Energy security and Australia’s economy

Energy security is becoming a hot topic, with both South Australia and Tasmania experiencing energy reliability and security concerns over the past six months.

As Australia’s energy system moves towards a lower emissions fuel mix, regions within our National Electricity Market are becoming increasingly reliant on connections between one another.

Take Tasmania as an example. Gas generation was decommissioned in 2013 as the combination of hydro and imported electricity from Victoria via the Basslink cable was expected to be sufficient for energy needs.

But a recent fault in the cable and current low water reserves has highlighted the lack of resilience and perhaps put energy and even economic security at some risk.

As a result, Tasmanian electricity wholesale prices have gone through the roof and large customers have had to make sacrifices by reducing their consumption, placing even more pressure on the local economy.

Chart: Tasmania’s wholesale electricity price, 2015-2016

South Australia is another example of the challenges arising as Australia’s energy system moves to a lower carbon future.

In February, the Australian Energy Market Operator (AEMO), which is responsible for ensuring reliable electricity supply on Australia’s east coast, found South Australia’s significant focus on renewable electricity generation had increased instability in the system and would require investment in large infrastructure to mitigate the risk of blackouts.

During a failure in 2015, more than 100,000 homes were affected, and Deloitte Access Economics estimated that this number could triple if the Heywood interconnector (which connects South Australia to the rest of the grid) fails in the future.

Solar and wind generation are very low marginal cost and have pushed wholesale prices down at certain times of the day, increasing competitive pressure on traditional large generators which provide the electricity system with stabilising effects and which, when removed, increase the challenge of reliability and the risk of blackouts.

To the degree that natural gas can substitute other fuels, gas generation can smooth out the peaks and troughs in the electricity market. But investment in new gas supply has stopped with the slowdown in the sector, increasing the risk of a domestic gas shortage (with the recent expansion focused on export).

This means that electricity users (and particularly businesses) may face shortages in supply at a time when the electricity network is adapting to a more variable mix of electricity generation to cater for an energy system which has a growing renewable proportion.

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