AEMO CEO delivers address at the Clean Energy Council CEO Forum

06/09/2022
10 min

Let me begin by acknowledging the Ngunnawal people as the traditional custodians of the land we are meeting on today.

I’d like to acknowledge their continuing culture and connection to country, and pay my respects to elders past, present and emerging,
and to all First Nations people here today.

And thank you Kane, for inviting me again to speak today – it’s been a busy few months in Australia’s energy transition!

So, today I thought I would share an update on Australia’s energy systems, and use these current events to explore a few topics that are relevant for all of us as we face into this rapid transformation.

And if there’s one message I want to leave with you, it’s this:

  • Australia is on a rapid transition to our future energy system that will be underpinned by firmed renewable energy.
  • This winter we hit a few bumps in the road, but those bumps should only strengthen our resolve that the end destination is the right one.
  • We navigated this first bump in the way that I want us to navigate every issue in the future – with openness, transparency and a high degree of collaboration.

We’ve recently put out two public reports that are essential reading:

These reports provide a really valuable insight into understanding what’s been going on in the NEM over the past few months.

I’ve been reminded recently that while it’s a huge amount of work within AEMO to publish reports like these, the real value is actually in the digestion of information outside AEMO, since the purpose is, of course, to provide a fact base that informs both investment and policy development.

The factors in the NEM that led to that unprecedented set of operational challenges were many. 

A cold snap which brought a sudden increase in demand, planned and unplanned outages of thermal generators, low output from renewable generation, high commodity prices and administered price caps first in gas markets and then, as we know, in the NEM.

The disruption in the east coast gas markets was a significant factor and highlights how tightly interlinked our gas and electricity markets are today, and will be for the foreseeable future.

Gas prices were already at record highs due to international factors when a large gas retailer collapsed in late May, triggering price caps at $40 / GJ.

On June 1st, AEMO triggered the Gas Supply Guarantee for the first time ever after participants advised us that they were unable to source sufficient gas to run their gas-fired power stations.

Several dual-fuel units opted to run on limited reserves of high-cost diesel.

And at the same time, the cold snap drove record demand for electricity and a number of network outages limited the ability to source electrons from the cheapest forms of generation.

On Friday 10 June, the first Lack of Reserve (LOR) notice was issued. An LOR2, in what would be the first of a total of 221 actual and forecast LOR declarations in this sequence of events.

During that period, over 6.5 GW of generation capacity, or about 20% of the NEM’s winter peak demand, was offline.

On the evening of Sunday 12 June, the cumulative price threshold was triggered in Queensland.

On Monday that cumulative price was hit in New South Wales, Victoria and South Australia, triggering the $300 / MWh price cap.

As you know, a large volume of generation withdrew their offers into the NEM, and AEMO intervened to maintain reliability by issuing a large number of directions.

By June 14 and 15, we were ordering on about 5GW of generation a day.

During the whole episode, we issued 483 separate directions, peaking at one stage at 110 directions in a single day.

The volume of these manual directions meant that NEMDE, our automated dispatch engine, simply couldn’t solve such over-constrained equations.

And no matter how much human effort we threw at the problem, ultimately the level of intervention made the ongoing operation of the market impossible.

As a result, we took the unprecedented decision to suspend all regions of the NEM at 2pm on Wednesday June 15.

I don’t have words to describe how challenging this period was for our operational teams. Our most seasoned operators describe this as the most difficult period they’ve ever experienced.

More challenging than the cascading impact of the Callide C4 incident a year earlier. More challenging than the system black in South Australian in 2016.

Each by an order of magnitude.

And the way our experienced team at AEMO were able to navigate this situation actually serves a template for how we will manage the bumps ahead that we know will come in Australia’s energy transition.

And that’s by turning the dials to maximum on both expertise and collaboration.

Having the best experts from right across the industry work closely, with an ultra-high degree of collaboration, is the way we must tackle these big hairy challenges.

It worked in this operational turmoil, it’s working to improve our connections process, and it’s how we are working towards operating the power system at periods of up to 100% renewable generation.

