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Select Committee into the Resilience of Electricity Infrastructure in a Warming World
07/03/2017
Storage technologies and localised distributed generation in Australian electricity networks

CROCKETT, Mr Lane, Energy Associate, Australia Institute; and Head of Renewable Energy Infrastructure, Impact Investment Group

MOUNTAIN, Mr Bruce, Director, CME

[15:41]

CHAIR: Welcome. The committee has received a submission from the Australia Institute—No. 54, published on the website. Information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. I invite you both to give a brief opening statement.

Mr Mountain : Thank you for the opportunity to make a statement, but I think the time is best left for questions.

Mr Crockett : I will make a statement, if that is all right. Thank you for the opportunity to attend the hearing. I am representing both the Australia Institute and the Impact Investment Group. I will just quickly introduce the Impact Investment Group. We are an impact investment funds manager. That means we provide investment opportunities which have commercial-level returns but also provide a social and environmental benefit to investors and society. An example of this that the committee may be interested in is the Impact Investment Group recently launched its $100 million solar income fund, which has over 100 private and institutional investors. It is chaired by Ross Garnaut, who I understand attended this morning. The fund's seed assets include the solar farms in the ACT, which you may have driven past, in WA and in the Northern Territory.

The fund's assets are expected to produce around 1.3 million megawatt hours of clean renewable energy, providing on average power for about 9,000 homes and will abate more than one million tonnes of carbon dioxide equivalent over their lifetime. The social and environmental benefits of the assets from the fund are also significant. Over its lifetime, it is estimated the clean energy generated will avoid 29 pollution related deaths and 16,000 illnesses due to the onset of coal and gas powered generation. It is also estimated to save $57 million in health and environmental related costs. So here we have a $100 million fund saving the Australian community $57 million in costs. Because that $100 million was raised in two days, the Impact Investment Group and its investors are of the view that this is an excellent investment, whatever way you look at it.

The committee may also be interested to know that the Western Australian solar farm located in Karratha Airport has new technology, which supports its connection to the grid. Because the grid in that part of the world is unable to withstand significant fluctuations, the solar farm has a battery storage facility and cloud prediction technology. Essentially, that is a set of cameras that look upwards. They see the clouds coming towards the facility and that information is then used to control the facility, with the help of the battery, and to ramp down at a rate that is acceptable to the grid. This technology was supported by ARENA, and it is an excellent example of good government policy resulting in substantial energy cost savings to a regional community.

The Karratha Solar Farm is a good segue to the submission from the Australian Institute, which highlights the potential of battery storage as a technology that will facilitate very high levels of intermittent power generation, such as solar and wind. So while balancing a network is a matter of matching both fluctuating demand and supply, the cheapest forms of power generation—in other words, solar and wind—are intermittent and, therefore, some form of firming supply is required. Battery storage technology is evolving very quickly, partly due to its transportation applications but also due to the opportunities in the electricity networks. One of the things I have learnt over the years is that once international investors perceive there to be a market opportunity for a particular product, then that product's development will be very fast. We have seen that in the solar PV industry, and we expect that battery technology will follow a similar path both in the reduction in costs and in the uptake. You will note that in the Australia Institute's report, research of consumers who own PV shows that over 80 per cent of those who own PV are already considering buying or purchasing batteries. So batteries, even at a residential level, have an impressive ability to assist in the transition to a cleaner, safer and healthier electricity network. They can also provide good stability support and reduce wholesale price fluctuations, which is a benefit to all consumers.

My final statement to the committee is that the transition to a clean, robust and low-cost electricity network in Australia is best supported by evidence-based policy. The policies and regulation should support the transfer from high-emission, high-cost systems to clean energy power generation integrated with smart networks, with consumer options which offer lowest cost alternatives.

CHAIR: Thank you, Mr Crockett. We appreciate that. Mr Mountain, I would like to go to you. There has been quite a bit of evidence, both in written submissions and via these hearings, put to us that the way the current rules are structured effectively have the system rigged for the old power generation, and that they lock battery storage capacity out—or at least make it harder to compete. There have also been various levels of allegations of price gouging and gaming the system. Could you go to those issues for me please? I know you have done a bit of research around that.

