Decoding the Finkel Review for the ‘Common Man’

Following the ‘Finkel Review’ into Australia’s electricity market we are witnessing reviews of a ‘Review’, unsolicited and uninformed opinions, as well as party political and industry motivated brain farts. Let us debunk these first. The ‘Finkel Review’ of the Australian electricity market is a ‘Review’. It was not an Inquiry. The ‘Finkel Review’ is essentially a report card on the current state of the electricity sector. The ‘Finkel Review’ ‘Recommendations’ are a list of market failures that Alan Finkel advises should be addressed if Australia wishes to have:

  • A secure, reliable and affordable energy system for the 21st century
  • A properly functioning and responsive ‘Energy only Market’

The Finkel ‘Review’ documented a variety of governance, regulatory and market mechanism failures. These issues have been long standing; are a function of both state and federal government failures, market body infighting, overlapping responsibilities, incompetence, poor planning and the lack of a national strategic vision. There is simply nothing new about this. For most of us who are even vaguely familiar with the issues, the call for a ‘National Strategic Policy Vision’ followed by a ‘National Energy Framework’ that clearly articulates energy supply priorities for a ‘National Energy Policy’ has been a long standing battle. Despite stating that a ‘Business as usual approach’ is no longer acceptable, the Finkel Review contains several contradictions without offering any real solutions. To be fair, the purpose of a ‘Review’ is to review the current state of play. By definition a review is not a document aimed at delivering solutions beyond the provision of a list of recommendations under the defined terms of reference.

This is precisely what the ‘Finkel Review’ is. The shortcomings of the ‘Finkel Review’ are the assumptions that underpin it and a failure to detail the CET / EIS modelling methodology used. Let’s consider the first of these failures. Finkel clearly worked under very specific political constraints. Even though I consider the notification of a generator closure period to be a reasonable recommendation under a German targeted capacity market model, Finkel rejects the German model in favour of the current ‘Energy only Market’ model operating in Australia. In the same vain the chapter on Australia’s gas market recommends a limited regulatory intervention response with a preferred option of securing new conventional and unconventional gas supplies as critical. With the Howard government ignoring the need for regulating a domestic gas supply, despite Labour calling for it at the time, the subsequent neglect by the Rudd / Gillard years to secure a national gas reserve remains a missed opportunity.

This policy vacuum was identified by overseas and domestic bankers as a risk management strategy against the closure of existing coal fired power stations. As far back as 2012 I discussed this issue with two Bankers who attended one of the conferences I was hosting. Both maintained that their current risk exposure into coal is best served by a transition into gas fired power stations. ( Either new or as a coal to gas conversion) The reasoning was surprisingly simple. The projected domestic gas price increase can be leveraged against international forward contract risk under current state and federal regulatory arrangements. For this reason I must question the Chief Scientist’s reasoning that any future expansion of gas generation in order to meet supply shortages, black start, frequency and voltage system stability with some type of ‘Target Capacity’ supply reserve under an ‘Energy only Market’ model is actually possible? You just can’t have it both ways. You cannot categorically rule out the need for an energy reserve to meet supply shortages, black start, frequency and voltage system stability needs under an ‘Energy only Market’ system whilst advocating it as an urgent recommendation for consideration. This fundamental confusion in the ‘Finkel Review’ may have a lot to do with the terms of reference, the political imperatives and the position the Chief Scientist took on reforming the energy market bodies controlling the NEM. Others factors that might have contributed to the Chief Scientist’s thinking on this matter might have been the Western Australian Review into its capacity market model as well as the ‘Vertigan and Harper Reviews’. Alan Finkel does acknowledge that both the ‘Vertigan and Harper Reviews’ are gathering dust in Canberra. Pretty much like my own ‘Energy Efficiency’ recommendations to the Rudd government that eventually and perhaps bizarrely informed India’s ‘Renewable Energy Policy’ (MNRE). On the flip side, the Western Australian capacity market model has been roundly criticized as the most shambolic and incompetent energy market model anywhere in the world.

