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Thursday, February 23, 2017

Electricity prices are going up regardless

I'll give it to you cold. Electricity prices are going up. They have been too low for too long.

Malcolm Turnbull, Treasurer Scott Morrison and their Energy Minister, Josh Frydenberg, are happy to make political capital out of the inevitable return to normality (by blaming Labor and fondling pieces of coal in Parliament) but they are careful not to say they can stop it.

Frydenberg talks about "reducing pressure" on prices rather than keeping them down.

Prices have been unnaturally low because we've had more generators able to make the stuff than we have had people wanting to use it.

Usage per person started falling in 2010 and has only recently begun to recover. To sell power, generators have had to cut prices. Worse still, three of the biggest were bought by their present owners for next to nothing.

That means they can afford to unload electricity for little more than the cost of making it, pushing down the prices that can be charged by the others who need to also cover the costs of set-up.

One of the lowest-priced is Hazelwood in Victoria. The present owner got it for a song when it acquired its parent company. Another is the nearby Loy Yang A. Australia's AGL bought much of it from the Tokyo Electric Power Company in a fire sale after the Fukushima nuclear disaster.

And the third is the giant Liddell power station in the NSW Hunter Valley, virtually given to AGL by the NSW government as part of a larger deal that enables the government to avoid the clean-up costs when it's shut down.

Hazelwood is closing next month. Its French owner wants to exit coal worldwide. The ageing Liddell plant doesn't have long to go. With fewer of these unusual competitors able to charge unreasonably low prices, the other generators will be able to charge more like what they need and prices will shoot up.

The Energy Market Commission says wholesale prices will jump 20 to 40 per cent in Victoria, South Australia and Tasmania when Hazelwood goes, before falling back somewhat as new wind-powered stations come on-line.

But no new station, be it wind or even coal-powered, will be able to act like the big three have and sell power as if the station itself costs nothing. Nor will they be able to plan to sell power without factoring in environmental costs.

You can't plan to do that if you're building something that's going to last 50 years.

Which isn't to say there's nothing Frydenberg and his state counterparts can do. They are attempting to depress retail prices by changing the rules so they eat into retailing and transmission margins, and they could easily change the archaic and apparently manipulated rules governing how power is sold every five minutes.

That's right. Every five minutes, there are auctions to determine who gets to sell how much and for what price during the next five minutes in different parts of the so-called National Electricity Market, which takes in the eastern states and South Australia.

But a quaint historical rule means what the winners are actually paid is the average price over the six five-minute intervals that make up each half-hour.

So if the generators hold back and offer very little power and demand high prices during the first five minutes of each 30-minute cycle, and push the price per megawatt hour towards the ceiling of $14,000, they can offer much more at lower prices during the rest of the half-hour and still get an average price north of $2000, which is above the odds.

A new "five minutes means five minutes" rule would stop them.

And it would make it easy for battery farms to submit bids when the price gets high. They mightn't be able to bid for a full half-hour to take the edge off high prices, but they could do it for five or 10 minutes. Overseas, and in Western Australia, companies such as EnerNOC act as "demand aggregators" bidding to turn off demand when prices get high.

A zinc smelter might be able to turn off for five or 10 minutes and still keep its zinc molten, but not for half an hour.

And they could change the rules to reward generators that provide "inertia". Old-style coal-fired power stations do it automatically. They alternate the direction of current at 50 cycles per second because their turbines spin at a constant speed.

As coal-fired stations become more scarce, other generators are going to have to be paid to provide that service. Wind farms can do it using electronics, and the government is funding a trial at the massive Hornsdale wind farm north of Adelaide.

Down the track, battery farms should be able to do it as well, providing "synthetic inertia" as good as that created by spinning lumps of iron.

Away from the glare of politicians, the Finkel Review being conducted by the chief scientist, Alan Finkel, for the state and federal energy ministers is examining all of these options. It won't be able to stop prices rising, but it might just be able to make things work better.

In The Age and Sydney Morning Herald