Mr Mountain : Certainly. There are two levels at which I would like to say something on that. The first is in respect of batteries operating within the wholesale market. In the case of batteries they are for the production of power generation, taking from the battery and putting it into the power system at short notice. The market we operate sets prices in five-minutes trading intervals or auctions. The trading period, the settlement period price—the price that the generators receive and that the consumer pays in the mandatory wholesale market—is the average of those five-minute trading prices. So batteries, which can actually respond in very short intervals and can adjust either the demand that they are taking from the grid or the exports back into the grid at a very rapid pace, are not getting their full compensation for that because the value they offer is very high in that five-minute interval but the price they get is the average over the half-hour. Essentially, the market is not reflecting that very short transient value that batteries, first and foremost, and hydro, secondly, have the greatest value in actually producing. So a lot of the economic value that batteries has is not captured by that particular market flaw.

The second is quite different to what you might have heard so far and that is in respect of the tariff construction or the tariff design. Around one-third of the residential price to a household consumer or a small business consumer is a fixed charge, which does not vary as a consequence of how much the customer consumes. Batteries and solar, which are a fixed cost outlay to a household, do not capture that value because the household or the business is still exposed to the fixed charge, so the economic value that it has is actually diminished to the householder or the small business that puts in a battery by virtue of the tariff structure.

So those are two quite different elements of the rules in which I think the economic value of a battery, both to those who invest in it and to the power market more generally, is not adequately captured.

CHAIR: What about power generators taking advantage of the spot price?

Mr Mountain : It is my view that in many trading intervals and half-hour settlement periods, most notably in South Australia and in Queensland, the prices we see do not reflect a genuine scarcity in the market; they reflect the exercise of market power. Generators through their actions can withdraw capacity from the market by either not making it available to the market at all or, alternatively, only making it available at extremely high priced bands and as a consequence, although they lose production through the smaller volume that they are dispatched to, they gain a price which is a multiple of the lost production. This is a straightforward exercise in market power. In my opinion it is well documented by the regulators and noted duly. I think the enforcement regime we have in Australia is inadequate in dealing with that. I think prices would be lower if those issues were adequately addressed.

CHAIR: What kind of price differentiation are we talking about? How much are these generators making while they sit back and wait for the price to peak and then bid into the system?

Mr Mountain : The maximum price that a generator can receive in a half-hour is $14,000 per unit that they produce. The typical annual average price is in the range of $50 per megawatt hour to $100. So by withdrawing capacity and achieving extremely high prices in a number of these half-hourly periods they can obtain two orders of magnitude or three orders of magnitude more revenue than they otherwise would. It is impossible to say how much they actually get because the amount they get is a function of their contracts in the market. The wholesale market is a mandatory spot market. They have to produce and sell into that market but they can hedge around it by entering into contracts.

Not knowing the contract position, I cannot identify how much any individual market participant gets, but I know that they can affect spot market outcomes and hence contract market outcomes and hence enforce their own competitive position in the wholesale market and most notably in the retail market, where they can drive out competitors who can otherwise not get access to contracted positions that will hedge this extreme volatility.

CHAIR: Is that particularly important for generators who have both generation capacity and retail? They know what is going on there.

Mr Mountain : Yes, I think there is a vertical integration and incumbency problem, and I think it is particularly acute in South Australia. I think it is also a problem in Queensland and then New South Wales and Victoria, in that order. I think the loss of Hazelwood will probably introduce the problem into Victoria because Hazelwood has been a largely uncontracted trader. It has had excess capacity compared to the retail generation that its owner, ENGIE, had through its retailer, called Simply. And as a consequence, the loss of that generation will put greater contractual authority and power in the hands of the incumbent generators. This evidence is quite visible, simply looking at the number of contracts traded in the contracts markets, for which there is good data; there are almost none traded on the SA market and, as a consequence, if you are seeking to compete in that market you are at a disadvantage.

CHAIR: Did you think it was sheer consequence that on 8 February, when there was high demand—a heatwave in South Australia—the energy operator put out a call and said there was going to be high demand and they were encouraging people to bid into the system, and yet three generators just happened to have—quote—'technical difficulties'?

Mr Mountain : Yes, I think one needs to look into the circumstances in every case. But I am of the view that that sort of picture and that pattern of behaviour is consistent over time, and is a form of capacity withdrawal. It is a market, and the regulators will say: 'This is reasonable market behaviour; there is a capacity shortfall, or a prospect of one, and so we do not have to make our plant available.' In market economics, that is pure and simple the exercise of market power. You are not taking the price in the market, you are making the price in the market. Again, I cannot make an allegation against any party. You would need to look into it in detail. But these are the circumstances in which you are able to exercise market power.

