Over the past ten years, South Australia (SA) has been the target of significant investment in renewable energy.

Prior to 2005, SA’s energy generation needs were predominantly sourced from gas and brown coal power stations. Since then, according to an August 2016 report from the Melbourne Energy Institute, over 1500MW of wind capacity and 680MW of rooftop solar have been installed. At the same time, the state got rid of 770MW of brown coal based power generation.

Unlike in other states, where around 90% of electricity is generated by coal power, in SA approximately 60% of electricity is generated by natural gas and more than 187,000 households have installed rooftop PV. The rest comes from wind farms and an interconnector between Victoria and SA. In the 12 months up to 30 June 2016, wind generation contributed 37.6% to the total grid dispatch.

More renewable energy is set to come online over the next five years as per SA’s targets, which is laudable for a state in a country that is less than progressive on climate change issues.

However, several recent extreme power outages across SA have raised concerns about the security of supply, leading many to ask whether the state is too reliant on wind energy and why there is no new investment in base load power.

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In February, BHP Billiton chief executive Andrew Mackenzie, whose company has been hit by blackouts in SA, claimed that renewables are being targeted at the expense of security of supply.

“Let’s talk about affordability, reliability and emissions reduction, as opposed to having some secondary target about just having more renewables, which might deny you all three,” he said. “We have lost $100m in this period because of the intermit­tency of power in South Australia, and also we are facing more ­expensive electricity, frankly, than we budgeted for at this time last year.”

The issue has become so politicised that the SA government has taken the rather radical steps of pledging to directly intervene in the market and invest in a new gas turbine and battery powered storage for emergency capacity to the system – a move that is considered highly controversial in a liberal, privatised energy market.

Security of supply

It’s debatable whether SA has a sizable energy security issue, as the two major blackouts that occurred were caused by unforeseen circumstances – a major fire and an unexpected weather event – and can be deemed beyond the scope of credible contingency events.

However, it’s true that the region is plagued by high electricity prices.

As cheap renewables have made inflexible coal plants uneconomic and investment into base-load power has dropped off, SA’s dependence on gas – which is very expensive in Australia despite the country being a major importer – for power at times of high demand has increased. The cost of electricity is, therefore, highly sensitive to price movements in the market.

Furthermore, an assessment from the Australian Energy Market Operator is warning that, without a swift response, Australia could face shortages in gas supply – with SA being hit first.

Managing partner for power and utilities at EY Australia Matt Rennie doesn’t believe there is an energy crisis and says the wrong signals are being sent to the market. This, he says, is largely because Australia has an energy-only market and not a capacity market.

"There is a real question about whether it is economic to bring new gas powered plants online if they are only going to be used for a small number of hours per year."

“The talk of investment signalling is very interesting, because as we near the point where an energy-only market needs new capacity, the increasing amount of renewables in the system means the capacity is met by fast starting gas turbines,” says Rennie. “In an energy-only market plants are only paid for the megawatt hours they produce – so there is a real question about whether it is economic to bring new gas powered plants online if they are only going to be used for a small number of hours per year – people haven’t been making that investment.”

Several such plants have been mothballed, including in Adelaide, SA, because they can’t be operated for enough hours per year to return the capital investment.

Furthermore, Dylan McConnell from the Climate & Energy College at the University of Melbourne, believes there won’t be any new investment while policy around climate change is so uncertain.  

“Even though it could be economic to build some gas or storage in different parts of the grid, without subsidies, no one is prepared to make the investment because the political environment is too uncertain,” he says. ”"Investors have no idea what carbon price or regulation might be instated due to our climate commitments – the government doesn’t have a plan.”

Government intervention

The response from the SA state government has been ‘quite dramatic’ in McConnell’s view.  

It plans to spend AUD150m to support the installation of 100MW of battery capacity this year, which would be the world's second-largest battery system.

Batteries are very efficient for short periods of time and prices have been falling considerably. They can effectively improve grid stability, specifically for frequency control and ancillary services, by providing capacity for very short time periods – one minute at a time maximum – correcting deviations in the demand and supply balance that were not forecast.

“If the interconnector [between SA and Victoria] became stressed due to a fault you could then engage a battery,” says Rennie. “Doing this for one minute and being paid fully for that minute, can give enough time for an isolated system to recover by turning on new generators.”

However, the technology is too expensive to be used beyond this.

In a controversial move, SA is also planning to build a new government-owned gas-fired power plant to provide up to 250MW of power for emergency use. It’s not certain if private investment will be involved. New legislation will also allow the energy minister to intervene in the national electricity market to instruct operators to switch on when emergency power is needed.

The highly conservative national government has said it is seeking legal advice on whether this decision to intervene in the market constitutes a breach of national electricity market rules.

Before anything goes ahead, it’s likely these plans will face further legal battles. However, this intervention was a direct result of a situation where a gas plant was not switched on and about 90,000 people had their load cut off, says McConnell, adding: “That is part of the genesis of this response, to say that if the market is not going to provide then the state will participate and the price will automatically go up to the market price cap.”

What else could be done?

The SA government has made it clear it wants to take decisive action, but what more can be done to improve security of supply and lower energy prices?

The answer is that it will likely depend on the federal government and overall Australian energy market.

Many, including the Commonwealth Scientific and Industrial Research Organisation, the Business Council of Australia and BHP Billiton, have called for a price on carbon emissions that would essentially skew investment further towards renewables. But the issue is politically controversial.

However, if such a measure was introduced SA would benefit immensely because it produces a lot of low-carbon energy and could trade credits with fossil fuel users in other states.

"On the surface the politics are pretty dismal, but due to the broad support it is one of those things that could change pretty quickly."

“On the surface the politics are pretty dismal, but due to the broad support it is one of those things that could change pretty quickly – but it won’t be called a carbon price,” says McConnell.  

The next step is for the federal government to design a market that better integrates renewable power supply, and this involves sorting out gas supply and contracts.   

“There is a matching process that needs to happen between the market to produce electricity and the gas contracts to use the electricity – and that is quite a new problem for Australia,” says Rennie. “You could just let the market do what it wants to do and people will invest because the price of power will get so high that it will send a signal – but there are obviously some political issues with that.”

“There is a delicate balance to be struck between the impacts of increasing prices on households, many of which are under affordability stress, and the intergenerational benefits of renewable energy. It’s no different to problems faced in other countries but it is politically acute in Australia.”