This is part two of a two-part series by the Clean Energy Council's Director Energy Transformation, Christiaan Zuur, on the suitability of a capacity mechanism in managing the transition of the energy system from fossil fuels to renewables. In the first part, we looked at the rationale for capacity mechanisms, how they relate to the exit of thermal coal and gas generation and why they aren’t fit for purpose in the Australian context.
The renewables industry is already leading the way with building new capacity, as evidenced by the recent massive over subscriptions to NSW’s renewable energy zones. Outside of these state schemes, investment continues apace at both the large and small scale. The reality is that the economics of renewables stacks up and investment in clean energy makes financial sense.
However, it’s not as simple as just ‘build more wind and solar’. Rather, we need specific combinations of different types of renewable generation, coupled with transmission and energy storage, to deliver a reliable and secure supply of energy.
To answer this question, we need to think about the underlying physical realities behind keeping the lights on. As the power system transitions to being fully renewable, these physical realities will change, and we need to adapt accordingly. In particular, we need to rethink the way that we deliver a reliable energy supply, and when this reliability may be challenged.
Historically, reliability challenges often arose on ‘peak demand days’, such as a hot February afternoon when everyone in Victoria, South Australia and New South Wales was using their air conditioner at the same time. To meet this challenge, you simply needed to ensure there was enough coal, gas and hydro capacity available to run at the same time to meet demand on this small number of peak days. However, even with stacks of thermal coal generation in the mix, there are several examples from the recent past when there wasn’t enough supply to meet demand and ‘load shedding’ had to occur to keep the system stable on these peak demand days.
As the power system shifts to include a greater proportion of renewables, these challenges will change. For example, we could theoretically face challenges during so called ‘dark doldrum’ shortfalls – such as consecutive cold, cloudy and windless days in winter when a reduction in solar and wind generation availability, coupled with increased electrical heating load, might mean a supply shortfall occurs. Other kinds of challenges could include daily ramping events, such as a rapid fall off of solar generation as the sun sets, which could again result in supply shortfalls.
The Australian Energy Market Operator (AEMO) has already turned its mind to this problem. In its recent Integrated System Plan (ISP), which considers the long-term development of the Australian energy system, AEMO has found that these supply adequacy challenges can be managed through technological and spatial diversity – effectively applying a portfolio approach to energy supply.
Technological diversity means delivering the optimal mix of pumped hydro, battery, biogas/hydrogen, wind and solar generation, many of which provide electricity in different, but highly complementary ways. Spatial diversity means spreading renewable generation across a wide area to take advantage of the varying availability of renewable energy. This reflects the fact that the wind blows at different rates and cloud patterns provide different levels of sunshine in different parts of the country. Taking advantage of both of these diversity types requires significant investment in transmission to ensure that the optimal mix of renewable generation and storage is available for end users.
In short, it’s not clear that simply ‘paying for megawatts’ will cut it. As we can see, it’s not just about delivering bulk capacity; we now need to think about the ‘flavour’ of the capacity delivered. A wind megawatt is different to a solar megawatt, and the two are likely to be highly complementary in terms of final supply outcomes.
It’s also true that the introduction of any new market mechanism is a complex process that can create significant regulatory complexity and cost for investors and operators. This means that the case for change needs to be unarguable, with the benefits of the change clearly outweighing the costs of implementation.
Rather than introducing a full-blown capacity mechanism, it’s likely a better outcome will be to address any supply reliability issues through a combination of incremental market and regulatory measures.
Firstly, we need to remove the roadblocks to investment in the right mix of renewable generation and storage. The Clean Energy Council is currently progressing a series of reforms related to how generators and storage are connected to the power system. Secondly, we need to streamline the process for integrating storage, particularly battery storage with grid-forming inverters, into the power system. This is also a key focus area of AEMO and the Clean Energy Council in 2022.
Changes to the market frameworks may also be warranted, but we should start small before moving to introduce a major change like a capacity mechanism. In particular, we should consider whether the parameters of the existing ‘energy-only’ market can be tweaked to support investment in the correct mix of renewable assets to support supply adequacy. These changes must be fully explored and unpacked before we move to even considering a potentially costly and complex mechanism like a capacity market.
And of course, governments have a key role to play. The NSW Electrcity Infrastructure Roadmap will drive significant investment in new renewables and storage as well as the transmission to transport this zero-carbon energy to end users. Other governments are likely to follow suit with their own renewable energy programs and support for transmission investment. It’s important that these schemes are as coordinated and consistent as possible to support efficient investment and deliver the lowest possible cost of energy for end users.
The renewable energy transition is happening and is bringing with it low-cost, zero-carbon energy for all Australians. A safe and stable transition requires us to consider how to phase out coal as rapidly as we can while also quickly bringing in the renewable assets needed to replace it. Now that the politics finally seem to be shifting, the time has come to focus on the physics and get this transition done.