On Radio National last week, AEMO CEO Daniel Westerman, presented highlights from the market operator’s latest Quarterly Energy Dynamics report. Rooftop solar, and its effect on wholesale prices, got much attention.
Westerman pointed to limitations in the capacity of the existing Victoria to New South Wales interconnector for depriving NSW of access to Victoria’s cheap rooftop solar and its consequent depressing effect on wholesale prices. Therefore, he said, a second interconnector should be built.
But policy-makers have said for ages that the policy argument for rooftop solar is that by putting production close to load we get to save on the need for great big transmission expansions. Here was AEMO’s CEO apparently saying the opposite.
Did Westerman “mis-speak”? What reason, exactly, does AEMO give in the WRL-VNI Consultation Report for building this enormous transmission line – the biggest transmission project in more than 50 years – from Melbourne through Western Victoria and then up into NSW?
As we set it out in our submission, actually what AEMO’s modelling shows is that the main benefit of WRL-VNI is that it allows batteries in NSW to avoid the need to build 24 hour pumped hydro in Victoria.
This, too, is hard to understand: Why not just build the batteries in Victoria instead of NSW and avoid the huge cost of WRL-VNI? After all, batteries cost the same in Victoria as in NSW, according to AEMO.
Digging deeper, AEMO’s numbers reveal that if WRL-VNI is built, there is little need for grid scale storage in Victoria. In fact AEMO’s numbers say Victoria needs so little grid-scale storage that what it already has now, is more than it needs until 2040.
This is shown in the chart below which compares AEMO’s projection of the storage needed in Victoria compared to the storage targets that the Victorian government has set (and which it says it will legislate).
In the chart we see that AEMO says Victoria will need 46% less storage by 2029/30 and 56% less by 2034/35 than the Victorian Government has targeted and said it will legislate.
In fact AEMO says that Victoria will need less grid storage by 2029/30 than the volume of grid storage that is already operating in Victoria now.
And if we add the grid scale storage that Victoria has now plus what is under construction and which will soon be operating, it is more than AEMO thinks Victoria needs by 2039/40. Instead, AEMO envisages that much electricity will be stored elsewhere and then imported to Victoria.
Let’s now return to the export of renewable electricity (and specifically solar) from Victoria to NSW. Again, digging into AEMO’s Consultation Report reveals a different picture on the energy balance that AEMO intends for Victoria.
Not only will Victoria become a big importer of storage (as shown above), but it will also become a big importer of renewable electricity, consistent with AEMO’s modelling that shows a drastical reduction in the rate of renewable electricity expansion in Victoria, as we pointed out previously.
The change that AEMO models for Victoria and which underlies its recommendation for WRL-VNI is quite staggering. In 2016, Victoria exported on average 850 MW every hour of the year, this was 16% of its average hourly demand for electricity drawn from the grid in that year.
By 2030, when WRL is commissioned but shortly before VNI-West is commissioned, AEMO models that Victoria will import 16% of its electricity.
By 2040, AEMO models that Victoria will import 26% of its electricity. This is shown in the charts below, along with the fuel mix of electricity production in Victoria that AEMO intends.
So here is the rub: the current Victorian government went to the electorate with a policy to ensure that 65% of Victoria’s electricity demand is met by renewables sources in Victoria by 2030. By 2035, the government has said 95% of Victoria’s electricity must come from renewable sources, in Victoria.
The government has said it will legislate this and so the government will be liable to legal challenge if these outcomes are not met. Even if we discount the election promises, what government in its right mind would possibly welcome a future in which a state imports 26% of its electricity?
AEMO has therefore developed a plan – which underpins its rationale for WRL-VNI – that is starkly inconsistent with the Victorian government’s to-be-legislated renewable electricity policy.
Can these contradictory positions be reconciled?
AEMO might say these are just plans and modelling, and that this is not what will happen for sure. And the government might say that while AEMO’s assessment of the case for WRL-VNI assumes offshore wind will not be developed in Victoria, the government intends that offshore wind will be developed.
In fact the government has said that WRL-VNI will be useful not to import electricity (as AEMO envisages) but to export electricity.
What would the inclusion of Victorian offshore wind mean for the net benefit of WRL-VNI? AEMO did do a sensitivity in its Consultation Report (though none of the details are published) that included Victorian offshore wind, and it concluded that the net benefit of WRL-VNI was about half as much as it would be without offshore wind.
AEMO also did a separate sensitivity using the discount rate that it has proposed to use in the forthcoming ISP (during which WRL-VNI is to be built) to (correctly) reflect the repricing of risk in financial markets.
This sensitivity analysis shows that the net benefit of WRL-VNI is as near to zero as “dammit” is to swearing, when AEMO uses the correct discount rate.
Put together the correct discount rate that AEMO has identified, with the development of offshore wind as the Victorian government intends, and the net benefit of WRL-VNI is deeply negative even if we ignore AEMO’s ridiculously under-estimated costs of WRL-VNI.
If the Victorian government looks past AEMO’s disregard for offshore wind (as it has) it is clear from AEMO’s analysis that this is no solution: the net benefit of WRL-VNI will be hugely negative.
AEMO seems to have painted itself into a corner. Under scrutiny, its case for WRL-VNI can not be sustained whether or not it assumes that the Victorian government’s offshore wind policy will fail.
The inevitable conclusion is that WRL-VNI will be a deadweight on the shoulders of Victorian electricity consumers (unless the government transfers the burden onto Victorian tax payers) and that’s before we even begin to count the social cost on farmers, towns and the environment of 1,500 85 metre 500 kV towers with 90m easements cutting a swathe from Melbourne through Western Victoria and then up to Kerang.
None of this should be surprising. Our economic regulatory assessment processes are clumsy, but this can’t overcome the fact that the costs of renewable generation and storage are relatively much smaller than the costs of high-capacity long distance transmission.
AEMO is fighting this reality and consequently has delivered a recommendation to the Victorian government and the Victorian people that is not in their interest, and neither is it in the “national” interest.
Judging by AEMO’s recent media release in response to our submission (our response is here) AEMO will be sticking to its guns in its forthcoming Project Assessment Conclusions Report. More’s the pity.
Bruce Mountain is director of the Victoria Energy Policy Centre. Simon Bartlett is an independent analyst who is a former COO of transmission company Powerlink and chair of Electricity Transmission at the University of Queensland.
