static image

Our energy system is at breaking point - reform can no longer be avoided

"The recent surge in South Australian electricity prices has disrupted industry and shown that our energy markets are a shambles," Innes Willox, Australian Industry Group Chief Executive said.

"In June, electricity cost SA $133 per megawatt hour on average – already a high price. But since 1 July electricity prices have spiked above $10,000 per MWh at times. Ai Group estimates the cost of the spike over the last three weeks at $155 million. That is a serious blow to energy users across SA and has disrupted supply chains upon which thousands of jobs depend. But the real risk is if this volatility becomes the norm across the National Electricity Market.

"SA has had by far the most volatile electricity prices since 2001, with many previous price spikes. The factors behind the latest crisis are clear:

  • the main interconnector allowing power to flow between SA and Victoria was largely down while expansion work proceeded;
  • demand for electricity increased with winter weather as South Australians reached for their thermostats;
  • the wind turbines and solar panels that now meet much of SA's electricity demand generate as much as they can whenever the wind is blowing and the sun is shining - they can’t ramp up further when demand is high and other suppliers fall short;
  • all of SA's coal generators, and much of its gas generators, had closed or been mothballed in the face of weak demand and competition from renewables;
  • the remaining rampable gas-fired generators appear to have been hit by higher prices for natural gas, which reflected the impact of winter demand on an extremely tight gas market.  

"These conditions allowed market participants to bid electricity prices up to extreme levels. We will see similar episodes again, and not just in SA. Changes in the pattern of energy demand and the ongoing buildup of wind and solar make life increasingly difficult for 'baseload' electricity generators across the country. But we are not yet serious about the reforms needed to secure supply as the grid grows more renewable.

"Power flows across regions are going to become ever more important to balance the grid. The interconnector disruption was not clearly flagged to energy users and almost certainly should have been delayed to the spring. Asset and market operators need to communicate better and be given an incentive to avoid contributing to price incidents, not just to avoid blackouts.

"Managing power demand is vital to smooth a volatile market, but COAG has dragged its heels for years over two measures to help demand better respond to costs. One is the 'Demand Response Mechanism' that would let energy users sell demand reductions directly into the wholesale market, now in limbo despite endorsement by energy ministers in 2012. Another is the push to incentivise consumers to save money and reduce system-wide costs through dynamic pricing backed by smart meters. The States have drastically lowered their ambitions to avoid a repeat of Victoria’s costly big-bang rollout of smart metering.

"Energy storage will ultimately play a large role in making our markets work, and we need to accelerate efforts to integrate storage at all scales – grid, commercial, household, electric vehicles. But in the meantime gas is going to play a crucial role in balancing markets while renewables grow. The tight gas market is going to make that much more expensive and less flexible unless we act. Bringing new gas supplies to market is urgent. Current and likely blanket bans on producing gas onshore need to be replaced with smart regulation. Gas market reform needs to maximize competition. Efficiency policies need to encourage gas efficiency in practice – not just in theory, like Victoria's efficiency scheme to date.

"Ultimately we are going to need investment to deliver an energy system that meets the needs of industry and households. But investment is almost impossible. The electricity market is creaking beneath the weight of overlapping and poorly coordinated energy policies that veer between blind ambition and myopic caution. After years of partisan warfare over climate and energy, the future shape of policy is far too uncertain. We've seen the impacts of all this in the lack of investment that followed the deal last year to continue the Renewable Energy Target.

"The time has come for all levels of government and all sides of politics to get real on energy. Slow-walking demand management, smart meters, batteries and gas production might have worked if they were dragging their heels on renewables as well. Instead the Federal Government and the States have opted for increasing ambition.  But a half-transformed energy market is a recipe for disaster. There is no going back. We must go all in, and take the hard decisions that will make our energy system secure and affordable into the future," Mr Willox said.

Media Enquiries: Tony Melville – 0419 190 347