The future of energy generation and storage

[Smurf1976]

W

What has caused the surge in prices that triggered the cap?

Three things really:

The dramatic increase in the price of coal, gas and diesel. The latter is a minor input to generation but coal and gas are extremely important. Gas price has roughly quadrupled over the past two months on the Australian domestic market.

Technical failure at some individual generating facilities has reduced supply from those sources. Not to the point of putting the lights out, but a reduction nonetheless.

The National Electricity Market by its very design is an economic market first and foremost and suffice to say it's a long way short of optimal from a technical efficiency perspective. That mattered modestly when gas was cheap, still a waste of fuel but not a huge waste of money, but it matters a great deal when fuel costs a fortune.

That all gets lost in a huge amount of politics and ideology but suffice say my own view is that if we're to have a market with traders competing and so on well then OK, no problem, but that shouldn't be interfering with physical generation operation as it presently does.

That situation, where financial trading determines physical production, leads to some far less than desirable operation at times. It ends up with low cost plant owned by one company being underutilised whilst high cost, less efficient plant owned by someone else is running and that does include wind / solar going to waste whilst fuel is burned at times for purely financial trading reasons.

Lots of things like that but ultimately everyone just grits their teeth and makes the best of it. That it works that way is a political / ideological / economic / legal construct dating back to the 1990's, it's certainly not something a technical person came up with.

My own view, very firmly, is that physical operation needs to be separate from financial trading so as to remove such silly outcomes and doing so would be a major step forward in resolving all this. Legally and politically however that would be opening up a huge can of worms.

 

[SirRumpole]

So you are saying Australia imports gas from Russia??

Considering the stupidity of the previous Federal government that wouldn't surprise me at all.

Bu t we pay world parity prices for our own gas, so when prices go up we have to pay what the rest of the world pays

 

[3 hound]

Three things really:

The dramatic increase in the price of coal, gas and diesel. The latter is a minor input to generation but coal and gas are extremely important. Gas price has roughly quadrupled over the past two months on the Australian domestic market.

Technical failure at some individual generating facilities has reduced supply from those sources. Not to the point of putting the lights out, but a reduction nonetheless.

The National Electricity Market by its very design is an economic market first and foremost and suffice to say it's a long way short of optimal from a technical efficiency perspective. That mattered modestly when gas was cheap, still a waste of fuel but not a huge waste of money, but it matters a great deal when fuel costs a fortune.

That all gets lost in a huge amount of politics and ideology but suffice say my own view is that if we're to have a market with traders competing and so on well then OK, no problem, but that shouldn't be interfering with physical generation operation as it presently does.

That situation, where financial trading determines physical production, leads to some far less than desirable operation at times. It ends up with low cost plant owned by one company being underutilised whilst high cost, less efficient plant owned by someone else is running and that does include wind / solar going to waste whilst fuel is burned at times for purely financial trading reasons.

Lots of things like that but ultimately everyone just grits their teeth and makes the best of it. That it works that way is a political / ideological / economic / legal construct dating back to the 1990's, it's certainly not something a technical person came up with.

My own view, very firmly, is that physical operation needs to be separate from financial trading so as to remove such silly outcomes and doing so would be a major step forward in resolving all this. Legally and politically however that would be opening up a huge can of worms.

Thanks, makes sense. I know lots of workers at a power station. It seems incredibly complicated to even know who owns the plants.

Is coal going up because supply shortages from Russian sanctions mean we sell more to euro?

 

[sptrawler]

So you are saying Australia imports gas from Russia??

No what I think he is saying is, Queensland didn't make a gas reservation policy like W.A did, so the gas companies over East can sell it at market price and the market price has gone through the roof due to the Russia EU issue.

 

[3 hound]

T

No what I think he is saying is, Queensland didn't make a gas reservation policy like W.A did, so the gas companies over East can sell it at market price and the market price has gone through the roof due to the Russia EU issue.

That only makes sense of we are selling gas to euro as an export. I didn't think we were, are we?

 

[sptrawler]

Considering the stupidity of the previous Federal government that wouldn't surprise me at all.

The gas is a State issue, as most of Eastern State gas is onshore, you have to not fall into the chestnut barrel. It wont be long before that one gets a roasting IMO.

Bu t we pay world parity prices for our own gas, so when prices go up we have to pay what the rest of the world pays

So why doesn't W.A pay world parity pricing for gas?
Take a breath and maintain perspective, they have gone, no need to maintain the rage. ?

