Your Energy Bill Explained

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The word "energy" has many meanings. In a technical sense, it means the capacity of a physical system to perform work. That "work" is the word physicists and engineers use to describe many of the useful things humans put energy to doing: heating water to drive a steam turbine, for instance, or propelling the cylinders in the internal combustion engine in your car.

There’s also an industrial and economic sense of the term "energy", which is really about the ways companies make money by exploring, producing and selling energy commodities. Generally, these commodities are minerals such as coal, uranium, oil and gas, but they can also be electrons sold from a generator into the national electricity grid. This article aims to give you a snapshot of this huge and complex industry, and the big corporations that dominate it.

In this article, we’ll look at the energy industry in Australia mainly in an industrial and regulatory sense. We’ll take a quick peek at the way electricity market works, for example, and briefly examine some of the complex regulations that govern our grid. The second is to look at the greenhouse gas emissions of Australian energy, which constitute the single biggest environmental impact of our modern civilisation.

King Coal
Because Australia mainly generates electricity by burning fossil fuels, the electricity industry and the mining industry are closely linked. Plenty of coal-fired electricity generators have long-term contracts with coal mines that guarantee them supplies well into the future, for instance, while many companies that generate electricity for the national grid also own gas wells and coal mines as well. However, energy commodities are also traded on a global market, so many of the firms digging up coal or drilling for gas in Australia are mainly interested in selling these raw materials for export.

Perhaps the best place to start in Australian energy is one of the most controversial: uranium mining. Australia produces vast amounts of uranium ore for export, in giant mines such as BHP Billiton’s Olympic Dam. In fact, uranium is Australia’s second largest source of energy production. But Australia has only one nuclear reactor: the OPAL civilian research facility at Lucas Heights, so very little uranium is consumed here. All of BHP’s uranium is exported as fuel for civilian nuclear reactors around the world.

At the other end of the spectrum, all of Australia’s renewable energy is consumed domestically. Australia can’t export electricity; indeed, we can’t even send electricity from the east coast across the Nullabor. Unless huge long-distance electricity cables are built to link Australia’s grid to countries to our north, Australia’s electricity grid will remain a completely domestic energy system.

Between these two extremes lies the bulk of Australia’s energy industry, coal. King coal dominates Australian energy. Coal is Australia’s largest source of primary energy production, and accounts for three-quarters of our electricity generation. Coal is Australia’s largest energy export earner, with a value of around $44 billion in 2010-11.

Coal dominates Australian primary energy production. Source: ABARE, BREE

Coal is also the largest of Australia’s energy industries. In 2009-10, coal mining employed around 34,000 Australians and accounted for $22.5 billion in gross value added, according to the Australian Bureau of Statistics. Australia is the dominant world exporter of metallurgical coal, and one of the largest exporters of thermal coal.

Economic size of Australian energy industries in 2009-10. Source: ABS, BREE

Coal also dominates Australian energy consumption. In 2009-2010, black and brown coal constituted 75 per cent of the energy burnt to make electricity in Australia, with black coal representing about half of the fuel burnt in Australia’s electricity generation. Future trends see coal declining slowly, however, replaced by gas and renewables.

 

Australian energy consumption is dominated by fossil fuels, although gas is expected to slowly replace coal over coming years. Source: BREE

But coal’s biggest footprint is undoubtedly on the climate. Burning one tonne of black coal produces about 2.4 tonnes of carbon dioxide, so coal is a major culprit in the warming of the world’s atmosphere. Australia’s coal mines have a significant global impact on the world’s rising temperatures. Despite Australia’s commitment to a 5 per cent reduction in our greenhouse gas emissions by 2020, this figure does not include coal exported to other countries and burnt there.

The Electricity Grid
Australia’s electricity grid is a complex system with three major components. First, generators make electricity. Second, networks distribute the electricity through a vast network of transmission lines and their associated infrastructure like transformers and sub-stations. Finally, retailers buy wholesale electricity from the National Electricity Market, sell it on it consumers, and bill them for it.

 

A simplified model of the Australian electricity industry. Source: CS Energy

The National Electricity Market is a market for electricity, but it’s not truly national. Owing to the huge expense of connecting up distant states to the east coast, neither Western Australia nor the Northern Territory are connected. Moreover, the big transmission lines that connect South Australia to Victoria are running at close to capacity, meaning that the cheap wholesale electricity available in South Australia when the wind blows does not completely flow through to the rest of the market.

Let’s look at the grid in a little more detail.

Generation
Electricity is generated in hundred of plants across Australia. There are 322 facilities in the NEM alone, plus independent operations such as the mines in the Northern Territory and Western Australia. As our reliance on brown and black coal wanes, renewable energy is slowly gaining traction, as the two pie charts below demonstrate. In general, less coal and more green power equals fewer emissions.

 

Fuels used for electricity generation in the NEM, August 2010 and August 2012. As you can see, coal-seam gas is an important new player. Source: New Matilda analysis of AEMO and Garnaut Report data.

Unfortunately, the grid is not the whole picture. There is plenty of electricity being generated off the grid. A lot of this generation is diesel. For instance, the electricity used to power the mines in the Northern Territory emits more carbon than the electricity powering the city of Darwin. Prominent scientist Barry Brook estimates that the greenhouse gas emissions from the Olympic Dam mine expansion would have led to an additional 4.7 million tonnes a year, equivalent to the electricity use of a half a million homes.

The Price Pool and the Merit Order Effect

What about distribution? After electricity is generated in a wind farm or a gas turbine, generators sell it into a pool where it can be bought by retailers. In the eastern states, pooling the generated power is centralised, as the NEM collects electricity under the management of the Australian Energy Market Operator (AEMO).

How does this pooling work? Imagine the selection process for a school yard footy team. All lined up, the generators bid to supply electricity into the pool. "Pick me, pick me," they yell. Starting with the cheapest offer, bids are selected. Selection stops when the NEM has enough power to meet demand. Don’t be too disheartened if you weren’t picked; the next round starts in five minutes.

Here’s the part that drives prices: the dispatch price for each five-minute interval equals the bid of the last player selected. In other words, the price for everyone equals the price of the last bid required to make up the available demand. Coal is generally the cheapest option, because of its low costs. Coal plants will even bid negative prices (in other words, pay for the privilege of bidding) in times of low demand, because the costs of turning off a coal plant outweigh the cost of a negative spot price for a short period of time. This means coal plants don’t have to go through the expensive and difficult process of powering down.

Wind farms, on the other hand, are built to harvest intermittent power, which means that whenever the wind is really blowing, they can bid very low wholesale prices. After all, the wind is blowing, so what have they got to lose? And when that happens, more expensive generators are bumped off the team. What gets squeezed out is typically gas: unlike coal, gas can’t meet the very low marginal costs of wind and solar. This is known as the "merit order effect", and it is playing a big role in driving wholesale electricity prices down, particularly in South Australia.

This is the first part of a two-part explainer on the Australian energy industry by Ben Eltham and Squirrel Main. Read the second part tomorrow.

Ben Eltham

Ben Eltham is New Matilda's National Affairs Correspondent.

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