10 minute read 20 Nov 2019
Solar energy pylons

Grid expectations: Solving Australia's energy impasse


EY Oceania

Multidisciplinary professional services organization

10 minute read 20 Nov 2019

Delivering electricity to consumers used to be straightforward. But the age of renewables and distributed energy resources is provoking a radical rethink.

When Cara Graham begins to explain the wickedly complex energy grid in Australia, she doesn’t start with electrons, volts and interconnectors. She starts with Beethoven. And not because of classical music’s ability to calm the mind. Instead, she conjures a baton-wielding conductor as the energy market operator, arms waving, cajoling an increasingly complex set of players into harmony. For decades, she says, the conductor has kept the symphony running – and with only a few bum notes.

Now, Graham says, the orchestra must hold a tune in the face of an audience that can walk into the concert hall with its own instruments – a ukulele here, a bassoon there – and play whatever notes it fancies. Beethoven is at risk of being reduced to a cacophony.

“We’re seeing customers at individual connection points starting to do things the grid wasn’t designed for – generating and supplying their own electricity to it,” says Graham, EY Oceania Partner, Energy Transition.

And this trend is unlikely to abate. As technology improves and costs come down, Australia is likely to remain at the forefront of energy systems grappling to integrate distributed energy resources such as electric vehicles (EVs), solar PV and batteries.

“For decades, distribution network operators have been taking electricity from the high-voltage transmission networks and delivering to end-use consumers without too much trouble,” Graham says. “They have surprisingly limited visibility of what actually happens on the low-voltage network down to each customer’s connection point.”

This passive approach to delivering electricity to customers needs to change. As Graham points out: “From a distribution perspective, you’re suddenly managing a network that’s got a whole bunch of assets hanging off the end of it that you don’t own or control or, even worse, you don’t know are there.”

Estimated proportion of energy provided by distributed energy resources in Australia by 2050


ARENA: Electricity Network Transformation Roadmap, 2017

It’s by no means an easy problem to solve, but one that requires urgent attention. Most critically because of distributed energy resources (DER), the technical catch-all term for systems that households or businesses are using to provide them with power, from rooftop solar PV units and battery storage to electric vehicles and home energy management technologies. By 2050, it is estimated that DER will provide up to 45 per cent of the nation’s energy mix.

“The framework that we wrap around DER integration, including commercial, technical and regulatory aspects, needs to be developed quickly,” Graham says. “We have a limited window of opportunity to develop a consistent framework, or risk individual market players developing bespoke solutions that aren’t ultimately in customers’ best interests.”

EY Oceania Energy Transition Leader, Matt Rennie says this matters for one simple reason: household prices. “The time for waiting is over,” Rennie says. “With billions needing to be spent in the next 20 years getting the networks ready for these new technologies, ensuring prudency and efficiency are part of the deal is the new exam question. We simply can’t afford to wade into the water with our eyes closed.”

engineer or electrician inspect and checking solar equipment

Lines of power

But it’s not just at the distribution level that Australia’s energy system is changing. At a basic level, the energy grid is made up of a high-voltage spine with distribution networks running off it like ribs to provide power to consumers. Traditionally, the spine connected large thermal generators – coal and gas – and hydro on a predominately state-by-state basis. Over the years, the network has used interconnectors to bolt those spines together, usually near the state borders.

What’s been happening recently, as with the announced QNI upgrade (Queensland-NSW interconnector) is a move to tighten those connections to help energy flow between source and destination. The improvement may be measured in microseconds but it is enough to make a serious difference to how power can be generated, shared and traded, especially in a future in which data platforms will govern distribution of electrons.

“It’s accepted that coal is going to generate less of Australia’s energy needs over coming decades, and that we need to find new mechanisms to incentivise the additional services that have traditionally been provided by coal-fired generation such as inertia,” Graham says, referring to the stable grid frequency created by the spinning turbines in coal, gas and hydro generators. (Motor loads, which comprise up to 70 per cent of total power demand, powering air-conditioners, cooling fans, refrigerator compressors and so on, also have to synchronise with those large turbines to deliver consumer demands.)

However, progress towards a new grid that will enable the orchestra to stay in tune won’t happen unless we – the conductor and the audience – have an agreed understanding of what the future energy market looks like, and how we should get there. 

Shaking up the rules

At the heart of Australia’s energy policy paralysis is the lack of a strong, clear and mandated central coordinating authority. This is despite well-intentioned attempts to create such an authority. In 2017, the Council of Australian Governments (COAG) recognised the need for a co-ordinated approach, and through its Energy Council, set up the Energy Security Board (ESB) with representation from the Australian Energy Market Commission (AEMC) which is the ultimate rule maker; the Australian Energy Regulator (AER) which polices the rules; and the Australian Energy Market Operator (AEMO) which operates the system and markets.

