Capacity market will act as a fossil fuel subsidy, Australian regulators warned

Australia has been warned against the introduction of capacity markets as a way to stimulate new investment in new electricity generation, with the head of a leading demand response technology company labelling them as effective subsidies for fossil fuel companies.

The warning came from Sara Bell, CEO of UK-based demand response start-up Tempus Energy, which has run successful legal challenges against the introduction of capacity markets in the UK and in Europe. Bell says that the best solution is to help energy users participate in in the energy market through demand response.

“The idea that (a capacity market) it might be a good idea to subsidise fossil fuels is ludicrous. Why would you take cash from consumers and hand it to polluters when you could take cash from polluters and hand it to consumers?” Bell told the All Energy conference in Melbourne.

“No matter how well intentioned your policy design starts off, it is going to be a fossil fuel subsidy scheme.

“I think it is impossible to create a capacity mechanism that doesn’t it become a fossil fuel subsidy scheme. We legally challenged the UK capacity market under competition law. Basically our legal argument was if customers can do this cheaper, why the hell are we subsidising fossil fuels?”

Tempus was successful in its legal challenge, and the EU subsequently suspended the UK capacity market scheme in November last year, but not without strong opposition from fossil fuel generators.

“Just to illustrate how powerful the fossil fuel lobby group is. Throughout this year, I’ve received regular letters from UK government saying, ‘Tempus when you lose this case and, you have to pay our legal fees and you go bankrupt, how will you pay the legal fees of the 57 fossil fuel companies that are also fighting it?'”

“The objective of these letters is to terrify us into withdrawing based on a concern around bankruptcy. There’s just one problem with that. I run an early-stage company. Unfortunately, bankruptcy is a fact of life.”

Tempus Energy has developed a software platform that manages energy demand from flexible devices, using the software to optimise energy consumption to minimise cost and reduce pressures on the grid.

Bell told the All Energy conference that facilitating demand response providers to participate in the energy market was a key step towards building a more effective energy market.

“Renewables, flexible electricity customers equals a cost effective energy transition. So it’s incredibly important that we incentivize customers to be flexible.” Bell said.

“I profoundly believe in markets. I think more than any other policy instruments they do actually deliver. But they’ve got to be a real market. So if only one side can respond to price, it’s not really a market, and that’s why customers being flexible is so important,”.

It was a message echoed by ARENA CEO Darren Miller, who used his keynote speech to the All Energy conference to expand on his vision for a flexible Australian energy system built on renewables and targeting an export market for renewable gas.

“Hydrogen has this dual effect of bringing down the costs of the actual generation and bringing down the costs of the balancing of that system,” Miller said.

“Electrolysers can be operated flexibly and can provide valuable balancing service to the electricity system, potentially delivering us low cost, reliable and low emissions electricity as a by-product of a giant hydrogen system in the Australian market.”

Head of the Australian Energy Market Operator, Audrey Zibelman, who will have responsibility for implementing any reformed National Electricity Market design, defended the role of markets within the energy system, saying that markets served an important role, provided they were designed correctly.

“A lot of customers, customers need time in order to prepare to shift their load. If it’s a commercial load, they need to think about actually moving shifts, moving inventory, things like that. So they can’t really operate necessarily in real-time,” Zibelman said.

“They like to have a sustainable market signal that they could work on, but they know they’re going to commit, they know they’re gonna get paid for it. So it’s very important to have the right market design so that people can actually act on a systems basis.”

The Energy Security Board is currently reviewing options for a redesigned national energy market to operate from 2025 and beyond, and is aiming to deliver recommendations to the COAG Energy Council by the end of 2020.