The true cost of keeping the Liddell power plant open | RenewEconomy

The true cost of keeping the Liddell power plant open

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It is the worst of all worlds: a market-based system but with extensive and unpredictable intervention by governments that tend to undermine investor confidence

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The Conversation

The Liddell power station in the Hunter Valley near Newcastle, Thursday, May 31, 2007. A much-anticipated report on climate change will be released today, with Prime Minister John Howard poised to announce a long-term target for cutting greenhouse gas emissions. (AAP Image/Dean Lewins) NO ARCHIVING

For a long time, Australian governments have believed that the private sector should run the electricity sector. And successive governments have used market instruments to incentivise reducing emissions, by supporting renewables, discouraging coal use, or both.

Now things seem inside out: uncertainty about energy policy mechanisms is pervasive, and the federal government is attempting to broker a deal for the ageing Liddell coal plant to stay open past its planned decommissioning date. It’s possible the plan will require government payments – amounting to a carbon subsidy.

Fear of supply shortages and an appetite for coal have combined with an inability to resolve the political side of energy and climate policy.

Power companies see coal as a technology of the past, but the government seems unready to accept that wind and solar technologies (already the cheapest option for new capacity in Australia) are the future of Australia’s power.

The latest suggestion amounts to deferring serious investment in renewables for a while, fixing up some of the old coal plants up so they can run a few more years, and buying time in the hope of keeping power prices down. Chief Scientist Alan Finkel has backed the idea, at least in principle.

The cost of delaying the inevitable

Commissioned in 1972, the Liddell power plant is the oldest of Australia’s large coal-fired stations (after the closure of the Hazelwood station). The New South Wales government sold it to AGL in 2014, at an effective price of zero dollars.

AGL announced some time ago that it will close the plant in 2022 and has considerable financial incentive to do so. This week AGL reiterated this. The latest suggestion is that Delta Electricity might buy and continue to operate Liddell.

What might be the benefits and costs of keeping Liddell running for, say, another decade? We do not know the plant-level technical and economic parameters, but let’s look at the principles and rough magnitudes.

Keeping the plant running longer will require refurbishments, defer the investment costs in renewables, and result in additional emissions, both in carbon dioxide and local air pollutants.

Refurbishment is costly. Finkel put refurbishment costs at A$500-600 million for a 10-year extension. Such refurbishment might achieve an increase in efficiency – as GE, a maker of power station equipment, recently argued – but perhaps not by much for a very old plant like Liddell.

And refurbishment might not work so well, as the experience with the Muja plant in Western Australia shows: A$300 million was spent on refurbishment that ultimately failed. Spending big money on outdated equipment is not a particularly attractive option for energy companies, as AGL’s CEO recently pointed out.

Liddell’s power output during 2015-16 was around 8 terawatt hours – about 10% of present NSW power supply (it was more in 2016-17, and less in previous years). It might well be lower as the plant ages.

Ironically, the reduction in the Renewable Energy Target, from 41 to 33 terawatt hours per year, almost exactly matches Liddell’s present power output. With the original RET target, new renewables would have covered Liddell’s output by 2020.

Liddell emitted around 7.5 million tonnes of carbon dioxide per year in 2015-2016. With the assumed reduction in output and some improvement in CO₂ emissions intensity, the carbon dioxide output might be in the order of 5-6 million tonnes per year, or 50-60 million tonnes over ten years.

If the government were to pay for the refurbishment, as has been suggested, this would equate to subsidising CO₂ emissions at a rate of perhaps $10 per tonne, compared to the alternative of replacing Liddell with renewable power.

At the same time, the government is paying for projects to reduce emissions, at average prices of around $12 per tonne of carbon dioxide, under the Emissions Reduction Fund. The contradiction is self-evident. Furthermore, keeping more coal plants operational deters commercial investment in any kind of new plants.

Of course this needs to be seen in the context of supply security, any subsidies that might be paid in future to renewable energy generators, and the possibility that a Clean Energy Target will determine overall emissions from electricity production irrespective of whether Liddell operates or not. It’s complicated. But the fundamental point is clear: paying for an old coal plant to operate for longer means spending money to lock things in, and delay the needed transition to clean power.

A possible compromise might be to mothball the Liddell plant, to use if supply shortages loom, for example, on hot summer days. But such a “reserve” model could mean very high costs per unit of electricity produced.

It is not clear that it would be cheaper than a combination of energy storage and flexible demand-side responses. And it may be unreliable, especially as the plant ages further. During the NSW heatwave last summer Liddell was not able to run full tilt because of technical problems.