For both Graham and Rennie, the coordination role is critical to getting the necessary grid transformation happening now. Bluntly put, it’s time to get things moving on the ground. “There are two critical tipping points for the Australian generation mix,” Rennie says. “The first is the point at which new renewable energy is cheaper than new coal. The second is when new renewables are cheaper than existing coal.

“We passed the first one two years ago. The debate on coal versus renewables is over. We are now heading straight towards the second tipping point, with higher cost generators to be impacted by new renewables from 2027. It is time to start talking about how to create a reliable system in the face of massive changes in the cost of renewables. The question is no longer ‘whether’, and has moved past ‘when’. We are now talking how.”

It is time to start talking about how to create a reliable system in the face of massive changes in the cost of renewables. The question is no longer ‘whether’, and has moved past ‘when’. We are now talking how.
Matt Rennie
EY Oceania Energy Transition Leader

Rennie believes that the single most important factor missing from the market is a coordinated approach by a mature and enabled body. And that that body should be a beefed-up AEMO. “AEMO needs to investigate and determine what the system requires and should be given the power and the knowledge and, crucially, the capacity to be able to do that,” he says. “This is an engineering issue, not an economic issue. What matters now is keeping the lights on through the most efficient system design possible.”

AEMO needs billion dollar funding 

Coordination of generation, transmission and distribution level assets doesn’t mean tossing out the existing state of play, but it does represent a significant amount of work and needs to be funded properly. Rennie says this funding would need to be in the range of $1 billion to build the systems needed for the next 50 years. “AEMO is going through a maturity journey of its own – they’ve never solved these problems before,” Rennie says.

“AEMO needs a funding mechanism from state and federal governments that rivals the programs controlled by market participants if it is to play a central role. It can’t be asking the network participants to give it money every year like a membership fee – which it pretty much does at the moment. There are more than 900 people working at AEMO and they don’t have the capacity to raise money.”

He says AEMO needs budget allocations to execute significant capex programs. “At a minimum, they need an imprimatur to develop a blueprint for a prudent and efficient network architecture to enable the future of the NEM [National Electricity Market]. Questions around edge versus cloud technologies, communications protocols and technologies cannot be answered seven times by seven different entities. We have the governance system we need right now to see these decisions made. We just need to use it.”

Rennie is talking about the Australian Energy Market Agreement, the document that sees government act through COAG and allows the AER, AEMC and AEMO to co-exist in a growing and changing system. “The roles of the three are clear,” says Rennie. “AEMO, as operator, has a clear mandate to operate the system and to develop the basis on which effective operation can be best enabled. The AEMC needs to be able to balance the needs of all of the stakeholders and develop rules which are to work.

“And then the AER needs to have a funding compact with all of the network companies to ensure the build is both necessary, interactive, prudent and efficient. This provides network investors with the certainty they need as well as allowing a playing field which is known and understood for new entrants and enabling technologies. Above all, households can’t afford to pay for system capability they don’t need.”

If the grid is to transform, we simply need to clearly delineate the roles of market participants and strengthen the coordination role.
Matt Rennie
EY Oceania Energy Transition Leader

Of course, there is a legitimate view that AEMO doesn’t have all the answers and should be open to challenge. To maintain a healthy mix of competition and co-ordination in the grid, and to enable the best technological solutions to come forward, the concerns around a “benevolent dictator approach” need to be addressed in the design of AEMO’s role as coordinator. The existing rigorous tests for the benefits of interconnectors have, for example, passed the test of time and need to continue. Ultimately, however, the aim is to move to a strengthened and interdependent transmission network that creates a level playing field for all generators and stabilises the grid to enable competition.

Rennie says the expansion of AEMO’s role into the distribution network will also undeniably require buy-in and flexibility from the current market participants. “I understand that the network businesses in particular get a little bit nervous that AEMO is going to come in with their system operator hat on and manage the individual distribution networks,” Rennie says. “But if the grid is to transform, we simply need to clearly delineate the roles of market participants and strengthen the coordination role.”

How do you know how to fix the grid?

In the 1980s, Ian Rose would walk into the Queensland Energy Commission offices and look at the weather forecasts. He wasn’t wondering whether he’d need an umbrella for the commute home or if his children’s soccer match would be cancelled. He was in charge of the state’s entire energy system – determining how much fuel would be shovelled into the enormous boilers; how those miraculously created electrons would course through the transmission system to power air-conditioners or ovens or factories or streetlights or cash registers.

Rose and his colleagues used similar-day weather scenarios to estimate the energy needs they had to meet through their generators. Now, life is a lot more complicated. “The difference is that, in the '80s, the control centre was operated on a command-and-control basis, and the generators had to do what they were told, while still leaving the safety of the plant in the hands of the power stations,” Rose, EY Oceania Associate Partner, Energy Market Modelling, says.

“Now, if the generators don’t like their level of dispatch – how much coal goes into the boilers, for example – they can simply change their bid, or the amount they’ll receive for sending energy into the grid. At the same time, large wind-and-solar generators can’t control their inputs – the wind and sun – so they’re naturally trying to produce whenever possible.

