Will The Lights Stay On?

Leading engineering and ESG advisory consultancy, BG&E Resources, chats with Bindi Shah, Principal Consultant – ESG, to gain a better understanding of operating a power grid as we move towards net zero.

She says, “It’s only after coming to Australia and working in the energy sector that I realised what it takes to keep the lights on!

Prior to joining BG&E Resources, Bindi worked with the Australian Energy Market Operator (AEMO) (pronounced “ay-eeeeh-mo”) for four years.  

AEMO operates the South West Interconnected System (SWIS) which is part of the Wholesale Electricity Market (WEM). It supplies electricity to over 1.1 million Western Australian households and businesses each year.

“In a nutshell, the WEM is a market where customers create electricity demand and generators supply the need by bidding in the market – similar to the stock exchange,” adds Bindi.

“One of the unique features of the SWIS is the Reserve Capacity Mechanism (RCM) which ensures there is sufficient generation and demand side capacity to meet peak demand and avoid volatile price hikes (such as those experienced in the East Coast last year).

“Security, reliability and cost are three words often associated with keeping the lights on. The energy sector has worked hard to focus on security and reliability but achieving the trifecta with cost is a challenge!

“The AEMO publishes the WEM Electricity Statement of Opportunity (ESOO) annually which provides a 10-year forecast of projected demand, and determines a Reserve Capacity Requirement (RCR) – this is the ’target’ for how much capacity must be made available to meet peak demand from market customers. The ESOO (almost sounds like a sneeze!) is also THE document that sends signals to the market for the investment required to keep the lights on!

“The giant warning in the 2023 WEM ESOO is that urgent investment in big new electricity projects on WA’s SWIS is needed to meet a forecast shortfall…an understatement of 945 MW in 2025-26 and around 4,000 MW by 2032-33!

“For context, this is a significantly different outlook from the 2022 WEM ESOO where the additional capacity requirement was expected to begin in 2025-26 and reach 303 MW by 2031-32.”

Rising Electricity Demand

The rapid energy transition is now fueling extraordinarily strong forecast growth in electricity demand compounded by the transition to new, lower-emissions sources of supply and managing the phase out of coal-fired generation.

Some facts at a glance:

Source: AEMO

Bindi adds, “As consumers, we are experiencing the pressure of rising electricity costs. Up to now, installing rooftop solar panels has been touted as one of the best ways to reduce power bills and make your household more sustainable.

“But, operating the traditional grid is prone to huge ‘swings’ in demand due to these rooftop solar installations together with cloud cover, ramping timings of thermal generators, planned and forced outages, frequency, inertia are just some of the day-to-day aspects managed by AEMO to keep the lights on. “New technology integration has its own challenges and opportunities; however, it will be the development and implementation of legislation, policies and procedures that is going to be massive. Approvals times, having poles and wires in areas of proposed projects is also another potential hurdle.”

Capacity Credits are Key to Keeping the Lights On

The RCM ensures that there is sufficient generation capacity in the South West interconnected system (SWIS).

This is achieved through a range of methods including setting a RCR two years ahead – this published in the Wholesale Electricity Market (WEM) Electricity Statement of Opportunities.

As to why the RCR is key to keeping the lights on, Bindi explains, “There is a certification process for capacity which then gets allocated Capacity Credits (MW).

“If there is tightness in the market Capacity Credits can be worth a lot – for example, for the 2024-25 Capacity Year, incumbent generators earn $150,745.81 Capacity Credit and the new Facilities earn $194,783.54/Capacity Credit. This means with 4,596.425 MW of Capacity Credits assigned, the capacity market could be worth $700 M or more, if they have a power purchase agreement.

“The Reserve Capacity Price has been increasing over the last few years as seen in the chart below. As a result, there is a lucrative incentive to get new capacity connected to the grid!”

Source: AEMO

The Bottom Line

Based on the outlook period, there is a real sense of urgency for ongoing investments in extra large-scale generation capacity, expediting the pipeline of generation, storage, and demand-side projects, as well as investments in transmission infrastructure.

“Transitioning to a cleaner renewable capacity is needed, but maintaining a strong and resilient power system that can satisfy future demand is complex and challenging, not to mention costly – in the order of trillions!” concludes Bindi.

Stay Informed

For more information on how BG&E Resources can help with the Energy Transition including learning more about the RCM, power systems and operations as well as ESG matters, contact:

Bindi Shah

Principal Consultant – ESG

T: +61 8 6375 4257 
E: Bindi.Shah@bge-resources.com

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