TIM COLEBATCH. Old coal, no new gas: how to generate an electricity crisis.

The oldest units of the Hazelwood power station, which closes this week, are more than fifty years old; the newest are forty-two. It was built with the expectation that it would last for thirty years. Lest we forget, Hazelwood has also been one of the most polluting power stations in the world. With every megawatt hour of electricity it generated, it emitted 1.4 tonnes of greenhouse gases – three-and-a-half times the waste produced by a modern gas-fired plant generating the same power.

When the Australian discovered recently that a number of coal-fired power stations have closed since 2012, it attributed the trend to the pernicious influence of renewable energy subsidies. It failed to mention that all of them were between thirty and sixty years old.

It’s normal for old power stations to close down. What isn’t normal – indeed, it’s seriously alarming – is that Hazelwood is shutting down when no equivalent generating capacity has been built to replace it. It could mean our electricity system is heading for disaster.

If the Kennett government had left the State Electricity Commission as Victoria’s publicly owned electricity monopoly, then Hazelwood might have given way a decade ago to a modern coal-fired plant producing lower emissions, as John Brumby, premier at the time, had hoped. But no one volunteered to build one, and now that time is past.

The station’s French owner, Engie (formerly known as GDF Suez), has a policy of getting out of coal in developed countries – it’s also trying to sell Victoria’s most modern coal plant, Loy Yang B – but its chief executive Alex Keisser made it clear last week that Hazelwood is also unsafe and commercially unviable. Engie executives told a recent Senate committee hearing that no other firm had expressed interest in buying it.

In the twenty years since private companies were given responsibility for Victoria’s power supplies, they have built just one small gas-fired plant between them, and none using coal. Since the national electricity market started up in 1998, no coal-fired stations have been built in eastern Australia outside Queensland.

The Australian Energy Market Operator estimates that we still have enough spare capacity in our power system to cope without Hazelwood, assuming all goes well. But it concedes there could be shortfalls in Victoria’s power supply reserves on up to seventy-two days over the next two years – that’s one day in ten. And even if blackouts are rare, the cost increases facing business are so huge – $120 per megawatt hour for future supply contracts, up from $40 two years ago – that some energy-intensive firms could be forced out of business.

Would we be in this crisis now if our electricity system were still run by state government monopolies? That is a real question. Nothing like this happened when it was. Most of the time, markets work well. But when they don’t – and the Australian electricity market is mostly made up of monopolies running the network, and a small oligopoly of generators-cum-retailers running the rest – the costs can be devastating. No one warned us that the market might fail like this.

With hindsight, those who privatised essential monopolies were naive about how capitalism works when firms have the effective power to set prices. Electricity and gas prices alike have almost trebled in this century; the privatisers assumed that regulators could keep prices under control. They privatised even the highways of energy trade – electricity transmission and gas pipelines, which can only be monopolies. Did they forget that it is normal for business to maximise profits?

Australia’s electricity crisis has three dimensions. The first is long-term: no new baseload plants, which generate round-the-clock power, have been built for years, and none are planned. Most of the plants closing are baseload plants; all of the new capacity being built is wind and solar, neither of which can generate around the clock.

This reflects the policy failure that began when Tony Abbott as Liberal leader ended the bipartisan push to reduce greenhouse gas emissions. The energy industry’s virtually unanimous view is that we need a bipartisan policy based on an emissions intensity scheme that sets a timetable for emission reductions. Only then can firms have the confidence to make long-term investments.

But Malcolm Turnbull has ruled that out. His government’s latest effort, a discussion paper on future climate change policies released last Friday, is a bland catalogue that fails to mention such a scheme, even though it has been the key recommendation of the electricity industry, of business groups – and of reports by the government’s own Climate Change Authority, in September, and the COAG review team, headed by chief scientist Alan Finkel, in December. There is no sense of direction, and no urgency about defining one.

