Shortcuts / 23 June 2022

How we’re keeping the lights on

One of the biggest news stories going around is what’s happening with our energy system, with Oz facing a raft of issues that have smashed supply and demand for electricity. It’s a discussion that’s packed with technical jargon and detail, so in this Squiz Shortcut, we get back to basics and take you through how our power grid works, what’s happened to bring it to crisis point, and what can be done about it.

Let’s start with the basics – how is our electricity made?
It depends on the energy source, but the trick is having an energy source like coal, gas, hydropower or wind to turn a turbine so that it spins magnets surrounded by copper wire, to get the flow of electrons across atoms, which in turn generates electricity.

Sounds like magic…
Yes, from a non-scientific standpoint it does seem like some sort of sorcery… But how a power plant operates depends on the energy source. Coal and gas work in a similar way – they are burned to heat water, which creates steam and turns the turbine.

What about renewables?
Hydropower and wind operate by using water and wind sources to turn the turbine. And solar converts solar radiation from the sun into electricity using semi-conductors right at the site where it’s captured. That’s why if you have solar panels on your roof you can feed your surplus power into the grid.

Okay, we’ve generated the power – where does it go from there?
So Australia has a couple of networks. The National Electricity Market interconnects the 5 eastern and southern states – so that’s QLD, NSW, Victoria, Tassie, South Oz and the ACT – and that delivers around 80% of all electricity in Australia.

What about Western Oz and the Northern Territory?
They’re not connected to the National Electricity Market because of the distance and have their own electricity systems and regulatory arrangements.

How is power shuttled around the country?
So in a practical sense, after electricity is generated at these power plants, it then travels along the power lines and wires that we see all around us.

And how do greenhouse gas emissions tie into all this?
According to the latest stats from the 2020/21 financial year, 65% of our electricity generation is fueled by coal. The next biggest sources were wind and solar with about 10% each, followed by hydro with more than 7%. In that year, gas-fired electricity production sat at around 6.5%.

So all up, how much of our electricity comes from fossil fuels?
About three-quarters, with a quarter coming from renewable sources. But the renewable sector is growing thanks to a boom in solar installation. Solar is now the largest source of renewable energy in Oz, with one in 4 Aussie homes having solar panels installed. That’s the highest uptake in the world.

But the sun isn’t out all the time…
No – there’s a thing called night that gets in the way… And even during the day, there’s cloud coverage that lessens how much solar power can be generated. That’s the gist of the debate about shoring up dispatchable power – electricity that can be generated rain, hail or shine – and in our system that’s the power that comes from burning coal and gas.

Is it possible to have dispatchable solar power?
Yes, and that’s why there’s also a focus on using batteries to store renewable energy so it can be dispatched when it’s needed. But those batteries need to have much more capacity to get to a point where renewable energy can replace that created by coal and gas.

Gotcha. So what’s this latest energy crisis about?
Last week, the Australian Energy Market Operator – or AEMO for short – suspended the spot market in the National Electricity Market for the first time in our country’s history. AEMO is an independent government organisation that monitors most of the nation’s electricity consumption and the power generators’ supply across the system.

How did we get to this crisis point?
There are a lot of factors here, but essentially, Russia’s invasion of Ukraine and the fallout in global energy markets has sent world coal and gas prices skyrocketing. That’s because Russia is a major gas producer and it exports a lot of it into Europe, so Western sanctions on Russia have seen increased demand for alternative supplies of gas and rising prices.

If gas doesn’t contribute much to our electricity supply, why has the shortage from Russia had such a big impact on energy prices here?
Because when one energy source is impacted it has a trickle-on effect on other sources. Long story short, it’s meant global demand for gas and coal has gone up and our electricity generators have had to fork out more to buy both fuels.

Doesn’t Oz supply a lot of coal and gas to the world market?
Yep, around 85% of our produced energy commodities – coal and gas – are exported out of Oz. That’s seen call for a ‘reservation policy’ to be implemented in the eastern states, which would see a certain amount held here in Australia for our domestic purposes.

So that would apply to both coal and gas?
Just gas, as our energy generators can usually get their hands on enough coal – they just have to pay the global price for it. But there has been a shortage of late because of the Ukraine situation.

