Taylor’s favoured coal subsidy could reach $7 billion and hit households

Households and businesses could be hit hard by major electricity bill increases if a proposed new subsidy to keep ageing coal and gas plants to stay open is approved by state and federal energy ministers.

The Institute for Energy Economics and Financial Analysis (IEEFA) and Green Energy Markets say the cost of capacity payments made to thermal generators, under a plan proposed by the Energy Security Board and championed by federal energy and emissions reduction minister Angus Taylor, could be as high as $6.9 billion.

That estimate is double their previous calculations, and would push the average annual household electricity bills up by between $182 and $430 a year, significantly more than the cost increases from the Gillard government’s carbon price that was subsequently repealed by the Abbott government.

Federal and state energy ministers meet on Friday to discuss the ESB’s proposal for a ‘Physical Retailer Reliability Obligation’, a type of “capacity payment” that would see large coal and gas generators receive substantial payments to remain operational.

The proposal has been criticised on the basis that it is both unnecessary and could delay a transition to cleaner energy sources, but it has been embraced by Taylor and the Morrison government as a way to prevent the early retirement of Australia’s ageing fleet of coal fired generators.

The details of the new policy have yet to be released, but the IEEFA and GEM analysis is based on the capacity market in Western Australian. They insist there are no indications that the reliability of electricity supplies were under threat.

“While it is true that several coal power plants are facing financial difficulties, our analysis finds that reliability is not at threat by the level of likely coal power plant exits over the next ten years,” IEEFA analyst Johanna Bowyer said.

“The ESB’s new proposal will require electricity consumers to pay primarily conventional generators such as coal and gas plants for what they could produce if the plant was operating at its full level of capacity, regardless of whether or not, or how often, the generator uses all of its capacity to produce electricity.”

The analysis also suggests that payments used to keep ageing plants open could ultimately lead to worsening reliability, a point underlined by a new Australian Energy Regulator report that noted “1,000 days of baseload outages” just in the last three months.

“An additional payment to existing generators in the NEM risks locking the old legacy system in place for longer, which may in fact harm reliability,” the report says.

“A financial lifeline to these aging power plants leaves us reliant on supply that will become increasingly unreliable, while exacerbating uncertainty about when they may exit. This uncertainty will deter investment in newer, more flexible and more reliable power plants that make better sense into the future.”

Bowyer says the estimated impact of the capacity payments – of between $182 to $430 a year, would dwarf the cost increase faced by New South Wales, Victorian and Queensland consumers from the carbon price of between $112 to $150.

It’s a remarkable prediction, given that the new mechanism is being pushed by a Coalition government that so fiercely opposed the introduction of the Gillard government’s carbon price.

Households are also unlikely to be compensated for payments made under the proposed ‘Physical Retailer Reliability Obligation’, whereas the costs of the carbon tax were more than offset by reductions in income tax.

Co-author and Green Energy Markets analyst, Tristan Edis, said there is unlikely to be any benefit in introducing the new payment regime, with a substantial amount of new dispatchable energy projects in the development pipeline.

“We should not panic about reliability. From 2017 to 2027, almost 6,500 megawatts of dispatchable power project capacity will be added to the grid,” Edis said.

“To put this into perspective, this is almost double the capacity that will be lost from the next three coal power stations due to close after 2027 – Yallourn, Callide B and Vales Point B.”

“There are also thousands of megawatts of further battery projects in development which could be committed to construction if required. Meanwhile, the extra cost imposed on consumers to keep coal power plants afloat could be very large,” Edis added.