Redistributive policy

Solving Australia’s Energy Crisis – Policy Forum

To deal with its energy crisis, Australia could protect its energy market from global disruptions, facilitate fuel switching, invest in storage and protect consumers, writes Roc Shi.

On June 15 this year, the Australian Energy Market Operation (AEMO) made history by suspended the national electricity market (NMS). He explained that price caps in the market, coupled with large unplanned outages and supply chain challenges, are causing producers to pull capacity from the market.

The unprecedented event, however, was not intended as a permanent solution to the current energy crisis. The operator noted the range of issues plaguing the NEM that the country must address if it hopes to normalize its energy situation.

As a major supplier in the global energy market, Australia’s crisis is not due to a lack of supply. At the heart of this problem are issues of affordability. The Australian market is well connected to global energy markets and its consumers are therefore feeling the effects of global disruptions.

Rising energy prices are a market reality all over the world. Brent Oil pricesa global benchmark, fell from $74 per barrel a year ago to $119 per barrel on June 16, 2022 when NEM was suspended.

The Japan/Korea markera spot price benchmark for gas in East Asia, fell from $3 per million British thermal units – a measure of the energy content of gas – in July 2020, to $13 in June 2021, to 38 dollars in June 2022, a multiplication by twelve in less than two years.

That said, Australia cannot hide from the failures of its own policies to alleviate this burden.

The inability of the NEM to generate sufficient supply is mainly due to price caps and other political failures. Faced with electricity production at a loss, producers are forced to withdraw their offers to sell electricity and stop producing – rational market behavior.

This situation, where the generating sets trim decline in their generation capacity despite an increase in electricity demand, also occurred in China later last year. A proposed solution is to Expressway electricity market reform so that the electricity market can encourage peak generation.

Various options are available to do this in Australia to deal with the energy crisis.

The first is to take steps that progressively separate Australian markets from world markets. Because Australia is a net exporter of coal and natural gas, it can limit its exports. This may not be in line with the market principle, but neither was NEM’s suspension.

The exit Gas supply guarantee mechanism, or a possible gas reservation as in Western Australia, can already restrict gas exports, but for coal the government should add a new regulatory instrument – it should.

This won’t solve the problem on its own though. Whether low gas and coal prices can lead to low electricity prices for the consumer depends on transmission and generation capacity, which is also currently in shortage.

The second option will be to facilitate fuel changes. Switching from coal and natural gas to renewables will be an obvious choice, as renewables do not consume fuels and are therefore immune to changes in the global energy market.

Importantly, however, the AEMO has flagged stability issues within the Australian grid if more storage for renewables and firming capacity – a flexible energy supply that can be activated to supplement supply during peak demand periods – is not secure to support the switch to renewables. His estimates show that firming capacity would need to triple by 2050 to facilitate this.

This is the third option – invest heavily in increasing this storage capacity, with more projects such as Snowy Hydro 2.0, which will have a total capacity of 350,000 megawatt hours when completed in 2028.

AEMO was also recently authorized to operate national gas storage. Although current storage technology is often effective at managing short term volatility, more storage capacity will be needed in a power system dominated by renewables.

Another less desirable, but possible, fuel switch is to switch from part gas production to coal production. Coal power is often cheaper than gas power, and this cost advantage has been more significant over the past year, as world gas prices have skyrockets.

However, due to a lack of investment in new coal-fired power plants since 2012Australia currently has to count on its aging coal-fired plants – at least 25% of which are out of service due to scheduled or unplanned outages – to provide firming capacity.

The Australian public may have to accept that coal and natural gas generation capacity will play a role in Australia’s energy future for a long time to come.

Coal and gas generation is a cheap way to provide the flexible firming capacity that provides a renewable-dominated grid with crucial energy “back-ups” during increasingly common peak demand events. like heat waves. A capacity mechanism proposed by the energy ministers is a means of ensuring this safeguard.

The fourth option is to protect the vulnerable without distorting energy markets by providing energy rebates or other support to low-income households, a practice that has been implemented in several states, but could be rolled out nationwide.

AAny solution of sufficient scale will require the redistribution of wealth, but given that coal and gas exporters will receive windfall profits, fiscal mechanisms similar to those in the UK exceptional tax could be used to finance them.

Overall, Australia needs to enter into an inclusive and realistic debate about its energy transition plan which considers these ways to ensure secure and affordable energy during its transition to net zero. Australia should not exclude any policy or technology from its deliberations as long as it facilitates progress towards this goal.