The second dimension, as I discussed earlier this month, is the impact of the nation’s gas crisis on electricity prices and availability. Until recently, 22 per cent of Australia’s electricity was produced by gas-fired power stations, and that share was rising rapidly and expected to keep doing so. But soaring gas prices and limited availability have forced gas to the sidelines. No new gas-fired stations have been added to the grid since 2012, all plans to build them have been shelved, and by 2015–16 South Australia’s Pelican Point plant and Victoria’s Newport power station were both operating at just 7 per cent of their capacity.

The third, and most urgent, fact is that the crunch has already happened. We see it in the massive hikes in electricity prices for business, and the first of what could be many large-scale power outages. The Financial Review reportsthat the electricity price demanded for future contracts has trebled since 2015. Brickworks, one of the nation’s biggest brick producers, has revealedthat it has started to import bricks from Spain, and is now looking at shifting local production to Malaysia or New Zealand.

Importing bricks! We are now in an extraordinary situation. You can paste that one up with AGL’s proposal to set up a liquefied natural gas import terminal in Australia (which is about to become the world’s largest LNG exporter), because Australian gas is now far cheaper in Asia than it is in Australia – and shipping it here is cheaper than paying for it to be sent interstate in our monopoly-owned pipelines.

A real risk exists that key plants will close in key sectors of the economy. Tens of thousands of workers could lose their jobs, and the closures could do serious, permanent damage to Australia’s industrial capacity.

That threat could be averted if federal and state governments, and energy market operators, regulators and producers do all they can to reduce not only the pressure on supplies, but also the pressure on prices. But there’s no sign of that. Turnbull held one meeting with gas producers, which produced reassuring words but little change in the realities on the ground.

Take the longer-term issue first. As I have reported, the only firm commitments in the pipeline are for a few wind and solar plants, with a total capacity of 634 megawatts, or MW. Commercial plans for new gas-fired plant have been shelved, because none of them is feasible with gas prices where they are. And no one has a serious plan to build new coal-fired plant.

Yet some 5453 MW of old coal- and gas-fired plant has either closed in the past year or is slated for closure. As a result, the capacity of the national electricity grid (responsible for three-quarters of Australia’s electricity) will shrink from 49,872 MW to 45,053 MW – almost a tenth of the capacity of a network that recently had to shut down supplies to parts of South Australia and New South Wales.

Gas was meant to be the transition fuel that would gradually replace coal as the main source of electricity, until producing and storing renewable energy had become viable. Instead, as Professor Ross Garnaut noted ruefully to the Senate committee on electricity infrastructure, since he wrote his climate change report in 2008, “the cost of solar PV has fallen by 85 per cent… at a time when there has been a trebling or more of domestic gas prices in Australia.”

At a time when new coal-fired stations are no longer seen as environmentally viable, the sharp change in relative costs has shifted gas off the table. And while some advocates claim that renewable energy with battery storage is now cheap enough to fill the gap, most analysts are unconvinced.

What’s wrong with building new coal-fired plant? It would lock in high emissions far into a future in which rising carbon prices would make such plants financially unviable. Power stations are thirty-year investments, and companies will not build a station that might be uneconomic in fifteen years’ time.

Yes, new coal plants are cleaner than old ones, but not much. The average black coal plant in NSW and Queensland emits 900 kg of greenhouse gases for each megawatt hour of electricity it produces. Our newest coal-fired plant, Kogan Creek in Queensland, uses supercritical technology and emits 840 kg. The Minerals Council estimates that a new ultra-supercritical coal-fired plant would emit about 770 kg, and an advanced ultra-supercritical plant – the state of the art now, and seriously expensive – about 700 kg of greenhouse gases per megawatt hour.

But new gas-fired plants on average emit 400 kg per megawatt hour. Even a new ultra-supercritical coal plant would produce almost twice the greenhouse emissions of a plant using gas. (A coal-fired station with carbon capture and storage would be a very different story, but it would require big subsidies to pay its way. Only Clive Palmer has put up his hand to build one.)

The future options for round-the-clock power are gas, or renewables-plus-storage. But new gas-fired plants have been priced out because their potential gas supplies are now being exported to Asia.

