AEMO urges quicker shift to renewables amid coal failures and soaring fossil fuel costs

The Australian Energy Market Operator has called for an accelerated shift to wind and solar, backed up by batteries and other storage, as a devastating combination of coal plant failures and soaring fossil fuel costs and bidding changes 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 legacy fossil fuel industry, prone to outages, plant failures, soaring fuel costs, and bidding patterns that combined to push the price of electricity to unsustainable levels.

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

The QED report shows that average wholesale price in the National Electricity Market, the main grid, leaped 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 average of 2020.

It lays the blame squarely at the failures of the legacy assets – the soaring cost of coal and gas, the multiple and repeated failures of aging coal generators, and the inability of some thermal generators to source enough coal or gas, or for hydro plants to get enough usable water.

“These price hikes were driven by high international commodity prices, coal-fired generation outages, elevated levels of gas-fired generation, fuel supply issues, and a very cold start to June,” it noted.

The most significant impact was the number of unplanned coal-fired power station outages that peaked at 4.6GW in June, and caused coal output to fail to its lowest second quarter output on record. And there is little respite for the future.

“What’s clear is the urgent need to build-out renewable energy with diversified firming generation – like batteries, hydro and gas – and transmission investment to provide homes and businesses with low-cost, reliable energy,” said Violette Mouchaileh, AEMO’s head of Reform Delivery.

AEMO last month released its 30-year planning blueprint for the grid, which puts a switch to 80 per cent renewables by 2030 as its most likely scenario, and underscored the need to prepare for moments of 100 per cent wind and solar penetration within five years .

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

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

“The sooner our nation can integrate higher levels of firmed renewables 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 meet our emissions targets, and the sooner we can reduce 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 4.6GW, on top of more than 2GW of planned outages at the time that administered pricing was imposed in mid June. Planned and unplanned outages had peaked at nearly 8GW in early May.

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

But all states were impacted because they couldn’t escape the pricing influence of gas fueled generation, which increased across the board in the face of falling coal availability and rising demand.

AEMO noted that gas remains the “key marginal supply source in the NEM”. This is despite a 21 per cent increase in wind and solar output (over the same period a year earlier), and an overall renewable share of 31 per cent.

This 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. Given Australia effectively has no “low cost” gas, it makes the idea of ​​a “gas-led recovery” barking mad.

But the story of the June quarter did not end with planned and unplanned outages, and soaring fuel costs. AEMO also notes the sudden drop in “availability” following the imposition of the administered price cap.

This graph below shows NSW only. Capacity only returned on June 14 because it was instructed to by AEMO in a futile attempt to restore stability before it had to suspend the market completely.

This withdrawal of capacity – mostly gas and hydro (see graph below) is the subject of fierce debate, between those accusing the generators of gaming the system, and those saying they had no choice given the competing compensation schemes and fuel supply issues.

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

AEMO also noted “very large shifts” in bidding by thermal and hydro generators across the NEM. Prices had already spiked after the Callide C coal generator exploded in spectacular fashion in May, 2021, but the amount of lower cost supply had been significantly reduced since then, from coal, gas and hydro.

“For coal-fired generators, these bidding shifts partly reflected higher outage levels removing lower cost supply,” AEMO noted.

“However, for New South Wales black coal-fired generators in particular there was also a very clear trend in marginal offer volumes moving to progressively higher price bands through the quarter.”

But what is also interesting that hydro assets – those operated by the federal government owned Snowy Hydro – was responsible for setting prices in 47 per cent of the pricing intervals over the quarter.

“The much greater role in marginal price setting played by hydro may reflect more flexible “opportunity cost”-based pricing of underlying water reserves, whereas gas-fired generation offer pricing is more constrained by actual fuel costs,” AEMO noted.

But these weren’t the only issues in what Westerman has described as the “perfect storm”. Network constraints also impeded flows between states, and finally the administered price cap was too low to reward thermal generation and the AEMO was forced to suspend the market.

It is still counting the cost of its intervention. The triggering of emergency reserves on multiple occasions will cost $86 million, but the compensation under the market cap and suspension is likely to be well over $1 billion.

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

As nearly every one now understands, the only solution is a rapid switch to renewables, along with the storage and transmission to support it.

See also: “Opportunity cost” The role played by Snowy’s hydro plants in market crisis

And: Batteries and pumps revealed in market volatility; the price cap not so much

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