How Not to Transform a Power Grid: Lessons From Australia

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By Murray Griffin

Is your country aiming for a reliable, low-emissions electrical grid? If so, then Australia offers valuable lessons in what not to do.

Instead of making a smooth transition, the country is stumbling its way toward a cleaner electricity system in a manner that is hurting companies and households alike, according to business leaders and environmental groups interviewed by Bloomberg BNA.

“The Australian grid is now in a process of much more advanced degradation than people realize,” said Matthew Warren, head of the Australian Energy Council, which represents 21 major electricity and gas businesses. “The world gets to sit back and watch how not to do it.”

Said Olivia Kember, acting CEO at the Sydney-based Climate Institute: “We are ending up in the worst of all worlds, where our electricity is neither affordable, nor secure, nor low-emissions.”

So What Happened?

A few years ago, it seemed a national carbon tax and a renewable energy target would by themselves transform Australia’s energy sector—one managing-out coal and the other managing-in new renewables to provide electricity for the continent.

But it didn’t pan out that way. The Australian Industry Group, which represents most of the country’s manufacturers, now complains of “staggering” increases in power prices. And grid reliability itself has become a major concern in some parts of the country.

The culprit? Most point to years of bitter political disagreement.

“Everyone has been warning of these problems for ages, but the polarized nature of energy and climate politics in Australia has contributed to this basic impasse where either side of the political debate in Australia talk up their specific agenda but nothing gets done,” said Warren.

Australia’s Labor government introduced a national carbon price in 2012, making it among the first non-European nations to make companies pay a price for their greenhouse gas emissions. But just two years later, Australia became the first developed nation to rescind a price on carbon when the tax was repealed by a Liberal-National Party Coalition government led by Tony Abbott.

As prime minister, Abbott then watered down a federal renewable energy program.

“Everyone has been warning of these problems for ages, but the polarized nature of energy and climate politics in Australia has contributed to this basic impasse where either side of the political debate in Australia talks up their specific agenda but nothing gets done,” said Warren.

During Australia’s brief flirtation with carbon pricing, electricity emissions did fall, and in 2013 were 9 percent below the five-year average before the carbon tax was introduced.

But the backtracking forced electricity generators to rethink—and in many cases suspend—their involvement in new clean energy generation projects.

‘Enduring Dysfunction’

The country’s across-the-board exasperation with political feuding was made clear earlier this year in a statement remarkable for the diversity of its influential signatories—and for its bluntness.

“More than a decade of [political fighting] has made most energy investments impossibly risky,” said an alliance of associations representing Australia’s aluminum, energy, steel, cement and chemicals companies—as well as the country’s major environment and community groups. “This has pushed prices higher while hindering transformational change of our energy system. The result is enduring dysfunction in the electricity sector.”Australia’s grid is also significantly reliant on one of the dirtiest forms of electricity generation: coal.

Nationally, 65 percent of Australia’s electrical generation in 2013 came from coal, among the highest rates of coal-fired electricity in the world for a developed country, according to World Bank statistics.

And the lack of a unified national electrical plan has meant that clean energy projects are not necessarily built in locations best-suited to grid needs.

Political Lessons

Last year it seemed politicians were ready, perhaps, to leave years of poisonous feuding on climate and energy behind.

Ahead of the federal election, Labor opposition climate spokesman Mark Butler said dealing with greenhouse gas emissions from electricity generation was the issue on which consensus between the two major parties was likely to be “easiest” after the election.

And when Prime Minister Malcolm Turnbull led his Liberal-National Party Coalition to a narrow victory, he appointed Josh Frydenberg to lead a new combined energy and environment portfolio.

The move was widely praised as recognition of the connection between the electrical system and greenhouse gas emissions. Frydenberg then called for “hand-shaking and deal-making” across the political divide.

The prospect of an end to political discord was a relief to the Australian Energy Council, the Australian Industry Group and the Business Council of Australia—which represents the country’s largest companies—which have all acknowledged it is time for Australia to head toward net-zero emissions by minimizing and offsetting all greenhouse gas emissions.

But to widespread dismay the briefly opened window for political collaboration appears to have closed again due to divisions in the Turnbull government, skyrocketing power prices, blackouts in South Australia—global mining company BHP Billiton said a statewide blackout in South Australia last September cost it more than $92.3 million in lost production at its Olympic Dam uranium and metals mine and processing facility—blackout fears elsewhere, and several state governments going it alone on renewable energy policy.

‘Battle Lines’

“The battle lines have been drawn,” Turnbull said in February.

His government has ditched its support for a carbon emissions intensity-based trading scheme for electricity generators, which was widely seen as the landing zone for political consensus.

To some extent, Turnbull’s statements are viewed as political theater designed to placate climate skeptics within his party—even while he continues to direct some money to renewable energy, energy efficiency and battery storage.

But the statements will make it harder to build support for complex solutions and has created space for a resurgence of climate change doubters and deniers.

