Links to customer value – Future Energy Supply Strategies

Regulatory tests and security of supply –Sounds so elegant so simple when it is a strategic position statement or statements. Queensland gives some very good examples in recent times.

The first being the effort Ergon Energy put into the work to secure power supply upgrades to the ‘Granite Belt’ and that process started in 2011. It was abandoned 17 September 2014. What changed?

Then there is biofuel potential in Queensland. Why the focus on non-fossil sourced fuel now?

Then there are the Coal industry woes – China does not want the Galilee Basin coal type – it is too dirty for its cities!

Back to Ergon: After the Warwick Daily News headlined its story, 15 September 2014, “ERGON pulls the plug” – The story was quoting the Qld Energy Minister – Mark McArdle, as announcing the end of duplication of the Warwick to Stanthorpe power line and the controversy over the routes being selected. Ergon Energy then in a letter 17 September 2014 wrote to the landholders that were to be affected by the proposed duplication of the power line and formally advised they will no longer be effected. Clearly indicated for making the decision were the outcomes of the regulatory test(s). How could the regulator test find as it did to stop the project, even sway the politics of the project? Well, the key findings were:

  • The reliability standards changed on 1 July 2014. There is a heightened need to weigh the costs against the value to customers.
  • Existing demand is slowing and the evidence future demand will continue that trend if not further reduce. Certainly not inside the regulatory forecast periods.
  • Rising costs can no longer be blamed on rising demand predictions, that waste and excess must now be addressed for efficiency dividends.
  • There was very little to be concerned about with the reliability of the network as it stands now.
  • There is an edit the focus should be on affordability. That capital expenditure must be justified as needed.

Another way of putting all this is – Ergon Energy or any other supplier cannot get away with gold plating and excessive redundant equipment and infrastructure just because it gives them comfort – it must give value. How can you get value? You can improve the technology offering better monitoring, performance and be ‘smart’. The later is as simple as balancing the demand supply equation with incentives and/or implementing demand management strategies.

And, yes there is more: alternative energy supply is opening being touted as ‘planned initiatives’ What alternative energy? Call it what you like – clean, green or whatever. But what will stick is not only ‘proven technology’ as the descriptors now includes ‘likely technology’ of distributed type and ‘battery’ storage.

As an aside did you know as ‘battery’ can be a physical volume exchange as well as an electron store!

Does this mean technology will save coal? It is possible – but at the end of the day it will get down to the economics and it is not looking all that bright for coal as sustaining its position even for baseload demand.  Even our world partners are turning their backs on coal – it is now seen as too expensive in terms of the outlook, and the economics, the environment and the cost of the process to make it ‘clean’. Recent Chinese regulatory changes are testimony to that issue. Then there is the story -AngloAmerican boss sees coal mines closing at a rate of one a fortnight http://www.goulburnpost.com.au/story/2569015/angloamerican-boss-sees-coal-mines-closing-at-a-rate-of-one-a-fortnight/ … – no a good look is it!

Yesterday, 22 September 2014, in Canberra the Minister for Industry Ian MacFarlane addressed a biofuel forum on the strategy for Queensland to take the lead on bio fuel production. This follows a paper released through the Queensland University of Technology prepared by Corelli and Deloitte Access Economics. The paper called “Economic impact of a future tropical bioenergy industry in Queensland”. It talks of the ‘potential’ of new manufacturing facilities, and how biofuels can be used as an area of increased focus in agricultural strategy.

What all this means is that traditional energy is heeding a need for a strategic change of heart. Despite what is being said about business as usual, that is not the behaviour behind the scenes and increasingly it is coming to the fore that change is inevitable. The EUAA calls it a paradigm for the industry. The question is what part of the pack are we to become. Australia has always been world renown for finding solutions. What we have not been good at is getting things done, besides talk about it that is.

And, there is more: some government facilitations would assist in industry establishment. Not our quote, it is taken straight from the above papers key findings.

energy efficiency barriers – problem 1,2,3

They are at the end of political and economic capital and old Generation assets have a problem – they are competing with innovation that promotes efficiency. The problem is not new, just reborn ideals that have new tools available. Recently the ACT Energy Minister said it very well (as reported this week in the RENeweconomy ) as the real issue is not that wind, solar and other technologies are added to the grid. It’s that old and inefficient generators are refusing to leave. Therefore new renewables are not the problem.

