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Rules to protect electricity supply as renewables undercut coal

Electricity retailers face a government-imposed reliability trigger being made permanent and a new payment mechanism introduced to ensure enough power supplies are in place before coal plants shut down, amid fears investors may back away from committing to fund new capacity.

A blueprint for Australia’s national electricity market by the federal government’s Energy Security Board proposes major reforms as part of a redesign of the power grid from 2025, aimed at ensuring a smooth transition to renewables as coal plants retire.

Potential solutions to ensure enough generation could involve removing a trigger for the Morrison government’s Retailer Reliability Obligation and instead making it a permanent obligation for electricity companies to guarantee dispatchable power for businesses and consumers.

The mechanism was introduced by the Australian government in July 2019 to manage the risk of declining reliability in the grid and can be triggered if a supply shortfall is forecast by the Australian Energy Market Operator.

Adding a new price mechanism reflecting the important reliability role provided by power stations through a “capacity market” could also help spur investment before coal plants retire, according to the ESB.

Some power stations, including coal plants, are currently struggling to receive any value for their generation when they get undercut by renewables that can produce at close to zero cost.

Expanding the obligation or implementing a capacity market could “encourage more long-term financial or physical contracts to support the cheapest form of investment before coal-fired plants exit, thereby minimising the risk of government intervention during the transition,” the ESB said.

“The uncertainty around timing of plant exit coupled with the risk of unexpected or unplanned exit may lead to investment uncertainty for both new generation investors, as well as uncertainty for AEMO as integrated system planner. It may also create risks of significant market and price volatility as investment lead times for new generation or essential system services can be significant,” the ESB says in its consultation paper to be released on Monday.

Coal, which currently provides 70 per cent of electricity, will contribute less than a third of supply by 2040 and could be forced out earlier than planned retirement dates as competition from renewables and carbon constraints ­render plants uneconomic, Australian Energy Market Operator forecasts show.

By 2035 nearly 90 per cent of power demand could be met by renewable generation during periods through the day. However, that will require up to 50GW of large-scale solar and wind to be added under the most aggressive plan to cut emissions, representing nearly all the current capacity to be built in just two decades.

Concerns have been raised by investors that the current market prices are too low to justify bringing new “firm” power supplies into the grid while the potential for fresh government intervention also weighs on sentiment.

“While average pool prices are expected to be lower in future, prices in some periods would need to be higher to incentivise investment in flexible generation and storage. Sustained prices at the level required for dispatchable plant may be so high that government intervention is demanded,” the ESB paper notes.

“This is driven by a concern that governments may not be willing to tolerate periods of high pricing that drive investment and will instead intervene in the market. This perception, coupled with an absence of long-duration price signals in the national electricity market and the inability to hedge large demand risk, may deter future necessary investment which in turn risks further intervention — a vicious cycle.”

The so-called “big stick” legislation was introduced last year to tackle energy market manipulation and followed Canberra’s introduction of a safety net for electricity prices through the default market offer.

Origin Energy and EnergyAustralia have also blamed the government’s underwriting gener­ation scheme for distorting investment signals and making it more difficult to sanction pending projects that would add new baseload supplies to the grid.

Origin Energy said in August it would hold off investing in new power generation due to low wholesale electricity prices, threatening a pipeline of generation needed to back up renewables in the national electricity market. Similarly, AGL Energy warned the rapid fall in electricity and gas prices could result in an investment strike, raising concern as the country looks to boost generation before coal plants retire.

The ESB noted recent investment in renewables generation had been supported by government subsidies and mechanisms may need to be put in place to ensure the right supply mix for the grid over the coming decades.

“The ESB is also considering options to create a price for reliability or capacity that is separate and additional to investment signals for future expectations about the energy price. Such a change would give policymakers greater direct control over the signal for investment and greater assurances that future investment will be forthcoming.”

ESB chair Kerry Schott is concerned Australia’s coal plants are increasingly becoming uneconomic and operating at razor thin margins, amid big falls in wholesale power prices as more renewables enter the electricity grid.

The closure of coal plants looms as an issue for the power grid, she said, given issues in integrating new supplies.

Source: The Australian