Why including coal in a new ‘capacity mechanism’ will exacerbate Australia’s energy crisis?

Australian electricity producers would get extra money to be available even if they do not generate energy, under a new mechanism proposed by the Federal Government’s Energy Security Board (ESB).

Controversially, the ESB has recommended: all generators are eligible for compensation, including obsolete coal-fired generators that are increasingly breaking down.

The proposal comes last week after federal and state ministers applied for the ESB continues to work on a “capacity mechanism … to enable renewable energy sources and storage”. The ESB says that a mix of generators is crucial for the mechanism to be effective and to ensure power supply to the grid.

Will this capacity mechanism lower energy prices for households? Probably not, as it includes unreliable coal plants, and consumers will likely bear the costs when the plants eventually fail.

The electricity market is in crisis

Wholesale electricity prices have skyrocketed due to two main factors: high coal and gas prices (as a result of the Russian invasion of Ukraine) and about one in four coal-fired plants shut down at various times in recent weeks.

The coal-fired power stations are not available due to maintenance and the sudden failure of 3,000 megawatts of power due to faultswith nearly all Australian coal-fired power plants now older than their original design life.

The Australian energy market operator has: the market suspended in response to the crisis, and it is unclear when it will start again.



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Under the temporary system now in place, generators ensure their availability and the market operator tells generators when to run to ensure supply. Market prices are then set at the average of the past 28 days for that hour of the day, between A$150 and $300 per megawatt hour.

If the generation costs are higher, power plant owners can request an additional fee, which is later recovered from the consumer. Unfortunately, this means that all electricity customers will effectively subsidize the companies that own the unreliable coal generators that have caused this crisis.

AEMO suspended the National Electricity Market last week in response to rising energy prices.
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Would a capacity market have helped prevent this crisis?

The short answer is no. The long answer is actually even worse: a capacity market is likely to trigger new crises like the one we are currently in.

The ESB suggests that the sale of “capacity certificates” three or four years in advance will mean coal producers will indicate when they plan to close. But coal producers probably won’t be fined if they don’t show up when needed — they’ll simply refund the extra payments they’ve received.

This kind of arrangement is what economists call a “free option” — it costs nothing to join. If the coal plants fail to deliver, as they have for the past two months, it will be left to the consumer to bear the consequences.



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By including all existing generators (including coal), a traditional capacity market is more likely to delay investment in new, fast-start, shippable technologies (such as batteries, pumped hydro and hydrogen-ready gas turbines) than to accelerate them, as ministers say. want.

Indeed, ESB’s recommendation already seems difficult to implement. Federal Energy Secretary Chris Bowen says it will be up to the states to choose which generators qualify, and Victoria has said fossil fuels won’t be

Most electricity suppliers also say that they: don’t want coal included

Chris Bowen

Federal Energy Secretary Chris Bowen.
MONKEY Image/Lukas Coch

What is the real problem we are trying to address?

Every capacity mechanism must have a solution for unexpected and sudden capacity shortages.

The ESB has noted that the biggest risk to consumers is that coal will disappear suddenly and with little warning because it is old and prone to breakdown. This has contributed significantly to the current crisis.

It also drove higher prices in 2017 when Hazelwood suddenly closed without enough time to bring investments in new capacity online.

The market operator not provided no reliability issues less than two months ago – and no one on the market did either. The ESB’s proposed capacity market would have implicitly recommended fewer capacity in the system.

Hazelwood workers left their hats on the last day of the power station.
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A capacity mechanism must create a reserve

As older coal plants become increasingly unreliable, it may be wise to install a new generation before coal plants fail.

Governments should create a market for capacity reserves. In effect, a capacity reserve pays for new generators for new capacity until it is needed, while a traditional capacity market (such as the ESB recommends) pays for all existing generators that would have been available anyway. This is the main difference between a capacity market and a capacity reserve.

With a capacity reserve, governments could only make payments to new, modern, reliable, fast-start, firm capacity, such as batteries, hydrogen-ready gas turbines and pumped hydroelectric power plants. This can be taken to a “waiting room” and held until needed.



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New generators can be deployed immediately if coal-fired power plants fail, helping to prevent the kind of crisis we’re going through right now.

It is important that consumers only pay for: new ones generation, no coal plants. This costs less and is the only way to provide the insurance the market needs.

Wind turbines in a field at sunset

Ministers want a smooth transition to renewable energy sources.
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We already have the tools in house

Several years ago, the ESB introduced the Reliability obligation in retail, which requires retailers to contract with producers for their share of peak electricity demand. This is intended to encourage retailers to plan ahead.

The retail trustworthiness obligation framework can be adapted to address situations like the one we find ourselves in.

If coal plants fail and the market operator is forced to intervene as it did last week, then all the costs incurred by the market operator could be passed on to the retailers without there being enough generation or contracts to supply all of their customers.

This would be better than now, where the operator’s costs are passed on to all electricity consumers.



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By amplifying price signals and building reserves, we can help prevent future crises and deliver what ministers have rightly asked: a smooth path to more renewable energy sources and storage.

It’s also worth remembering that coal-fired generators received a windfall of up to $5 billion under the Future of clean energy package in 2012. How much more money do coal producers need from taxpayers and energy consumers to just do the right thing and make their installation reliable? Or shutting down in time to be able to build new capacity?

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