Complex Problem

“The challenge is much greater than people first thought to transform this type of grid,” Australian Energy Council’s Warren told Bloomberg BNA.

If and when a carbon price is reintroduced in some form, it will need augmentation with other measures, such as managed phaseout of coal-fired power plants, the Climate Institute says.

No Natural Gas Bridge

The Clean Energy Finance Corporation, an independent federally funded agency that provides loans to clean energy projects, said Australia needs to develop a grid that relies on diverse generation technologies spread across a wide range of locations.

It also needs more interconnectors between the electricity submarkets, greater deployment of large-scale energy storage and changes to outdated electricity market rules.

The irony is that energy should be the least of Australia’s worries.

“Any kind of energy that you can think of, except maybe wet geothermal, we have stonking great quantities of,” said Australian Industry Group national public policy adviser Tennant Reed. “And intuitively, it seems like we should be able to turn that abundance into advantage.”

But Australia hasn’t succeeded in using natural gas as a transition fuel as it moves from coal to renewables, because the gas industry is now export-focused and environmentalists oppose on-shore gas exploration. Both factors have constrained domestic supply.

Looming Review

Electricity providers are now largely pinning their hopes on a review of the future security of the national electricity market, jointly commissioned by the federal government and states and territories.

The review is led by the country’s chief scientist, Alan Finkel, and its panel members include Chloe Munro, the highly respected former chief executive and chairwoman of the Clean Energy Regulator, an independent federal agency.

The Finkel Review is due by mid-year, and is comparing numerous ways to cut electricity industry emissions that can put Australia on course to achieve “net zero” sometime after 2050, while maintaining system stability and energy affordability.

“The Finkel Review is a really smart response,” the Climate Institute’s Kember said, adding that she hopes federal and state governments “take the process seriously enough to follow through.”

The federal government March 31 also agreed to a separate review, to be jointly conducted by its advisory Climate Change Authority and the Australian Energy Market Commission, to examine potential policies to improve power system security and reduce energy prices—but in manners consistent with meeting the country’s commitments under the international Paris Agreement on climate change.

Politicization

Reed said one bright spot is that energy is a somewhat less politicized issue than climate change.

“We have not yet reached such an intensity of politicization and culture war over the detail of energy as we have over responses to climate change,” he noted.

That could bode well for the kind of technical-focused changes that are likely to emerge in the Finkel Review report, he says.

“There is still good potential for agreement on a whole raft of changes that could make energy more affordable and keep it reliable as we journey towards our Paris Agreement goals and ultimately net-zero emissions,” he said.

Quick Completion of Renewable Projects

Despite Australia’s absence of a coherent, long-term strategy, there have been important achievements.

After several years in the doldrums due to the political brawl over a renewable energy target, Australia’s large-scale renewable energy industry is on the rebound, with a strong development pipeline of new wind farms and utility-scale solar projects.

And the Clean Energy Finance Corporation points out that wind and solar farms typically are completed quickly—within one to two years of financial close.

Clean energy projects also are benefiting from support delivered by the federal government through its renewable energy target, and from the Clean Energy Finance Corporation and Australian Renewable Energy Agency, each of which uses different tactics to ensure the viability of large-scale renewable energy projects.

Buyers Clubs

State government assistance is also playing a role.

That can be a mixed blessing, as it leads to a less nationally consistent approach. But states and territories have bolstered and augmented federal action in significant ways, and they have been important policy innovators.

Meanwhile, renewable energy buyers clubs of medium-scale energy users, such as one led by Melbourne City Council and another in Sydney led by property company JLL, are starting to emerge.

Energy companies are themselves keen to innovate.

‘Virtual Power Plant’

Kember singled out a project by AGL Energy to create a “virtual power plant” in the form of 1,000 batteries installed at homes in Adelaide.

The project will allow homeowners to store excess solar energy and also allow the company to feed stored power from the batteries into the grid at peak times.

“We’ve spent a decade chasing our tail, and catching it, and biting it very hard,” Reed said, but noted that new technologies are leading to efforts to create “new kinds of value in the electricity system.”

“Everybody is trying to find ways to take those technological possibilities and create a market around them that actually works,” he said.

Most importantly, the plummeting costs of renewables and distributed technologies such as energy storage means Australia’s shift to clean energy—haphazard, uncoordinated and a victim of endless political vacillation—also is inevitable, said former Climate Institute chief executive John Connor.

“After a decade of squabbling and university-grade politics, a perverse outcome might be that because we’ve stuffed around for so long on what might have been a smoother transition that we actually have a swifter jump to a much more distributed and cleaner and smarter energy system,” he said.

To contact the reporter on this story: Murray Griffin in Melbourne at correspondents@bna.com

To contact the editor responsible for this story: Greg Henderson at ghenderson@bna.com

For More Information

The Australian Industry Group statement is available at http://www.bca.com.au/media/no-room-for-partisan-politics-in-energy.

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