 

[sptrawler]

T

That only makes sense of we are selling gas to euro as an export. I didn't think we were, are we?

They have pre contracted more gas than they have, so what little if any they have left over, they can sell on the spot market.
Why would they sell it to the East Coast for $6 like W.A, when they can sell it on the spot market for $40, it isn't St Vincent de Paul.
The big stuff up was made years ago, when no gas reservation was put in place.
I worked with a guy who was an engineer on oil tankers, when the fuel crisis of the 1970's happened, apparently they just sat in the Gulf of Aden watching the spot price of oil, when it fell they on loaded then waited for a buyer.

 

[SirRumpole]

The gas is a State issue, as most of Eastern State gas is onshore, you have to not fall into the chestnut barrel. It wont be long before that one gets a roasting IMO.


So why doesn't W.A pay world parity pricing for gas?
Take a breath and maintain perspective, they have gone, no need to maintain the rage. ?

Weren't you saying that Gillard negotiated gas contracts without ensuring local supply ?

So who is responsible , State or Federal ?

 

[sptrawler]

Weren't you saying that Gillard negotiated gas contracts without ensuring local supply ?

So who is responsible , State or Federal ?

As I said when I posted that, the gas was offshore and only 35% of the field was in W.A jurisdiction, 65% was in Fed waters.
So the Feds over ruled Barnett with regards onshore processing, but they did sign over the royalties to W.A.
On the East Coast, most of the gas is onshore.
From what I've read the gas is in Queensland and exported through Gladstone, so that is a State jurisdiction and under State control, they would have to negotiate any reserve, when they were organising the extraction contracts as W.A did.
That is the problem the last Fed Government had, and now this Fed Government has, the contracts were signed.
To now try and change the terms of the contract, would mean the company could ask for compensation, for building the infrastructure and lost revenue as their business case for building the infrastructure was based on the original assumptions.
The only difference now is Scomo isn't there to blame, it was so much easier when they just had to say it's his fault, it was a get out of jail card for every ailment.

 

[SirRumpole]

As I said when I posted that, the gas was offshore and only 35% of the field was in W.A jurisdiction, 65% was in Fed waters.
So the Feds over ruled Barnett with regards onshore processing, but they did sign over the royalties to W.A.
On the East Coast, most of the gas is onshore.
From what I've read the gas is in Queensland and exported through Gladstone, so that is a State jurisdiction and under State control, they would have to negotiate any reserve, when they were organising the extraction contracts as W.A did.

Ok, well some government is to blame. I've no problem blaming Annastasia or Campbell Newman, whoever it was made a blunder.

 

[sptrawler]

Ok, well some government is to blame. I've no problem blaming Annastasia or Campbell Newman, whoever it was made a blunder.

Yes I don't know who was in and I'm not really interested, but IMO someone really dropped the ball and it would be a great issue for an ICAC to look into. But I think Queensland already has an ICAC, oh well maybe an ICAC 2.0.

If i was cynical, all an ICAC would mean, is there more palms to grease. ?

 

[sptrawler]

On a brighter note, this sounds ominous.

Queensland blackout warning as AEMO steps in​

AEMO has introduced price caps and ordered generators to keep running, as it warns that parts of Queensland face possible blackouts this evening.

 

[Smurf1976]

Thanks, makes sense. I know lots of workers at a power station. It seems incredibly complicated to even know who owns the plants.

Is coal going up because supply shortages from Russian sanctions mean we sell more to euro?

Coal really falls into two categories:

1. Inferior quality coal that doesn't meet international specifications or coal that can't physically be exported. The cost is basically just the cost of mining it and getting it to the power station.

2. Coal that's of export quality and able to be physically exported. International factors determine what it's worth - the war is one but it was rising even before that.

Same basic situation with gas.

Explaining the issue with the NEM and trading versus physical dispatch, a simplified example as follows.

Suppose that we have 3 fossil fuel power stations, one hydro station and some random wind and solar. Obviously there are more in practice but this is just to illustrate.

Power station "A" uses coal from its own mine that's cheap and plentiful.

Power station "B" uses coal of export grade and the power station itself is near a port. It's more costly to operate.

Power station "C" uses diesel and costs a fortune to run.

Power station "D" is hydro.

The wind and solar work when it blows and shines.

So how should we use this? Well if the aim is to keep the cost as low as possible then it's pretty straightforward:

Run the wind and solar first.

