South Australia may face rolling blackouts, or load-shedding, over the coming days. How did this situation arise and what is being done about it?
Both local and international factors have influenced the increased energy pricing and supply constraints. At a local level, the recent cold snap across south-eastern Australia contributed to less renewable energy – wind and solar – being generated. This was coupled with outages of coal-powered generators and wet coal, increasing demand from gas generators. And globally, gas market prices have been on the rise following Russia’s invasion of Ukraine, and sanctions from the European Union, United States and others, and the resulting volatility in gas supplies and costs.
Although Australia has an abundance of natural gas, it is also one of the world’s major gas exporters. Due to existing contracts, it is unable to redirect flows and must pay international market prices for imports from the United States, Indonesia, South Korea, China, and Papua New Guinea. The federal government has the option to limit exports to ensure a sufficient supply of natural gas for domestic consumption through invoking the Australian Domestic Gas Security Mechanism. While this option has not been ruled out, it would only come into force from 1 January 2023, since it is subject to several steps, including consultation with the industry.
The Australian Energy Market Operator (AEMO) attempted to manage escalating prices by imposing temporary caps. It first set the price of $40 per gigajoule of gas last week. While this is significantly higher than the average of $10 and a historical low of $3, were it not for this intervention, prices could have climbed as high as $400 – 800 per gigajoule. This would have a particularly adverse effect on businesses and manufacturers relying on the spot market, compared to those operating on long-term contracts. The spot market is used to match the electricity supply from generators with real-time consumption by consumers and businesses. Every five minutes generators submit offers to supply electricity for a set price and AEMO accepts their offers, starting with the cheapest one, until it secures enough to meet demand. AEMO CEO Daniel Westerman promised that this is a temporary measure which would be reviewed daily.
The next step was to set fixed price caps for consumers at $300 per megawatt hour, causing some generators to withdraw from the energy market, because they would be running at a loss due to fuel costs. Analysts supported these claims, estimating that the current gas prices mean it would cost $450 to produce one megawatt hour of electricity.
In spite of these measures, AEMO could still not ensure reliable electricity supply and took the unprecedented step of suspending the spot market entirely across the National Electricity Market (which supplies Queensland, Victoria, South Australia, NSW and the ACT). This suspension means that AEMO will be able to control electricity supply. It also hopes to keep prices in check, although some generators will be compensated for generating below cost. However, the warning of lack of reserve remains over the coming days. Should load-shedding be required, those connected to the Woodville power substation in Adelaide would be first to have a 45-minute blackout. This will only happen if AEMO orders SA Power Networks to cut supply to keep the grid stable. Next on the list are Woodville Gardens, Wingfield, Pennington, Rosewater and Woodville, followed by St Clair, Cheltenham, Woodville North, Ridleyton, Brompton and Bowden.
South Australia has been leading the transition to renewables, with 60 per cent of its power needs now generated by sustainable sources. South Australian Energy Minister Tom Koutsantonis is hopeful that power cuts will not be necessary. He also stressed prioritising South Australia’s capacity to produce its own power and avoid volatility in the future through more storage, batteries, renewables, and a planned $593m hydrogen capacity in Whyalla.
