on the analysis in this section are consistent with those outlined in section Analysis Results Table 4 provides estimated average monthly reductions in gas generation for various increases in renewable capacity 22 up to a level consistent with the hypothetical SWIS LRET. Table 4: Forecast reduction in gas-fired generation for various levels of installed renewable nameplate capacity in the SWIS Total renewable nameplate capacity installed in the SWIS (GW) Post 2010 new renewable nameplate capacity installed (GW) Reduction in gas generation from monthly average (GWh) To convert the reduction in gas generation values outlined in Table 4 to reductions in gas demand, an average efficiency needs to be applied. The efficiency values applied in the 2016 Gas Statement of Opportunities (GSOO) are outlined in Table 5. The average efficiency for generation offset by renewable generation will most likely lie somewhere 22 This reduction is calculated by multiplying the post 2010 new renewable nameplate capacity values by the historical reduction value (2.76 GWh p.a. per MW of new renewable capacity) then dividing by 12.

16 between the mid-merit and baseload values, since peaking gas turbines only operate occasionally. Therefore, their effect on overall gas demand is much smaller than mid-merit and baseload facilities. Table 5: Assumed gas generator efficiencies Generation Type Efficiency Baseload Gas-Fired Generation 44.0% Mid-merit Gas-Fired Generation 38.0% Applying these efficiencies to the values in Table 3 for reduction in gas generation suggests that at the hypothetical SWIS LRET renewable generation level, a reduction in gas consumption of between 62.1 TJ and 71.9 TJ per day could be expected Reductions in gas consumption are calculated by converting the monthly reduction in gas generation value (230.7 GWh) to a daily value, multiplying this by the GWh to TJ conversion factor (3.6), and then dividing by the efficiency values in Table 5.

17 5. IN SUMMARY The incentives from the Commonwealth Government and a reduction of capital costs for renewable energy creates financial incentives for increased levels of renewable generation in the SWIS. Increased renewable generation has an effect on how thermal generators are traditionally being dispatched and influences the volume of domestic gas consumed by gas-fired generators in the SWIS. The LRET is the key incentive that is driving investment in renewable generation. This was introduced in 2001 and revised in 2015 to 33,000 GWh per annum of renewable generation by 2020, anticipated to be 23.5% of total sent out electricity generation in To gain an understanding of the contribution the SWIS is making towards this target, and to analyse the LRET s potential effect on gas demand in the SWIS, a hypothetical SWIS LRET was calculated along with an investigation of the historical effect of new renewable capacity on the generation mix. Using these, projections were made to estimate the future effect of new renewable facilities on gas generation and gas demand in the SWIS. The results of this analysis are detailed below: The total renewable generation in the SWIS required to meet the 2020 LRET is approximately 3,773 GWh per annum. This is more than double the current sent out renewable generation in the SWIS ( ) and is equivalent to a total nameplate capacity of approximately 1.21 GW of large scale renewable generation, 0.7 GW more than what is currently installed. Analysis of the historical effect of new renewable capacity on gas generation indicates a reduction in gas generation of approximately 2.76 GWh per annum for every new MW of renewable capacity installed. Projecting this forward to the hypothetical SWIS LRET gives a reduction in gas generation of 2,768.4 GWh per annum. This suggests that if the level of additional renewable nameplate capacity required to meet the 2020 LRET (0.7 GW) was installed tomorrow, a reduction in gas demand relative to current levels of between 62.1 and 71.9 TJ per day 24 could be expected. These results are subject to the assumption that a number of variables remain constant. These are fully defined in Section 3 of this paper. The top-down nature of this analysis means that the impact of some variables is not fully explored. These include the influence of new coal-fired generation over the analysis period and changes to average yearly load growth. These influences are discussed in Section The analysis in this paper suggests that in the SWIS under the current market structure, gas-fired generation is affected to a greater extent by increasing levels of renewable generation than the other dominant form of thermal generation, coal. 24 Gas demand reductions calculated using gas generation efficiencies published in the GSOO for baseload and mid-merit gas generation facilities.

18 6. GLOSSARY Terms used within this paper are defined below. For a full list of defined terms used in the WEM refer to Chapter 11 of the WEM Rules 25 Ancillary Service: A service that is required to maintain Power System Security and Power System Reliability, facilitate orderly trading in electricity and ensure that electricity supplies are of acceptable quality. Bilateral Contract: A contract formed between any two persons (excluding System Management) for the sale of electricity by one of those persons to the other. Capacity Factor: The percentage actual generation relative to the maximum theoretically possible based a facility s nameplate capacity (eg: a capacity factor of 100% for a facility with a nameplate capacity of 100 MW would be 100 MW x 8,760 hours = 876,000 MWh per year) Demand Side Programme: Means a Facility registered in accordance with the WEM Rules. Generation: The electrical energy produced by a facility (in MWh). This is typically used in this paper when quantifying the percentage share of a type of generation in the SWIS. Generation Mix: the proportion of generation associated with the particular generation types (wind, coal, gas, etc.) Load Following Service or LFAS: Load Following Service is the service of frequently adjusting: o o the output of one or more Scheduled Generators; or the output of one or more Non-Scheduled Generators, within a Trading Interval so as to match total system generation to total system load in real time in order to correct any SWIS frequency variations. Market Generator: A Rule Participant registered as a Market Generator. Market Participant: A Rule Participant that is a Market Generator or a Market Customer. Nameplate Capacity: The maximum theoretical output of a facility (in GW or MW). Ramp Rate Limit: Means the Market Participant s best estimate, in MW per minute, on a linear basis, of a Facility s physical ability to increase or decrease its output from the commencement of a Trading Interval, and includes a DSP Ramp Rate Limit. Short Term Energy Market (STEM): A forward market operated under the WEM Rule in which Market Participants can purchase electricity from, or sell electricity to, AEMO. South West Interconnected System (SWIS): The electricity network extending between Kalbarri, Kalgoorlie and Albany that serves the majority of Western Australia s population. Wholesale Electricity Market: The West Australian electricity market, established under section 122 of the Electricity Industry Act. 25

19 7. APPENDIX A Table 6: Renewable installation by facility, type, and time period Participant Alinta Facility ALINTA_WWF Registration Year-Month Nameplate Type Capacity MW Wind 89.1 EDWF Manager Pty Ltd EDWFMAN_WF1 80 Landfill Gas and Power Pty RED_HILL Facilities 3.8 Ltd TAMALA_PARK installed 4.8 between ATLAS and Biogas Perth Energy Pty Ltd ROCKINGHAM SOUTH_CARDUP 3.4 Waste Gas Resources Pty Ltd HENDERSON_RENEWABLE_IG1 3 ALBANY_WF Synergy KALBARRI_WF Mt.Barker Power Company Wind SKYFRM_MTBARKER_WF Pty Ltd Collgar Wind Farm INVESTEC_COLLGAR_WF Synergy GRASMERE_WF Greenough River GREENOUGH_RIVER_PV Solar 10 Denmark Community Wind DCWL_DENMARK_WF1 Farm Mumbida Wind Farm MWF_MUMBIDA_WF1 Wind 55 Blair Fox Pty Ltd BLAIRFOX_KARAKIN_WF BLAIRFOX_WESTHILLS_WF CleanTech Energy BIOGAS Biogas 2 Synergy BREMER_BAY_WF Wind 0.6