A market model to pay for reserve capacity would surely do better than government direction.

Australia’s energy companies have been calling for a mechanism to support new clean investment, such as the Clean Energy Target. And many would no doubt be content to simply see a broad-based, long-term carbon price, which remains the best economic option. If the policy framework was stable, private companies would go ahead with required investment in new capacity.

Meanwhile, federal and state governments are intervening ad-hoc in the market – making a deal to keep an old plant open here, building and owning new equipment there. It is the worst of all worlds: a market-based system but with extensive and unpredictable intervention by governments that tend to undermine investor confidence.

 is Director, Centre for Climate Economics and Policy, Australian National University and co-author  is a PhD student, Australian National University

Source: The Conversation. Reproduced with permission.

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  1. David Rossiter 3 years ago

    It would seem that this random knee jerk interference in markets with little thought behind it would make any investors alarm bells ring around risk – political risk.
    First we have Snowy 2.0, then new coal fired power stations and now this supporting clapped out old base load coal fired power stations to do peaking work. What ever happened to the firm dispatchable capacity of gas turbines for peaking roles.
    Well someone, the various governments involved, did not properly regulate the gas export market and it has been sold elsewhere. We had a perfectly good example of what happens when a domestic gas system turns to exporting unfold over decades in WA – domestic gas gets diverted to higher value markets (LNG) and domestic markets suffer. While this was drawn to attention of the Commonwealth Government years ago, and even blind Freddy could see it happening, nothing happened and here we are now with an east coast gas problem and another weak Government. Governments need to be strategic and regulation at some strategic levels is required to ensure markets work properly.
    Turnbull needs to do just that – turn bull into strategic regulation and capture some gas for a peaking role for gas turbines rather than play around with a worn out base load power station that even private enterprise has declared is worth zero.

    • Joe 3 years ago

      Interesting that you mention the gas export market. Federal Labor’s Mark Butler was on ABC Lateline last night ( 7/9/2017 ) and was quizzed about the ‘Gas Supply Problem’. He said that when the Gladstone LNG export terminal was set up it was meant to only ship overseas ‘new gas production’ and that existing gas production was to be kept for the Australian domestic market. But that didn’t happen as so called ‘domestic gas’ has been shipped overseas as well as ‘new gas production’ creating problems with domestic gas supply. Clearly then there has been a regulatory failure. The gas majors are making merry.

      • David Rossiter 3 years ago

        You make a very good point perhaps we should encourage Mark Butler to pursue this. The lack of gas availability was the root cause of the South Australian transmission system failure being a blip and then becoming a disaster – no dispatchable power was on line in case the interconnection failed to Victoria. I will email Mark Butler on his claim tonight.

        • BushAxe 3 years ago

          No dispatchable power online? Have you actually read the system black reports?

  2. Sally Noel Triggell 3 years ago

    All these companies now calling for a carbon tax, or some thing similar, wonder why they were prepared to support the lieberals with their millions in 2013. Not working out too good for anyone other than the owners of FF generators. So on the face of it looks like most businesses have shot themselves in the foot, and not just on energy policy.

    • Joe 3 years ago

      I just have to laugh every time The Libbies mention… ‘Carbon Tax’. Despite what the Libbies and Rupert’s newsrags want to claim, we never had a ‘Carbon Tax’. We had what was exactly promised from Julia Gillard in the run up to the 2010 Federal Election…an ETS with a fixed price for 3 years then reverting to a floating price. And this continually selective partial quote of Julia Gillard’s full statement about not promising a ‘Carbon Tax’…just go back and read the full statement! Of course the true ‘Carbon Tax’ is what The Libbies have dumped upon us with their “Direct Action”…our / taxpayer dollars being pissed away paying The Carbon Polluters to…not carbon pollute. I call that….’Carbon Tax’.
      Eventually a proper price on carbon pollution will come and then we will all wonder why we wasted so much time and sweat these last 10 years.

  3. Joe 3 years ago

    No need to worry about keeping Liddell open. ‘Our Bananabee’ has spoken. The future is a brand new ‘CLEEEEN Coaler’ to be built upon the old Coaler at Hazelwood. Have you had the joke about the Scotswoman ( Fifi Nash ), the Italian ( Bambini Matty ) and the New Zealander The Year ( Kiwi Bananabee )? They chose to believe that they were 100 % Aussie and they got together at The Nationals Federal Conference (9/9/17) and declared that our future is “CLEEEEEEN COAL”……build it and they will come.

  4. trackdaze 3 years ago

    Turn it into a solar and storage park AGL.

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