Alan Kohler: Grant, obviously there’s been a lot of controversy about the big price spike in South Australia earlier this month. Is your view that it was caused by renewables or by gas?
Grant King: Look, there’s no question that it’s been cause by a significant increase in the amount of renewables in the system. When that occurs, you get a lot of zero marginal cost energy coming in and that lowers the pool prices, but that of course makes the economics of base load coal plants very difficult because for many hours of the day they’re receiving very low prices. So what it’s actually caused by is the base load plants at Flinders and as a result there’s less base load generation in the system. So when the wind doesn’t blow particularly… obviously the sun doesn’t shine at night, but that’s predictable, but when the wind doesn’t blow, there’s just much less energy in the system. That energy has to be firmed in some way, and it’s firmed by gas. But at the end of the day, the increasing gas price in Eastern Australia does not of itself drive the higher prices you’ve seen in South Australia. It’s because, actually, of the withdrawal of that baseload, for which the economics have been degraded by the influx of a lot of zero marginal cost energy into the system.
AK: So, a lot of people have been using what happened as a basis on which to criticise South Australia’s renewable strategy. Is that a reasonable thing?
GK: Look, I think that for quite some time in the industry, we’ve all held the view that the amount of renewables in the South Australian system was very high in relation to any world experience. And the, if you like, the intermittency that that causes, because South Australia, to back it up, has to either interconnect it from Victoria which is limited in its capacity, or has gas fire generation which has to firm that intermittency. Clearly you put Australia right out on the edge in terms of the shear amount of renewables that it relies on for its energy today.
AK: I’m just wondering what the lessons we can learn from what has happened in South Australia and specifically, I’m wondering whether it means that we should be focusing more on solar than wind.
GK: Solar and wind, both for different reasons pose the same problem of intermittency, it’s just that solar intermittency, is obviously much more predictable because it’s sort of day and night, to state the obvious. There’s much more wind in the system in South Australia than there is solar. So, I think that there is… I’m not sure what would lead you to argue that we ought to rely more on solar than wind because both of them still involve significant intermittency. What solar does is move you to Winter evening peaks, simply because on cold Winter days, people still need all the energy that they need and there is no contribution from solar. So one or the other won’t necessarily, I think, be preferable. They key issue is that whatever you use will need to deal with intermittency and intermittency in any system has to be dealt with by having backup generation. And that’s typically storage, either hydro-pump storage, gas, which acts like storage, or of course people speculate that in the long run batteries will provide that role.
AK: Well, I’m wondering, in fact, whether batteries are just long run, because obviously Tesla is pushing its Powerwall batteries quite hard and you’re selling them, in fact. Is that likely to be more of a short term solution, perhaps, as people take them up?
GK: No, no, if you just look at the numbers, the volatility, so the amount of wind generation coming into South Australia system when its running at peak and then ceases to contribute when the wind stops blowing is so far in excess of any amount of foreseeable installed battery if you took it to the three, four, five year horizon. It takes many hundreds of megawatts of gas fired generation to firm that intermittency, so if you took a ten to twenty year view, I’m sure that batteries will have a role to play at the system level as well as the household level. But in terms of the evolution of the power market if you like, the generation of electricity, supply and demand in South Australia, batteries will not…. I can’t see that batteries are providing any solution inside five years for the current situation, that is, the need to firm that intermittency with backup generation.
AK: In fact, in a recent presentation you quoted Bill Gates saying that storing energy turns out to be surprisingly hard and would triple your electricity bill. I assume by quoting it, you agree with it.
GK: Yeah, well, storing energy in batteries is at the volume of scale that we’re talking about in terms of the South Australian power system is still difficult, both technically and economically. There is no question that batteries can go into households and bridge… some of the testing we’re doing, typically bridge three, four, five hours of consumption. In other words, fill them up in the day and discharge them at night. But they bridge three, four, or five hours of consumption in a day. They don’t bridge across days and they don’t deal with long periods of time when the sun’s not shining and the wind’s not blowing. So batteries have a role at a household level, but not yet at a system level. The system still has to rely on backup generation, and that either comes from being connected to another grid, S.A. to Victoria, for example, or in South Australia, gas fire generation backing up all those periods of intermittency.
