What is the real cause of our energy crisis - and what should we do?

What is the real cause of our energy crisis – and what should we do?

The East Coast energy market is now experiencing an unusually high price. Wholesale gas prices have reached such persistent high levels that they have imposed a mandatory cap, although this is still at an eye-catching level of $40 per gigajoule. It’s usually around $6 to $12 per gigajoule.

Meanwhile, wholesale spot energy prices for May averaged more than $300 per megawatt-hour in Queensland, New South Wales and South Australia. In April they were a little better but still exceptionally high.

Prices haven’t been too bad in the previous months this year, but as shown in the chart below, prices across all months to date for 2022 are exceptionally high in Queensland, as well as high in NSW.

Source: Green energy market analysis based on NEM review data

Rising gas and electricity prices – is it because of the shortages of coal, wind and solar energy?

Some in the gas industry have claimed that the unusually high prices have nothing to do with it, and are in fact a function of inefficiencies in coal generation as well as wind and solar.

They say that gas prices only rose, because an unusually large amount of gas had to be directed to power generation in order to save, due to the shortage of these less reliable alternatives.

So is this true and what does it mean for how to respond to our current circumstances?

If we look at monthly generation levels by fuel type, it is indeed true that coal production has declined. The chart below compares each month’s coal production over the years 2017 to 2022. Since electricity demand is seasonal and strongly influenced by weather, it is a good idea to compare production during the same month across the years to assess how changes in production have led to changes in market outcomes.

Source: Green energy market analysis based on NEM review data

Overall, we can see a very clear trend of steady decline in coal production across every month over the years examined. But in 2022 compared to 2021, there is a particularly sharp decline in coal production in every month other than January.

On average over the months from February to May of this year, coal production was about 1,000 GWh lower per month than in 2021. In addition, it is worth noting that January 2022 had significantly higher electricity demand than 2021, So all other things being coal the output in January 2022 should be higher than 2021, not lower.

Part of the answer to the decline in coal production is that – quite contrary to assurances from the gas industry – wind and solar power generation was higher in 2022 than it was in 2021. But the other explanation is that coal generators were experiencing larger outages – some of which were planned, But worryingly, there were a lot of unplanned malfunctions of various kinds.

The graph below shows that there is not a single month in which wind and solar combined production fell in 2022 compared to its production in 2021. The worst that can be said is that output in May 2022, which is up by 103 GWh compared to 2021, did not align with the months The other of the year, which rose by between 471 GWh and 868 GWh compared to the same months in 2021.

Source: Green energy market analysis based on NEM review data

So has gas generation skyrocketed to unusually high levels to save the day of 2022, causing gas prices to soar?

The chart below shows that the level of gas power generation in 2022 is by no means unusually high compared to what we have seen over the previous five years. Sure, it’s higher than its record lows in 2021, but it’s in several months so far this year lower than we’ve seen over previous years.

The month things were a bit high was May, but production was still lower than in 2017. It seems hard to believe that the rise in gas energy production in May of this year was something beyond the supply capabilities of the gas industry.

Source: Green energy market analysis based on NEM review data

To close the loop, below is the hydro output by month over the same time period. Production in May was higher compared to previous years, but all other months were relatively in line with previous years, indicating that it cannot be an explanation for the extraordinarily high energy prices during 2022.

Source: Green energy market analysis based on NEM review data

The reason for the price hike is that gas and coal producers can already charge international market prices

The reasons for the skyrocketing electricity and gas prices on the east coast of Australia during 2022 have nothing to do specifically with some mythical shortages of wind and solar power. It also seems strange that the gas industry will find it very difficult to provide a level of gas power generation in 2022 that is not very different from what has happened historically.

It seems that the real reason for the high prices is that the gas and coal miners are charging very high prices for their products because that is what they can sell them for in the international markets.

This flows through electricity prices because the outages of coal power plants mean there is much less competition between coal producers. So, instead, the remaining coal generators, as well as hydropower plants, price their production relative to the exorbitant costs faced by gas generators.

