Merit order, falling demand claim their biggest coal victim

Australia’s coal-fired generation industry has announced further cutbacks, with the mothballing of one of the units at the Yallourn brown coal generator in Victoria’s Latrobe Valley – perhaps the most significant closure yet, and taking the amount of coal-fired demand closed or mothballed in recent months to around 3,000MW.

Energy Australia, formerly known as TRUenergy, confirmed the closure of one of its units at Yallourn this morning. It put the blame on the closure on falling wholesale energy costs, caused by the impact of renewable energy and falling demand.

It says wholesale energy prices are now falling to “uneconomic” levels. What it means is that the coal-fired generators no longer hold their preeminence in the National Electricity Market merit order, where for decades the brown coal generators had priority.  They have been displaced by green energy, and the addition of the carbon price, and their prospects have been worsened by falling demand. The only way they see that they can reclaim that preeminence is by halting, or dramatically slowing, the deployment of wind and solar energy.

The closure of the Yallourn unit follows the halving of output at Tarong in Queensland, the closure of Munmorah in NSW and Playford B in South Australia, and the seasonal closure (since reversed) of the Northern power station in South Australia. Some of these had hoped to receive payments from the government for the privilege of closing, but have done so anyway despite the withdrawal of the contracts for closure scheme.

Such closures have been predicted for years, but the pace – hastened by the unexpected fall in demand – has taken the industry by surprise. As we wrote earlier this week, this could be the beginning of the end of the coal industry. It echoes the situation in Germany, where it is recognised that the fossil fuel industry will only continue in the medium term as a form of back-up to renewables. That is creating its own policy challenges, but slowing the deployment of renewables is not one of them, as Repower Systems CEO Andreas Nauen points out in an upcoming interview with RenewEconomy.

It seems clear now that Australia has a unique opportunity to effect a dramatic change in its energy make-up, if it’s got the courage of its convictions. The carbon price has served to send a signal that new investment in coal is a really bad idea, and shuffled the pack in the merit order. The LRET and the additional investments that could be made by bodies such as ARENA and the CEFC could effect a transition more rapid than most could have imagined.

In this context, the timing of these plant closures is interesting, and Energy Australia has used it to repeat its demand to the Climate Change Authority that the Renewable Energy Target should be curtailed to reflect falling demand. Again it has trotted out the estimated $53 billion cost of the LRET, quoting an analysis by ACIL Tasman that claims this cost could be reduced by $25 billion over 18 years should the target be adjusted, or effectively halved.

It’s worth, once again, putting these figures into perspective. Even if you accept the ACIL Tasman numbers – which no one outside the coal industry does – it translates into $840 per household over 18 years, or $46 a year, or 90c a week, or 13c a day. Divide the household into individual units and it works out to be around 5c a day for every man, woman and child.

Other analysis suggests that the savings of halving the RET might be a quarter of those claimed by ACIL Tasman, because it is not a linear equation and the ACIL Tasman analysis does not reflect the workings of the market. That would equate to 3.5c a day for each household, or just over 1c for each man, woman and child. AGL Energy, which incidentally owns the Loy Yang A coal-fired power station, warms that overall electricity prices could actually rise because of the extra cost of financing risk caused by yet another change in energy policy.

Meridian Energy has argued that if the hidden costs and benefits of the scheme were also calculated – adding the price of reserve plants and some network upgrades, and subtracting the avoided cost of new baseload gas plants, gas turbine running costs and avoided emissions – then the net benefit of the scheme would be $4.77 per MWh, or about $1 billion a year.

The incumbent generators, however, are more worried about the loss of revenue if the LRET is allowed to continue. The Australian Energy Market Commission in 2011 said the “merit order effect” could be $10-$15/MWh – or more than $3 billion a year.

That is a scary number for the coal industry. It should be noted that an Australian Energy Market Commission report last year says that – contrary to popular belief – transmission costs and investment would be lower with more renewables than if the alternative recommended by the likes of Origin Energy and Energy Australia – more gas generation – was adopted. Indeed, it notes that if gas was used instead of renewables, it would lead to an increase in energy costs. This is a realisation dawning on the energy industry as a whole, if not the mainstream media and some politicians.

Note: Energy Australia said the unit that is to be closed has avcapacity of about 360MW. A spokesperson said, “we will operate the unit when market demand and wholesale prices send signals for its return.”