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SA running short on time and power

Analysis

The State Government is going to find it very difficult to fix the state's electricity problems without driving up prices, writes Richard Blandy.

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Just when you were starting to think that it might be safe to get back in the water, BP pulled the pin on its oil exploration program with Norway’s Statoil in the Great Australian Bight. This decision must have been perilously close to the “go/no go” point because BP had its Ocean Great White drilling rig, nearing completion in South Korea, destined for the drilling program in the Bight this coming summer.

Will there be a domino effect on explorers’ plans in adjoining leases? How will the remaining exploration lease-holder, Chevron, Santos/Murphy and Karoon, react to BP/Statoil’s decision?

This is particularly bad news for Ceduna, as well as being bad news for the state’s economy more broadly, already reeling from the economic aftermath of the blackout.

Something obviously needs to be done to bolster the reliability of the state’s electricity supply without costing South Australia’s citizens more (either in higher State Government debt and/or taxes, or in higher prices for electricity).

This is a tall order. The State Government’s plans appear to rest, in the immediate term, on bringing one of the mothballed gas-fired base-load generators into play to supply the State Government sector, by contract, outside the framework of the national electricity market (NEM). By reducing its demands on supplies available to South Australian households and businesses through the NEM, the Government hopes to avoid blackouts in the peak demand summer months when air conditioning use is at its peak.

Presumably, the price needed to attract a gas-fired base-load generator to supply the Government must be higher than the price on offer to the generator in the NEM. Hence, the Government’s power bill will increase. Will the Government cut its spending in other areas? On past form, not by much, if at all. Taxes and/or state debt will increase.

In the longer term, the South Australian Government plans to have the NEM build an extra interconnector to New South Wales, to connect the South Australian market to NSW’s efficient black coal electricity generators, on the one hand, and to connect the NSW market to SA’s efficient renewable electricity generators, on the other.

This is a sensible plan, in the circumstances, but the interconnector has been estimated to cost $0.75 billion, which has to be paid-for by someone. The cost of the interconnector will be recouped by a charge by Electranet on sales of electricity carried on its transmission network, presumably with a subsidy from the South Australian Government.

How soon the extra interconnector can be up and running is anybody’s guess, but several years away would be a reasonable expectation. The study and decision to build (or not) will take at least a year, with at least another year for acquisition of land and for building the transmission system, even in the best of circumstances.

What about nuclear power? Nuclear power does not release CO2 into the atmosphere and does not add to global warming. However, its used fuel is highly toxic and needs to be disposed-of safely. Nuclear energy costs less than wind and solar energy, but more than coal power. Like coal, it is only useful for base-load generation. That is, nuclear power plants must operate continuously.

Like coal-fired power plants, they are vulnerable in South Australia’s circumstances that there is so much zero marginal cost wind (and solar) power available that it would be impossible for them to operate continuously. Hence, nuclear power is a non-starter in South Australia, for the same reason that coal power is a non-starter.

The reason why there is so much zero marginal cost wind power available is the system of renewable energy certificates (RECs) that underpins the economics of wind farms. Electricity retailers are required (under rules operated by the NEM) to buy an ever-increasing amount of energy from wind farms. By doing so, a retailer acquires RECs which must be presented to the NEM to prove that the retailer is abiding by the rules and to be allowed to keep operating.

The marginal cost of wind may be zero, but the price of a REC is related to the average wholesale price of electricity: one REC can be exchanged for 1MWH of electricity. A wind farm makes its money from sales of RECs to retailers, not only from sales of electricity in the wholesale market of the NEM.

A profit-maximising strategy for a wind farm is to maximise sales volume on the NEM by tendering at a zero price (but receiving the wholesale market spot price, which is likely to be above zero), and to sell the RECs so created to retailers at the average wholesale price for electricity.

Wind turbines near Burra

Wind turbines near Burra

Just as coal-powered generators will go broke under the REC system when faced with competition from large amounts of wind power, so will nuclear power plants. Nuclear energy is not a solution to our power crisis, unless the subsidies that underpin renewable energy generation (the RECs, essentially) are discontinued.

This is also the reason why reopening Northern Power Station (which would be an attractive option in normal circumstances) will not work as a solution to South Australia’s electricity problems. In fact, nothing will work except electrical storage of some kind or interconnection to coal, gas or nuclear interstate, in places where wind and solar generation have not yet reached a sufficiently large share of the market to drive base-load generators to the wall.

New South Wales only has a 20% renewables target by 2020, for example, and fits the bill, in this respect.

Victoria (40% by 2025) and Queensland (50% by 2030) do not. They are heading into South Australia’s situation where non-renewable, base-load generators are forced out of the market.

New South Wales could show the way to a different solution to the global CO2 problem by introducing Chinese, low-emission, coal-fired, electricity-generation technology. These generators are called high-efficiency, low emissions (HELE) generators, predominantly supercritical (SC) and ultra-supercritical (USC), pulverised coal combustion units. These generators reach a thermal efficiency of 45% (compared with an average efficiency of today’s coal-fired plants of 33% or less). Technologies in development promise even higher values.

The other alternative is battery back-up. While there are technologies in development to store wind and solar energy where the electricity is generated, they add further to the cost of providing reliable electricity from renewable sources. The alternative is to install back-up batteries or generators in households and businesses. The cost of doing so would be high, but this solution is already available.

The last Census says there were 644,000 households in South Australia. A battery back-up system that would keep the lights, power and air-conditioning going in an average household would cost a minimum of $5,000 – $10,000. The capital cost of this solution would be $3 billion – $6 billion, therefore, and the increase in an average household’s annual cost of electricity would be $500 – $1,000. After that we get to the cost of business-sized battery back-ups to provide South Australian businesses with reliable power!

An interconnector to NSW would cost less than $1 billion, by comparison. Assuming it, and the Hazelwood and Riverlink interconnectors to Victoria, will provide power when we need it (which Victoria’s renewable energy plans throw into some doubt), this is probably the most feasible solution to the electrical supply problems that the South Australian Government’s adventure into renewable energy has foisted upon us. But it will take time.

So, for the next year or so, South Australian households and businesses remain vulnerable to circumstances where demand for electricity exceeds supply. Very hot days create a high demand for air-conditioning. If there is a north wind blowing hard, some wind farms are likely to be turned off. If bushfires were to take out powerlines or the Hazelwood interconnector, the result could again be catastrophic, as we have just experienced.

Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia and a weekly contributor to InDaily.

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