How to decarbonise the grid without being held hostage to coal power

The most urgent challenge facing the National Electricity Market (NEM) as it transitions to clean energy is not technological but regulatory; keeping coal power stations going for the minimum time required as new clean energy and system services supply is built.

The Options Paper prepared by the Energy Security Board provides Australian governments with the missing pieces of this coal retirement and reliability puzzle. 

Our overarching proposal is that state governments can use the ESB’s new mechanisms in conjunction with their own policies to push forward with renewable energy zones (REZ) without being held hostage by ageing and unreliable coal power stations. 

State governments face a policy dilemma which is that preparing for coal retirements brings them forward. It is a rare public policy challenge that risk mitigation increases risk, but that is the situation faced in a coal-dependent and largely laissez-faire generation market such as the NEM. 

In theory, coal power stations are supposed to give 42 months notice before they retire and to operate at full capacity until that retirement date. Unfortunately, the rules are insufficient to enforce this. 

The key question is how to remedy this regulatory failure. There are two options on the ESB’s table. The first is to redesign the market to keep coal generation going over the long term, through a complex retailer contracting system overseen by the Australian Energy Regulator (AER).

The second option is to use state contracting to keep specific power stations operating for short periods at the discretion of state ministers until new capacity is built.

The second option is preferable. Orderly Exit Management Contracts could give state ministers direct control over specific high-risk generators. This is appropriate risk management as these are the jurisdictions responsible for electricity supply. State contracting is simple to administer and imposes no costs on market participants. 

The most important immediate reform is the Orderly Exit Management Contract. The ESB and state governments were right to seek a mechanism to force unhelpful owners of coal power stations not to create disorder in the NEM.

The Contract allows states to step in and force coal generators to continue operating for a short period until new energy and system security resources are in place. It is the ultimate insurance policy for state energy ministers and it allows them to proceed with building out REZs without fear that new supply will undermine the profitability of coal power stations. 

The System and Market Impact Assessment is an excellent proposal and should be a priority immediate phase reform. It would give states the information they require to plan infrastructure and if necessary to propose Orderly Exit Management Contracts. This reform recognises that states are actively planning the clean energy transition and managing risk on behalf of the public. 

Dan Cass is energy policy and regulatory lead at The Australia Institute. This article represents a summary of its submission to the ESB market options paper.