5 minute read 8 May 2019
Workers inspecting power turbine

When the spin stops: How to create a market for inertia

By

Matt Rennie

EY Energy Transition Lead Partner & EY Parthenon Partner

Passionate about helping clients navigate Australia’s energy transition.

5 minute read 8 May 2019

We need to move beyond conventional wisdom when it comes to transitioning our energy networks.

With the rhetoric around renewables, coal, system security and keeping the lights on, we’ve largely missed the fact that it is now, according to research, cheaper to build a renewable plant than it is to build new coal1,2. Equally, little has been made of the fact some existing coal-fired facilities are already being wound down, with Bloomberg New Energy Finance research suggesting private owners are more likely than ever to begin closing their aging coal facilities early3.

Now that the tipping point of it being cheaper to build a new renewable energy facility than a new coal-fired one has passed, we’re rapidly approaching the second tipping point when it becomes cheaper to build a new renewable energy facility than continue to operate an existing coal-fired power station. The first has implications for the way in which capacity is replaced in a system, the second has far more disruptive implications for the shutdown of plants before the end of their useful life.

Don’t shut down coal yet

This is not to say that coal plants should be shut down and replaced with new renewables in all areas – for two simple reasons. First, there are some extremely cheap coal-fired power stations, some of which will never be more expensive than renewable facilities even under the most optimistic forecasts, and which in the absence of draconian carbon policies will produce cheap and reliable electricity to the end of their useful lives.

Second, there is a minimum amount of inertia that is required in an electricity system to make it work, which means there is a limit to the amount of renewable energy that an electricity system can bear. Without sufficient inertia, whether from coal, gas or hydro generation, the system cannot recover from the impact that temporary reductions in sunlight and wind invariably have on renewable plants.

Challenges in setting energy policy

There will come a time, somewhere between 2025 and 2050, when it will not make commercial sense to run coal-fired power stations because renewable energy will (a) be cheaper; and (b) the amount of money made when the sun goes down will not be enough to pay for the costs of operation.

The difficulty is that this is not a problem that can be solved, economically or technically, with storage unless the technology evolves to a point where batteries can provide both inertia and capacity.
Matt Rennie
EY Energy Transition Lead Partner & EY Parthenon Partner

The risk is that there might not be enough inertia in the system, which will destabilise markets (and arguably this point goes beyond questions of reliability and to the heart of whether we can or should maintain our present quality of life). The difficulty is that this is not a problem that can be solved, economically or technically, with storage unless the technology evolves to a point where batteries can provide both inertia and capacity.

It means that solving for these points often leads commentators to the extremes for and against different fuel types. That is the challenge with policy development in most countries, Australia included, because it requires us to hold a number of conflicting points in check while coming to an answer of how to set energy policy.

Laser focus on the specific problem

In Australia, the National Electricity Market (NEM) is an energy system, meaning it pays when energy is being generated and supplied into the system. It does not pay baseload or peaking power to sit idle and to provide capacity or inertia when it is required. Many other systems globally have similar structures.

One of the options to address the issues associated with mass penetration of renewables, namely, maintaining inertia, is to begin paying for it.

Batteries are not a viable solution to create synthetic inertia. While batteries provide capacity, that is very different to providing inertia. It means they provide little in terms of system strength and risk destabilising when grid signals increase from rotating generation. Current battery software and communication technologies are also too slow to respond to sudden frequency drops, which can happen in less than a quarter of a second.

Nor is demand response a viable solution, whether it is contractual (through paying people to turn off), or the more politically unpalatable load shedding or rolling outages.

That leaves paying for inertia, by creating inertia markets. This would require rotating inertia as a service, to be valued in a much different way than it is today, and paid under mechanisms that will incentivise both new and existing technologies to provide the underpinning reliability the system needs. These are significant changes and would stretch the bounds of existing ancillary services in a market like the NEM in Australia.

These are not new challenges. In Australia, like in many other countries, the Australian Energy Market Operator (AEMO) establishes minimum inertia requirements in each region. These are published, along with rules around system strength. However these arrangements imply a continued requirement for rotating inertia. How that looks in an environment where renewables are rapidly reducing in price is the challenge.

We need to balance a need for rotating inertia in the system with the fact that renewables will be the primary method of power generation in our grandchildrens’ lives. While the energy only market has served us well in the NEM since 1998, it may be time to challenge the conventional wisdom.

  • Show article references#Hide article references

    1. https://about.bnef.com/blog/battery-powers-latest-plunge-costs-threatens-coal-gas

    2. https://www.climatecouncil.org.au/new-wind-and-solar-now-as-cheap-as-existing-coal

    3. https://www.climatecouncil.org.au/new-wind-and-solar-now-as-cheap-as-existing-coal

Summary

The looming energy transition means that new markets may need to be created to manage a shift away from traditional forms of energy generation. 

About this article

By

Matt Rennie

EY Energy Transition Lead Partner & EY Parthenon Partner

Passionate about helping clients navigate Australia’s energy transition.