CHAIR: Have you tracked that behaviour? You say 'over a period of time'. I used that one day as an example. Is that information available—is it transparently available? Can we track that?

Mr Mountain : Yes, you can. In practice, you need to be on the ball, and you really need to make a lot of effort. Because you need to go into, often, five-minute time intervals, and if a generator claims that they have a unit on maintenance, and your impression of the operation of the market is that, by virtue of that, they effectively withheld, you then need to request information from the company to understand the nature of that maintenance outage—that sort of process needs to be gone through. I have done a South Australian—

CHAIR: Who would be the right body to do that?

Mr Mountain : The right body would be the Australian Energy Regulator. To its credit, it does a number of studies and it has obligations when prices exceed a certain threshold to do a particular type of study. If they exceed $5,000, it has an obligation to do a particularly rigorous study. I believe a lot of what they have done is to observe behaviours. They have pointed to pretty precise dots, but have stopped short of joining them. I think much more could be done to join those dots and to get more inquisitive when these events occur.

CHAIR: I cut you off before; were you going to say that you have done some of this?

Mr Mountain : I do not have access to the information, and I can ask the company questions but they are under no obligation to answer me. I did a study in 2012 looking at the behaviours in South Australia, most notably in the period from 2007 to 2012, to assess whether, looking at the wholesale market data, I could see any particular behaviour. My conclusion from that study is, in South Australia, Torrens Island A and B, in the ownership of AGL, had withheld capacity from the market and effectively made the price rather than taken the price—and had gained from that considerably. I looked also at 2012 and, from memory, parts of 2013, and I noticed similar behaviour by Northern and Playford, in what I subsequently understand to be their last gasp at an attempt to achieve higher prices—but were unsuccessful. They do not have the same market position that AGL has in that particular market. I would love to keep on doing it but unfortunately lots of things pull me in other directions. I think the evidence is abundant and just waiting for the dots to be joined.

CHAIR: What do we do to make that happen? Do there need to be changes to the regulations? Do penalties need to be imposed? If that is simply market behaviour, what do we do about it?

Mr Mountain : I think I have given up on penalties for which there are limited abilities to levy them legally, as I understand it. I have given up on admonition to good behaviour and bidding in good faith. I think these things mean very little in practice. The generators quite reasonably claim: 'It's the market. We'll do what we like under that market,' and so on. I think it is an issue of market design. We are now one of the only mandatory energy markets, which is an energy-only market; it compensates only for the energy that is actually produced. A widely understood disadvantage of that market is it provides extremely high incentives to exercise market power. If you can drive the price up to two or three orders of magnitude more than the average you have an incentive to do so. What you lose on the volume you gain by several factors on the price.

I think we need to move away from that. I think we need to move away from that not just to do with the exercise of market power, but to do with the fact that the generation mix is changing. A lot of the new generation coming on—irrespective, frankly, of what politicians decide—will be renewable generation. It is the cheapest source, and that has zero variable costs of production. And an energy-only market in which the clearing price—the price of the last generator to be ordered to actually produce a zero—ends up with very volatile prices and does not compensate those generators adequately. So we need to end up with a combination of a capacity payment, a payment to be available, and a payment to actually produce. I think that will ameliorate some of the market power concerns.

There is a strong constituency in the economics community against that, because they see it as anticompetitive or not a market. I disagree. It is every bit as much a market, and what we have now is no less an intruded market; there are controls in it in other ways. So this debate is wending its way at a glacial pace through the energy institutions. I think it is one in which politicians should also get involved, and really the mandate should actually come from them in a much more general sense, looking across the economy—the gains and losses from it.

CHAIR: And just to be clear you said there would be two payments: the payment to be available—

Mr Mountain : Yes.

CHAIR: And then a payment to generate?

Mr Mountain : Yes.

CHAIR: And payment to be available of course—and perhaps, Mr Crockett, this is a question more for you—you would imagine that is something that would suit storage capacity very well, since it sits there and it could be available immediately. Am I right or I have I missed?

Mr Crockett : Yes. That is essentially correct. Obviously, it would provide a revenue stream for battery storage. At the moment, if you are trying to find an investment case for a storage facility of any kind—battery or pumped hydro or whatever—the only revenue you can earn is the differential between higher and lower prices. And of course bringing yourself into the market can have the impact of actually reducing that differential, so it is not a good investor environment for bringing the storage in, which is one of the reasons it is just not valued in the market at this point, which I think is consistent with what Mr Mountain was saying.