“It means that when you add up both bidding by fossil and hydro, with the weather conditions affecting renewables, there’s a major impact on the flow of power throughout the grid. This is all while maintaining the grid within the stability envelope where it can instantly recover from any and all disturbances thrown at it, such as heat, snow, lightning, fires, storms, generator breakdowns and human error.”

And this is why determining what the grid needs to transform into – as distinct from who will coordinate it – needs the kind of data from the household level that is only just now becoming available through smart meters. At the same time, the high-voltage grid is going to need greater oversight of renewables, as happens already in Ireland and South Australia, where the proportion of production by wind, solar and batteries is limited to a value that maintains the stability of the grid.

“The value might be 70 or 80 per cent, depending on complex engineering assessments of stability,” says Rose. “But it won’t approach 100 per cent until the grid is entirely re-engineered in ways that are not yet identified, but are the subject of worldwide research and development, particularly in the US and Europe, with significant contributions from Australia and other advanced countries.”

The path of least regret

This re-engineering of the grid is also undergirded by some seriously mind-bending maths. It’s not good enough trying to figure out what might happen one day in the future. It’s about forming up and understanding all those micro and macro decisions along the way – from mega-scale battery tech advances to Jane Smith installing three panels on her suburban rooftop and plugging in her new EV. “One of the really significant challenges of the energy transition is understanding what’s happening every five minutes of every day,” says Ben Vanderwaal, EY Oceania Partner, Energy Market Modelling.

One of the really significant challenges of the energy transition is understanding what’s happening every five minutes of every day.
Ben Vanderwaal
EY Oceania Partner, Energy Market Modelling

“Because of the introduction of bidirectional energy flows in the grid from disparate renewable sources, we now need to understand exactly what happens, for example, when a great big cloud comes over the southern half of New South Wales and the solar ramps down then ramps up again.”

Vanderwaal says the answer to grid transformation lies in obtaining and analysing better data. “We are modelling the power system, at a very high geographical resolution, to the existing substation level and also at a very high time resolution,” he says. “We are regularly crunching the dispatch of power at hourly intervals 20 years into the future, using our large datasets derived from a decade or more of real-time satellite and ground measurement by the Bureau of Meteorology at hundreds of thousands of points where generation may be built in the new renewable world.

“But to understand what sort of future grid we need to model and the implications of that new infrastructure, we really do need a more coordinated approach, something that allows us to identify the ‘path of least regret’,” he says. “And then that path is consulted on with the individual transmission entities to build their parts of the puzzle according to that plan.”

A 'macro microgrid'?

For Vanderwaal, the future is a far more sophisticated grid, run using data and governed by new language that also deals neatly with the sticky question of future coordination – assuming, of course, that the current transformational impasse is a thing of the past. “If I were to put my blue-sky thinking hat on, I’d ask why we need all of those resources to have a central authority. Why can’t we build a grid and a platform that allows them to coordinate themselves with their peers rather than by a central authority?” he says.

If I were to put my blue-sky thinking hat on, I’d ask why we need all of those resources to have a central authority. Why can’t we build a grid and a platform that allows them to coordinate themselves with their peers rather than by a central authority?
Ben Vanderwaal
EY Oceania Partner, Energy Market Modelling

“The fundamental issue with conventional thinking is, in order to coordinate all of those distributed energy resources, we need some kind of super-fast communication system that transmits all of that information to some kind of controlling entity. And at the moment that just seems impossible.”

Vanderwaal’s idea relies on two key levers. First, an appropriate market signal for the behaviour of individual pieces of equipment, such as rooftop solar systems or electric vehicle batteries, which would rely on every piece of equipment in that network talking to each other and algorithms determining inflow and outflow.

And second, a set of rules ensuring operators with more devices and therefore more market power can’t game the system to the detriment of single household participants.

“The biggest fear would be 100,000 small batteries in a part of the network seeing the signal and all turning on at the same time, creating an overload in the wrong direction,” he says. “But it’s all about having the right information about what’s going on in the network so that the devices can be constrained in a coordinated way.”

But there could be another solution. One that gives Beethoven a chance of being played perfectly not just at the time the orchestra sits down, but at a time when each of us wants the conductor to start waving the baton. “If there’s true peer-to-peer communication and coordination among a whole range of devices, some of the most important fixes for the grid can happen on the demand side,” Vanderwaal says.

“At the moment, when people switch on a light or a business turns on a big electric motor, the power just has to be there. The current paradigm is all about supply-side incentives. But there is so much value to be extracted from more choice on whether to consume electricity right now or if the need for that consumption could be delayed by five minutes or by one hour.

“It’s a really underutilised part of the market design. We need instantaneous price signals about when and how to use power, and then the ability to communicate that standard and act on it, which will enable the demand side to be far more responsive.”


The answer to Australia's energy grid woes lies in better coordination alongside a sophisticated view of how the future network will operate.

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EY Oceania

Multidisciplinary professional services organization