“The reasons for South Australia’s high power prices compared to the rest of the country remain the same as they were before a single wind turbine or solar panel was installed there – a heavy reliance on expensive gas power plants and only a small number of companies generating that gas power in the state’s energy market”
– Tom Butler, Clean Energy Council Network Specialist
The combined problem
Renewable energy is being wrongly blamed for high energy prices in South Australia. In fact, the problem is not a failure of renewable energy; it is a failure of the national electricity market. The higher prices being experienced by energy customers in SA are due to a number of factors: high demand for electricity and gas during a cold snap, the lack of competition to energy giants AGL and Origin at such times of high demand, restricted interconnector capacity and high costs relating to gas.
Gas generators are the price setters
Following the closure of Alinta’s coal-fired power plants, renewables and gas are the main sources of electricity generation in SA. Renewable energy is produced at a very low cost and is usually dispatched first. Hence the wind farms are price takers – in other words they must accept the prevailing market price for their product. This leaves AGL and Origin – which control the rest of SA’s available electricity – generated at relatively inefficient gas fired power plants – as the price setters. So at times when demand is high, and renewables are not able to keep prices low, these two companies have very strong power to set prices.
Lack of competition in the SA retail electricity market
Other retailers have had trouble entering the SA retail market. Large industrial users have had difficulty getting supply contract offers from companies other than AGL and Origin.
Engie’s Pelican Point gas plant
The 480MW Engie Pelican Point gas power plant has been essentially mothballed and only runs at half capacity during summer. Engie chose to sell its gas to LNG export plants in Queensland and gave up its contracted gas pipeline transport capacity. The fact Pelican Point, a highly efficient plant, has been mothballed while older, much less efficient operations remain operational again points to a market problem.
Impact of severe weather
Last week, SA experienced low temperatures and strong winds. The cold weather meant demand for energy was relatively high at times. The high winds blew trees over and in some cases took down power lines. Some suburbs lost power. This had nothing to do with the wholesale market, but it added to talk of a ‘power crisis’. There were unfounded references to ‘brown outs’. These were not ‘brown outs’ – which are caused when there is not enough generation in the system to maintain voltage and frequency – they were power outages as a result of power lines coming down.
At the time of the severe weather last week, the capacity of the interconnector with Victoria was constrained. This was a planned outage (for work ongoing to expand its capacity) and had been signalled to the market many months ahead. The interconnector can supply up to 480 MW into SA, so taking some or all of that capacity out of the market at a time of high demand would have significantly enhanced AGL and Origin’s pricing power.
Impacts on power prices
Unlike in the eastern states, gas is more commonly used in SA than coal. This contributes to SA having historically higher energy prices than NSW or Victoria. However, price spikes in SA have decreased as the percentage of renewables in supply has increased. If the higher prices in SA were due to renewables, one would have expected prices in other states like Victoria and NSW, which have ample surplus base load coal capacity, to stay low. In fact, prices in NSW and Victoria, set by the bidding of the big energy players like AGL and Origin, have tended to follow higher SA and Queensland price spikes.
There is no question the National Energy Market was developed for a different era and is not equipped to handle a 21st century power mix, with its large degree of renewable energy. Australia needs a national plan to manage the transition to clean energy. This plan should deal with: intermittent generation and energy security, appropriate interconnections, careful placement of renewable facilities to maximise flexibility, an orderly closure of coal-fired power plants and detailed strategies to help affected communities with the transition. The benefits of renewable energy are numerous. But without national leadership and a national plan to transition our energy sector, we are certain to see a rocky transition with more price fluctuations. With the newly combined portfolios of Energy and Environment, Minister Josh Frydenberg is well-placed to provide this national leadership.