And because of this incredible effort, we kept the lights on.

Now one thing is for sure. This will not be last pothole we hit on Australia’s rapid energy transition.

But I can promise you this. The way AEMO operated in this event is exactly the way we will operate moving forward.

Always putting the interests of consumers first, and working together with industry and governments with the highest degree of collaboration.

And, this is the approach we are taking to mopping up the consequences of the market suspension and claims for compensation.

I had previously estimated that costs would be a meaningful fraction of the $800 million reduction in wholesale electricity costs from the 10-day prior period.

  • RERT costs have largely been settled with participants – this was approximately $80 million, the majority of which was recovered
    from NSW.
  • Provisional compensation for directions have been settled with participants – this was approximately $9.3 million spread across mainland regions.
  • And AEMO has also received claims for additional compensation totalling approximately $114 million, which will be assessed by independent experts over the coming months, with any compensation awarded to be settled in November and January.
  • The outstanding compensation category is administered pricing, which is managed by the AEMC, which I expect will become clear soon.

So, roughly $200 million in total to date – a quarter of that $800 million reduction in wholesale costs I mentioned.

But these are still meaningful costs to pass through, and I appreciate that any costs are a burden on retailers. Particularly in an environment where many retailers are already grappling with a very challenging commercial environment.

And of course, in an environment where inflation is over 6%, energy costs are at the forefront of everyone’s mind, and consumer trust in the energy sector is low.

Energy affordability has long been an economic advantage for Australia. It’s allowed industries to flourish and the population to live in relative comfort in a harsh climate.

And right now, we’re headed the wrong way.

The QED for Q2 showed east coast gas market prices averaged $28/GJ, virtually triple the cost in Q1 or for the same period last year.

If we look at the winter season, the average cost is even higher, at $32, and in mid-July, the price was just shy of $60 a GJ in Adelaide and Sydney spot markets.  

And electricity prices in the NEM hit record highs, with wholesale spot prices averaging $264/MWh across the five NEM regions in Q2.

This was the highest NEM average price recorded for any quarter since market commencement in 1998: in fact it’s double the previous record of $130/MWh set in Q1 2019.

And volatility was also extremely high.

And I’ve said before that the best way the Australian energy sector can relieve these price spikes for the longer term is to break the dependency between commodity prices and electricity prices.

And that is, of course, moving to renewable generation where the fuel is our sun, wind and water.

Our GenCost report with the CSIRO shows wind and solar are, by far, the cheapest forms of generation. Even with the cost of new transmission and grid integration. And even in today’s environment of elevated input costs and supply chain constraints.

So, the best way we can lower energy costs for all Australians is to get more of the cheapest form of energy into the system, and for that we need three things urgently: more generation, more firming and more transmission.

The new ‘ESOO’, the Electricity Statement of Opportunity, which we released last week shows just how urgent these needs are.

I’ll take each of these in turn.

In the next decade, Australia will experience our first cluster of coal-generation retirements.

At least five power stations totalling 8.3 GW are set to close, equal to approximately 14 per cent of the NEM’s total capacity.

And possibly more.

Over this period, just 7.3 GW of committed generation capacity, and several committed transmission developments, are scheduled to become operational.

So this is a net reduction in available generation in the NEM, over a period where electricity consumption is increasing.

Not surprisingly, our ESOO forecasts reliability gaps in South Australia from 2023-24 and Victoria in 2024-25. New South Wales is forecast to breach the reliability standard from 2025-26.

That 7.3 GW of ‘committed’ generation includes over 1 GW of gas generation from Tallawarra B and Kurri Kurri in NSW, 250MW of pumped hydro in Queensland, and around 1GW of wind and 1.5GW of solar developments.

There’s obviously another category of projects called ‘anticipated’, and if these projects are delivered to their current schedules then the reliability standard would be met in all regions of the NEM until later in the decade.

But these projects, and more, really do need to be delivered.