Looking at the problems of our energy system as a whole CO2Land org sees, just like our bills read – three pricing areas that can be improved. Or should we say need to be addressed.

Problem 1 – the price of energy is set by a market mechanism that in Australia is opportunistic. Old inefficient generators can remain viable by gaming based on availability and triggers to elevate prices. So long as they remain the ‘baseload’ capability and sufficient ‘events’ occur in the market they will remain viable. With or without a renewable target review, the Old King Coal will remain. But we will pay more – not less. Why? Like an old car it needs maintenance and those costs must be passed through. Of course the fuel cost factors in too.

Problem 2 – the Grid system is a capital hungry beast. Both transmission and distribution networks (poles and wires) are encouraged to overinvest. Overinvestment is encouraged in the name of reliability and capability. How can this be necessary? Our regulatory system set the network charges and penalties. When the prices are set for the charges (network tariffs) the weighted cost of capital and the need for maintenance and cash injections need to be reliably for at least 5 years is part of the formulae. Estimated is approximately 10% more is payed than need be – with or without a carbon price – OK!

So what should we do? Agree to keep up prices or encourage a write down of the asset – In 1996 or thereabouts the answer was do no maintenance other than priority works. The system had sufficient redundancy that it could take it. In this way privatisation can look promising. Then some time later the capital injections will be required again and up go costs – it does sound very much like todays 2014 talk too does it not!

Problem 3 – the issue of managing costs to consumers. This is the vexed issue – the supply side believes costs should go up, demand side costs should go down. Therefore you could say energy efficiency means demand decreases and prices will go down. But, think this Problem 2 shows the networks are overinvested and cost will be recovered even if not actually expended – they can be anticipated! Then think Problem 3, the market anticipates events 5% of the time and this accounts for 20% of the costs. A nice little earner lost if you change that!

We know some of you will be saying but a capacity market will fix that, just change the rules will be your cry. The reality those with the courage to change things will have 5 years to bring about the change and then need to predict 2 years in advance. They will need to establish how to impose penalties on the gamers. And, we know the gamers are very good at lobbying for no change. They might even say climate change bah humbug!

But, you know all three problems have another issue: Each problem area participant can be asked what does efficiency mean to you – The answers are very likely to differ and that is an issue for policy makers too. Think this – Federal government will side with security of supply, state with balance of supply and local and consumers with the cost of supply. Makes for interesting responses does it not!

Work Smarter – retail v’s wholesale rules

The various ways innovation can be killed off achieves only one goal, to prevent us from doing things smarter. In 1994 the Department of Finance issued a statement aimed to clarify working smarter. In 2014 the Australian Government again said: We need to work smarter. What does smarter mean? You could take the view it is a balancing term where working smarter is a term that illustrates the rigor and complexity of the English language. Smarter used this way works equally well in arts, literacy, and performance tasks. However, what if it were used as a verb as an irritating means to stop something innovative?

The US gives us a good example of this where the legal challenge to a regulator that issued a rule for good and smart behaviour needed to be defended because it balanced the demand supply equation and that disrupted business as usual. This example was blogged by Joel Eisen: D.C. Circuit Vacates FERC Smart Grid “Demand Response” Rule.

Joel B. Eisen is Professor of Law and Austin Owen Research Fellow at University of Richmond School of Law. His scholarly work is available here.

Last Friday (May 23), in Electric Power Supply Association v. FERC, a D.C. Circuit panel split 2-1 and vacated Order 745, a Federal Energy Regulatory Commission (FERC) rule designed to promote “demand response” (DR). DR is a rapidly growing and valuable means of reducing electricity demand, thereby benefiting consumers and the environment. It is also an important part of the Smart Grid, in which smart meters and devices that communicate with one another and energy service providers can further promote these goals. Indeed, former FERC Chairman Jon Wellinghoff has called DR the Smart Grid’s “killer app.”

The case tested a question of near first impression about the Smart Grid: which level of government regulates it? For now, the D.C. Circuit has held squarely for the states, concluding that DR regulation is a matter of exclusive state jurisdiction. If the decision stands, it will have many adverse implications for federal regulation to advance the Smart Grid and use the wholesale electricity markets to achieve energy reductions and environmental goals.”

What was the argument for the smarter innovation? 1. Directly affects wholesale rates by reducing prices and improving overall market functioning. 2. It has the effect of enabling demand-side resources, as well as supply-side resources, and improves the economic operation of electricity markets. 3. The regulator believed there would be limited Demand Response participation in the markets without encouragement.

