Although not much is known so far about the Energy Security Board’s Physical Retailer Reliability Obligation – where coal and gas plants may be paid to stay online – it’s obvious that dispatchable generation’s role as a complement to renewables will become increasingly important over the next two decades. EcoGeneration asked a selection of leading energy consultants for their views on how the two may co-exist as the grid is decarbonised.
- Katie Barnett, environmental transactions and advisory partner, PwC
- Dominic Mendonca, energy transition services Australia-New Zealand lead, Accenture
- John O’Brien, energy transition and decarbonisation partner, Deloitte Australia
- Sandy Starkey, energy market analyst modeller, Cornwall Insight Australia
- Sally Torgoman, senior energy expert
John O’Brien, energy transition and decarbonisation partner, Deloitte Australia
The easy bit of energy transition is coming to an end. As a country we’ve done really well, partly thanks to generous subsidies, getting solar on our sunny rooftops and starting to replace the large-scale generation fleet with lower emissions alternatives that happen to now be also cheaper. We’ve managed to get a few good-sized batteries built and have chatted lots about pumped hydro projects.
As the market economics continues to bite, we are likely to see the coal-fired generators become uneconomic and, unless they are paid heavily for capacity services, they will drop out of the market many years before the end of their design lives. This is going to challenge the grid design as the electron flows change direction across the network and through the day. So, we have reached the end of the beginning of transition.
The next stage is going to be much harder and require the development of more integrative solutions that are more than just technical. To be successful in getting to 90% renewables will require a very different energy market. It is really important to not get distracted by the challenges of the last 5-10% as that can be a cause of delay in getting underway. We’ll need to further adapt the plans as we go but continuing progress is critical if we are going to get close to the global expectations on emissions targets. It is also important to not get distracted by current Australian emissions targets as they will inevitably change over time.
Dispatchable generation will be a critical part of the solution so that we can ensure security of supply when we have a windless night. Gas and large-scale hydro have been the historical non-coal solutions for this but the options going forward are expanding. Pumped hydro is going to take a long time to get approvals and build but will be part of the final solution. Big lithium batteries also provide a part solution and are best suited to providing the relatively short-term grid services. More interestingly, work we have been delivering on commercial modelling and policy design around enabling digital energy solutions is likely to be the glue that sticks it all together.
Harnessing distributed batteries, many in vehicles, into virtual power plants and having demand response as standard part of every grid connection will allow massive flexibility and a grid that is more resilient, more secure and cheaper to operate than anything we have had before. The future grid will look very different to the one built a hundred years ago and will be as focused on data as it is on electrons, and will be one in which disruptors may flourish, incumbents may struggle and in which business models will be very different. And that’s all before we consider the detail of decarbonising 90% of energy provided by gas and liquid fuels!
Katie Barnett, environmental transactions and advisory partner, PwC
After some elements of the Energy Security Board’s report were leaked from discussions with federal and state energy ministers there has been a lot of media commentary on limited detail. To a certain extent, debate is bifurcating into “thermal vs renewables”, with formal and informal advocacy groups forming around these positions. There is legitimate concern from some commentators that the ESB is yet to make an evidence-based case for the need for further physical reliability/capacity measures and consequential increases in power prices for consumers.
The above aside, what is clear is that we need more detail to consider the ultimate purpose and likely outcomes of the ESB’s proposed capacity mechanism – details on how long it will last, how “dispatchable” is defined and how the mechanism will (and should) create incentives for new investment in “dispatchable” generation to replace the ageing thermal fleet in an orderly way. If cleverly designed, it can support investment in new flexible, low-carbon firming technologies and smooth the exit of coal and gas.
