The independent advice provided to the Energy Security Board strongly recommended against the controversial “capacity” markets proposal – now dubbed the “Coalkeeper” subsidy by its critics – that has been championed by federal energy minister Angus Taylor.
The advice provided by Baringa Partners has not been disclosed in the detailed ESB recommendations to state and federal energy ministers that was finally published on Thursday, but RenewEconomy understands that it was firm in its judgment that a physical retailer reliability obligation was not needed, and was not efficient.
Its advice ran along the same lines as previous advice from FTI Consulting, which in a published paper delivered to the ESB last September, noted that such mechanisms amounted to significant market interventions, could be costly, may compromise other market design principles, and are difficult to roll back.
“Additionally, there is no guarantee that capacity procured will be “deliverable” to meet the real-time requirements of the power system,” the FTI report noted. That view – which simply underlines the stupidity of the idea – is supported by nearly everyone in the industry, with a couple of notable exceptions amongst Taylor allies.
Despite these reservations, the ESB has put PRRO forward as an option, and Taylor has championed what is now being dubbed the “Coalkeeper” subsidy because it is likely to boost the revenues of Australia’s ageing coal fleet and ensure they stay in the market longer than they would otherwise.
Taylor pre-empted the official release of the ESB advice by selectively briefing friendly journalists, and this media management paid handsome dividends, with The Australian writing several articles hailing the “coal subsidy” as crucial to grid reliability, and the AFR producing the bizarre headline: “Keep coal to encourage renewables.”
Another Murdoch media story hailed a potential billion dollar plus windfall for rooftop solar households, which seems a bizarre claim given that the details of the favoured mechanism have not been worked out, and likely won’t be for at least another 18 months.
As one industry insider noted in an email to peers: “Taylor is spinning this as hard as he can, with a bunch of lines that are basically bullshit, but as so often in energy politics the attempt is to baffle the journalists and the public.”
The energy industry – including fossil fuel generators, networks, renewable energy companies and technology groups – have been nearly unanimous in their condemnation of the PRRO, saying it would do little apart from keeping coal in the system for longer than needed, and adding costs and complexity.
Only two companies – Liberal Party donor Trevor St Baker’s Delta Energy, and EnergyAustralia – have openly supported the move. But Taylor is said to be putting enormous pressure on energy company CEOs, and Alinta and Origin have added their names to the supporters list in a letter released late last week.
In reality, the PRRO is just one of a number of possibilities canvassed by the ESB, but Taylor’s support, along with that of some key figures within the ESB, means it has taken centre stage.
The result of this dragged out process and the political meddling is that investment in new large scale wind and solar has come to a near complete halt in 2021, despite a growing pipeline of proposals, due to uncertainty about the post 2025 market design, and the shortage of network capacity.
Curiously, the ESB, which makes no mention of Baringa in relation to capacity markets (and chair Kerry Schott did not respond to our emailed questions), refers to the PRRO as its “straw” proposal. We are not really sure what that means. One observer suggested it might have been a gender-neutral version of “straw-man”. If so, it is apt.
Baringa was contacted for comment about its work for the ESB but it refused to comment.
The clean energy industry says the capacity market makes no sense, given the recent 1,000 days of baseload outages in a single quarter noted by the regulator, the shift away from “baseload” coal confirmed by both AGL and Origin, and it is also concerned about changes to access arrangements that would also add risks to investors.
“A capacity market could fundamentally change and distort the energy market and price signals for new investment,” Clean Energy Council CEO Kane Thornton said in a statement.
“This would be further compounded should such a scheme ultimately subsidise existing coal plants and unnecessarily prolong the life of fossil fuel generation that is both high emitting and increasingly unreliable.”
“Any subsidy for old coal would undermine confidence in new clean energy generation critical to delivering long-term energy reliability of supply, reducing emissions and supporting economic growth.
“The case for such a profound change has not been made, particularly in light of the array of policy measures that have recently been established to ensure reliability.”
ITK principal David Leitch also said the ESB hasn’t demonstrated how the proposed capacity market will lead to the orderly retirement of old generation and incentivise new generation.
“For it to succeed, new firming capacity will need to bid in below the costs of existing capacity providers,” Leitch said.
“This will have to be achieved in a shrinking capacity market overall as the variable energy share increases, making it even harder for new capacity to get in.
“The ESB reports provide no examples, do not list the modelling results in any detail and just don’t explain how the capacity market will achieve the over arching objectives.
“This is not to say a capacity market is inherently “bad” but simply that the text of the proposal does not directly address the problem the ESB itself outlined. Nor does the ESB proposal contain discussion of the impact that the capacity market may have on energy only spot prices, and therefore how existing contracts may be impacted.”
The states are also split about the proposals, as RenewEconomy reported earlier this week, even though the details are still vague. It risks the “balkanisation” of the National Electricity Market as each state goes its own way, a fact that Taylor appeared to acknowledge in one interview.
“Every state is in a different position,” Taylor told The Australian. “Some need different mechanisms more than others. The implementation of this needs to be flexible and recognise that.”
So, despite the headlines, there is no clear support from the states, even though Taylor may still be able to exert leverage through his favoured “bilateral” deals.
The rhetoric and the campaigning will continue, and analysts and industry executives will pore over the details, such as they are. But the overarching problem for the electricity industry in Australia is that there is no plan.
One way to explain the ESB’s abject failure to produce anything concrete after 18 months of consultations is that there is no guidance as to what it should be aiming for. Taylor, despite the fact that he is also minister for emissions reductions, refuses to embrace even a net zero target for 2050.
That leaves the National Electricity Market in a void. The NEM was deliberately designed to have no environmental component, a handicap that has undermined all decision making from regulators and rule-makers for the last two decades.
The Australian Energy Market Operator has tried to fill that gap with a sound 20-year blueprint that takes note of the rapid technology changes and various climate targets, but Taylor refuses to endorse that, leaving regulators and rule makers in charge of their own little fiefdoms and free to indulge in their own ideological pursuits.
As the industry group AI noted, the proposals put forward by the ESB are incredibly vague.
“The mooted capacity mechanism is still impossible to evaluate given its vagueness. It could be a huge change to the NEM, or a modest tweak,” it said.
“It could be palliative care for fading coal generators, or the foundation of investment in new clean dispatchable resources. It could armour the power system in gold plate at eye-watering expense, or deliver just enough new resources just in time to match accelerating retirements. We can’t yet know.”
Energy adviser Danny Price, from Frontier Economics, made a crucial observation in an email to RenewEconomy in response to a question about whether his firm had conducted modelling for the ESB, as rumoured.
“I can confirm that we have not done any modelling or assisted the ESB in any way. I would note that the PRRO ultimately derives from the RRO which derives from the NEG,” he said, in reference to the National Energy Guarantee policy Frontier helped develop with the Australian Energy Market Commission.
“But I would note that the NEG had two mutually supportive limbs – the emission limb and the reliability limb. When you remove one limb from a two limb structure, chances are it will fall over.”
Note: You can register for a webinar to be held next week titled NEM Reforms: Who rules the market, featuring AEMC boss Anna Collyer, NSW energy minister Matt Kean and Clean Energy Advisory Group CEO Simon Corbell, to be hosted and moderated by Paul Curnow from Ashurst. Please go to this link.