The disruption to the smarter solution was achieved by dissention. It was not an issue of being straightforward and sensible, it was that it was competing with the established market and compensated those other than the supply side of the market. The smarter practice affected (can do) the wholesale market in a positive way, but it was “a part of the retail market. It involves retail customers, their decision whether to purchase at retail, and the levels of retail electricity consumption.” The regulator was empowered to regulate practices affecting the wholesale market, not the retail market.

So dear innovators, we have a situation: Working smarter has drawbacks, it can inflict pain, it can wound and be irritating to watch the dissenters argue you have no right expecting a retail outcome where it might affect the wholesale heaven of the established. It does tend to put the perspective on the ‘valley of death’ referred to in commercialization preamble!

 

Rock and Hardplace – RET and DAP predictions

Let us now predict: Soon after the RET review the fossil fuel generators will celebrate with a short-term price relief. It is a two edged sword, as they will discover the relief may be temporary. Partly because large-scale renewables facilities are likely to continue to experience cost reductions, and the Federal government’s Direct Action Plan may further dampen electricity demand – not a good outlook for coal fired generation known for its baseload dependability to be profitable.

It is scheduled for the Australian government’s Direct Action Plan (DAP) to release its white paper -Emissions Reduction Fund, this month April 2014. Also scheduled for mid-2014, the Government’s Renewable Energy Target (RET) Review expert panel will report to the Prime Minister. We might even guesstimate that the PM will find DAP will be unlikely to be a benefit or too expensive for the resources sector, and simply drop it. It could be easier than you think, why because it is not yet funded!

Apart from funding, the Governments’ own wording suggests the final design of the government’s Direct Action Plan will be critical for coal generators, and their survival, with potential for emissions baselines and penalties to curb potential growth prospects. Add to this that individual states do more and encourage energy efficiency, and other large-scale efforts to improve energy efficiency via the Emissions Reduction Fund will be a terrible place for coal fired generators to be if the predicted demand for electricity continues to decline. This will put significant pressure on profit margins of these generators.

CO2Land org feels the PM is in a rock and hard place, by his own doing. Come July he will have no choice but to continue with the threat to repeal the Carbon Price Mechanism (which he refers to as the Carbon Tax) – Which results in a short term gain for coal fired generation. Even if RET is reduced or halved, the long term trend for coal output is still dependent on the price effectiveness of that form of supply – it might even need a ‘subsidy’ to continue supply.

That said, if energy security is the stated reason for a subsidy, it is likely the penetration of renewable energy will continue because it will continue to be subject to falling prices to its advantage, and those prices are dropping because of efficiencies in the way it can deliver. Let us not forget – business too will be more efficient, and in order to survive will factor in the need to reduce energy demands, or at least be more efficient in the use of energy.

Lastly, if the PM were thinking of killing off the Direct Action Plan (DAP) it would be unwise. It is the only mechanism the government has to show they care, or are earth aware. Even South Africa has come to recognize a price on carbon + Renewable Energy + Energy Efficiency + Land use change = business success. We don’t want to appear dumb do we!

 

 

Renewables require less incentive money – because

Having read a good news story that renewables require less incentive money because they are very successful, it is then you will notice other media is displaying it as a negative. We suspect the matter will always be reported ‘on balance’ – code for a licence to adjust for the audience. So which story do you want to hear? Is your glass half empty or half full?

Example one: “Global investment in renewables fell by 14% during 2013, but the percentage of electricity generated by renewable sources still grew, a report shows. It said investment fell for the second year in a row because of cheaper technology, but also as a result of uncertainty surrounding energy policy. However, falling costs meant renewables accounted for 8.5% of the global electricity mix, up from 7.8% in 2012. Renewables accounted for 43.6% of newly installed generation capacity in 2013.”

Unfortunately the above is reported as a negative, and actually was a good news story. The good news is – renewables have continued to get cheaper and the industry built more Gigawatt capacity with less dollars. If you continue to research you would notice:
Globally, renewables – excluding large hydro -accounted for 43.6 per cent of newly installed generating capacity in 2013.

Also the costs of generating electricity via onshore wind turbines and crystalline silicon PV systems have fallen by some 15% and 53% respectively since the third quarter of 2009. This means increasingly, the competitiveness of wind and solar compared to conventional options for generation of energy – such as coal-fired power stations, gas or diesel generators, or nuclear reactors. Other evidence is also supplied by the NSW Government that this is a fact. Globally, an increasing number of wind and solar projects are being built without any subsidy support. Especially noted is Latin America, the Middle East and Africa.

