SA takes its energy experiment back to the lab

This week the South Australian Government announced a radical plan to improve the reliability of the state’s electricity grid. This follows blackouts in the state on 8 February (90,000 households), 20 January (55,000 households), 28 December 2016 (155,000 households), 30 November (200,000 households), a system black event in September 2016 (whole state), an electricity price spike event in July 2016 and a blackout in November 2015 (110,000 households).

While consumers observe chronic and increased unreliability, the reasons for these events are varied.  Some, like the 28 December blackouts, were solely the result of extreme weather knocking out transmission infrastructure.  Others, like the November 2015 blackout were caused by a fault in the Heywood interconnector between South Australia and Victoria.  The system black event was also triggered by a major weather event which knocked out transmission infrastructure.  Some sort of blackout was inevitable.  The issue here, and in other cases, was the inability of the SA grid to respond quickly enough to minimise the impact of large losses of load.

Since the closure of the Northern Power Station in April last year, South Australia is now sourcing almost half of its electricity from intermittent generation.  While other countries and regions may have high renewable penetration, none are as singularly reliant on intermittent renewables (wind and to a lesser extent, solar) as South Australia is.  As we have observed over the past year, managing a high intermittent generation electricity grid is materially different to the conventional baseload model of the 20^th century.  As evidenced by the increased incidence of blackouts, there are now more and increased reliability risks in operating this type of grid.  These risks include:

• Firm generators are increasingly being required to operate as a counterweight to intermittent renewable supply, in some cases marginalising their business case and accelerating retirement of firm capacity, which in turn is increasing forward contract prices and increasing the risk of capacity shortages when demand is high;
• Tight domestic gas markets aggravate already marginal operating conditions for remaining firm gas generators;
• Power quality can be harder to manage during periods of lower demand and higher intermittent renewable generation, because these conditions tend to reduce the number of ancillary services providers;
• When intermittent generation is operating at scale, modest changes in weather conditions can translate into material and sudden changes in generation;
• Obversely, because intermittent generation cannot respond like firm generation, the SA grid is also increasingly less able to respond to sudden, unanticipated losses of generation.

Managing the South Australian grid has been exacerbated by reduced reliability of the Heywood interconnector as upgrading work is completed.  Into the future, the South Australian grid faces an additional external risk with the closure of the Hazelwood Power Station In Victoria at the end of March.  This will mean in future high demand events (like heat waves) the South Australian grid will be less confident of being able to source additional supply from Victoria via the two interconnectors.  This risk materialises almost immediately, but is likely to be most keenly felt in the summer of 2017-18.

Enter the SA Government plan

Faced with these risks, the South Australian Government plan South Australian Power for South Australians contains six headline actions in an attempt to increase system security.  The focal point of the plan is on increasing and enabling more firm generation to be available in South Australia.  The centrepiece appears to be state government subsidies for a new 100MW battery which, while expensive, should be able to be operational by next summer and in some situations will be able to help manage high risk events.  But will it be enough?

Build a 100 megawatt battery system: In twitter discussions leading up to the announcement and in reporting of it, there appears to be some confusion about whether this would be a 100MW or a 100MWh battery system (as proposed by Elon Musk from Tesla).  They are not the same thing.  Assuming a three hour dispatch, 100MW of battery storage can dispatch up to 300MWh of electricity, while 100MWh of battery storage has a capacity of only around 30MW.  Given the size of the SA market (maximum peak of 3397MW but lower with rooftop PV), we would assume a 100MW battery system would be needed to be able to assist with the scale of the reliability events that have been occurring.  This would likely cost somewhere between $150-$200 million, so is likely to draw heavily on the new $150 million renewable energy technology fund to get private investment across the line.

It is theoretically possible to get this size of battery storage approved and operational before next summer, which would be the likely deadline.  Like other storage devices, it will then be run commercially by its owners, arbitraging between low and high prices in the market.  It can also be called upon to discharge during potential reliability events (both capacity and ancillary services), although the duration of this will depend on the level of charge at the time.  The market effect of all storage technologies is to smooth out the volatility in the market, which in turn reduces the viability of future storage investments.  So in the short run this investment, if it proceeds, may impact the viability of other commercial plans to invest in storage in South Australia, like EnergyAustralia’s feasibility study for a 100MW pumped hydro plant or AGL's virtual power station using home battery storage, as well as any new firm generators.