Perhaps the other key consideration was the need to balance ‘Transmission and Distribution Network’ costs with the need for an affordable energy price going forward. Even though the Chief Scientist makes some very good points here, the fundamental contradictions remain. If Australia’s future energy system will contain substantial gas fired power stations in order to meet energy demand, supply security, network stability standards and emissions reductions targets, then pegging the future on gas will not reduce the consumer energy price. Alan Finkel acknowledges that current market spot prices as well as future prices in the FCM and VCM markets going forward; are determined by the gas generators. This simply makes a mockery of the idea that we can contain electricity price increases within a reasonable margin when only days after the release of the ‘Finkel Review’ various Utilities in three state jurisdictions announced price increases in multiples higher than the Chief Scientists CET model projects by 2030. The key failure of the ‘Finkel Review’ in this respect is that he did not recommend an Electricity Pricing Commission with the authority to restrain price increases to the CPI and the means to hold proper evidence based market inquires. Australia has a Wage Commission system. Why not an Electricity Price Commission? Is this a function of the AEMC, AEMO, AEMR, or who? Perhaps neglecting the very concept of an Energy Price Commission is partly due to a reluctance to tinker with a failed market model and an ideologically abhorrence to acknowledge government responsibility for this failure. No doubt the omission of such a key recommendation was calculated not to offend the far right of the LNP. It didn’t really make any difference because we were still bombarded by the ‘No Energy Future without Coal’ and the ‘Over my Dead Body’ simpleton positions splashed across the media.

To Alan Finkel’s cedit, he did at least imply in his report that Australia’s energy future could be achieved without excessive reliance on gas and coal. He discussed storage at some length but without any real rigor. We all agree that hydro storage is a good long term opportunity after 2025 when the various options proposed by the Turnbull government are likely to be commissioned. Hydro doesn’t solve the issues facing various state jurisdictions in 2018. Very few options will! Biogas generated from sewage sludge could be implemented relatively quickly and at a relatively low cost. This generation option is not enough to replace a coal fired power station. The best solutions mentioned in passing by the Finkel Review are ‘Renewable Energy Zones’, embedded Mini/Micro/ Smart-grids, Grid embedded storage ( other than hydro) and adding storage to new and existing wind and solar farms. By now you are wondering why you need to read the Finkel Review because it is beginning to sound like my Blog without the acid lampooning of our political elite. Well! Alan Finkel did not go into any details about what he meant by a ‘Renewable Energy Zone’ so let me assume this privilege.

Let’s assume that Victoria’s Regional Towns along the NSW boarder all agree that they wish to become independent grid connected renewable energy zones. In accordance with the local council objective to reach a zero carbon target by 2050, each will implement a strategy of rooftop solar with either an on-premises installed or a zone collective storage hub. These regional renewable zones will be an autonomous DER using TAG-e technology in a block chain connecting each household and small industry customer into the embedded mini/micro/ smart-grid zone. The management authority of each mini/micro/smart-grid will in turn enter a clean energy supply agreement with any of the wind and solar farm operators in the region. There are a few of them. Since all energy markets are ‘Capacity Markets’ this localized supply agreement would form a target capacity market system under the existing ‘Energy only Market’. In essence, a decentralized time base energy dispatch model, to be more accurate. If the wind/solar farm operators agree to install their own storage and the Victorian government approves a third party grid embedded storage solution between the wind/ solar farms and the regional smart-grid ( renewable zones ) we solve:

  • energy supply security,
  • price affordability,
  • black start,
  • FFR under an internationally compliant FCM, VC stability standards model,
  • spot market volatility and market gaming,
  • transmission and distribution grid investment,
  • bushfire and storm risk
  • Future investment in renewable energy capacity as the localized clean energy supply guarantee acts as a default PPA with a known capacity

We can solve all issues identified by the ‘Finkel Review’ and acknowledged as the lowest long term cost solution in the review without bothering to invest excessively in new gas or CCS compliant coal technology. This would solve the problem of over investment and misdirected investment in transmission and distribution lines. It would solve all data collection and forecasting issues. It would even create NZE ( NET Zero Emission ) zones that can earn multiple credits under the ‘Finkel Review’ CET system. It would do all that at the lowest cost to the government and prosumers long term whilst it would send a serious spot price and FCM signal to the Utilities. Unfortunately Alan Finkel did not even bother to model this solution. Offering a sensible solution was clearly outside the terms of reference of a review.

In Conclusion

What new information or great insight did the Finkel Review deliver to the ‘Common Man’s’ understanding of the Australian Energy Market? Not much, really! None of the recommendations can be described as visionary, radical, exceptional or outstanding. On hind sight though! I will reconsider my call to get rid of the Energy Market Quangos and start from scratch. I agree with the Chief Scientist’s view that it would be too expensive and at the cost of lost institutional knowledge would be too great. To be honest! My gut tells me different. Let’s see if the politicians in Canberra actually read the ‘Finkel, Vertigan and Harper Review’ and stop talking nonsense.

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