Australian PM Turnbull’s Hydro solution risks crowding out better entrepreneurial solutions

Australian media and political commentators believe their energy markets are in the midst of a deep crisis. Australian Financial Review headlines include huge prices increases such as 76% increase in billed east-coast gas prices; South Australia electricity blackouts; and gas supply shortages predicted for next year as exporters cover their obligations to overseas buyers. A flurry of solutions over the last week include Elon Musk offering great deals on Tesla battery technology; obligations on gas exporters to divert a proportion of gas production to the domestic market; and PM Turnbull announcing a major upgrade of the Snowy Hydro Scheme.

UK experience with no natural resource

UK hardly has any natural resources compared to Australia, mainly in the form of dwindling North Sea gas. In comparison, it seems like Australia is facing a ‘rich man’s dilemma’, or too many attractive alternatives to choose from. UK has closed down its coal fired generation sector previously supplying 30% of their demand up until last year. It is successfully sweating its remaining energy resources including having installed relatively cheap LNG import terminals; developing new gas pipelines to neighbouring countries; extending gas storage facilities; broadly adopting energy efficiency initiatives across all medium sized energy users; major subsidisation of renewable energy sources; and most recently implemented a successful market for demand side response.

In the UK, this demand side response market has allowed energy buyers to sell options to allow the national electricity system operator to turn down or turn off their sites’ electricity demand in response to shortages during peak demand or intermittency. Demand side response has been a huge success by avoiding massive investment in infrastructure, resulting in the system operator reducing their generation supply buffers from 20% above peak demand several years ago, to 5% below peak demand over the last two years.

Australia energy markets in crisis

Australia is rich in energy resources, most notably sunshine and space for windfarms; along with abundant gas resources. And an invaluable hydro scheme which can provide the instantaneous electricity required to meet peak demand and intermittency in the system caused by renewable electricity sources. However, they face a short-term crisis in supply of electricity and gas.

Yesterday, Prime Minister Turnbull announced a plan to invest $2bn to increase the capacity of the Snowy Hydro Scheme from 4MW capacity to 6MW, with a four-year implementation timeframe.

The announcement referred to the ability to provide the extra hydro capacity in the form of a continuous baseload supply, but the real benefit and value from the scheme will be the ability to supply electricity on an immediate basis. This will underpin the value of solar and wind farms by filling the intermittency gap risks to allow them to generate relatively cheap continuous baseload electricity supplies through regional diversification, as proved in Germany.

This purpose for Hydro will compete with the role emerging for battery technologies which costs are rapidly falling. There is currently an outcry that the Snowy investment will crowd out this innovation. However, this argument should hinge on which solution is most economic and least risky.

 Comparison of PM’s Hydro solution versus Elon Musks Offer

The MP’s Hydro announcement followed Elon Musk’s offer last week, to solve South Australia’s electricity supply problem by providing 100MW of battery capacity at a cost of $250/kWh. With the guarantee that if it’s not implemented in 100 days it’s free.

Batteries are used to discharge electricity for specific planned purposes such as meeting demand from expensive peak periods; meeting gaps in intermittent supplies; and meeting demand side response calls from the system operator; or ideally all of the above. The battery then re-charges at cheaper periods, which may be overnight or when there is excess renewable production.

A comparison of these two offers are not straight-forward as the underlying economics of each technology is different, for instance a large cost driver is the rate of discharge and re-charge rate. These rates are dependent on the specific requirements of the battery or for the energy supply problem the battery will solve.

The battery costs also need to include additional costs for supporting technologies such as invertors. Expensive capacitors are a different battery technology which can discharge the quickest but are very expensive.

PM Turnbull Hydro Scheme plan implied that it could be used for a lower-value adding baseload electricity supply. However, in order to optimise value, the Hydro scheme should be used in the same way as batteries. The best market configuration would be to use the Scheme in a battery role, to meet peak demand; and to remove the intermittency risks from larger centralised solar and wind farms for them to provide the baseload continuous supply.

If the Hydro Scheme was used as a battery, then we can compare the two technologies using some reasonable assumptions based on our experience of working with battery commercials in UK. We can compare the Elon Musk Lithium-Ion battery offer based on an assumption of a typical 2-hour discharge capability and $200/kWh of additional costs for supporting battery technology and implementation. Also assuming the quote was based in USD using 0.75 exchange rate. So the comparable Tesla quote is AUD1,200/kW. So 2,000 MW would cost about $2.4bn using Tesla’s battery technology.

Based on this comparison analysis the Snowy Scheme is comparatively good value at $2bn as the Snowy Scheme can match the same requirements of batteries, but at about a 15% lower cost.

However, there are substantial risks proceeding with the Snowy Scheme:

  1. The Scheme would take at least four years and the crisis would still need to be resolved in the meantime. The Tesla solution would take 100 days for the batteries to be implemented.
  2. Within this four-year period, battery technology costs should fall further to become cheaper than the Hydro scheme.
  3. The risks of many small battery investments backed by private sector entrepreneurs are substantially diversified and therefore less than a single $2 billion-dollar golden bullet which could become a white elephant.
  4. Demand side response by energy users with flexible capacity can go a long way to meeting peak-demand constraints. This market should emerge in Australia over the next four years. UK now has less generation supply capacity than peak-demand with up to 5% of demand now being met by energy users’ voluntary turning off or turning down electricity usage.
  5. The Hydro Scheme’s existing 4,100 MW of instantaneous electricity supply could be better used to meet the risk of system intermittency preventing more widespread adoption of solar and wind farms.

Beond conclusions and recommendations

Based on these risks the energy market entrepreneurs’ outcries against the Hydro scheme crowding out innovative entrepreneurial efforts has merit.

Beond believes that distributed energy at the site level provides the best solution. This includes a combination of batteries, solar power, demand side response and energy efficiency driven by analysis of real-time usage data collected using ‘internet-of-things’ at the device level.

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