Paying coal plants to exit market may be costly and dirty

A new study from the University of New South Wales challenges the idea that the apparent impasse between Big Coal and the emerging green energy industry should be solved by paying coal fired generators to exit the market and curbing the growth of renewable energy developments.

The report – from a team led by Dr Jenny Riesz at the UNSW Centre for Energy and Environmental Markets (CEEM), and including Ben Noone and Iain MacGill – says the opposite may be true. It would be cheaper and achieve more emissions reductions to let the coal generators close by market forces, and use funds from Direct Action – if that is the mechanism of choice – to cause more renewables to be built – over and above the current renewable energy target.

The report comes at a critical juncture in the policy debate surrounding electricity, emissions and renewable generation in Australia, with the new government promising to remove the carbon price, create an emissions reduction fund that will “buy back” emissions, and to review the ambition of the 20 per cent renewable energy target.

Some leading renewable energy companies have sought – to the horror of some in the industry – a compromise deal with coal fired generators to limit the impact on their business. There is talk of resuscitating the “contracts for closure” proposal to take coal generation out of an oversupplied market appears to be a key part of talks between business and government.

However, the implications of the UNSW report are that any negotiated settlement between the major players in the renewables and fossil fuel industry may be good for the business models of those involved, but could deliver a lousy deal to the public in terms of emissions and costs.

It questions whether any paid closures under an emissions reduction fund would be “additional” – which the new government says should be a fundamental test of its policy. “Additionality” is a key criteria of emissions abatement projects world-wide and seeks to ensure that only those projects that would not have occurred in the normal course of business get extra funding.

But UNSW suggests says the contracts for closure could be expensive, would likely fail to deliver any emissions reductions, and may not be needed. It may, in fact, encourage dirty coal plant to stay open longer in the hope of receiving a government handout.

And there is anecdotal evidence, raised by Clean Energy Finance Corporation CEO Oliver Yates earlier this week, that this is happening in other key sectors, such as energy efficiency projects, where investment decisions are being delayed in the hope of pocketing a handout from the government.

Additionality is likely to be the biggest headache – and controversy – in the Coalition’s plan to use government funds to subsidise projects rather than a broad market signal. It was the issue that plagued the UN’s CDM program that Environment Minister Greg Hunt likes his emissions reduction fund to be compared with.

The big issue for the Australian electricity market is declining demand and falling wholesale prices – a situation greatly influenced by the rapid growth in renewable generation – both large-scale wind and rooftop solar PV.

While many now say this problem can be at least partly solved by paying coal fired generators to close, UNSW says this approach could be problematic and may “exacerbate” barriers to exit.

“Upon payment for closure, remaining generators will have an increased expectation of further payments, and are likely to remain in the market longer than economically efficient until those payments are forthcoming,” the authors say. It’s probably better not to make any payment at all.

It is also unlikely to cause any significant reduction in emissions. That’s because the gap left by an exiting coal plant would be mostly filled – in the short term at least – by other coal plants (just as dirty) that have been operating at reduced capacity.  The closure of Hazelwood, for instance, might only achieve a 15 per cent reduction from the plant’s historical emissions.

“It would certainly not be appropriate to pay for the closure of a fossil fuel generator and consider the full historical emissions profile to be abatement,” the UNSW researchers write.

And the report says payments for closures may not be needed anyway. Some plants such as Collinsville have closed permanently, others have been mothballed or moved to seasonal operation. It suggests that decisions on retirement are best left to the asset owners themselves responding to market signals.

It does, however, suggest that some financial assistance could be offered for “remediation” – an issue raised in recent months by AGL Energy boss Michael Fraser. These payments would be substantially lower, and should be properly assessed, but they create a “moral hazard” for the government for future closures.

And while the renewable energy industry appears ready to accept a reduction, or a delay, in the shorter term targets for renewable energy, UNSW suggests that Direct Action may be more effective by directing funds towards renewable energy projects over and above the LRET, and to energy efficiency, and hybrid-power stations that could also reduce emissions.

In a sense, this is an effective endorsement of the role that the CEFC could play – either within a carbon pricing regime or a Direct Action policy as an adjunct or extension to an emissions reduction fund. Hunt has complained that the CEFC will not reduce emissions because they are not additional to the LRET.

That, though, is easily fixed, even if the incumbent generators would rail at the prospect. And it would also encourage more emerging technologies, such as concentrated solar thermal with storage, which is being deployed in the US and other parts of the world, and should really be a no-brainer for Australia.

The UNSW report says that the government should seek bipartisan support to ensure that no government will make payments to incumbents to close. It could also include expansion and extension of the LRET to beyond 2030, and increase the shortfall charge that will be imposed if retailers fail to meet their renewable energy targets.

“It says that would deliver an “unequivocal signal to market that the ongoing entry of renewable technologies will be supported, and incumbents should respond to market signals appropriately.”

Among the sort of projects UNSW recommends that Direct Action support are:

– energy efficiency projects that reduce demand and improve efficiency at power stations (taking care that these are in fact additional)

–  supporting renewable generation projects that are additional to those already incentivised by the RET.

–  building hybrid renewable projects at fossil fuel power stations (producing the same MWh at a lower greenhouse intensity)

–  co-location of non hybrid renewable energy projects at fossil fuel power station site

–  and  projects that reduce network loss