Run "A" next because it's cheap.

Run "B" after that because it's medium price.

Run "C" as a last resort only when everything else is running and isn't sufficient.

Schedule "D", the hydro, based on water availability. It should always be run in preference to "C" for economic reasons but if there's enough water available then we can run it in preference to "B" as well. If we get a flood well then run it in preference to "A" too.

So the basic logic is really quite simple. Run the cheapest that's sufficient at any given time bearing in mind that maintenance outages, breakdowns etc will of course put constraints around this.

Now the basic problem with the NEM is that if A, B, C and D all have different owners, and with their individual traders all working on their own basis, then it does in practice lead to inefficient physical outcomes. It ends up with "A" running at half capacity and "C" running full blast and things like that simply because the traders are trying to make maximise revenue. The best financial outcome for the owners of "A" isn't necessarily with maximum output but rather, it's with the best combination of output times price. If that means "B" and "C" end up running unnecessarily then so be it.

That physical dispatch inefficiency leads to two basic problems:

1. It raises market prices by an amount greater than it raises profit, since very real costs are being incurred.

2. It's a truly terrible way to manage physical resources when it ends up with a solar farm being turned down and diesel being burned purely in an effort to make a profit.

That exists against a backdrop of political and economic ideology and the associated legislation and enforcement thereof.

Now if an engineer or similar person were just left to do what they saw fit, well they'd just run the wind / solar then A, B, C in that order with the hydro placed according to the water level in the dam and expected inflows looking ahead. When it comes to the money, well they'd just point out that this is the cheapest way overall so perhaps the owners of the various stations should just do a deal to split the benefits among themselves and consumers such that everyone wins. Simple.....

Those with a more ideological view, and those who enforce the law, would want nothing of that since it's against the ideology about free market competition, not colluding and so on.

Obviously there's more than 4 power stations in reality but the overall concept still applies. Traders working for the owners of low cost generation price a portion of the output highly, leading to their production being cut, higher cost generation running and price being pushed up. To be fair, they've little choice when they're faced with having to recover all business costs, including fixed costs, from that revenue - they can't simply price at marginal cost otherwise they'll go broke.

So a lot comes down to an ideological view of how the world ought to be there. Technical efficiency versus free markets and so on.

Personally I think they'd be better separated. We need a market design that doesn't lead to inefficient technical outcomes, and the waste of real physical resources, as a result of financial trading and so on.

 

[sptrawler]

@Smurf1976 it all comes back to some things are best left in Government ownership, as an essential public service, the amount of profit is decided by the Government.
Just another brain fart, that seemed like a good idea at the time, selling public services comes back to bite them on the ar$e every time.
On the flip side a lot of these power stations were sold for a good price and many since privatisation have been written off as a disaster for the investors, but the public wears the brunt of it in the end.

 

[Smurf1976]

@Smurf1976 it all comes back to some things are best left in Government ownership, as an essential public service, the amount of profit is decided by the Government.
Just another brain fart, that seemed like a good idea at the time, selling public services comes back to bite them on the ar$e every time.
On the flip side a lot of these power stations were sold for a good price and many since privatisation have been written off as a disaster for the investors, but the public wears the brunt of it in the end.

Agreed although I'll argue that a private owner, structured on the same basis as a government one so an integrated utility, should also be able to do a pretty good job of it.

The problem is fundamentally with the market itself. Government ownership gets around that in that it removes the need for a market but it shouldn't be impossible to come up with an alternative market design that makes private ownership work better than it does at present.

The latest is that SA entered price administration at 21:50 this evening and Victoria at 21:55, those times being eastern states time not SA local time.

That leaves the National Electricity Market, in terms of actually being a market functioning as an actual free market, confined to Tasmania which is about as ironic as it gets given the history of it all.

 

[3 hound]

On a brighter note, this sounds ominous.

Queensland blackout warning as AEMO steps in​

AEMO has introduced price caps and ordered generators to keep running, as it warns that parts of Queensland face possible blackouts this evening.

That not clever if as rumpoloe said a lack of maintenance is a factor.

 

[3 hound]

Coal really falls into two categories:

1. Inferior quality coal that doesn't meet international specifications or coal that can't physically be exported. The cost is basically just the cost of mining it and getting it to the power station.

2. Coal that's of export quality and able to be physically exported. International factors determine what it's worth - the war is one but it was rising even before that.

Same basic situation with gas.

