Coal included in reheated proposal for controversial capacity payments

“To be clear, the purpose of a capacity mechanism is not to extend the life of aging coal generators,” it says, adding that coal generators face technical challenges of transitioning to wind and solar power.

“The capacity mechanism would not and cannot meet these challenges. Instead, the capacity mechanism would provide more targeted incentives to ensure replacement capacity arrives when needed, providing greater assurance that the exit of these generators will be well managed.”

Coal producers have said a capacity mechanism should be open to coal to avoid ad hoc shutdowns in the next decade and to keep the lights on. AEMO predicts that 14GW will close in 2032 and some expect it could be earlier.

The ESB appears to have swallowed the line from the coal generators, but others, such as the Grattan Institute and the ANU, have proposed simple schemes to manage coal outflows — such as a series of coal bonds or “closure auctions” that would still enabling new market design to focus on the future.

Any others have proposed what are known as “enhanced” energy-only markets focused on flexibility and availability that, according to The Australian, received the most support from energy market players surveyed at an April meeting hosted by the ESB.

A source confirmed this to RenewEconomy, but the ESB chose to ignore the investigation – as it did with the minister’s advice – and went ahead with the desired design anyway.

The ESB has made two concessions: the recognition that new technologies need more support, and the option for individual states not to use certain technologies.

Victoria, for example, has pushed for the right not to take up coal – although it has signed a confidential agreement with EnergyAustralia on the timing of the Yallourn shutdown, now slated for 2028 – but again, this will add to the complexity.

And it will be devilishly complicated either way. The ESB notes that in its own infrastructure roadmap, the NSW government proposes its own form of storage contracts and has its own back-up mechanism. The ESB has not yet discovered the details of how those arrangements and the capacity mechanism can coexist effectively.

Thinking about another key element of design – the so-called “de-rating” of certain technologies – that mainly affects battery storage and demand management will also be seen as a drawback of what are seen as important parts of a new flexible approach to the network.

One of the cost issues, and to try and avoid the huge overruns of similar schemes in the UK and Western Australia (where over $1 billion was wasted) and multiple built diesel generators that were never switched on), the ESB proposes a “hybrid” model that combines market participant reviews and the best guesses from the major retailers.

To see: Chris Bowen Needs Flexibility to Avoid the Fossil Fuel Lobby Capacity Market Trap

Again, this is likely to fuel fears that this is another big opportunity for the big gene-tailers to gain control of the market in ways no one could have imagined. Currently, they have to exercise power on a daily basis. In the future, they may just be able to get what they want through a series of auctions.

And the other concern is the need for speed. The ESB has taken five years so far to get to this point and has released another “high-level” discussion paper with little factual detail.

But it wants the new mechanism to take effect within just three years. That requires the detailed draft — which has not yet begun — to be negotiated, drafted, completed and approved by February next year, and turned into law by the end of 2023. Even the transition to five-minute arrangements took six years.

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