The last gas unit to join the grid, in 2012, was Origin’s 550 MW-per-hour station near Mortlake in western Victoria. It was meant to be the first of six gas-fired units to be built in the region by Origin, Santos and AGL. They would have added 3000 MW of generating capacity in Victoria, enough to replace not only Hazelwood (1600 MW) but also its neighbour Yallourn (1450 MW). Yallourn is also well past its use-by date, and will replace Hazelwood as Australia’s most emissions-intensive power station (1.32 tonnes per megawatt hour).

But the surge in gas prices ended the dream of a smooth baton change from coal to gas. Santos instead signed contracts to export more gas from its new Gladstone LNG terminal than it could produce. It shelved its plans to build gas power stations in Victoria so it could instead sell the gas to companies planning to build them in Asia – and then had to go out buying up domestic gas supplies so it could meet its contracts to sell it to Asia.

In the short term, what can be done to undo the savage hikes in gas and electricity prices for industry, and ensure security of supply? The government can’t force power station owners to keep uneconomic plants open. And even if the proposals by the South Australian and federal governments to build their own power plants made economic sense, which is unlikely, they couldn’t be built for years. We need short-term fixes too.

First, the good news. As the Australian Energy Market Operator points out, the system has a cushion. The network has long had more capacity than it needed, and demand for electricity has been flat for years. The closure of Hazelwood creates opportunities for underused plant – such as the gas-fired stations at Pelican Point, Mortlake and Newport – to spring back to life.

But that assumes they can buy enough gas, and at prices that will make them competitive in the market. That assumption might not be realistic without government intervention to force domestic gas supplies up, and prices down.

Moreover, the blackouts of recent months happened when the system was supposedly awash with spare capacity. Hazelwood’s closure will increase the risk of this happening – and without some protection of domestic gas supplies, any gas reallocated to power stations would come at the expense of other domestic users.

Second, the debate within the industry since South Australia’s blackout last September has identified technical and operational problems that could be fixed by rule changes. Wind-generated power can be made compatible with the rest of the system. The market needn’t allow producers to bid in power for five-minute periods yet receive a price averaged over half-hour periods. The players have worked out how to game this system, and consumers are paying.

Problems like these could be fixed in time to make the system more secure next summer. But rule changes in this industry tend to be very slow in coming. Environment and energy minister Josh Frydenberg needs to keep kicking bums to make it happen.

Third, we could make better use of the 1.5 million homes and other buildings that generate electricity from the sun. If they all had batteries, if the market paid time-of-use pricing for sales to the grid, smart software such as that developed by Reposit Power could give operators instantaneous access to a sizeable array of reserve power.

As Tesla and its local competitors have all pointed out, we could also build new large-scale battery storage much more quickly (and possibly more cheaply) than we could build a new gas or pump hydro station. It would certainly offer a more flexible supply that can be fine-tuned to meet the demand of the moment.

A fourth option is demand management. We’re already doing that, as we saw last month when blackouts in New South Wales were averted because some big users agreed, for a fee, to have their power switched off. There is scope to expand this.

All these options are cheaper than building a $2 billion power station, and can deliver their impact far more quickly. Malcolm Turnbull’s Snowy 2.0 announcement was really a stunt. We need serious, cost-effective, quick-acting policies.

To fix the gas crisis and turn around the lack of electricity investment, we need, above all, a different way of doing politics. We are in a crisis, and governments, state and federal, Liberal, National and Labor, need to work together to get us out of it.

We need to set a timetable to reduce emissions from electricity generation, which now contributes a third of Australia’s greenhouse gases – and, by and large, the third that will be easiest and cheapest to reduce. We need price mechanisms to drive it.

And we need the federal government to step into the gas market and stop domestic supplies being sent overseas. It has the power to put a moratorium on sales to overseas spot markets until the domestic crisis is fixed – and to tell Santos and its partners that if they don’t produce enough gas to meet their contracts, they can buy more overseas. We can’t let Australia’s energy-intensive manufacturing die because of policy mistakes.

It could be the making of Malcolm Turnbull as prime minister if he takes the lead in fixing these crises. It could be the breaking of him if he doesn’t. •