FactCheck: does Australia have too much electricity?

By Dylan McConnell on 10th September 2014.

This article was originally published in The Conversation.

We have 9,000 megawatts (nine big power stations equivalent) of excess capacity in electricity generation … We have more than 15% overcapacity in generation in Australia - Industry minister Ian Macfarlane, ABC Radio, September 9.

Capacity and supply

In electricity markets, “capacity” is used to describe the total potential technical capacity (in megawatts) of a system. The total capacity in the National Electricity Market (NEM) is approximately 50,000 megawatts. “Energy” is often used to describe the output, or the electricity that is actually delivered.

The National Electricity Market is an “energy-only” market — capacity isn’t traded. We consider these markets in balance when there is 15% more capacity than the expected peak demand for electricity. The NEM has been in a state of structural over-supply for some time now — currently close to 30% over expected peak demand.

A key aim of the Australian Energy Market Operator (AEMO) is to “promote efficient investment in and operation of Australia’s electricity and gas markets”.

As part of this AEMO, prepares an “Electricity StatementOpportunities”, that highlights generation and demand-side investment opportunities. In the latest update, rather than investment opportunities, Australian Energy Market Operator reported on the surplus capacity throughout the National Electricity Market:

“There is potentially between 7,650 megawatts and 8,950 megawatts of surplus capacity across the National Electricity Market in 2014–15. Approximately 90% of this is in New South Wales, Queensland, and Victoria.”

The operator modelled three economic scenarios — high, medium and low growth. For the first time in the history of the National Electricity Market, the modelling shows that no new capacity is required over the next ten years. The figure below illustrates that this surplus capacity may increase or decrease, depending on the scenario.

Range of surplus capacity forecasts in the National Electricity Market over the next 10 years. AEMO

Enter the RET

This is a point echoed by the latest Renewable Energy Target review from a panel led by businessman Dick Warburton. The current levels of oversupply are used to argue for no new investment in renewable energy:

In a market environment where capacity is already oversupplied and demand may continue to decline it is quite reasonable (and efficient) for no new investment in capacity to occur.

This may be true. However this argument confuses the role of the RET with the role of the National Electricity Market. As the Panel’s report points out, the “NEM was designed to correct [oversupply in the market]”. The objectives of the RET, on the other hand are to:

  • encourage the additional generation of electricity
  • to reduce emissions of greenhouse gases
  • to ensure that renewable energy sources are sustainable.

Given that they are the objectives of the legislation, these represent a useful measuring stick to evaluate its performance against. The legislation itself actually provides guidance on the review process, including:

the Climate Change Authority must conduct reviews of the following: (a) the operation of this Act and the scheme constituted by this Act …

Minister Macfarlane also claimed that the government was “simply keeping to the legislation” in reviewing the target.

But as we’ve seen the supply-demand balance of the market does not feature in the RET’s remit. And nor should it — that is after all the purpose of the NEM.