Overview

On the night of 7 July, the wind was hardly blowing in South Australia and the sun had gone down. Two coal plants had closed earlier that year, and an electricity connection that provides power from Victoria was effectively closed for upgrades. As a result, gas was supplying nearly all the state’s power needs. At 7.30pm, the wholesale price of electricity shot up to $8900 per megawatt hour, a staggering sum when wholesale prices in the eastern states average about $50 per megawatt hour.

Price spikes are a fact of life in the electricity market. Far more troubling was South Australia’s average wholesale price for the month of July - $229 per megawatt hour, more than three and a half times that of the eastern states. The news started a furious blame game. Some commentators attacked renewable energy for becoming a vital power source for the state, others the operation of the electricity market, others the behaviour of gas generators.

None of these narrow criticisms is fair. In fact, the market worked as it was meant to and the lights stayed on. Yet the incident exposed potential threats to the price and reliability of power in South Australia. Even more importantly, it revealed Australia’s urgent need to create climate change and energy policies that combine to produce reliable, affordable and sustainable power.

Since 1998, a wholesale market has supplied electricity needs to Australia’s east coast. It has mostly enabled large, centralised generators to dispatch reliable, affordable power. Short-term price volatility provided incentives for plants to meet peak demand periods, and periods of sustained high prices attracted new investment to meet growing demand.

Wind power now delivers about 40 per cent of South Australia’s electricity. Once a wind farm is built, the energy is effectively free. Wind’s ability to cut the wholesale spot price has put huge financial pressure on coal and gas generators, leading to mothballing and closure of plants. The full impact for reliability and cost of forcing a high proportion of intermittent and low runningcost electricity into the system was never fully considered.

Two big problems remain. Electricity contributes about a third of Australia’s greenhouse gas emissions. Yet there is no credible policy to reduce emissions in the sector and enable Australia to meet its international climate change commitments. Absence of such a policy also discourages investment in new power plants. Second, the wholesale market, as it is designed, may not provide the secure and reliable power that Australians take for granted.

Governments need to do three things. The 2017 review of federal policy must deliver a credible climate change policy that all states support and that works with, not outside, the electricity market. Second, there must be a separate review of the market to ensure that power flows reliably and affordably. Third, governments must explain that a transition to a low-emissions future will happen and that it will cost money.

The events of July in one state were a canary in the coalmine, warning of the risks in Australia’s power future. It is time to listen.