This summer, we’re seeing around 800MW more capacity in the NEM compared with last summer. But our modelling shows a greater distribution of outcomes.

For example, while the average result for unserved energy remains within the interim reliability measure for this summer, a meaningful number of model runs show a loss of load for some customers. This is often called ‘tail risk’.

We’ve provided a breakdown of these results in the state-by-state analysis this year, and we expect this distribution of reliability outcomes, or tail risk, to become increasing consideration.

Obviously to ensure new generation projects are delivered on time, it’s fundamentally important that we have an efficient and effective connections process.

As you know, AEMO continues to work closely with the Clean Energy Council and many of you in this room as we implement the Connections Reform Initiative.

And I’m pleased to say our efforts are making a difference.

During FY22, 29 projects representing nearly 4 GW of new generation, achieved market registration. That’s 1 GW more than FY21 and nearly 2 GW more than FY20.

And between now and the end of the year, another 19 projects totalling 2.7 GW of generation are also expected to achieve market registration.

And there have been some pleasing developments on a number of flagship projects:

  • Stockyard Hill, Australia’s largest operating wind farm, was fully commissioned in June.
  • The Golden Plains Wind farm, went from its application stage in January to agreed performance standards in August, one of the shortest timeframes we’ve managed.
  • The 200 MW wind component of the Port Augusta Renewable Energy Park in South Australia completed commissioning in August.
  • In NSW, the 400 MW Stubbo solar farm and the 330 MW Wellington North solar farm had their performance standards agreed in July and August.

These are just some examples of the 149 projects, representing more than 22 GW across the four connection stages.

This is a huge pipeline of critically important connections.

And I know you know this, but it’s really only a fraction of the work AEMO does across its remit, from operating the gas systems, power systems, markets, providing technical planning expertise, and implementing reform across east coast and west coast gas and electricity markets.

Now let me talk about that important word in firmed renewables: firmed.

This is the technology that unlocks renewables. It stores the excess energy and fills in the troughs when it’s dark and still.

And it comes in all shapes and sizes: from virtual power plants to grid-scale batteries, pumped hydro, and gas generation.

Approximately 14 GW of these additional dispatchable capacity projects have been added to the pipeline of future projects since the 2021 ESOO.

Our Integrated System Plan has highlighted how important these firming investments are to provide a reliable and resilient NEM to offset the closures of aging generators.

Over the next decade, 9GW of new firming generation is needed to support the 36 GW of renewable energy that’s required.

I might add that that’s 45 GW of new generation needed – some four and a half times the current pipeline of committed and anticipated projects.

And I’ll say it again: firming unlocks renewables.

This is where a capacity mechanism can help send the right market signals for investment in firming generation.

Everyone in this room understands the enormous potential of low-cost and low-carbon, firmed renewable generation in the NEM.

But we simply can’t get there with the current market design.

As variable renewable energy becomes the mainstay of our electricity generation, investors will struggle further with the increasing price volatility, and customers will balk at long periods of extreme pricing.

Nearly every advanced electricity grid in the world already uses some kind of mechanism that incentivises dispatchable capacity.

I’ve operated in many of these markets with capacity mechanisms.

I’ve built projects and made good returns across a portfolio that spanned from virtual power plants to grid-scale storage, and a Gigawatt of large scale wind and solar.

I understand though, that any change to market design is sensitive and carries inherent risk. That’s why I believe that the design of any capacity mechanism needs a mature conversation between governments, industry and consumers.

I also believe strongly in simplicity, and leveraging best practice and proven designs.

Over the last few weeks, the ESB has been discussing with jurisdictions exactly how best to leverage the good work that’s been done to date, and I’m personally very pleased to see Ministers and departments now leaning heavily into bring this work to fruition.

Why? Because I’m confident that collaboration can deliver a mechanism that drives the integration of more renewable energy, and ultimately more affordable energy for Australian homes and businesses.

And the third essential element the NEM needs is more transmission.

Those workhorse coal generators in the Latrobe Valley are reaching the end of their lives.

