Australia’s electricity system needs policy, not politics. The current Queensland and Victorian state goverment policies and the closure of NSW coal stations are going to completely transform Australia’s generation.
The following figure puts the “generation supply drivers” into some context. The numbers are relative to total NEM supply in front of the meter of say 200-205 TWh.
The influx of zero marginal cost variable renewable energy will make the spot price a bit of a sad joke.
Coal plant closures, concentrated around the early 2030s, but which the NEG does not contemplate, will cause price volatility and reliability concerns that could be avoided with better policy.
The lower but volatile pool prices that will result from the locked in 10% addition to NEM supply, coupled with high international coal prices, and the ever lower protection from existing coal contracts will mean that the current coal generation profits will be short lived.
Closures are more likely to be earlier than forecast, not later. Brian Flannery’s decision to try and sell 50 per cent of Vales Point B is as clear an indication of that as you are likely to see.
Whether we decarbonise or not much of the coal generation fleet needs to be replaced over the next fifteen years. Everyone from the Minerals Council to GetUp accepts this and some of the closure dates have already been announced.
There are only 8, count them 8, coal power stations located in the combined NSW, Victorian, South Australian and Tasmanian regions plus some limited import capability from Queensland.
We question whether Australia’s energy only market is a good enough policy to ensure that new generation is built before each of these coal plants close.
What we can say for sure is that the decarbonisation leg of the NEG will do nothing to induce sufficient new generation.
The table below shows 78 TWh more or less 40% of current total NEM supply as likely to close on before 2035.
We show the table in date order but we think that for technical reasons Tarong might come before Gladstone. We note that Origin’s announcement is that “Eraring will close by 2032 at the latest”.
Of the list below Liddell, Vales Point, Eraring and Bayswater are all in NSW and represent over 70% of NSW’s supply. Neither the NSW Govt or the NSW opposition seem to have any clue about this.
On paper the QLD renewable target is a large investment driver
Next we can look at the Victorian and Queensland renewable targets
The table shows that if QLD achieves its target it requires around 22 TWh more renewable energy. The actual and committed line of the above table incorporates all announced projects that are either being built or are sufficiently “committed” including 650 MW of VRET (Victoria renewable energy target)..
QLD needs around 8 GW by 2030: That’s both an easy target, ie about 750 MW a year and a hard one – who in the end will make that investment without the right price incentive?
The question is whether Labor in QLD is like Labor federally, loves to talk about 50% but not prepared to walk the walk to get there.
All talk and no action. QLD Govt controls much of the coal generation in QLD but has announced nothing about closures despite its 50% renewable commitment. It said it would look at starting a State owned Clean Gentailer but has deferred that.
In short if you were an investor looking at building a project in Qld would you believe the 50% commitment?
We factor in all commissioning, under construction and other confirmed new supply and the 650 MW VRET auction as well as Liddell closure. The only thing we don’t have is the increase net exports of behind the meter PV. Our estimate is:
NEG technical issues
Several technical issues have been raised with the NEG documents. These are far better covered by analysts such as Dylan McConnell and Bruce Mountain. However, my reading of their work leads me to believe that:
- There is a penalty rather than reward for overachievement;
- Lack of access to the registry to all but “customers” and generators is likely to reinforce market power of gentailers;
- There is no provision for “additionality”. Ie NSW gets a free ride on the back of everyone else’s work;
- Even at this stage the Federal Government’s position on international credits is not settled. This may be a bargaining chip Frydenberg is keeping in reserve but that’s for the politics section. Here, it’s just worth noting that (i) international credits can’t be policed and have a good track record of fraud and (ii) in any event they do nothing to help Australia decarbonsise or induce new supply in Australia. An aluminium smelter will not get cheaper electricity in Australia by buying international credits. It reduces potential supply in Australia likely making for higher prices.
- If the NEG emissions reduction is written into law it will be difficult if not impossible to change. That’s a politics point so lets get onto them.
Politics: it’s now or never for the ALP
The question for the market is how serious is the ALP about its targets? Is it walking the walk or just talking the talk?
Federally, it requires policy commitment because the politics are not strong
Federally Bill Shorten talks about 50% renewable energy but few believe he wants to fight an election about electricity policy. Been there, done that. The ALP would be attacked on price and reliability fronts.
Of course, those arguments are nonsense and there is clear public support for renewable energy and decarbonisation, but it’s just not going to be the ALP’s best election battle ground.
On that basis there are grounds to think that from a politics point of view Federal Labor position will be “we will wave the NEG through, but the target is weak and when we get into power we will change it”.
However, the prospects of changing law are low. The ALP/Greens have only had a majority in the Senate twice since 1949.
For the States it’s different. Here, it’s about State’s rights
If the States wave through the NEG they are essentially ceding some electricity policy ground to the Feds. It should be remembered that COAG is a politics forum where the States as a group have more influence than the Federal Govt.
Perhaps most importantly, COAG represents a forum where there is more opportunity for policy. There is no upper house, generally it’s the major parties that are represented and with so few members, agreements can be hammered out.
In this case QLD, Victoria and the ACT form a powerful Group especially when a unanimous vote is desired. South Australia and Tasmania are Liberal but have strong renewable ambitions and the NEG will not help them.
Politically, QLD and Victoria have little to gain by waving the NEG through without extracting a pound of flesh along the way.
It’s true they can continue with their own policies, but these are watered down by the NEG.
There is nothing to gain because the NEG does nothing: It won’t lower prices, it won’t reduce the large gentailer influence, it won’t bring about the new investment required, it does nothing to integrate behind the meter with in front of the meter.
It has no commitment to change. In fact it tries to preserve as much of the existing system as possible and to require as little policy as possible. In short, it’s fraud as far as policy goes, or at best, a fix.
On the other hand the politics of rejecting the NEG outright are not all that good, putting Australia back in the “no national policy” group and leaving the federal government plenty of room to attack “backwards, recalcitrant states”.
Nevertheless, were I the QLD Premier I would reject the NEG. QLD has no election worries, its “greener” credentials were arguably the difference between winning and losing the last election and it has nothing to gain from NEG . Most importantly the NEG is a bad, inadequate policy.
However, I’m not the QLD Premier and its more likely that Victoria, QLD and the ACT will simply demand a price for letting the NEG through. In the end COAG members will choose optics over hard work.
26% in each State, early review, no international offsets, open access, additionality encouraged
What could the price be?
The most obvious one would be additionality. That is each region/State must separately meet the 26% target. In the long run this would be great for NSW consumers.
Secondly an earlier review of the 26% target with a wider window. So a commitment to review the 26% in say 2020 with a wind that could raise it to 35% or a more desirable 50%-60% in line with State targets (but still not enough for a 2 degree warming scenario). Either that or the 26% is not written into legislation.
Thirdly a commitment to deal to the technical deficiencies outlined above.
David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.
David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.