Example two: ”The global power utility market is currently undergoing an increase in capital expenditures. Increasing power demands, aging infrastructure, new energy sources and regulatory pressures are contributing to this growth in capital spending and projects.”

Coupling these factors with the staffing constraints of many utilities often results in difficultly completing this increase in workload. However, with these challenges come opportunities to evaluate and create more efficient project delivery models.

The report – Global Trends in Renewable Energy Investment 2014 – was produced by the United Nations Environment Programme (Unep) and Bloomberg New Energy Finance. The assessment said the US $214.4bn (£129.2bn) worldwide investment in the renewable sector during 2013 was 23% below the 2011 record. One of the report’s lead editors, UN energy expert Eric Usher, described 2013 as a “mixed year” for global renewable energy. Identifying the reasons behind the fall in investment, he explained: “One of the major factors was the fall in the cost of equipment. “Another negative factor was a touch of policy uncertainty, which saw investors delay spending their money.” He told BBC News that the fall in the cost of the clean energy technologies – particularly solar – had “left some governments thinking that they had been paying too much and reviewed their subsidies”.

Mr Usher added that while some nations, such as Germany, had been able to adapt very quickly, “other nations have not handled it quite so well, causing nervousness among investors”. He explained that for a number of years, there was overcapacity in the sector and supply was greater than demand, making it difficult for firms to record a profit. But lower costs, improved efficiencies and market consolidation had allowed companies to return to profitability. Mr Usher observed that there were a number of positive signs during 2013, including the fact that the renewable energy sectors in a number of nations, particularly in Latin America, were able to grow completely free of government subsidies. He added: “For the first time in 2013, China installed more new generation capacity using renewables than fossil fuels. “So it is a good sign for the sector that the world’s largest emerging economy is taking the sector very seriously indeed.” Responding to the assessment, Unep executive director Achim Steiner said: “A long-term shift in investment over the next few decades towards a cleaner energy portfolio is needed to avoid dangerous climate change, with the energy sector accounting for around two-thirds of total greenhouse gas emissions. “The fact that renewable energy is gaining a bigger share of overall generation globally is encouraging. To support this further, we must re-evaluate investment priorities, shift incentives, build capacity and improve governance structures.” The report’s findings are being presented to a Future of Energy Summit in New York, US, which runs until Wednesday – article attributed to Mark Kinver (BBC News), 7th April, 2014.

For more on the article please visit http://www.bbc.com/news/science-environment-26923260

If you take the time to read this report you will notice it is a good news story, equipment prices are falling, and therefore not a much is needed to be spent to implement. So investment needed was 23% lower in 2013 compared to 2011. In example 1 the story said prices have fallen by as much as 53% for solar equipment. This can be construed by the shrewd to askew what ever story you want. Enough to sit you ‘Bolt’ upright hey Andrew?

Transistions – SME or Contestable Energy Strategies

Energy procurement is significantly different in 2014 than previously. The models for success require a multifaceted theme for the energy procurement process this time around.  What is different is you must manage and arranged the information for what you see as the product, and have them – the energy retailer/supplier, evaluate whether they want to participate.  The critical success factor is no longer ‘did you get the best price’, it is ‘did you get enough participants to respond with a good price and adequately market test your result’. It was so much easier when performance was as simple as input becomes output = price paid, and outcome was the accountant is happy.

Some of you reading this may not understand that the original idea of being contestable was to adequately market test and as the market matured the real cost of generation and supply would settle at the economic point of being sustainable. This point may disappoint those that are building reputations on driving prices down, and that the market is doing as it is expected to do – show maturity of the design.

So, it is time to move on and change the model of the market? Wintelboff and CO2Land org are seeing the Australian Electricity Market and the rules are in itself bringing about change, and there is further evidence most participants in the market are not prepared for the changes. Most of the difficulties are not the will to change by the participants, but more likely to be the extent of the systems required and needed to bring about the change.

Consider that it is now clearly the market is in two different tranches, and when you last went to market the electricity market described itself as contestable down to 160MWh pa consumption, and then below that effectively you were termed domestic and regulated at a set price or reset by regulatory pricing structures and determinations. It was also much easier when you could use the meter type as the rule for whether you contested on price or sought a discount on your tariff with the incumbent retailers. The incumbent was usually your network company and default retailer.