So what’s the issue with our gas supply?
Well, it’s not unusual for there to not be enough for local electricity generators to buy, because producers lock in big contracts to ship it off to international markets. Western Oz is the exception – it already has a reservation policy where 15% of the gas produced for export must be provided for local consumers – and that’s kept gas prices low there.

Aside from the Ukraine war, what else is contributing to our energy crisis?
Another thing that’s been talked about is the state of Australia’s ageing coal-fired power plants. Large parts of Australia’s current fleet were offline for maintenance, with about 30% of the supply knocked out.

What’s the issue there?
That our power plants are old, they’re owned by companies who have shareholders concerned about their investments, and there’s not a lot of enthusiasm for spending more money on maintaining or improving these assets, because it’s clear that phasing out coal is going to be a thing in the coming years.

Because of climate change?
Yep – the burning of fossil fuels to produce electricity contributes about a third of Australia’s total carbon emissions, and to meet our commitments to emissions reductions, our power plants will be phased out over time.

So back to AEMO – what led to it intervening in the market?
Electricity generators are obligated to supply power when needed, and what happened last week was that AEMO suspended the market and forced energy companies to pump out more power. It was a bit sceptical about why so many of those plants had taken themselves offline…

Why was that?
The regulator thought some companies were saying they were closed for maintenance when they actually didn’t want to be online because the price of coal is so high and their profits were being squeezed.

What did energy companies say about that?
They have denied that claim, and the government said it will provide the companies with compensation if that’s the case. It’s also worth noting extreme weather events like the recent floods have also affected some power plants. On top of that, a cold snap and households turning up their heaters saw the National Energy Market hit a crisis point.

So AEMO suspended the spot market… What happened after that?
Since then, there have been meetings and guidelines have been drawn up for things to go back to normal. AEMO reckons there’s just a small risk of the same conditions re-emerging in the very short term. It’s now started to wind back its intervention in the energy market, with authorities increasingly confident in the supply of wholesale electricity.

But the issues aren’t over?
Not at all. AEMO says it’s still directing generators to pump power into the network and that there will continue to be challenges with managing the supply and demand for electricity in our biggest population centres.

And supply and demand is a big issue right now…
It sure is. In the first three months of 2022, the wholesale price of electricity went up by 141% compared to the same quarter last year and it has only continued to rise due to all those issues we’ve mentioned.

Apart from the electricity itself, what else do our energy bills pay for?
Electricity wholesale prices make up just a third of the total price consumers pay. The rest of it comes down to the costs of getting electricity from the generator to our homes and businesses. There are also network costs, including maintaining the lines, poles and other infrastructure (45%), meeting renewable energy target obligations (10%), and retail costs, including things like managing billing and customer service (10%). And of course, the retailers pocket about 3% of the final cost.

Maintaining infrastructure takes up a pretty hefty chunk…
It does, and it’s another thing that’s talked about as an issue in our electricity grid. The problem is that the network is old and is adding to the cost. And not only that, but experts say building new transmission lines is critical if Australia is to meet its net-zero emissions target by 2050 commitment.

You’re going to have to explain that…
It’s due to inefficient power transmission and distribution – if the system isn’t good it means additional electricity has to be generated to compensate for losses.

So is the plan to build better infrastructure?
Yep, and the new Labor government has promised to create a $20 billion fund to offer low-cost loans to develop new transmission lines, called the Rewiring the Nation policy. It’s a policy former PM Scott Morrison said will push energy prices higher, but AEMO says it will pay off in the long term.

Okay, give it to me straight. Are we all about to be hit with bigger power bills?
A lot of us will. But there are 2 things to note: firstly, the regulator caps the price of some of our most expensive power plans. They say prices will go up by up to 20% depending on where you live.

And the second?
One bit of advice floating around right now is to ensure your energy provider is also a power generator. That’s because they should be in a stronger position to ride out the ups and downs of the wholesale market.

And we should probably also turn the lights off when we’re not using them…
Good point. It’s harder these days because we have so many appliances that are on standby all the time, but there’s no harm in reducing your energy consumption.

Squiz recommends:
Energy Made Easy website

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