Explaining the issue with the NEM and trading versus physical dispatch, a simplified example as follows.

Suppose that we have 3 fossil fuel power stations, one hydro station and some random wind and solar. Obviously there are more in practice but this is just to illustrate.

Power station "A" uses coal from its own mine that's cheap and plentiful.

Power station "B" uses coal of export grade and the power station itself is near a port. It's more costly to operate.

Power station "C" uses diesel and costs a fortune to run.

Power station "D" is hydro.

The wind and solar work when it blows and shines.

So how should we use this? Well if the aim is to keep the cost as low as possible then it's pretty straightforward:

Run the wind and solar first.

Run "A" next because it's cheap.

Run "B" after that because it's medium price.

Run "C" as a last resort only when everything else is running and isn't sufficient.

Schedule "D", the hydro, based on water availability. It should always be run in preference to "C" for economic reasons but if there's enough water available then we can run it in preference to "B" as well. If we get a flood well then run it in preference to "A" too.

So the basic logic is really quite simple. Run the cheapest that's sufficient at any given time bearing in mind that maintenance outages, breakdowns etc will of course put constraints around this.

Now the basic problem with the NEM is that if A, B, C and D all have different owners, and with their individual traders all working on their own basis, then it does in practice lead to inefficient physical outcomes. It ends up with "A" running at half capacity and "C" running full blast and things like that simply because the traders are trying to make maximise revenue. The best financial outcome for the owners of "A" isn't necessarily with maximum output but rather, it's with the best combination of output times price. If that means "B" and "C" end up running unnecessarily then so be it.

That physical dispatch inefficiency leads to two basic problems:

1. It raises market prices by an amount greater than it raises profit, since very real costs are being incurred.

2. It's a truly terrible way to manage physical resources when it ends up with a solar farm being turned down and diesel being burned purely in an effort to make a profit.

That exists against a backdrop of political and economic ideology and the associated legislation and enforcement thereof.

Now if an engineer or similar person were just left to do what they saw fit, well they'd just run the wind / solar then A, B, C in that order with the hydro placed according to the water level in the dam and expected inflows looking ahead. When it comes to the money, well they'd just point out that this is the cheapest way overall so perhaps the owners of the various stations should just do a deal to split the benefits among themselves and consumers such that everyone wins. Simple.....

Those with a more ideological view, and those who enforce the law, would want nothing of that since it's against the ideology about free market competition, not colluding and so on.

Obviously there's more than 4 power stations in reality but the overall concept still applies. Traders working for the owners of low cost generation price a portion of the output highly, leading to their production being cut, higher cost generation running and price being pushed up. To be fair, they've little choice when they're faced with having to recover all business costs, including fixed costs, from that revenue - they can't simply price at marginal cost otherwise they'll go broke.

So a lot comes down to an ideological view of how the world ought to be there. Technical efficiency versus free markets and so on.

Personally I think they'd be better separated. We need a market design that doesn't lead to inefficient technical outcomes, and the waste of real physical resources, as a result of financial trading and so on.

That helps a lot.

Without being to cynical it sounds like in a pinch we end up with the worst of all worlds also also has a lot of blame distribution built in so perfect government system.

 

[SirRumpole]

Agreed although I'll argue that a private owner, structured on the same basis as a government one so an integrated utility, should also be able to do a pretty good job of it.

Quite possibly. The splitting off of generation, distribution and retailing and sale to different entities who all wanted to make a profit is a disaster.

Thanks Peter Costello and 'asset recycling'.

 

[rederob]

Quite possibly. The splitting off of generation, distribution and retailing and sale to different entities who all wanted to make a profit is a disaster.

Thanks Peter Costello and 'asset recycling'.

Yes, as each element split off now has to make their individual profit, rather than a single entity serving the public good.

Interestingly, not long before I left WA over 4 decades ago the State Electricity Commission of Western Australia plus the Fuel and Power Commission were amalgamated into a single "Energy" Commission to better plan for the State's needs. I know it was a long time ago but I believe the change was put in motion by "Honest John" Tonkin. No doubt @sptrawler will know for sure.

 

[sptrawler]

Quite possibly. The splitting off of generation, distribution and retailing and sale to different entities who all wanted to make a profit is a disaster.

Thanks Peter Costello and 'asset recycling'.

Probably the biggest fopar of his career IMO.
Thankfully W.A dragged the chain with that one, they allowed competitors into the market, even gave them preferential treatment, but didn't sell the Government power stations.