So what should state and federal governments do about it – ideas that are less attractive

Unfortunately, many of the choices that have so far dominated our political discourse are unlikely to help or come with some serious flaws.

Gas operators have already been approved to take advantage of the new gas reserves and it seems unlikely that they would charge less for this gas than they could obtain by exporting it.

Gas exports can be curtailed and instead this supply can be pushed to the domestic market. But the new federal Labor government is concerned that this undermines our reputation as a reliable supplier of energy to our northern neighbours. This could then undermine future investment in the country, and it is worth noting not only in fossil fuels but also in the future hydrogen industry.

What should worry energy consumers is that the solution energy regulators are encouraging ministers to adopt appears to be forcing consumers to pay more for coal, as well as hydro and gas generators through a “retailer reliability commitment”.

This is also known as capacity or availability payment. The argument behind this somewhat counter-intuitive proposition is that if fewer coal generators suffer blackouts, we will face more competition and lower energy prices. We will also need less gas to use for power generation, so obviously we need to bring down gas prices.

By paying generators extra money, not only for the power they actually generate, but also to have their capacity available just in case, they will be encouraged to maintain power plants better so they suffer fewer unplanned outages.

Of course, this would not do anything specifically to address the rising coal and gas prices faced by generators, which are a function of international markets. But in addition to that, part of the reason for the coal power plant outages we’re seeing is their planned maintenance.

As these coal power plants age, they require more maintenance to remain reliable and this maintenance often requires them to be taken out of service.

Even worse, these capacity payments are really a push to extend the life of coal and gas. This will deter investment in new power plants such as batteries which will be more reliable and flexible and therefore a better complement to the further expansion of wind and solar energy.

So what should our state and federal governments do about it? – good ideas

Instead of these options, our energy ministers need to consider options that would allow us to use less gas and provide greater competition for existing generators.

The first item on the agenda that can provide immediate relief does not actually require building anything new.

Currently, several hundred megawatts of wind and solar power plants are fully built but are constrained from exporting their full production due to what have become very lengthy grid-connected commissioning processes imposed by grid operators.

This commissioning process is meant to ensure that the network runs in a stable manner, but everyone agrees that it takes far longer than it should. Ministers should begin to demand answers about how to speed up this process and provide the appropriate resources to help make it happen.

The second item on the agenda should be helping low-income consumers obtain more energy-efficient equipment and housing.

Currently, there are almost no meaningful standards for ensuring energy efficiency of rental properties in this country. Admittedly, Victoria has a standard. The problem is that it is nothing short of pathetic (a two-star gas heater is all that has to be saved).

The end result is that rental properties in this country often have little or no insulation in the roof, never have solar PV systems, and have ineffective water heaters and water heaters.

As a result, more people die from the cold at home in Australia than they do in Sweden. More energy is also used to heat the average home in Victoria than in the colder UK and the Netherlands.

Fixing this problem isn’t expensive — $10,000 in upgrades per home will leave renters with comfortable homes and affordable energy bills — permanently. It will also provide more gas to Australian manufacturers.

However, it will take a few years to fix the energy efficiency of rental properties, and many need relief in the short term. Manufacturers need help, too. The cash assistance is clearly very fast, but it has to be paid for, and the federal budget deficit is already very large.

This is where Putin’s short-term gas tax on windfall profits should be seriously considered. When gas is exported at very high prices, say $20 or more per gigajoule, it is not unreasonable for the government to take a share of this windfall on behalf of the Australian people, who ultimately own the gas resource.

This can primarily be used to offer short-term cash relief. But to leave a lasting legacy, it should also be used to help fund energy efficiency upgrades for manufacturers and families.

This means that we are much less vulnerable to international energy shocks in the future. This will also reduce carbon emissions, unlike all other options that are currently actively discussed, which will increase emissions.

Tristan Ides is Director of Analysis and Consulting at Green Energy Markets. Green Energy Markets helps clients make informed decisions about investment, trade, and policy in the energy and carbon markets.

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