CHAIR: Obviously bringing the 30-minute rule down to five minutes would in some way send a price signal that availability is important. But, Mr Mountain, you are saying you actually think they are two very different markets; they are regulated differently or there are just two different prices?

Mr Mountain : I think what batteries and hydro—whether it is pumped or not—can achieve is incredibly rapid alteration of production or demand in short order, and that is not adequately valued. That does not get the adequate value in our market. So I think addressing that—whether it is through a five-minute rule or a mechanism that values that better—would be a step forward. This is the sort of service that large coal fired generators have provided through automatic control—there is a steam device on it which can essentially spill the steam and mean that the turbine can move up or down quickly, but not as flexibly and as quickly as a battery can.

So, in keeping with a change in the technology, the change in the market should occur. I think that is one issue and it should be kept separate from the energy-only market issue. I think the nature of our technology mix and compensation for batteries, wind, solar, the new technologies that are coming on, would be a compensation for being available and a compensation to actually produce. I do believe that is relevant also for the gas fired generators, where many are not operating in the market through very high gas prices, and if they were compensated to be available—

CHAIR: There would be gas on site ready to go.

Mr Crockett : Yes, indeed. I do not believe the greenhouse gas impacts to that will be terribly detrimental. The volume of their production is not going to be large. But they have a critically important role in keeping the system stable and bringing on production when it is needed at short notice.

CHAIR: Mr Crockett, do you have a view about the interconnection between South Australia and other states and whether that needs amending or fixing? Do we need a new interconnector?

Mr Crockett : That is a very specific question.

CHAIR: Sorry.

Mr Crockett : That is all right. I suppose it does affect the market in South Australia and it certainly makes South Australia potentially a more difficult place to do business because it is more volatile from a price perspective. That can be advantageous or not, depending on what type of generator you are, whether you are a customer or a consumer. So certainly more interconnection will help to assist with some of the issues that are going on there; however, they could also be dealt with via some of the mechanisms that we were just discussing, so you do not necessarily have to use transmission interconnection. There are other ways, which we have just talked about, of doing that.

CHAIR: Do you have a view on this recent push from the Prime Minister in relation to spending money out of the Clean Energy Finance Corporation on new coal generation?

Mr Crockett : Yes, of course. It is slightly confounding; I have to be honest. I guess if you get to a fundamental level of policy, the problem for investment—which is starting to already impact this system—is we are starting to see some older high-emissions assets closing down, but the problem is there is no policy that is actually defining how and when that should happen. So, for example, the only real climate related policy in the energy markets is the renewable energy target, and its effectiveness kind of finishes in 2020. So, whilst you earn income from LGCs through to 2030, it has kind of done its job by 2020. So, past 2020, we have a complete policy vacuum. So it is very hard; whether you invest in renewable infrastructure or power infrastructure generally, how do you make investment decisions past 2020? It is very difficult.

CHAIR: That is one of the things that has been put to us a number of times, from smaller start-up renewable generators through to even having AGL here this morning saying that the lack of a plan is stifling development and investment. The National Farmers Federation are today calling for an emissions intensity scheme and, effectively, a price on carbon. From an investor's perspective, if we were able to change the rules around allowing batteries to participate on a level playing field where they are valued in the system, and you had a plan that allowed for a price on carbon, do you think that would be a more secure investment environment?

Mr Crockett : Absolutely. There is no question about it. Probably the market design and the lack of a climate policy are the two fundamental issues, or the most challenging issues, for an investor at the moment.

CHAIR: Will Australia lose investment unless we put in place a proper plan?

Mr Crockett : It is most likely, yes. If we do not have a plan then we will not transition at the speed that we have already promised in our international negotiations. And the climate science is clear that even that is not fast enough. So at some point we will have to ratchet up those policies. Effectively, what you do is delay it. It is inevitable that it will happen. If you do not have sensible policies around it, you will delay that investment, which will make it more expensive for consumers in the long run.

CHAIR: Finally, there was a suggestion from Senator Xenophon that, from what I could tell, renewable energy generators should be forced to have storage capacity built in. What would the investor response to that be?

Mr Crockett : To be candid, I suggest that it sounds like a very reactive way of dealing with what is a challenge—no question—but one that could be dealt with in a far more forward-looking way that would be less confusing to both the industry and investors.

CHAIR: Through these price signals of valuing storage for its own sake?