This time around you are either on an agreed price to pay for energy as a contract rate above the threshold of 160MWh pa or seek a discount on tariff set by regulation under the rules of as a small business enterprise (called SME) from 100MWh pa. In the latter a retailer licenced to sell energy might offer aggregation of sites to a contestable size or elect to do nothing other than offer tariff rates.

Another assumption that can be dangerous is to assume as a contestable site the retailer/supplier has an association with the network service provider/utility that will work to your benefit. Changes from within the system in all likelihood  means we can no longer ring our loyal and trusted friend and say can we fix this on one side of the ring-fenced entity or the other and have the problem resolved to mutual satisfaction.  It is now a detailed process. To get a result usually you need to address what they call the asset on a project basis, and computer says yes for you to proceed. If you have previously watched the TV series ‘Little Britain’ you will understand that statement rings very true.

Pursuing sustainable outcomes too brings new awareness, and innovation and the introduction of technology would be assessed according to the business case. Where you are showing success at getting a good price for your energy it can undermine the business case for the sustainable outcome. Especially where carbon pricing is needed to level the playing field. If you have been following that approach you will be seeing with the Feed In Tariffs (FIT) and other incentives being distorted as a political whim that only brings uncertainty to the project, and uncertainty has a cost.

On the point of whims, carbon continues to be a problematic area and the federal Energy Reduction Fund (ERF) is still very much without detail other than a benchmark carbon price will be set by government as government dictates and that price can change when the government decides to do so at its whim. The assumption to be made is that either you or those that you invite onto your agreement might be liable entities under that rules and impact your outcomes.

If we are attempting to bridge the needs of Energy as strategic, tactical and operational, and we describe this as Energy Management, Transition Strategies, and Savings – the need for individual assessment is more important than ever before. Yet, most competitive services are tending to be web based and call centres. This is hardly adequate when you desire to be an energy efficiency centre.  That sort of work requires a fuller understanding of the needs, other than a checklist and dubious interpretation of guidelines according to the level of training or programing of the robot. As a sustainable approach it is likely changes to the energy needs over the life of the agreement is being sought, and that is more than price.  Another way of looking at that point is in medical practice the prognosis will be accessed as preventative (price gained now) or diagnostic (what is the best course of action). A good example can be taken as: You want to introduce solar technology, and you need to know what penalties are written in the contract and will a standard form contract be sufficient to cover this off sufficiently well. LED is another very interesting technology as it can negate the need for conventional building management systems entirely, and that could have long-term upstream effects on current contracts and relationships for tenants and landlords and building managers.

We must take into consideration the balance in terms of energy supply and demand, and the responses must relate to multiples of price, network and security, and even emergency responses. The later because increasing in frequency is disaster.

 

 

 

Illustration – LED technology triggers new value proposition.

Is behavior management key to Greenhouse Gas (GHG) reduction? Demand management is a great place to understand GHG sources. Reasonable observations are they not?

Then in a discussion with Carbon Professionals was added an illustration of the view that maintaining interest in the effects of product life cycle is essential  – because the product itself can morph so quickly into another business matter.  If you think business then you will understand – “When things are going wrong in a supply chain, the first reaction is all too often ‘if we could forecast demand better, most of our problems would go away.’” CO2Land org speculates it is not the inability to better forecasting demand that is the main cause of what is ailing that company’s operations….it is the changing conditions that it operates under in creating the demand. It is the need to hold and speculate the demand for its inventory.

CO2Land then postulates the opening paragraph in this post and a position on this: Agreed, it is an interesting statement on the connects that occur with behaviour management and demand management. But: reinforcement can be more difficult after the initial effort, a diminishing return for the effort. Why? The initiative came from a policy and policy can be altered, definitions diffused and vested interests will separate DM and GHG as coincidental to each other. If you follow that you will understand that the business will settle on the economic differences – the measurable, and initially DM works to reduce GHG and then technology (like LED Lighting) removes the need to think about it any more – a new policy is then needed. Motivation must then be linked to another driver.

While discussing this issue a story was printed as

http://www.energymanagertoday.com/shift-to-led-lighting-may-trigger-cataclysmic-change-in-building-automation-industry-095407/

“Shift to LED Lighting May Trigger Cataclysmic Change in Building Automation Industry.”

