The PRRO is unpopular because there is no clear evidence it is needed

According to a press release from federal minister for energy and emissions reduction Angus Taylor, the Energy Security Board’s final recommendations at the end of their post-2025 review have included the introduction of a capacity mechanism (referred to as the physical retailer reliability obligation or P-RRO).

Since then, there have been several media reports that have frustratingly emphasised the views in favour of introducing the P-RRO. These arguments include:

1. It is apparently needed to support a reliable, affordable energy transition
2. It could be pragmatic solution to reduce government intervention
3. It is only opposed by those protecting their vested interests.

We disagree with these arguments and caution against focussing on the P-RRO without exploring other options.

Firstly, there is no clear evidence it is needed. Based on the most recent forecasts of reliability risk, there does not appear to be forecast risk that is not going to be addressed by the investment commitments that have already been made.

There were references to AEMO’s need to intervene in the market, but this is due to a well-documented symptom of system strength issues, which are being addressed separately, and have nothing to do with the P-RRO.

To meet the objectives of the energy trilemma (affordability, reliability and sustainability), there needs to be a clear regulatory environment for rewarding good investment and operational decisions, and protecting consumers and taxpayers from unacceptable cost and risk. The National Electricity Market we have does this remarkably well.

It rewards dispatchability, and flexibility in the wholesale market and through financial products sold by generators. It also puts the risks on the owners of generators – if they can’t operate flexibly, they risk losing money. Continuing to reward this flexibility will be crucial as the power system becomes more and more renewable.

The ESB’s proposal would change this paradigm. Instead of paying for performance, we’re asking consumers to also pay for physical capacity. This risks compensating assets that either aren’t needed, or don’t show up when you need them most.

The best example we have of how the ESB’s proposal might work is a similar mechanism in place in the French Energy Market. In its limited lifetime, this mechanism has delivered significant price volatility and created immaterial new investment.

Secondly, it is unclear why this proposal would reduce government intervention in the energy market. Our recent history shows that introducing similar polices hasn’t stopped governments intervening or developing their own comprehensive energy policies.

In response to concerns from governments about the investability and reliability of the National Electricity Market, the ESB designed and introduced the existing Retailer Reliability Obligation (RRO) in 2019.

The introduction of the RRO was justified as “extra measures to ensure the reliability of electricity supply” due to the influx of renewables and retiring thermal generators. And, without it even having been tested, the ESB has already decided it needs a major overhaul.

This constant rewriting of the rules provides little confidence that, were the PRRO signed off on, it wouldn’t be replaced itself in a couple of years.

Lastly, some of the supporters for the ESB’s proposal have argued those opposing it are just protecting a narrow set of interests.

The ESB’s proposal elicited strong push back from a range of stakeholders. Consumer groups, retailers, renewables and battery developers, environmental groups and most of the large vertically integrated utilities opposed the introduction of a capacity mechanism.

Their arguments ranged from the lack of a defined problem, the high likelihood of increased costs to consumers, the risks of undermining competition and innovation, slowing the growth of demand response, chilling investment in renewables, chilling investment generally.

Of the market participants who have come out in support of the P-RRO, only two appear to directly support the current model – Delta Electricity and EnergyAustralia.

Alinta Energy’s submission supported a capacity market more generally. All three own coal-fired power stations that are increasingly threatened by the influx of renewable energy.

The owners of these generators should have long been aware of the financial risks associated with owning coal-fired power stations, particularly when genuine steps are taken to address climate change.

In terms of a better way forward, we need to go back to the drawing board. There’s no doubt that retiring coal-fired power stations will create challenges.

However, we know these generators need to be retired and the longer this is deferred, the less time we will have to manage the transition.  Policies like the P-RRO that create revenue for these generators would just be kicking the problem further down the road.

For a truly reliable and affordable transition to a low-carbon power system policy makers need to be more forward looking. The transition will require more interconnection, more storage, a more diversified range of supply and a willingness to embrace technological innovations.

Support for new transmission investment, integrating distributed energy resources and creating markets to address system security challenges are the urgent challenges and is where the regulatory focus should be.

For resource adequacy, the first thing should be evidence of the need for reform. If there is compelling evidence, let’s develop options that genuinely support new investment and protect consumers from unnecessary risk and cost.

The transition will create significant opportunities to access cheap, clean electricity and these opportunities are what we risk missing if our energy ministers decide to back the P-RRO without exploring better options.

Declan Kelly is regulation policy manager at Flow Power