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Monday, September 26, 2016

Electricity pricing opportunities

Policy makers received another jolt when the short term cost of electricity in South Australia leapt from a year-long average of about $60 per megawatt-hour to $9,000 per megawatt-hour.

This market fluctuation is nothing new. Demand for electricity is expected to vary a lot from time to time. Policy makers have chosen settings to promote investment in both generating capacity and distribution grids to be able to quickly respond with extra supply.

The policy problem is quite visible in the need to provide adequate transport infrastructure for peak periods while accepting that there will be times the infrastructure will not be required...

Freeway showing peak period traffic flow
Freeway showing peak period traffic flow

Freeway empty on weekends
Freeway empty on weekends
 Electricity price spikes have occurred during summer heat waves when there has been little reliance on renewable energy sources and fossil fuel generating plant has been operating without any incidents that limited capacity.
NSW electricity price spikes, January and February 2011
NSW electricity price spikes, January and February 2011
These occasional electricity price spikes are what the usual policy settings rely upon to encourage investment in capacity that will be idle most of the time. For instance, early in 2011 AGL proposed building a $1.5 billion power plant it foreshadowed would be "switched off for months on end."
"AGL project manager Neil Cooke said the planned $1.5 billion gas turbine power station would only operate between 200 and 400 hours a year during periods of peak demand and could be switched off for months on end."
(Article in Canberra Times, May 7, 2011 - page 15)

An intention to transition electricity generation to lower-emission technology does not materially alter this policy problem: whether it is a $1.5 billion power plant that is intended to be switched off "for months on end" or a $1.5 billion battery storage facility in its place.

Replacing freeways with mass transit would face the identical issues of peak demand far exceeding the capacity required on weekends.

With electricity generation and distribution there are some options to improve flexibility that might reduce the amount to be invested in equipment that is intended to be switched off "for months on end".

The development of robotics in automated manufacturing is increasing the flexibility to help reduce investment in electricity supply...

The principle can be seen in agriculture where crops are naturally adapted to be opportunistic consumers of sunlight and rainfall.

Automated factories and refineries that operate when electricity supply is at normal prices and switch off when the price begins to climb could be a more economic solution.

$1.5 billion invested on manufacturing  plant that is intended to be idled for short periods may be better for the economy than $1.5 billion invested in electricity capacity that will be kept idle for all but short periods.

This has implications for policy settings that for now are designed to promote investment in excess electricity generating and distribution capacity.