The story overtly portrays “As we go forward, the case for retrofitting buildings with LED lighting will become very compelling and with it will come a much broader application of controls.

The key difference, though, is that these controls applications and projects will be lighting-centric rather than HVAC-centric and that will make all the difference. These lighting-centric projects will be motivated by LEDs but will naturally incorporate wireless and cloud technology. The result will be the emergence of new players, new technologies and new application delivery mechanisms. The existing industry structure and business models could easily come tumbling down.”

If technology shifts, the business model – what is the value?

Lessons learnt, and studied results suggest that industry structure will remain during the commencing and product development process of the evolutionary change, and this provides incremental gain in the existing value proposition of the company. Once that process markets the technology or change the technology enabled so changes the value propositions, and business survival requires changes in the industry structure.

The example for the building automation industry is that Digital controls were an evolutionary technology shift away from pneumatics, and now LEDs are doing more than making an evolutionary change they are enabling whole new value propositions built on the fact that light affects people and behavior. In this case you can predict the LED transition is and will be far more disruptive to the industry than the introduction of digital controls.

The impact of LED lighting is creating demand for coincident adoption of two other technologies, wireless networking and cloud services. Why? The incumbents in the traditional industries are not geared to extract value from the technology! It is very likely a small company will build a value proposition that is the right combination of business model and technology to drive the industry. Why a small company? Large companies need linear projection for outputs and evolution tends to be non-linear. A smaller company is more likely to be agile and able to adapt, and not shackled by conventional wisdom.  That is they attack with vision and gusto, and not defend with placards to impress the public.

Has the pace of change, changed? Business as usual for industry has powerful reasons for resisting change, and techniques are deployed to slow down the introduction of new technologies and systems. It is not unexpected for 10 to 25 years being considered reasonable for a company to adapt to new technology. But LEDs “come from an industry that moves very quickly, as do wireless networking and cloud services technologies. So, to the extent that companies in these adjacent industries choose to involve themselves directly in LED lighting and controls, the historical rate of change in building automation may be a poor indicator of the future.

It is worth noting that in 2005 there was no You-Tube. The cost and complexity of creating and posting video on the web was prohibitive for casual users. Now, only eight years later, almost anyone can create and post videos on the web … and millions of people do every day.”

The above quote does answer the question:  That is how fast things are changing. So, government policy has to get it right too – to survive another election – eh the needs of society!

 

 

 

how to change a capacity market that serves BAU

In States like Western Australia there is potential for around 1 gigawatt of “avoided power purchase” to insulate against price rises through wide scale adoption by 2020, or in WA’s case 25% of the existing market. This is base load regenerative power capacity. In this discussion, Peter Davies of ID Gasifiers, also said “I was struck by the potential for increasing significant reduction of demand. Small scale efficient biomass energy plants are on the way.

CO2Land org recently posted, 10 September 2013:

the claim a capacity market only serves BAU

The quote in the story was from Dr Jeffery Doyle after posting his précis of a recent conference paper ‘A Cautionary Tale’ and reported through Greentech Media.

CO2Land org included in the story that advances in waste to energy technologies could have sufficient volume available in time for the next bidding cycle – assuming a two year timeframe – they have the potential to create an industry that has multiple product streams with the developing technology. This innovation can be described as ‘batteries’. The key is that reliable and predictable supply can be managed to provide the volume needed.

What might help readers understand the story better is some background facts on how the market operates in WA. The state operates its power supply under the Wholesale Electricity Market (WEM) that was set up so generators can offer electricity for sale to retailers who purchase electricity for their customers. It was part of the Western Australian Government’s reform of the way electricity is generated, distributed and retailed in Western Australia.

The WEM is not state wide in its supply, it in effect ‘islands’ grid connected supply to the more populist corner of the state and calls this bound the South-West Interconnected System or SWIS (an area bound by Kalbarri in the north, Kalgoorlie in the east, and Albany in the south). If you need to know, the ocean forms the boundary to the west. The dominant generation supplier is Verve Energy. Verve provides about 60% of the generating capacity in the SWIS. Verve Energy sells its electricity on the WEM as well as through bilateral contracts with other participants in the market. The majority of Verve electricity is sold to Synergy.

The operator and administrator of the market is called the Independent Market Operator (IMO). The IMO arranges the orderly dispatch of all the electricity traded and the System Operator, which is an independent operating arm of the network business, manages the dispatch.The bulk of electricity is traded as contracts between generators and retailers. In addition, the Short Term Energy Market provides for day-ahead and ‘realtime’ trading.

