Renewable Energy Policy Stirs Electricity Free-for-all in Australia

wind turbines

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The electricity market had some significant developments in 2020 but attracted little attention. The developments may have potentially important future ramifications.

The National Electricity Market (NEM), which covers all the states bar Western Australia, including the ACT, is now a national market nominally. Every state and the ACT decided to act in its own space. The national nature of the market is being held together only by relatively weak interconnectors that link the states’ electricity supplies.

Ultimately, if any blackouts or continual price increases, consumers will blame the state governments. Moreover, the realisation is acting as a mediator, stopping worse energy policies with the possible exception of NSW.

NEM initially had the vision to unite the state-based electricity generation systems. Unity could help electricity with efficient production using an agreed set of rules. NEM had also visioned that it would replace over-engineered, self-reliant, and overstaffed state systems. In this context, NEM worked well. Productivity in the electricity sector enhanced, and wholesale and retail prices went down.

With the uncoordinated addition of intermittent renewable energy into the system, cracks began to appear. Initially, the addition extended to the wind and more recently large-scale rooftop solar. The state initiatives, which began in 2001 to promote renewable energy, have been critical.

By 2010, electricity prices soared, attributed to sluggish productivity in electricity, water, and gas. The drag resulted in some of the highest tariffs in the world. However, in 2020, the final RET target of 33,000-gigawatt-hours was met.

Renewable energy companies (many overseas-owned) have turned to state governments and the ACT to underwrite their projects. The companies enter into power purchase agreements that effectively guarantee cashflows on projects. State governments and the ACT, in turn, have made their own plans involving RETs.

The latest development in the self-directed state government policies is the initiative announced by NSW Energy and Environment minister Matthew Kean. Kean refused to release the modelling underpinning his proposal to push an additional 12 gigawatts of renewable energy into the NSW grid within a decade. He is aware that the modelling is full of holes and would not withstand scrutiny. Failure to fine-tune the number of large-scale installations to accommodate variations in the uptake of rooftop installations implies that the remaining coal-fired power stations’ closure could be expedited easily.

Ultimately, balancing supply with demand into the future is a tricky proposition. In the meantime, the federal government is trying to offset the more perverse effects of the states’ policies. And lower gas prices, and close to zero electricity prices during some days help reduce wholesale electricity prices.

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