AK: But isn’t it that case that if enough households can store batteries, it becomes a system issue?
GK: Look, I think that it is conceivable in the long run future where that would be the case, but batteries would need to bridge a lot more than three, four, or five hours of consumption from night to day because we can get extended periods, for example, cloudy stormy weather in Winter, where all of those household batteries are not going bridge enough consumption and consumers in aggregate would still rely on the grid for all of the power that they would need.
AK: I noticed that your battery and solar package is zero cost upfront, which looks to me like a mobile phone type of plan, where people pay off the cost of the infrastructure in their bills. Do you think that’s going to be the way that people go, or is there a sense… does it looks like, from what you’re seeing, that people are going to use batteries to try to get off the grid?
GK: So, there is no question that there will be a part of the market that is. So for example, and none of this conversation applies to someone who lives in an apartment, you know, the third floor of ten story apartment building. So, for a start, this is not a whole of market question, but for those people whose circumstances, they have a house and it’s got a big roof, their energy usage is quite high, the products of the type we’re offering will make a lot of sense to them. The key question you ask is will people go off-grid. And our view is no because to go off-grid, you would have to bridge days in Winter where you’ve got limited hours of sunshine and potentially limited hours of solar insulation because it’s cloudy, for example. And in those circumstance, people will still want to draw their power from the grid and I think the way I would put it most colloquially is that at the end of the day, in our experience, very few consumers want to go without hot showers and without hot meals and without being able to warm their house in Winter or cool their house in Summer. So I don’t believe batteries will see people go off-grid, but batteries will levelise, for some customers who are in those circumstances that I described, some of their consumption and will clearly have a role to play as a commercial product in the market.
AK: More generally, do you think that the Paris agreement that was signed last December will lead to a resurgence of gas as opposed to renewables?
GK: I think that, again, it’s a good and interesting question, Alan, because South Australia is a little bit of exemplar because the consequence of the Paris agreement in order, for example, just for Australia to meet its obligations or its commitments would require, amongst other things, a lot more renewable energy in the system. So I would say that growth of renewables will be very strong, both domestically and globally to give affect to the Paris agreement. But as we’ve seen in that exemplar in South Australia, the more renewables that you put in, the more intermittency you create, and the more you will need a backup supply of power. Now some countries are blessed with lot of hydro and that can fulfill that role, but many, many companies in the world, hydro is already fully exploited, or for example, in Australia, it’s just not a choice we’ve got. So, I’ve got no doubt that gas will also play an increasing role. So gas and renewables will grow, but the use of renewables will grow very, very strongly. And in percentage terms, off a very low base, probably more strongly than gas.
AK: That’s really very interesting. Just finally, and given the issues of intermittency, and what you’ve just been talking about, solar is now cheaper than wind. Do you think that the way the cost curve is going on solar, that it will become cheaper than gas?
GK: So, I’m going to say no to that, but I need to explain why the answer is no. You’re quite right to say that the cost curve for utility scale solar continues to come down and probably more quickly than wind. So, it is certainly now competitive with wind. And when you look at the fact that relatively more of the solar energy is generated during the day when power is worth more, because more is generally used during the day, then the economics of solar are improving, if you like, more quickly than the economics of wind. But, the reason I say no to your question is that power systems, if you like, are overall electricity system, has to generate power when people want to use it. And the way to bridge renewables is through storage or gas, and so you have to think about the cost of energy as being, if you like, the synthesis of various ways powers is generated to provide consumers power when they want it. Because, believe me, when it’s dark and cold on a Winter’s night, people want the lights to go on, and they want the heating to work, and they want a hot shower. So, the key issue is what’s the cost to have a balanced system that meets the power requirements of people when they want it and therefore it’s very hard to say gas is cheaper than wind or whatever. The reality is they are complimentary because they provide power when people need it and gas is there to back up the intermittency that inevitably arises from the use of renewables.