Reliability of supply is the paramount concern in the SWIS.

More information about the market is available on www.imowa.com.au and www.era.wa.gov.au.

What concerns the discussion, in this instance, is the Reserve Capacity mechanism as is intended to ensure that the South West Interconnected System (SWIS) has adequate installed capacity available from generators and demand-side management options at all times in order to:

  • Cover expected system peak demand including additional capacity to cover the failure of the largest generator on the system and a capability to respond to frequency variations.
  • Remove the need for high and volatile energy prices in the wholesale electricity market (WEM).

The Independent Market Operator (IMO) administers the Reserve Capacity mechanism.

If there is insufficient Certified Reserve Capacity to fully cover the total Reserve Capacity Requirement in a future Capacity Year, the WEM Rules (clause 4.1.16) require a Reserve Capacity Auction to be held to secure additional Certified Reserve Capacity.

A Maximum Reserve Capacity Price (MRCP) is set for each Capacity Year (clause 4.16.1) and determines the expected cost of new entrant peaking plant and other costs required to establish plant capable of supplying electricity to the SWIS (clause 4.16.4). MRCP has the following price setting functions in the WEM:

  • MRCP is the maximum offer price to apply for the Capacity Year for which a Reserve Capacity auction is being held (clause 4.18.2.(b)).
  • MRCP is scaled down by the IMO when there is more Certified Reserve Capacity than required in a particular Capacity Year (clause 4.29.1).

Clause 2.26.1 of the WEM Rules requires the Economic Regulation Authority (ERA) to review a report provided by the IMO that proposes a revised value of MRCP. In approving the value submitted by the IMO, the ERA is only required to consider if the revised value reasonably reflects methodology specified in clause 4.16 of the WEM Rules and whether an adequate public consultation process has been conducted.

Clause 2.26.3 of the WEM Rules requires the ERA to conduct a review of the methodology specified by clause 4.16 of the WEM Rules on each fifth anniversary of the first Reserve Capacity Cycle.

The opportunity to influence the MRCP is also an opportunity to have in place mechanisms to encourage innovations, albeit Co2Land org has in the 10 Sept 2013 story said would require a courageous action. Writing in a preference to supply clause to alternative solutions or innovations to break the bidding ‘status quo’.

The typical Certified Reserve Capacity notices are typically listed Feb 2012 notices for MRC 2014/15, Jan 2013 for MRC 2015/16. Hence this might help you understand that bids are accepted 2 years into the future, but the need to influence should commence 2 years prior to that time of notice.

Can you bank on that?

the claim a capacity market only serves BAU

An unlikely scenario “Do you think we should run a high voltage line to 
Hawaii?” came from a talk that bidding practices for the Western Australia Electricity Capacity Market having lessons for what might happen in Texas USA. It happens they all have in common that they are isolated grid systems and not part of a national grid. If they were part of a National Grid then they could exchange excess capacity, peak loads and help with a transition to an energy spot market. The quote was from Dr Jeffery Doyle after posting his précis of a recent conference paper ‘A Cautionary Tale’ and reported through Greentech Media.

It is a serious matter that the claim a capacity market does not allow the effective operation of an opportunity to be set for demand response. This assumes demand response can only be reactionary to spot price pressures to be effective. However, at about 2007 it was proven the principles of demand management could be a good fit with the bidding practices of the capacity market, providing an advance intention to provide capacity as a virtual and apparent delivery.

What Dr Doyle exposed was that the problem of ‘business as usual’ is being supported by the bidding system. In practice that is a problem no matter where you provide a market (recently the outgoing CEO of Microsoft was quoted as saying they did not promote their capability to compete against their own Windows Operating System as they would have to destroy their infrastructure advantage in the market). If that is so, then courageous actions are needed to encourage innovation to meet the demand. An example of what could be done is changes to the conditions attached to the bidding requirements.

CO2Land org has noted the advances in waste to energy technologies and they can have sufficient volume available in time for the next bidding cycle – assuming a two year timeframe – they have the potential to create an industry that has multiple product streams with the developing technology. This innovation can be described as ‘batteries’. The key is that reliable and predictable supply can be managed to provide the volume needed. It can also be a multiple of aggregated provider units. 
All that is needed to make these ‘batteries’ available is the authority figures to be a courageous promoter and write into the bidding process that preference would be given to ‘new multi product’ generation. Why because cost of generation is then part of a mix of revenue potential and it encourages business opportunities to price in a way to be competitive with conventional supply for peak demand. Note: I did not claim total energy demand as that would be unrealistic.