Mr Crockett : Yes.

Senator McALLISTER: Thank you both for appearing this afternoon. Mr Mountain, I want to ask you about the work your organisation did in relation to batteries. That was a piece of work that you were involved in and can talk about?

Mr Mountain : Indeed. Are you talking about the comparative analysis of electricity and solar in South Australia?

Senator McALLISTER: No. I am talking about the work that I think you did for the Public Interest Advocacy Centre called Batteries and electricity network service providers in Australia: regulatory implications.

Mr Mountain : Yes, that was a more general regulatory framework piece.

Senator McALLISTER: Correct. We talked quite a lot in this committee about batteries being one of the technologies that might support a more reliable electricity network. I am interested in the conclusions you drew about the role that different market participants might play and the use of batteries. It is not simply the technology that is important, although it is very important. It also enlivens questions of market power and competition. You have given some thought to that. You highlight it in the executive summary, you step through a range of options and you consider a bunch of them are worthy of further consideration. It would be quite useful for the committee if you step through the main elements of that argument and the reason you came to those conclusions.

Mr Mountain : In the electricity market that we have after its reformation 20-odd years ago, we split the monopoly network services from the competitive generation and retail services. The idea behind that was to ensure competition in generation and retail. Even leaving batteries aside, there are problems with that, because a network can move power around in the same way that a generator can, and they can substitute for each other.

So you have different technologies; one which is regulated and one which is in the market, which can do competing things. This has long been a tension, but it is a somewhat limited tension, and until batteries came along it has been one that market participants could live with. There was a constraint on the network providers not to own more than a certain portion of the load they serve in generation, and although they could get involved in load management, which is just an alternative form of generation, there were limitations on that.

Batteries change the picture completely, because a battery can be both a customer—a demand on the network—and a producer. They can radically change the need for investment in a network by locating at a particular point in the network. And so a network provider that invests in a battery may well be able to provide its network services at much lower cost—a much, much lower cost—by investing in a battery at the right location in the distribution network rather than routing a new substation and transformer around. The problem with that is that a battery does more than just produce network services; it trades in the market, and when it trades in the market there is concern about crowding out.

This is a jolly difficult question. The argument for not having the network providers in it at all is essentially one of crowding out: it is a slippery slope, they serve themselves, they impose costs on others, there is an information asymmetry and the regulator can never know—and so it goes on. The contra-argument is exactly the point I have made: that they can substitute for network development and save a lot of money. My view is that the starting point should be that they do not get to own them so they cannot put them in their regulated asset base. They could purchase services from them, and a battery should be able to offer services to them, but do not allow them to put them in their regulated asset base. This will make it a lot less attractive to the network providers, because they make money by putting assets in their asset base. That is the source of their profit, not in the operation of the asset.

So you may well be cutting off your nose to spite your face, but I think the advantage is that you have less prospect of intrusion in a competitive activity through a monopoly. On balance, that would be my starting point. However, this is a really difficult, grey area, and I think you should explore the avenues over time and be willing to change the arrangements if you see fit.

Senator McALLISTER: If it were not in the regulated asset base there is a risk that, despite the potential cost efficiencies, networks would not choose to deploy that technology for the purposes of network efficiency. Certainly, that has long been the allegation around demand management and the reason that demand management has not been picked up—because of inadequate incentives for the network operators to participate.

Mr Mountain : Yes, this is a difficult problem. I think that the history of our regulation of networks in Australia has been a dismal failure. By international standards it has been a terrible failure. The outcomes we have achieved have been most unsatisfactory. So, on past track record, I would caution against anything that allows them more opportunity to put this into their asset base. Having said all that, I recognise the value they have.

Leaving all of that to one side, I think that batteries have a great future. They have become economical for small consumers, so I think that making sure they are not barriers to their uptake in standards, network tariff structures and retail tariff structures would perhaps be even more important than finalising the rule on whether or not they can put them in their asset base. Perhaps not too much damage is done by not having them in the asset base, at least for a period of time.

Senator McALLISTER: Thanks. I could talk all afternoon, but I will put some questions on notice.

Senator ROBERTS: Mr Crockett and Mr Mountain, thank you for coming. You mentioned, Mr Crockett, the word 'clean' a lot. What is clean renewable energy? Is it different from dirty renewable energy? If so, what is dirty renewable energy?

Mr Crockett : I am not—

CHAIR: Do you have expertise in these areas, Mr Crockett?

