Financial Review, 18 September. 2017.
(Ed. note: This is an article about Australia and its energy policiy – although in my view it applies very much to South Africa)
One of the few constants in Australia’s energy debate is the fervour of politicians’ and administrators’ homage to the idea that electricity prices should be lower than they are. That electricity prices have reached the level they have, suggests the homage has all too often been a camouflage for other agendas. For too long ideology and the protection of vested interests has lurked behind the apparent pursuit of “lower electricity prices”. The obsession with coal-fired “baseload” generation is an enduring manifestation of this malaise.
It merits critical scrutiny.
“Baseload” describes a generating plant, hitherto most commonly coal-fired, that is characterised by high capital costs and relatively lower variable costs. This cost structure renders such plant inherently inflexible: its viability depends on its ability to operate continuously. Such plant also has minimum stable generation levels and responds slowly to changing demand. For this reason, it was not long ago that the roofs in many Australian homes accommodated oversized and poorly insulated water heaters designed to keep the baseload plant operating in the dead of night. Though grossly wasteful, it was the best that could be done given the technological limitations of the era.
New technology, more flexibility
Fortunately the world moved on. From the late 1980s open-cycle gas turbines supplemented hydro generation in providing flexibility to match demand and supply. In other countries, market arrangements have also encouraged customers to respond to short-term price signals and this “demand response” has come to play a major role.
There have been astonishing developments in other areas. The installed cost of photovoltaics (solar panels) have declined by about 80 per cent over the past seven years. Despite patchy policy support, it has taken just seven years for photovoltaics to reach one in five detached houses. Electricity produced by photovoltaics on a roof typically costs about one-sixth of grid-supplied electricity. It is no surprise that photovolatics are now being installed at record rates not just on household roofs but also on farms and in businesses.
And now the trajectory of costs in batteries, particularly those with lithium chemistries is declining even more steeply than we have seen in photovoltaics. The combination of battery and photovoltaics installed behind customers’ meters now promises to meet customers’ needs more cheaply than grid-only supply.
South Australia suffers from concentrated electricity markets, dependency on expensive gas and structurally high network charges. The combination of behind-the-meter photovoltaics and battery with the grid for back-up is already cheaper than grid-only supply for most small customers in SA. While batteries plus solar and grid back-up is not yet viable for most customers in the rest of Australia, the gap is small and quickly getting smaller.
If the federal government is determined to deliver lower electricity prices, it might focus its effort on ensuring that demand is more responsive to short term price signals, and on making up the narrowing shortfall needed to encourage widespread uptake of distributed batteries. Such policies will not be difficult to develop or implement, they will require outlays many times smaller than those needed to build baseload coal plants, and will show results during the term of a government.
The market must adjust
Such policies will, however, speed up the nonetheless inevitable decline in many customers’ reliance on the shared power system. Generators and retailers should be expected to adjust without assistance: they operate in a market after all. The shared grid still has a future albeit different to its past and even in a declining market there will be ample opportunity for investment in decarbonising electricity production.
Networks are more difficult. Their excessive asset values reflect historic asset write-ups (when policy makers thought demand was inelastic) and many years of wasteful gold plating. Furthermore technology change (distributed energy resources, and more efficient appliances) is leading to declining use of the shared network. Write-downs to bring the regulatory asset values into line with their economic values is needed. The biggest adjustment is needed where the networks are partially or fully government owned. The challenge is not insurmountable but requires governments to take responsibility for their past mistakes. For the privately owned networks, asset write-downs raise legitimate worries about political expropriation and these would need to be resolved.
Read more: http://www.afr.com/opinion/columnists/want-lower-energy-prices-put-baseload-out-to-pasture-20170916-gyizrr#ixzz4t6ZundDe
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