AEMO urges a faster shift to renewable energy between coal failures and rising fossil fuel costs

The Australian energy market operator has called for an accelerated shift to wind and solar, supported by batteries and other storage systems, as a devastating combination of coal-fired power plant failures, rising fossil fuel costs and changes to deals pushed electricity prices to unprecedented levels in the June quarter.

Its latest quarterly Energy Dynamics report paints a bleak picture of the risks of relying on the legacy fossil fuel industry, prone to outages, plant failures, rising fuel costs, and supply patterns that have combined to push the price. of electricity to unsustainable levels.

But he also highlighted the role of hydroelectric generators, including those operated by the federal government-owned Snowy Hydro, which priced at nearly half of the trading intervals in the quarter, and mostly at very high levels, only slightly below. below gas and three to four times the price of coal.

The QED report shows that the average wholesale price in the national electricity market, the main grid, jumped to $ 264 / MWh in the June quarter, double the previous record, three times the price of the same period last year and more than five times the 2020 average.

He blames all the failures of inherited assets: the soaring cost of coal and gas, the multiple and repeated failures of old coal generators, and the inability of some heat generators to stock up on enough coal or gas, or to hydroelectric power plants to get enough usable water.

“These price increases were driven by high international commodity prices, coal-fired production disruptions, high levels of gas generation, fuel supply problems and a very cold start to June,” he noted.

The most significant impact was the number of unplanned coal-fired power plant outages that peaked at 4.6 GW in June and caused coal production to drop to its lowest level ever in the second quarter. And there is little respite for the future.

“What is clear is the urgent need to build renewable energy with diversified firing generation – such as batteries, hydro and gas – and investment in transmission to provide homes and businesses with low cost and reliable energy,” said Violette. Mouchaileh, responsible for the reform of AEMO Delivery.

Last month AEMO published its 30-year planning project for the grid, which foresees the switch to 80% renewable energy by 2030 as the most likely scenario and stressed the need to prepare for moments of 100% energy penetration. wind and solar within five years.

That report was followed by CSIRO’s latest GenCost report, with the help of AEMO, which highlighted the fact that “consolidated” wind and solar, including all its integration costs, are the cheapest form of electricity as described by AEMO chief Daniel Westerman as a “country mile”.

It’s a theme he picked up on in a speech last week at the Australian Clean Energy Summit.

“The sooner our nation is able to integrate higher levels of established renewable energies into the energy system, the sooner we can decouple domestic energy prices from these international shocks, the sooner we can electrify more of the economy, the sooner we can reach our emissions targets and sooner we will be able to reduce the stress on Australian homes and businesses ”.

The latest QED report paints a shocking picture of plant failures, with unplanned outages in the coal fleet peaking at 4.6 GW, as well as over 2 GW of planned outages at the time administered pricing was imposed at mid June. Planned and unplanned outages had peaked at nearly 8 GW in early May.

The hardest hit states have been those most dependent on coal, and particularly black coal – Queensland and NSW – and which have by far the lowest share of wind and solar power in their grids.

But all states were hit because they could not escape the influence on the prices of gas-fired production, which has risen across the board in the face of declining coal availability and rising demand.

AEMO noted that gas remains the “key marginal source of supply in the NEM”. Nevertheless, a 21% increase in wind and solar production (compared to the same period of the previous year) and an overall share of renewables of 31%.

The graph below shows the link between gas prices and the wholesale price. The link is only broken when enough renewables are produced to break that pricing power. Since Australia does not actually have “cheap” gas, the idea of ​​a “gas-driven recovery” is maddening.

But the June quarter story didn’t end with planned and unplanned outages and rising fuel costs. AEMO also notes the sudden drop in “availability” following the imposition of the administered price cap.

The graph below shows NSW only. The capacity only returned on June 14 because it was commissioned by AEMO in a futile attempt to restore stability before having to completely suspend the market.

This withdrawal of capacity – mainly gas and hydro (see graph below) is the subject of heated debate, between those who accuse producers of playing the system and those who say they have no choice given competing compensation schemes and supply issues. of fuel.

See: The day the fossil fuel industry lost all perspective and threw away its social license

AEMO also noted “very large changes” in offerings from thermal and hydroelectric generators across the NEM. Prices had already risen after the Callide C coal-fired generator exploded spectacularly in May 2021, but since then the amount of cheap supply had been significantly reduced, from coal, gas and hydro.

“For coal-fired generators, these bidding shifts partly reflected higher disruption levels by eliminating low-cost supplies,” AEMO noted.

“However, especially for New South Wales black coal generators, there was also a clear trend in marginal supply volumes moving into progressively higher price ranges during the quarter.”

But what’s also interesting is that hydropower resources – those federally managed owned by Snowy Hydro – were responsible for setting prices in 47% of the price ranges in the quarter.

“The much more important role in determining the marginal price played by hydroelectricity may reflect more flexible pricing based on the” opportunity cost “of the underlying water reserves, while the pricing of the gas-powered generation offer is more constrained by the actual costs of the fuel, “AEMO noted.

But these weren’t the only problems in what Westerman described as the “perfect storm”. Grid constraints also prevented flows between states, and finally the administered price ceiling was too low to reward thermoelectric production and the AEMO was forced to suspend the market.

He’s still counting the cost of his surgery. Activating emergency reserves on multiple occasions will cost $ 86 million, but compensation for market cap and suspension is likely to exceed $ 1 billion.

And the futures market expects little respite. International gas and coal prices will remain high, coal-fired power plants have become increasingly unreliable, and the desire to profit from supply shortages will continue to be irresistible.

As almost everyone now understands, the only solution is a rapid shift to renewable energy, along with storage and transmission to support it.

See also: “Opportunity cost” The role of Snowy’s hydroelectric plants in the market crisis

And: batteries and pumps revel in market volatility; the maximum price not so much

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