Mr Crockett : I think that what I was trying to communicate is that renewable energy does not have emissions at the source of the power generation.

Senator ROBERTS: Dirty emissions?

Mr Crockett : Well, there are no emissions from a solar or a wind plant.

Senator ROBERTS: So what is clean about renewable energy?

Mr Crockett : Clean—as in it does not—

Senator ROBERTS: You mentioned 'clean' a lot. Are you implying that coal fired or gas fired is dirty?

Mr Crockett : Yes.

Senator ROBERTS: What is dirty about coal-fired power stations?

Mr Crockett : 'Dirty'—I suppose I am using it as another word for 'polluting.'

Senator ROBERTS: What do you define as 'pollutant?'

Mr Crockett : Well, facilities that create nitrogen oxide, sulphur oxides and, particularly, particulates because particulates mostly affect the health of humans.

Senator ROBERTS: So that is what you mean by 'dirty'?

Mr Crockett : Correct.

Senator ROBERTS: So in plants with the particulates are scrubbed and the nitrous oxides and sulphur dioxide is all but eliminated and there is only water vapour and carbon dioxide, that is okay?

Mr Crockett : So, just to clarify—you are talking about a plant that produces only water and carbon dioxide?

Senator ROBERTS: Yes.

Mr Crockett : Well, that would have greenhouse emissions impacts.

Senator ROBERTS: So would that be dirty?

Mr Crockett : Look, it is a matter of personal opinion whether you would use that word or not.

Senator ROBERTS: In your opinion, is carbon dioxide dirty?

Mr Crockett : Carbon dioxide is a pollutant in terms of the fact that it causes greenhouse gases and climate change.

Senator ROBERTS: So could you tell me where you find that carbon dioxide is a pollutant? The definition for the UNIPCC certainly does not, because we have checked. Could you tell me the source for your determination that carbon dioxide is a pollutant.

CHAIR: It is probably well established science, Senator Roberts.

Senator ROBERTS: I am serious.

Mr Crockett : I do not understand the point you are making, to be honest. If you want to break up into the emissions of a coal-fired power station and how they impact, there are those that are possibly more likely to cause—

Senator ROBERTS: Is carbon dioxide dirty or clean?

Mr Crockett : It is an emission from a power generation facility that causes climate change.

Senator ROBERTS: Okay, so is that dirty or clean?

Mr Crockett : I just do not—

CHAIR: He has already said it was a pollutant.

Senator ROBERTS: Okay, so you are saying carbon dioxide is a pollutant.

Mr Crockett : I do not understand the point of saying whether it is one or the other. I am sorry.

Senator ROBERTS: Okay.

CHAIR: You will be close to repetition in a moment, Senator Roberts.

Senator ROBERTS: Okay, I accept that you do not understand that. Warren Buffett says he would not invest in wind but for one thing: subsidies. And he is looked upon as the world's best investor. It does not mean I do everything he says, but that is what he says. The only thing that makes him invest in wind is subsidies.

Mr Crockett : I do not know Warren Buffett.

Senator ROBERTS: Is wind a good investment without subsidies?

Mr Crockett : There are many investors in Australia who invest in wind who would be very happy with that investment.

Senator ROBERTS: Okay, with the subsidies, right. The last question I have for you is: you said, 'climate science is clear' and 'the speed we promised is not fast enough.' Could you tell me what science, noting that science is decided by empirical evidence, is saying it is not fast enough?

Mr Crockett : I am guided by the Climate Change Authority's reports in that regard.

Senator ROBERTS: Could you name them for me please.

Mr Crockett : The names of the reports?

Senator ROBERTS: No, the climate change authorities. Or you are talking about the—

Mr Crockett : The Australian Climate Change Authority.

Senator ROBERTS: Thank you. They are my questions.

Senator XENOPHON: I am sorry I was not in the room when the chair asked you a series of questions. I want to clarify—if I can put in context—the concerns that have been expressed or the matters that have been raised with witnesses today. If there is a form of renewable energy that is intermittent and there is intermittency in the system, that requires standby generators. That does pose a challenge under the current market rules. My question, which I put to other witnesses: is there a place for bringing change in the market rules so the renewables should bring to the market system security of services when they connect? I think Professor Garnaut made reference to a secondary market for that, so that if you are providing renewable energy, you can provide, through a market mechanism, backup energy so that the contract could guarantee, effectively, continual power. Is that something that you think ought to be looked at in the context of further integrating renewable energy into the system?

