Big win for coal generators as ESB pushes for Taylor’s favoured capacity markets

The Australian renewable energy industry fears it is about to suffer a major blow after learning that the Energy Security Board is recommending state ministers embrace a so-called capacity market that will be based around a controversial mechanism that received little support when first raised.

In a draft text sent to energy ministers, and seen by RenewEconomy, the ESB recommends that a decentralised capacity market be built around a physical retail reliability obligation, as well as a centralised strategic reserve.

The recommendations, along with a proposal for a “congestion management model”, seen as a revival of the discredited “Cogati” mechanism, are seen as a major victory for the coal generation industry, and devastating to alternative technologies such as wind, solar and battery storage.

It’s also seen as a victory for federal energy minister Angus Taylor, who appears to have imposed his will on the ESB with the support of key players such as ESB deputy chair David Swift and Clare Savage, the head of the Australian Energy Regulator.

To make matters worse, there are fears that the Victoria and NSW state governments will line up in support of the new proposals. Queensland, with a relatively young fleet of coal generators, is also a supporter.

The PRRO has been criticised as unnecessary and unwieldy, and a mechanism designed to support coal generators without ever guaranteeing they will actually be able to deliver the crucial capacity when it is needed.

Virtually no organisation supported the proposal, apart from EnergyAustralia and Trevor St Baker’s Delta Electricity. Likewise, the entire clean energy industry, and even some network operators, spoke out against the congestion management model.

“It’s a pretty disappointing outcome,” said one key player in the renewables and storage industry. “After all this consultation, they haven’t shifted one jot.

“I think we have lost the battle on this one. It has been one of the most frustrating processes in my life.”

The ESB was created with the specific purpose of helping to redesign the market, which was no longer deemed fit for purpose given the rapid change in technologies, particularly in wind, solar and battery storage, and inverter technologies in general.

But it seems the redesign has been done with a view to the rear-view mirror and protecting old and existing technologies, rather than looking to the future, with some of the key players unable to understand that firm capacity can be delivered by technologies other than coal and gas.

One of the key problems for proponents of the renewable transition will be the ESB’s recommendation that a “decentralised capacity mechanism” such as the PRRO must be “the starting point” for detailed design work that could take another 18 months.

Frustratingly for many in the industry, it will work with, instead of, a centralised capacity reserve. “They were suggested as alternatives,” said another observer. “Instead, they have chosen both. It is a terrible combination.”

Critics said such mechansisms would have a “chilling effect” on investment, and would increase costs to consumers without actually guaranteeing supply. Others suggested the whole thing was a farce and should be torn up.

Some of the other recommendations will be less controversial, and largely support the work of the Australian Energy Market Commission in producing a myriad different rule changes that address the need for fast frequency control, system strength and other grid services.

It is still thinking about services such as a “spot intertia market” and an “ahead market”, but now the ESB wants to be retained to help prepare advice on these issues through to 2023.

It also proposes a work program for decentralised energy, such as rooftop solar and battery storage, and how these technologies can be martialled and encouraged through a “two-way” trading system.

The scale of the opposition to the two key and most controversial market proposals are summarised in this document from Next Advisory.

It shows that on the decentralised capacity market (or PRRO), virtually everyone was lined up strongly against, with only EnergyAustralia and Delta strongly for, and two lobby groups in the middle.

On the transmission package, again there was a long list of strong opponents, and only some key lobby groups in favour.

The ESB’s own summary of submissions and feedback also noted that most in the industry thought there was no major resource adequacy problem, and stakeholders “were largely unsupportive” of modifications to the existing RRO mechanism.

Some key players argued against a capacity market but in favour of an operating reserve, others argued the reverse. None suggested the ESB should go with both, but it seems that is exactly what has happened after an intense lobbying effort from Taylor’s team.

The congestion management model is to be used as the key for integration into renewable energy zones, which different states see as crucial to the organised roll out of wind and solar over the next decade or two.

Again, the details have not been produced, but the fear is that this is the “son of Cogati”, the rule change proposed by the AEMC but withdrawn after howls of protest.

In a statement that covered the broad parameters, ESB chair Kerry Schott said the timing of the release of the details of the proposals would be decided by national cabinet.

“This isn’t just a tweak around the edges; it’s about a whole redesign of the national electricity market. We expect governments will need time to develop their responses.

“We all know reform isn’t optional. It is not something we can choose to do; it’s something we have to do to confidently embrace Australia’s energy future while reducing the risk of price shocks and blackouts.”

Taylor also issued a statement, noting the inclusion of a recommendation that governments further develop a capacity mechanism to provide the right market signals to drive investment in dispatchable generation.

“This will be crucial to ensuring that we can absorb renewables into the grid without threatening reliability and affordability,” Taylor said.

“The pace and scale of changes underway in our electricity system is unprecedented, and it is essential that the National Electricity Market (NEM) remains fit-for-purpose into the future in order to protect consumers from high prices and reliability risks as technologies in the energy sector change.”

Swift, formerly a deputy at AEMO, first raised a physical RRO back in 2017, but it was rejected by all and sundry as unworkable.

EnergyAustralia then took up the running and seconded one of its senior executives – Sarah Ogilvie – to the ESB where the idea has been developed and backed by Taylor and Savage, a former head of strategy at EnergyAustralia.