One of Australia’s most experienced energy advisers has downplayed concerns that a plan by state and federal energy ministers to overhaul the electricity market could prolong the coal-fired power industry.
Ray Challen, who was Western Australia’s energy coordinator between 2012 and 2017, said fears about a so-called capacity market wrecking Australia’s switch to renewable energy were misplaced.
WA is the only state in Australia with a capacity market, in which electricity generators are paid to be available when the system needs them.
“It’s an absolute red herring,” Mr Challen said.
“If anyone is going to be build capacity in the market in response to capacity payments, they’re going to be building renewable plant or energy storage, pumped hydro or batteries.
“At the very worst, they’re going to be building fast-response gas-fired plant.”
The comments from Mr Challen were backed by Kerry Schott, who until last year was the senior adviser to state and federal governments as the head of the Energy Security Board.
Ms Schott said the rest of the developed world was moving towards capacity markets to deal with the influx of renewable energy, which would eventually push out all fossil fuels.
“It’s to replace the situation where there’s a wind drought, or it’s not sunny, like in the winter when you get a still day.
“It just basically makes a payment, gives some reward, to firm plant to be available.
“The capacity market is really just an insurance exercise.”
At a meeting on Wednesday, state and federal energy ministers resolved to develop “at pace” a capacity mechanism for the National Electricity Market, which services about 10 million customers across the east coast.
Under the NEM’s current model, generators are only paid for the electricity they produce.
Energy retailers bail out amid price stress
But amid a wholesale price shock that has forced some retailers to bail out of the market and led to warnings of energy poverty and distress among vulnerable households and businesses, there have been claims the system is broken.
In a sign of the stress, consumer advocacy One Big Switch released a statement today showing 10 smaller retailers had shut up shop to new customers in recent weeks.
Joel Gibson, the campaign director at One Big Switch, said the retailers had exited the market in response to the biggest wholesale price hikes in living memory and that cheap deals were “disappearing by the day”.
Johanna Bowyer, a lead analyst at the Institute for Energy Economics and Financial Analysis, said a capacity market was a bad idea because it would effectively subsidize coal-fired power plants.
Ms Bowyer said this would extend the life of coal-fired power in Australia and hurt the country’s transition towards carbon neutrality by 2050.
She also suggested a capacity market would saddle consumers with unnecessary costs.
“The proposal in its current form does include paying coal and gas-power plants,” Ms Bowyer said.
“So, there’s concern that that proposal might actually delay decarbonisation by keeping the coal and gas power plants in the system for longer.”
According to Ms Bowyer, a better alternative to the proposed capacity mechanism was a renewable electricity storage target to boost the supply of batteries and pumped hydro projects.
Electricity storage capable of providing long-duration supplies is considered essential to replace coal-fired power, which currently provides most of the base-load capacity in the system.
But Ms Schott said until hydrogen made from renewable energy was viable, batteries and pumped hydro were incapable of substituting the capacity of coal, which currently provided more than 60 per cent of the electricity consumed in the NEM.
In the meantime, she said gas was going to be crucial to keeping the lights on by stepping in when the sun wasn’t shining and the wind wasn’t blowing.
“Until we’ve got hydrogen available, it must include gas,” she said.
“The only other firm long-duration storage we have is pumped hydro.
“And we don’t have enough of that, and we will never have enough of that, I don’t think.
“But we will have hydrogen, probably by 2030 or so.”
Ms Schott also disputed suggestions that a capacity market would keep coal-fired power stations running for longer, saying the mechanism could be structured to exclude the fuel.
In any case, she said coal would struggle to compete in a capacity market with other forms of energy such as batteries, hydro power or gas, arguing it was not designed to run in a stop-start manner.
“My take on it is that if you had an auction for people to provide that firming capacity, coal wouldn’t win anyway,” she said.
“And the reason for that is that coal plants have to run all the time and you really only need this capacity we’re talking about every now and again.
“The thing about a gas plant is it can be turned off and on.
“So, if it’s only needed a few days a month that’s all it would get paid for its power.
“But it would get a small payment for actually being around the rest of the time when it’s not being used.
“But that would be much cheaper than burning coal for 24 hours a day and really only needing it for three or four days a month.”
Mr Challen agreed, saying WA’s experience showed a capacity market had done nothing to slow the demise of coal.
He also noted one of the biggest strengths of renewable energy was its low – or even zero – cost.
However, he said that once renewable energy had completely displaced fossil fuel sources, this strength could push wholesale prices to unsustainable lows.
As a consequence, he said generators would need another source of revenue.
“The characteristic of wind and solar energy is that once you’ve actually got your generation plant built, then then energy is effectively costless,” Mr Challen said.
“And so, these new generators will … all bid in at close to the same close-to-zero price.
“In that situation, it’s actually very, very difficult to get an energy market to work to be able to decide which generators you’re going to take energy from and to allow them to make a revenue stream and a profit from that.
“We’re going to have to find other mechanisms for paying these generation businesses for to be there and to be operating.
“The obvious mechanism that is there is for a capacity market.”