The Clean Energy Council has released a damning critique of the federal government’s plans to underwrite new dispatchable generation, saying the Coalition has grossly distorted the recommendations of the ACCC in an attempt to favour coal-fired generation.
The CEC made the comments in response to the Coalition government’s rushed efforts to sign a contract for new investment in coal and gas (its preferred options) before the next election. Submissions were due late last week and expressions of interest will be called over Christmas and the New Year.
It said that the government plan, contrary to that proposed by the ACCC, could have “perverse, unintended consequences” and could result in less innovation and undermined investor confidence, as well as an “overbuild” of capacity that would hit consumers.
“The proposed government program is a high-risk strategy that creates a market distortion that could have the opposite outcome to the one intended,” CEC chief executive Kane Thornton wrote.
“The National Electricity Market (NEM) is one of the most liberalised energy markets in the world. Throughout its history when there has been political and policy stability, the NEM has been successful at attracting new investment in generation capacity which, as an energy-only market, is incentivised by higher price periods.
“This does not represent market failure. On the contrary, it shows that the market is working. The current boom in investment in wind and solar power, similar to the previous boom in gas-fired generation in the 2000s, is as a direct result of the high wholesale market prices seen in recent years.
“The entry of these new renewable generators is already bringing down wholesale prices, which is the expected result in the energy-only market design. As a capital-intensive sector with long lead times for obtaining planning approvals and for building projects, the energy sector has always had a classic ‘lumpy’ investment cycle. ”
Thornton said the program could create an investment pause as other potential players in the market awaited the outcome, and the potential impact on their proposed investments. The lack of integrated climate and energy policy was also impacting investments.
He noted that the government program had moved away from the intent of the ACCC’s recommendation in several respects, and had not been justified.
This included the question of reliability.
“The grave reliability concern that warrants expanding the program’s objectives to include reliability is unfounded,” Thornton wrote. He pointed to the recent Electricity Statement of Opportunities, issued by the market operator, which predicts no breach of the reliability standard – in part due to investment in renewables and storage.
“In addition, the ESOO also finds that transmission augmentations and new lines would reduce the need for additional dispatchable capacity and improve reliability over coming years by alleviating transmission congestion, leveraging resource diversity and maximising the value of the existing generation fleet.
“Considering the ESOO’s benign reliability outlook, it is unclear why an additional initiative to address reliability is required amongst the other existing and proposed reliability mechanisms and initiatives.
“These include the Reliability and Emergency Reserve Trader (for which enhancements are being considered currently through an Australian Energy Market Commission rule change proposal process), proposed Retailer Reliability Obligation, AEMO’s Integrated System Plan (ISP) and the work being undertaken by the Energy Security Board to make the ISP into an actionable strategic plan.”
“This focus on reliability could lead to unnecessary over-build, particularly given the Consultation Paper does not contemplate a funding or capacity cap for the whole program. This would not be in the long-term interest of consumers,” Thornton said.
The other key concern was the suggestion that – contrary to the ACCC recommendation – the government contract could be used to extend the life of ageing coal plants.
“This is clearly no longer technology-neutral and sharply contrasts with the rationale behind the ACCC’s recommendation of supporting sustainable generation projects in order to improve competition,” Thornton said.
He noted that supporting coal projects beyond their commercial life was unlikely to represent the lowest-cost solution, as AGL’s own analysis – and the new global report issued by investment bank Lazard – indicated.
It would also not be good for reliability as ageing coal plants are increasingly unreliable with an increasing frequency of generator failures as they approach the end of their technical life, particularly on hotter days that typically coincide with peak demand periods.
- And coal plants are relatively inflexible with an inability to ramp up and down quickly as the system requires. Thornton also said the CEC strongly opposed any proposal to indemnify new investments against a carbon price, as it could result in significant cost to the government and ultimately taxpayers.
The CEC also warned that the government program would put at risk the emerging corporate market for power purchase agreements (PPAs) which is finding innovative ways to provide “firm” capacity to meet the needs of customers.
“The CEC is concerned by the government’s ambitious timeframe to finalise the program guidelines in January 2019 in order that the first phase of support can commence from 1 July 2019. There is no demonstrated need for such a rushed process.
“We consider this an insufficient amount of time to fully evaluate the details and potential consequences of the program. It also does not provide adequate opportunity for public consultation.”