That said, Peter Davies then offered after reading through Dr Doyle’s analysis that: “

“I was struck by the potential for increasing significant reduction of demand. Small scale efficient biomass energy plants are on the way.

In States like WA there is potential for around 1 gigawatt of “avoided power purchase” to insulate against price rises through wide scale adoption by 2020, or in WA’s case 25% of the existing market. This is base load regenerative power capacity.

What is most interesting here though is if grid connected they can act as load following systems for wind and industrial solar, negating the argument of the existing coal burners that they need to maintain capacity anyway for when these falter in their dispatch. To add insult to injury the same biomass systems can co-fire coal…so fuel supply limitations are not an issue, and being modular such plants can be expanded as required on quite short lead times. The high quality syngas produced can also be used as feed stock for other processes and products, increasing both plant flexibility and resilience to fluctuations in the electricity market (real or forced by monopoly generators).

Start throwing in advances in lower cost domestic solar energy storage coming out of China shortly and demand for fossil energy generation can only fall even further…anyone want to bet on getting a good return on investment in building a new conventional coal or NG power station?”

As we said: A serious matter – this cautionary tale.

 

 

Power of Choice – review by AEMC of DR

All community is affected by the rising cost of energy. Something can be done, and the “Power of Choice” review being run by the Australian Energy Market Commission (AEMC) and a Senate Select Committee on Electricity Prices Inquiry is underway. Both these essential bodies need to be influenced and informed about how essential the implementation of and effective Demand Response (DR) is in the National Electricity Market (NEM) in saving $billions, and continuous saving thereafter.

Over the last 11 years there have been a number of Reviews that have made clear recommendations[1] that Demand Response (DR) should be implemented in our electricity markets.  Unfortunately, all these recommendations for implementation of DR have been ignored, with the exception of DR for Reserve Capacity in Western Australia’s Wholesale Electricity Market (WEM) which works very well.  In hindsight, the lack of an effective DR mechanism in the NEM in particular has cost electricity users an estimated Present Value (PV) of $15.8 Billion[2] (this is in the order of a 9% impost on their annual electricity bills).  Worse still this loss to the community is continuing to grow.

The “Power of Choice” Review is an unfinished work, and CO2Land org has experience in the material of Demand Response (DR). DR is most effective as a formal aggregation of small amounts of demand reduction from a larger electricity users who are contracted to reduce this pre-agreed amount of their demand at times when their are extreme wholesale prices, extreme peaks in demand or in emergencies.  It is much cheaper way to address these short term events than our current outdated approach of spending billions of dollars on more generators and networks which are only needed for a total of about 40 hours per year.

In the push for acceptance of DR becoming a part of the National Electricity Market (NEM) an article was written in the Daily Telegraph, 5 Sept 2012,  (link: http://www.dailytelegraph.com.au/news/power-shift-to-cut-household-bills/story-e6freuy9-1226465075377) after it was relayed some of the source contributions were gleaned from an EnerNOC sponsored report recently completed by CME.

CO2Land org and those mentioned in this post accept we look forward and hope the AEMC is now convinced that DR is essential to minimize further price rises.

If you are confused with the terminology, hopefully the following will help you better understand: The energy market has three components that affect the price we pay: Price response (PR), Demand Response (DR) and the Emergency response (ER).  Price is largely inelastic, and as we are experiencing alternative energy sources we notice the costs have similar or more Price effects to introduce them. Demand Response (DR) is the most volatile price driver in the market where smaller splices of time require a greater build and increase capital required for infrastructure projects (pole and wires builds and maintenance needs to cater for the demand growth). Emergency Response (ER) is an energy security problem and is reactionary to large events with little warning.

References to support this view are:

[1]

  • Alan Fels, Chair of ACCC, speaking at the Inaugural EUAA Conference on 19 November 2001
  • The Parer Review 2002 “Towards A Truly National And Efficient Energy Market”
  • The EUAA April 2004 “Trial of a Demand Side Response Facility for the National Electricity Market”
  • The ERIG Review November 2006 “Review of Energy Related Financial Markets”
  • Stages 1 & 2 of the Demand Side Participation Review (Stage 3 still in progress)

[2]