While battery costs continue to fall, they remain a boutique technology in electricity grids because of relatively high costs compared to other technologies.  Pumped hydro is far more prevalent and proven.  In the global scheme 100MW is a big battery system.  And its deployment in a grid the size of SA is also novel, but then the SA grid is novel.  The SA Government is doubling up by betting on a new technology to solve its new integration problem.  Will it work?  Will 100MW be enough to make a difference?

Build a government-owned 250MW gas-fired power plant: It is claimed this plant will not operate in the market, but will be “switched on” in times of emergency.  There is also suggestions it may be used at times to provide inertia in the South Australian grid, at times of high intermittent generation.

There are three main challenges that will need to be addressed.  First, it won’t be built until the summer of 2018-19 at the earliest.  Second, how fast can this power plant be switched on, and will it be fast enough to avert a sudden reliability event?  Third, how will the State Government source gas for it, noting that infrequent gas generation makes contracting supply more challenging.  Owners and investors of existing and proposed generation are likely to assume this generation may be used more extensively over time as future governments seek to increase returns on their asset, unless its operational remit is strictly and legally prescribed.  In other words, it may act to dampen investment that other parts of the plan are seeking to encourage.  Curiously, the second unit at Pelican Point power station has a capacity of 240MW, is already built, and is not being utilised.

Introduce new Ministerial powers to direct the market: Essentially the South Australian Government wants the ability to direct local generation when it thinks the grid is at risk of a blackout.  It is clear that the market should be operated differently in South Australia because of the high levels of intermittent generation.  Setting aside the legal questions which have arisen in regard to this measure, the main issue is one of practicality.  First if the market operator and the Minister make different directions to generators, which prevails?  Second, does the SA Energy Minister plan on monitoring the grid 24/7, as the risk of these events can occur at any time.  It would be preferable if there was agreement about revised operating rules for AEMO, which in turn would be part of a national energy reform package.

Incentivising increased gas production: The SA Government has been a strong advocate for increasing gas production to alleviate the supply shortages being faced in south eastern Australia.  It is demonstrating this with its continued push to support gas exploration and development in SA.  The fastest solution lies in opening up proven and connected gas fields in Victoria and the Northern Territory.

Introducing an Energy Security Target: This will require retailers to source a minimum amount of electricity from South Australian firm generators.  This is designed to increase demand for SA firm generation, with the idea of increasing its viability.  To the extent that retailers are not already doing this, they would otherwise be increasing their exposure to the spot market and hedging their risk in some other fashion.  This is presumably done because it is cheaper than the price they can get in SA, so it follows that mandating increased local supply may increase the security of the system but it is likely to be at a higher price. . It also adds to the risk and complexity of retailing in SA, which may inhibit new entrants

Using the government purchasing power to attract a new generator: This seems challenging given, as already discussed, there is a second unit at Pelican Point power Station which is already built and is not utilised.

Conclusion

Clearly there remains a lot more detail to fill in some of the details of the plan. Some of the initiatives appear to have competing objectives: the more you push specific technologies and projects, the more you risk reducing the business case for others.  The plan will clearly impact on feasibility plans for a range of proposed projects, including the regulatory investment test for the proposed interconnector to NSW.

The South Australian Government has decided to take new risks to try and manage its existing ones.  Building 100MW of battery storage ticks the populist, new-tech approach, and it has the advantage of being ready relatively quickly.  But it is expensive compared to other solutions, and the plan oddly seems less interested in actively ensuring existing firm generation in the state is shored up, which may be cheaper, quicker and more reliable.

As the South Australian Government points out, it would be preferable if we could solve energy policy at the national level.  This will require a suite of policy measures: a constraint/signal on greenhouse gases, agreement on improved gas access, a revised renewable energy policy and well as upgrades to the way the grid is operated to help avert and prevent future blackouts, whilst still seeking to keep costs down.

The National Electricity Market is not broken, and nor is there any sign that SA is exiting the NEM as some have suggested.  The market has been increasingly distorted by a number of policy interventions and poor policy co-ordination, too often designed by their impact on opinion polls rather than energy security.  Self-evidently this needs to end.

As ENA CEO John Bradley pointed out, breakout measures by state governments should be a last resort in a national energy market.  It would be preferable if the South Australian Government plan was made redundant by a well-designed national energy strategy.