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Wasting Energy with Listless Regulation

Australia's glacial response to the energy crisis

· Regulation,energy,Jamie Ennis-King

With both electricity prices and supply disruption predicted to worsen across the nation, and major government investments in storage planned at both Federal and State levels, Australia now requires an urgent response to changing market conditions. However, core assumptions in the regulation of the National Electricity Market (NEM) have hampered these efforts and are now dangerously out of date; namely that storage is impractical and that generation is continuous. Governing agencies need tools to adapt regulations to the evolving market without lengthy consultations and delays, or risk condemning consumers to high prices and blackouts. They must develop superior modelling of supply stability to improve distribution auctions and account for intermittent generation, and must also create new regulations for energy storage to ensure stability in peak periods and maintain quality standards.

In order to understand the current problems, some background is needed on how the market operates. The NEM’s role is to centralise regulation of Australia’s energy supply – to respond quickly to changes in demand the NEM allocates power distribution in 5 minute intervals, with the cheapest source for each regional node chosen to supply power. While this allows for quick adjustments, its regulatory framework is at odds with the continued stability of supply and it has not adapted well to intermittent generation, and therefore has trouble coping with the extremes of peak demand. The realities of this peak demand means that maintaining supply there is crucial – 25% of Australia’s generation capacity is needed for only forty hours a year when demand is highest.

Given these facts, the National Electricity Rules (NER) must change to account for the costs to generators of continuous supply, and the emergence of intermittent power. Over the last decade, investment in renewable energy has increased dramatically, with wind and solar energy making up most of the increase. These intermittent sources are an important part of the energy mix, but also bring specific regulatory challenges. Subsidies to these sources have let them provide strong competition to traditional power sources, often securing distribution rights in many intervals a day. This makes it increasingly difficult for generators with higher start-up and operational costs to remain economically viable. However, the intermittency of renewable sources has meant that this shortfall in energy production has not been made up for by the growth in renewables, especially during peak times.

If regulations were updated to factor in the costs of reliable generation, it would prevent shortages and high prices by stopping continuous sources from being consistently outcompeted. It would also encourage investment in energy storage to better apply the strengths of intermittent renewables. This is critical for allowing the growth of renewables to continue unabated, as otherwise supply shortages may lead to reticence in renewables investment. However, such regulatory change must be undertaken in a careful manner. Mandating a portion of generation to be allocated to continuous sources might mitigate immediate supply problems, but would not provide market signals to encourage investment and would hamper the growth of renewables. Instead, further modelling should be done into the costs of maintaining consistent supply, and this information included in the consideration for distribution rights. While such modelling is difficult, insufficient change in this area will only demand a costlier response in the future.

A gap also exists in the NER’s treatment of energy storage, which must be closed by categorising it separately to generation. When the National Electricity Market was established in 1998, large scale energy storage was considered infeasible. This has now changed, with both state and federal governments hurriedly proposing storage projects up to thousands of megawatt hours in capacity. Such developments are an essential part of managing the long-term transition to renewables. But in the medium-term, adjustment is needed to integrate storage into the existing market. The market treats storage plants that transmit to the grid as ordinary generators, but this is no longer sufficient. Storage is most useful at times of peak demand, when it is prohibitively expensive or slow to start-up large scale generation. Current proposals are government funded, and so have strict requirements for reliability of storage and transmission - but for long-term growth in energy storage, private investment is needed, and so storage reliability during peak demand must be regulated to prevent dangerous lapses in output.

Without sufficiently strict reliability requirements, storage carries many of the problems of intermittent sources. As the utility of storage is primarily to provide power during the highest of peak demand, it must do this consistently. Otherwise, storage could out-compete other sources at regular peaks, but then fail and lead to shortages on the hottest summer days. This is also why it is insufficient to treat storage as identical to generation. Most generators provide power round the clock, and even intermittent sources provide power over a wide range of times. By contrast, releasing energy from storage is always most profitable at times of peak demand. As these times make up most of its distribution, storage must be even more reliable at these times than regular generation, which requires specific provisions. This would establish energy storage as a strong investment vehicle in the energy sector, and encourage renewables growth in a sustainable manner.

More critical than any specific change is the ability for the market to adapt to changing circumstances. One of the key findings of the 2013 Productivity Commission report into Electricity Network Regulation was that the sector has been bogged down in endless reports and reviews of proposed changes, while accomplishing little. The recent crisis and hurried plans of this year show that the situation has not improved. Long delays followed by parliamentary intervention is a path to investor uncertainty and industry stagnation.

Clear and timely responses to energy issues are a necessary step towards long term energy growth and stability. Modelling for the cost of stable power will smooth out the disruption from renewables and encourage storage investment. Separately regulating storage will ensure private investment is properly directed. Adjustments like these provide a path to the energy sustainability and affordability that Australia so desperately needs.

Jamie Ennis-King is a policy analysis intern at FPL, writing on regulatory change and public sector policy.