Yes, high-carbon, ageing thermal fleet will continue to play a transitional role over the next decade, however it is no longer a question of if it will be replaced on the supply cost curve, it is a question of when – and, therefore, what new firming supply will replace it. For instance, if the definition of dispatchable is categorised into one-hour, two-hour, four-hour (etc) stops, providing investment signals for increasingly longer-duration (chemical) batteries, this will drive incentives for flexible, low-carbon firming technology. If, however, dispatchable is defined as eight hours or even 24 hours, in the near term this will only support less flexible and ageing thermal fleet and hydro/pumped hydro. Further, if dispatchable is defined in terms of carbon intensity, this will provide investment signals for hydro/pumped hydro and (chemical) batteries.
In short, where the ESB’s rumoured capacity mechanism is implemented (the need and pricing outcomes being questionable), the detailed design of the scheme and definition of dispatchable will be key for the mechanism to provide investment signals for new flexible, low-carbon generation and storage to continue to replace thermal fleet and deliver the renewable energy transition.
Dominic Mendonca, energy transition services Australia-New Zealand lead, Accenture
As Australia transitions towards a clean energy future, an increasing portion of electricity will be supplied by intermittent sources of renewable energy, requiring dispatchable sources, storage and dispatchable sinks (that is, demand) to stabilise the grid. These dispatchable sources will move from being the main sources of supply to playing a vital supporting role. To effectively support balancing the grid alongside aiding the energy transition at large for the next decade, dispatchable generation must undergo a critical transition of their own.
Firstly, dispatchable generation should adopt a digitally enabled, data-driven operating model. Fossil fuel dispatchable sources such as gas will serve as capacity that can be rarely called upon, which causes challenges in maintenance and reliability. Natural gas-powered generation must therefore embrace the opportunity that digital offers to improve efficiency in maintenance and optimise trading, particularly as new capacity and day-ahead markets are introduced.
Hydro generation and batteries will play an increasing role in the market, particularly in frequency control and ancillary services, and particularly when five-minute settlement is introduced. Managing the volume of data and being able to optimise trading with automated algorithms will be important in extracting the most value out of these new opportunities. Secondly, as we transition to net zero, fossil fuel generation will need to convert to a zero emissions fuel. Conversion to hydrogen represents a potential opportunity to continue operating in the long-term and should be investigated for feasibility.
Sandy Starkey, energy market analyst modeller, Cornwall Insight Australia
The ESB’s consideration to resource adequacy and reliability of energy in the presence of ageing thermal generator retirement has attracted significant primarily negative attention. The ESB has proposed a physical retail reliability obligation will provide a new revenue stream to generators in the form of capacity payments. Electricity retailers will have to pay generators for being available to generate energy in peak demand periods, but not for actually generating electricity.
There is still significant work to be done in the design of a Physical RRO if it is to be considered for implementation. Other than state ministers wanting more assurance that there will not be reliability gaps, it is unclear what benefit an enhanced RRO seeks to deliver. The argument that it improves investment signals is contentious as the contracting window for derivative products is typically three years ahead. Beyond that point there is uncertainty in outcomes.
There could also be a risk that customers end up paying for capacity that is not required depending on the penalties for non-compliance and the relative risk profiles of individual businesses. For those without dispatchable resources this would add an additional cost.
As the recent wind drought in June 2021 in Victoria has demonstrated, the need for long-term deep or dispatchable storage is of vital importance to the NEM as thermal plant retire. It is not obvious without further details that this would be the right policy to encourage such investments, which would typically require a longer lead time than such contracts would cover.
Similarly, if the intention is to provide more transparency and certainty to the ageing fleet of coal plant to enable a planned and practical exit strategy from the market, then further details on the policy would be required. This is necessary to ensure that the PRRO will occur without unnecessarily prolonging the length of time coal plant stay in the market.
Sally Torgoman, senior energy expert
Whilst little is known about the PRRO, and whilst it may be of assistance to some firming assets such as pumped hydro and battery storage, it isn’t solving the elephant in the room. We need more variable wind and solar to replace our decommissioning coal plants – and given the nature of those resources we need transmission urgently to enable those projects. We must focus on the material issues that are preventing investments of those first.
Lastly, it goes without saying that any capacity obligations on retailers will be born directly by customers. It makes one wonder if it’s the right solution to the right problem.