In their place are an increasing number of smaller generators dotted around the landscape, that use the power from the sun and wind to generate electricity.

And because the new generators needed to replace retiring coal plants are being built in places that haven’t been on the grid superhighway before, we need new transmission to connect low-cost renewable generation to consumers.

The five transmission projects identified in the 2022 Integrated System Plan – HumeLink, VNI West, Marinus Link, Sydney Ring and New England REZ Transmission Link – should progress as urgently as possible to enable electricity consumers to make shared use of existing and future generation and storage.

These actionable transmission projects identified in the 2022 ISP will improve the reliability forecast significantly if developed to their current anticipated schedules.

Conversely, delays to any other currently identified transmission projects may further worsen the reliability outlook.

And one of the critical factors influencing the delivery of new transmission projects is earning the social licence to build the infrastructure.

To date, I’d say all of us in the industry could have done a much better job of selling the need and benefits of new transmission projects to the community.

I went to Ballarat recently to hear first-hand the views and concerns of the community along the alignment for the Western Renewables Link.

Local tight-knit regional communities are being asked to shoulder the burden of construction and hosting the projects, while the benefit will be shared with people hundreds of kilometres away.

The regulatory test for transmission projects doesn’t accommodate community and environmental concerns until the ESS process, and that’s too late in the piece.

Communities want to be consulted openly from the outset so they don’t feel railroaded.

That’s fair enough and while there are a number of larger reviews underway, we’re already engaging in a very different way on the VNI-West proceedings.

Now, once we have more of these three essential components of Australia’s renewable energy system in place…more generation, more firming, more transmission….the focus turns to operating this most complex of machines that we’ve built.

We’re grappling with grid operability every day as the system becomes more complex, more decentralised and more divergent in technologies.

Already, our control room staff are grappling with higher levels of instantaneous renewable generation.

The current NEM record for instantaneous renewable penetration is 61.8%, observed on 15 November last year.

But we’ve already seen times when South Australia is running almost entirely on solar.

Our modelling shows that there will be enough resource potential to reach 100% instantaneous supply from renewable resources by 2025 in the NEM, so we need to invest in new tools to operate at this level.

Many of you will be familiar with our work on the Engineering Framework to outline the engineering changes required over the next 5 to 10 years to cope with high levels of renewables feeding the grid.

We’re progressing 46 priority actions identified through the framework and by December we will publish the additional steps necessary to ready us for operating at 100% instantaneous renewables.

Like every other advanced system operator around the world, we also have to spend some money in AEMO to get our control rooms ready for the future.

From replacing ST-PASA which is at the end of its life, to upgrading our forecasting toolkit to better integrate a diverse set of forecasts, these investments are critical to ensuring a secure, reliable operation.

Of course we will continue to drive efficiency and effectiveness across all our activities at AEMO, but we are also beginning to invest at a rapid rate as we uplift our operational toolkit and implement a wide-ranging program of reforms.

As you know, we’ll do this with openness, transparency and collaboration. And I’m grateful to those of you who provide input through our Finance Consultation Committee, our Reform Delivery Committee and other forums.

Investing in people will be just as critical as technology or delivering reform.

I’m very pleased that we’re doubling our graduate intake for next year at AEMO for up to 16 positions, and people from diverse backgrounds are encouraged to apply.

I do think that AEMO can play a central role in helping build skills and capability right across the industry.

Since as we know, Australia’s energy transition will require new skills, from a new workforce, to implement new technologies.

Some challenges will be met by office-based technology workers, while others will require the deployment of traditional roles to undertake the civil works.

The opportunity set is significant, and lies beyond our capital cities.

The transition, if managed well, will create thousands of highly skilled roles that will be dotted across the Australian landscape, in a pattern that will match our new generation fleet.

And we’ll be able to navigate those whose jobs transition from our retiring coal fleet.

I know this is a critical conversation to have across the industry, with governments and broader society.

I think AEMO can play an important role, and I look forward to continuing that dialogue.

So I’ll wrap up there and I’m happy to take any questions you may have.

[ENDS]

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