Mr Crockett : We had quite a discussion before about differing market mechanisms that would facilitate the more intermittent generation into the market. I understand that this is something you, being a South Australian senator, are looking at, but I would challenge that to have a policy where a renewable generator, just because it is intermittent, has to bring its own, let's say, firming capacity is what I would possibly call inefficient. I am only hearing this idea for the first time right now, so I am shooting from the hip a bit. But, if you look at the market as it exists, at the moment if a baseload dispatchable generator fails then already the system requires enough backup for the largest generator to fail at any time.

Senator XENOPHON: Minus one.

Mr Crockett : Yes. So that already exists. On that basis, I am hearing that you are suggesting a policy that means that some have to bring their own firming capacity and some do not. At the end of the day, if a dispatchable generator fails, it still requires the market to pick up the problem.

Senator XENOPHON: That is right, although the difference with a baseload generator—and in that I would include a solar thermal generator, which if well designed is effectively baseload—is that we are not talking about a mechanical failure or a maintenance failure. There is intermittency inherently, whether it is solar or wind, coupled with a market mechanism so that it can contract for baseload power, in effect.

Mr Mountain : Can I add a few points. This term 'baseload' is appropriated and elevated to some particular level as if it has some intrinsic value. Baseload, per se, is not useful. In my ceiling in my house, when I changed the insulation some years ago, I had a look at my old water heater, which is a big, thin-steel container, exposed to an uninsulated roof, and I inquired as to why this was such a wasteful device. The answer is that the coal-fired generators in Victoria had a minimum stable generation level. They were baseload. They could not operate other than flat-out, and to keep them going they had to soak up their generation at night. They were inflexible. That was the only way they could justify putting them on, and that is an illustration of the wastefulness of baseload per se. So baseload is elevated to a level that it really should not be. What matters in the market is that you have producers able to produce from a variety of sources—the cheapest first—and consumers that are able to buy when they want and are priced at a suitable level. All consumers should not be mandated to consume at a constant rate, and all producers should not be mandated to produce at a constant rate.

Senator XENOPHON: But consumers expect a reliability in their power supply.

Mr Mountain : Yes, indeed.

Senator XENOPHON: So it is a question of how you integrate the two.

Mr Mountain : Yes, quite. Going back to theories of economics dating back to Mr Adam Smith, allow people to specialise. For those who produce wind farms or solar panels efficiently, let them specialise. For those who come up with other devices that are more flexible—a gas turbine, a battery, pumped hydro or hydro that can soak up these differences—create an arrangement, regulation or market design which encourages them, but do not impose on those who seek to produce a particular good using the sun, the wind or an open-cycle gas turbine an obligation that they also become capable in batteries and hydro so that they can present a constant load to the system. I do not believe that is good economics.

Senator XENOPHON: Mr Adam Smith's 'invisible hand' is predicated on a market that was basically an open and free market, without having other mechanisms or interventions in place.

Mr Mountain : No, I am not sure that that is what Adam Smith said, but we are stepping into economic history. When it comes to energy markets, do not for a moment believe that there is any free energy market anywhere or ever has been. Energy is a political commodity and, in its technical nature, is very complex. Our so-called free market has administration throughout, not just in the wholesale market. So the thing to focus on is the changes in the administration we have now, which are often not visible. Think about the changes to the new regime and, if I may, use appropriate language. I do not believe this terminology 'baseload' is at all useful.

CHAIR: Or fit for purpose.

Mr Mountain : Yes, for saying, 'What is the least-cost way that we might provide energy services to the community?' Use the available resources. In the history of this energy industry, it started off using whale fat, biomass and little hydro, because that was what was useful, and then we discovered coal as a large-scale source, and there was large-scale building of it, and we have now discovered how to capture the sun, wind, biomass and what have you, and we are decentralising back again. Come up with a regulation and a market design which takes account of the technology changes.

Senator XENOPHON: Thank you.

CHAIR: Thank you, Mr Mountain. I think we will leave it there. Thank you, Mr Crockett. That concludes today's proceedings. I would like to thank all of the witnesses we have had today for their evidence. Answers to any questions taken on notice should be provided by close of business Friday, 17 March. I thank the Hansard staff and Broadcasting for their assistance, and the secretariat, of course. Patrick, you have suffered through another one of these! Thank you very much, and thank you to the deputy chair.

Committee adjourned at 16:30