Explained | Why is Australia facing an electricity crisis despite being a top exporter of coal and gas?

Australia’s energy market operator, in a drastic step, has suspended the National Electricity Market to avoid blackouts

Australia’s energy market operator, in a drastic step, has suspended the National Electricity Market to avoid blackouts

The story so far: On Thursday, June 16, Chris Bowen, the Energy Minister of Australia — the world’s biggest exporter of coal and Liquified Natural Gas — asked the residents of its most populous state New South Wales (NSW), to conserve power as much as possible during the peak demand hours of 6 pm to 8 pm to prevent blackouts. Mr. Bowen added, however, that he was confident that the government could avoid blackouts.

This came just a day after the Australian Energy Market Operator (AEMO), in an unprecedented move amid the ongoing power crisis, suspended the wholesale electricity market for the East Coast, which includes five of Australia’s six states. AEMO cited that the power market had become “impossible to operate” while ensuring reliable and secure electricity supply to Australian households and businesses.

How does Australia’s electricity ecosystem function?

The Australian Energy Market Operator (AEMO) is responsible for operating two electricity spot markets through which electricity is traded across the country.

It operates the National Electricity Market (NEM), which is a wholesale market covering Australia’s five eastern and south eastern states- Queensland, New South Wales (including the Australian Capital Territory), South Australia, Victoria, and Tasmania —effectively covering the whole of Australia excluding the state of Western Australia and the Northern Territory. On the East Coast, coal-fired power constitutes nearly 65 per cent of electricity generation and gas 7 per cent, with the rest coming from renewable sources like wind, solar, hydropower, and others. The NEM operates a massive power grid and thousands of kilometres of transmission lines and cables.

On this wholesale or spot market, power generators offer to supply the market with specified amounts of electricity at varied prices or bids. The AEMO then “decides which generators will be deployed to produce electricity, with the cheapest generator put into operation first.” With this, AEMO aims to exactly match supply and demand.

The auction between generators is held every five minutes, meaning the dispatch price to deliver electricity is determined every five minutes. It is here that distribution companies or retailers buy electricity to provide power to homes and businesses.

As per the National Electricity Rules, minimum and maximum spot prices are set between -A$1000 and A$15,000 per megawatt-hour.

The AEMO also gives a seven-day outlook of prices or the cumulative price of electricity in the NEM over a period of seven days. A price cap gets triggered automatically when the cumulative spot pieces for a seven-day period reach A$1.3591 million.

The second market, called the Wholesale Electricity Market (WEM), covers the state of Western Australia, which is not facing the current power crisis.

How did the electricity crisis unfold?

Electricity prices have been skyrocketing in Australia since May for a combination of reasons. But by June 11, cumulative electricity prices in the state of Queensland had reached the market cap threshold, and the AEMO announced that prices would be capped at A$300 and generators would be compensated.

Shortly after, as the other states in the NEM network, with the exception of Tasmania, also hit the threshold, the A$300 cap was instituted for them as well.

The A$300/MWh price cap, however, was A$100 to A$200 lower than what several power generators were spending on one megawatt-hour. Consequently, many of them decided to withhold capacity and not offer it on in the wholesale market, creating a gap in demand and supply.

By June 13, the AEMO predicted electricity shortfalls for all five states covered by the NEM- Queensland, New South Wales, South Australia, Victoria, and Tasmania. More than 10 per cent of the power generation capacity had been withdrawn from the East Coast.

Owing to many generators withdrawing from the market and fears of power blackouts, the AEMO had to trigger a mechanism called the Reliability and Emergency Reserve Trading (RERT), telling generators to fire up their power plants again to meet the supply. Notably, this mechanism ensures a more profitable compensation for generators.

The situation became tricky to manage as the AEMO had to issue separate directions to multiple generators to infuse the supply back into the market.By the morning of June 15, it had issued more than 5,000 MW of directions, constituting roughly 20 per cent of the East Coast’s demand.

As the market became “impossible” to operate under such conditions, the AEMO finally decided to suspend spot trading in the NEM. Now, generators would have to inform AEMO about their availability beforehand, and the operator would then decide which generator would be activated to ensure timely supply. The AEMO would also set fixed prices for electricity. It would be monitoring the situation daily to slowly restart the market in states where it was confident that stability had been achieved.

What are the factors that led to the current crisis?

The larger crisis in Australia’s energy sector has been ongoing since May. On June 1, citing revelations that gas prices in Victoria were 50 times the normal average, the new Federal Treasurer Jim Chalmers said in a speech that the country’s energy sector was facing a “perfect storm” of conditions.

State of coal-powered plants– While Australia still depends on coal for two-thirds of its power generation, the country’s coal-fired power stations are ageing and are not in a stable condition. Many of these have also been marked for closure. According to Reuters, nearly 25 per cent of the eastern market’s 23 gigawatts of coal-fired capacity has been out of service over the past month, with as high as 30 per cent being unavailable at times.

Soaring coal and gas prices– Global supply chains have been hit by the ongoing Russia-Ukraine crisis and the sanctions on Russia.

Due to untimely domestic shortages, many Australian power generators were forced to secure oil and gas on spot markets, sending production costs skyrocketing. Domestic gas prices spiked to such high levels that AEMO intervened to cap prices at A$40 per gigajoule (GJ).

The soaring prices of raw materials like coal and gas also had a domino effect on electricity prices, which again led the AEMO to introduce the A$300 price cap.

Domestic coal output hit– Instances of heavy flooding in NSW and Queensland earlier this year affected the coal capacity in mines. Besides, owing to technical problems, output has been curbed at the two mines that supply the NEM’s biggest coal-fired plant, the Eraring power station in New South Wales.

Early winter– A cold snap owing to the early arrival of winter drove up gas demands for heating households, while gas also needed to be diverted to fire up gas-run power stations owing to the power crunch.

Meanwhile, Liquified Natural Gas (LNG) exporters on the east coast had been selling as much gas as possible into the export market in lieu of Russian supplies. The market operator did order the exporters to divert any uncontracted gas they had into the domestic market, which they did two weeks ago, but it wasn’t enough.

Why was Western Australia saved from the crisis?

Interestingly, while Western Australia also has its own wholesale market, a built-in safeguard prevented the state from facing a power crisis.

In the 1980s, the State had adopted a Domestic Gas Policy, reserving LNG equivalent to 15 per cent of all exports from the Northwest for domestic use.

This means that apart from domestic-only power projects, Western Australia has, at all times, gas reserves for ensuring supplies for its gas-fired plants.

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