Have we reached peak stupid on electricity?
Sometimes you have to ask yourself this question when you read ideas put forward by politicians. Take the recent proposal from a group calling themselves the Monash Forum. They want the government to fund, build and operate a new coal fired power station to address rising power prices and the outages that east coast Australia experienced in the summer of 2016/17. There are many reasons why I think this is a BAD idea.
Let’s start with a little background on why power prices are so high in Australia.
- The major reason for the increase in energy costs since 2000 is that the state-owned grid companies, particularly in NSW and QLD, were allowed to significantly overinvest (“gold-plate”) during the period from ~2000 up until ~2011. As they are regulated utilities, they are allowed to make a fixed return on their asset base and hence they were incentivised to build as high an asset base as possible. If you look at your electricity bill, you will see that the majority of it (unless you are a very heavy user) comes from daily charges which are what the grid companies charge to deliver the electricity to your home, and has nothing to do with how expensive the actual electricity is to generate. This is not something that politicians can influence by building more generation, as the only way would be to force a write-down of the asset base and as some of the assets have been privatised, this would create a large sovereign risk factor that I do not think any politician will be prepared to take.
- The second reason energy prices have gone up significantly is mismanagement of the gas resources on the east coast of Australia.
- Australia signing up to the Kyoto and Copenhagen protocols meant that electricity generation over time had to be shifted from being based predominantly on coal to renewable sources. The decision was taken to do this by subsidising renewables through a renewable energy target, creating a secondary income for renewable generation until costs had come down enough for it to be competitive with fossil fuel generation.
- Renewable generation is by its nature intermittent (it is not always windy or sunny) and needs to be “firmed” up to be able to supply continuous power.
- This firming can either be through storing energy when there is plenty generated and then using the stored energy when needed or by burning some fuel (i.e. converting chemical energy to electricity).
- As a lot of the coal generating fleet was starting to get old, and coal power stations are by their nature very slow to start and ramp generation up and down, a decision was collectively taken to use natural gas as a “transition” fuel until energy storage technologies were cheap enough to eventually take over the firming role.
- The east coast of Australia is blessed with a lot of natural gas resources so there should in theory be plenty of gas to use for this firming role.
- The problem is however that three consortia of companies decided to capitalise on high international gas prices by each building their own LNG export facilities on Curtis Island outside of Gladstone in Queensland. And when I say their own facility, I really mean their own! There is no shared infrastructure at all between the facilities even though they are just next to each other. They each have their own pipelines and loading facilities etc., which from an outside observer’s perspective is just mind-blowing as there would be massive scale benefits if they had instead cooperated and built one shared facility. This means that these export facilities are expensive and the companies need to sell their gas at a high price to make a return on their investment. They have long-term contracts at oil-linked prices to sell the gas.
- The biggest problem was that all the companies looking to export had not produced enough gas to fulfil what they had promised their international customers, so they had to go to the domestic gas market and buy up gas to fill their LNG facility.
- At the same time, the state governments in NSW and VIC implemented moratoriums for new gas exploration, resulting in less than expected supply of gas coming to the market.
- The result is that the supply/demand balance in the east coast gas market has shifted significantly since the LNG export facilities came online and gas prices have increased from about $3-4/GJ to $8-10/GJ. This impacts both the generators with no internal gas supply as they have to buy gas at a higher price and the generators with their own supply as they have modified their bidding behaviour as they can alternatively sell their gas to the LNG exporters for a higher price.
- Due to how the electricity wholesale market works, gas generation is the price setter when there is not enough other generation (it is the “marginal generation”). The lack of cheap gas in the domestic market has driven up the wholesale price of electricity from ~$50-60/MWh to the current level of ~$80/MWh.
So why would it be stupid to build more coal generation?
Without involving any arguments about climate change etc., building a new coal fired power station would be stupid for the simple reason that it is just not cheap electricity!
The 1H2018 LCOE report from Bloomberg New Energy Finance, which looks at the Levelised Cost of Energy (i.e. an all-in measure of the cost of energy including capex, opex and financing costs etc.), was released last week. It includes some very interesting charts.
The first chart shows the current LCOE for all types of electricity generation.
The chart shows that:
- Wind and solar are already – even on an unsubsidised basis – significantly cheaper than both gas and coal generation (the red circle).
- Wind + storage is also cheaper than coal generation for small capacity batteries and on par for large capacity batteries (the blue circle).
- Utility scale batteries (i.e. the Tesla battery in South Australia) is very competitive with pumped hydro (Snowy 2 scheme) (the green circle).
In addition, keep in mind that a coal fired power station would probably take at least 5 years to build while wind and solar stations are much quicker to construct, meaning that if we decided we needed extra capacity for, say, 2023, we would have to commit to coal now, but if we were to instead choose wind or solar, we could begin construction in about 2021. Note also that battery storage is very quick to construct as evidenced by Tesla, which famously installed its giant South Australian battery in less than 100 days.
It is therefore interesting to see what is expected to happen over the coming years. Lets first look at the pure generation cost estimates.
- We can see that the price for coal and gas generation is not expected to change in any meaningful way while the costs for both wind and solar are expected to come down significantly, so the gap would be even bigger once the generation is on-line.
If we then look at dispatchable generation (i.e. adding a battery to a windfarm), we can see that even with a large capacity battery, we are rapidly going well below the cost of coal generation. This is shown in the following chart.
So, in conclusion, building a new coal fired power station does not make financial sense today and will make even less financial sense in the years to come so the message to politicians is please do not waste my tax money on doing something that does not make sense.
The figures also raise questions about the viability of the Snowy 2.0 pumped storage project. This project is projected to come in at the high end of the pumped hydro range at ~$500/MWh and take up to 8 years to construct – during which time battery storage costs should come down even further.Is building and operating a new coal fired power station to address rising power prices a good idea? Click To Tweet