State and federal energy ministers meet again on Friday to talk about the best way to redesign Australia’s electricity market, in light of what should be a rapid transition to renewables and the managed closure of the country’s remaining coal fired generators.
Already it is clear that the Energy Security Board’s proposal, and federal energy minister Angus Taylor’s preferred option – for a sort of capacity market that would deliver excessive payments to incumbent coal generators – is dead in the water after the rejection by the two biggest states, NSW and Victoria, and indifference from others.
The question remains: if the capacity market is rightly a no go, then what are the options that the energy ministers should be considering?
Analysts Johanna Bowyer from IEEFA and Tristan Edis from Green Energy Markets, who together authored a study that suggested Taylor’s favoured “Coal-keeper” mechanism could deliver a windfall $6.9 billion to coal generators, funded by consumers, have come up with a range of alternatives.
They also suggest, quite pointedly, that these possible measures should be further developed and evaluated by a “genuinely independent panel of energy market and decarbonisation technology experts.” It’s a message, shared by others, that the ESB is no longer considered as such.
“Unlike the ESB, these individuals should not be not be dependent on ministers for their ongoing employment,” Bowyer and Edis write.
“This will ensure recommendations are not distorted by short-term political pressures and do not obscure or pass over uncomfortable but important challenges society must grapple with as we seek an electricity system which delivers reliable, affordable and ultimately zero emission power.”
Here is their list of possible proposals:
- A strengthened regulatory regime for ensuring owners of large and aged power stations give at least three and half years notice of exit based on providing an upfront bond rather than depending on application of penalties only once a breach occurs (which is the current case). This should be complemented by the use of financial and engineering audits every three years of these large, aged power stations to undertake stress-tests of their ability to maintain reliable operation and their risk of abrupt exit.
- Enact legislation that sets out a schedule for coal generating units to be steadily retired once set amounts of new reliable replacement capacity are built. This will give investors in new capacity enhanced clarity and incentive to build new plant but such investments will be primarily guided by expected returns in the electricity market, and should allow investors wide discretion on the plant technology that best suits market needs. The specific order in which coal units are retired can be determined through an array of different alternative methods which could include: voluntary nomination by owners (likely if plant is loss making and notice period bond is returned); an auction process where units are paid to retire; or regulatory criteria (e.g. evaluation of their relative reliability or unplanned outage risk; emissions intensity, age).
- Provide a floor price underwriting mechanism to encourage new competitors that build new dispatchable capacity. This could be modelled along the lines of the ACCC’s 2018 electricity market review recommendation where a new entrant would be expected to first secure a 3 year contract to provide firmed power supply to customers outside of the major government and private sector retailers. The price floor would then cover years four to seven of the plant’s life.
- Implement the emissions obligation component of the National Energy Guarantee or an alternative, long term mandatory obligation for electricity retailers or generators to reduce emissions based on tradeable certificates. The emission target should be based on a steady reduction in annual emissions in line with States’ net zero by 2050 targets with interim targets reducing emissions well below an expected business as usual trajectory.
- Contracts with individual generators to remain open as per the Victorian Government arrangement with Yallourn should be avoided. If such agreements are entered into they should include a schedule (detailed publicly) for faster retirement of generating units than agreed based on when suitable replacement capacity comes online. That replacement capacity should not need to come from the owner of the generator which is party to the support contract.
- If merited based on an evaluation of the risk to reliability from abrupt coal exit in advance of completion of Snowy 2.0, augment the existing energy- only market with enhanced energy reserve mechanisms.
It is clear that some governments are already considering at least one or more of these proposals. NSW energy minister Matt Kean is in favour of, or at least open to, direct talks with coal generators along the same lines as Victoria.
NSW already has a “go it alone” strategy, with a detailed roadmap for the rollout of at least five renewable energy zones, some 12GW of new wind and solar generation and at least 2GW of large scale storage.
That can and will be expanded as need arises, and particularly if NSW – as Kean has suggested it could – seeks to facilitate the removal of all coal generation by 2030, as per the urging of the UN and climate scientists.
Victoria has rejected the Coal-keeper proposal outright, and is looking for new ideas. It says that whatever the final choice, it is now clear that the focus must be on paving the way for fast, flexible and smart dispatchable capacity to replace the ageing and increasingly unreliable coal generators.
But that is not the way the federal government is thinking.
“Comments by energy minister Angus Taylor appear to indicate that batteries will be cut out from qualifying for capacity payments,” says Edis.
“This is based on a dubious claim that only power sources which can deliver capacity over long periods of time can fill the gap left by exiting coal.
“Analysis that takes into account variability of wind and solar power suggests that the vast bulk of the gap left by exiting coal can be filled with batteries capable of supplying power for around 6 hours or less.”
The whole market is ready to move. There are two, at most four, coal generators that actually support the capacity market proposal put forward by the ESB, despite its insistence that it is “technology neutral.”
“A financial lifeline to aging thermal power plants leaves the NEM reliant on supply that will become increasingly unreliable, and exacerbates uncertainty about when coal plants may exit,” Bowyer and Edis write. “This uncertainty will deter investment in newer, more flexible and more reliable power plants.”