Huge spikes in wholesale electricity prices in South Australia in July show stable, nationally consistent climate policy must urgently replace “unmanageable uncertainty” for energy market investors, according to a new analysis by the Grattan Institute.
When the short-term spot price of electricity spiked to its peak of $14,000 several times on 7 July, some commentators sought to blame the high share of wind power in the state. Energy experts argued the price spikes were a result of an abuse of market power, with a small handful of generators gaming the system.
But Tony Wood and his colleagues at the Grattan Institute argue both these claims were wrong. They say the spikes were not a sign the market was not working: “On the contrary, in July the electricity market did what it was designed to do,” the authors argue.
With an increase in intermittent wind energy, there was a higher requirement for flexible energy sources to fill the gaps when the wind wasn’t blowing.
“The market’s performance in South Australia in July indicates that it is doing what a market should do. High price volatility – on 50 occasions the spot price was above $150 a megawatt hour – encourages flexible generation in the form of gas.”
“New flexible generation will need to earn revenue through volatility in the price. For new intermediate generation, prices will need to spike at regular intervals,” the authors say.
This means that as the energy system transitions to renewables, there will be an inevitable increase in costs to pay for the shift. The thinktank argues politicians need to acknowledge and explain this to the public.
“These two messages – that a major transition is going to happen and there will be a cost – need to be accepted and explained. Setting alternative expectations will leave the public frustrated and disappointed,” they say. “Increased electricity costs when consumers are not expecting them could lead to a backlash that once again slows Australia’s response to climate change.”
The authors argue one cause of the problem in South Australia was the lack of effective and stable climate change policy. That discourages investment in new generation, and could discourage dirty power stations from shutting, as they wait to see what the next policy is.
“Neither the [emissions reduction fund] nor the safeguard mechanism provides an effective binding constraint on emissions in the power sector,” they say. But since Australia has committed to reducing emissions to at least 26% below 2005 levels by 2030, “the result is unmanageable uncertainty for investors.”
The authors also argue that having a renewable energy target without a broader climate change policy is distorting the market. “By separating climate change policy from energy policy, Australia has caused changes in South Australia that are not as economically efficient or as environmentally effective as they could be,” they write.
Having a high renewable energy target, without a broader climate change policy, was driving a lot of extra capacity into the system and guaranteeing that energy was mostly wind, even if that wasn’t the most useful type of energy supply.
Wood, the lead author, said the overall picture was simple. “We desperately need to get climate change policy right in this country and integrate it with energy policy and energy markets if we want to achieve low emissions without skyrocketing prices or blackouts,” he told Guardian Australia.
