Electricity Grid Faces Challenges Amid El Niño’s Return, Warns AEMO

Australia’s electricity grid is bracing for potential disruptions this summer, particularly in Victoria and South Australia. The Australian Energy Market Operator (AEMO) has expressed concerns about the imminent El Niño, which is anticipated to bring about a season of extreme heat and wind-less days.

This latest warning from AEMO (2023 ESOO) presents a very concerning picture. The slow pace of transitioning from old coal plants to cleaner energy sources, coupled with potential coal and gas shortages, has heightened the risk of blackouts. AEMO’s annual 10-year outlook emphasizes the urgency of investments. With nearly two-thirds of Australia’s coal power fleet expected to shut down by 2033, the need for swift action to ensure uninterrupted power supply is paramount.

The challenges of transitioning to a greener economy are becoming more evident. The scenario in NSW, following the proposed 2025 closure of the massive Eraring coal generator, is particularly urgent. AEMO strongly recommends postponing such retirements to avoid blackouts. Contrasting their optimistic report from February, the upcoming summer may see Victoria and South Australia facing with power shortages. These shortages can be attributed to a mix of factors, including periods of low wind, recurring generator breakdowns, and the gas plant shutdown.

The latest AEMO report indicates that roughly 3.4GW of new generation and storage capacity is projected by this summer. Furthermore, initiatives like Snowy 2.0 in NSW and the Borumba pumped hydro project in Queensland are aimed to bolster capacity by 2032-33. However, there are concerns as projects like Snowy 2.0 confront delays and rising costs.

With the re-emergence of the El Niño pattern, the electricity grid is anticipated to be under significant stress, especially following three comparatively milder summers due to La Niña. The growing popularity of electric vehicles and electric heating, notably in states like Victoria, will add to the strain on the grid.

Sarah McNamara, the CEO of the Australian Energy Council, perceives this both as a challenge and an opportunity. She is optimistic that the market can overcome these obstacles with the appropriate price signals to stimulate investment.

In conclusion, while the journey to a low-emission economy might be lined with challenges, with the right strategies and investment, Australia can ensure a reliable and sustainable power supply for its citizens.

The Safeguard Mechanism – not so safe anymore

Once again, the Labor government has shown its teeth when it comes to climate. Last week rebuffing the Energy Security Board’s action for a Capacity Mechanism, which would inevitably only benefit large coal and gas generators, and today bringing out a consultation paper to reform the Safeguard Mechanism.

This hasn’t come as a surprise as it was a cornerstone of their election campaign, but to have done it so quickly may surprise some, and to have a start date for these reforms at the start of the next financial year, 1st July 2023, will surprise many.

To re-cap, the Safeguard Mechanism is the legislation which came in in 2016, it was designed to reduce the emissions of the industrial sectors within Australia with targets or baselines capping the amount of emissions each facility can emit. The flaw was that the large industries could continue to re-set these baselines so as to ensure that as production increased, so did the baseline and as such the emissions would also be increased without penalty. In the Financial year 2020 – 2021, these large emitters made up 28% of Australia’s Carbon Footprint

What is currently being proposed is a type of basic cap and trade model with stricter reduction targets, to help the government achieve their net 43% reductions by 2030 and net zero by 2050. This equates to reductions for these large emitters of an initial 3-6% and increasing post 2030.

The consultations also ask for feedback on whether the concept of using industry average benchmarks should be used to set all baselines. This will be strongly argued against by industry, especially since the published default values are significantly lower than most emitting facilities. However, it may enforce the desired reductions, this I am sure will be a major discussion topic in the weeks ahead.

Other parts of the paper discuss increasing the transparency of the Australian Carbon Credit Units (ACCU) market and the Carbon Offsets used to abate the excess Scope 1 emissions. This would support the tender sent out late last year to establish a trading platform for the Carbon Credits, which would de-mystify the pricing and availability of this currently opaque market. This is a measure, I am sure, will be welcomed across the industry, especially by those projects with excess certificates.

However, what will not be welcomed from the green flank in government, and their supporters, is the possible future inclusion of international Carbon Offsetting certificates. With many of these trading at significant discounts to the Australian government accredited ACCUs, the value of these domestic projects could be significantly eroded if international credits can be applied to excess emissions.

The drafts of the responses will be being formed by C&I regulation teams over the coming weeks, with the aim to try and protect their position and emissions as much as possible. I am sure they will be arguing for facility specific, production adjusted targets with the cheapest offsets possible for over emissions. However, how successful their lobbying will be is yet to be seen. This new government is not afraid to turn the status quo on its head and with ambitious climate targets, and with international eyes watching, I am not sure that industry will receive the desired outcome from this reform. With the consultation closing at the end of September this will certainly be one to watch before the end of the year.