The Energy Security Board’s (ESB) proposed Physical Retailer Reliability Obligation (PRRO), which will provide a new revenue stream to generators in the form of capacity payments, has come under renewed criticism ahead of today’s meeting of federal, state and territory energy ministers.
The proposal – dubbed the ‘coalkeeper subsidy’ by its critics – has been included by the ESB in proposed reforms designed to support the delivery of affordable and reliable power in the National Electricity Market (NEM) beyond 2025.
The controversial proposal will require electricity consumers, via their retailer, to pay primarily conventional generators such as coal and gas plants not just for the electricity they generate, but also for the size of capacity installed in the power plant, irrespective of how often that capacity is needed to generate electricity.
A report published this week by the Institute for Energy Economics and Financial Analysis (IEEFA) suggests the capacity payments could cost consumers up to $6.9 billion a year, or $430 per household.
The proposal has been slammed in an open letter penned by representatives from leading clean energy companies, including French renewables developer Neoen, China-based solar module manufacturer and project developer Risen Energy, German renewables developer Wirsol and Tilt Renewables, part of leading Australian renewable energy provider Powering Australian Renewables (PowAR).
The group warned the proposed reform could undermine “the already fragile confidence in future clean energy investment” and slow Australia’s renewable energy transition.
“The ESB has proposed the establishment of a capacity market, which could be used to subsidise existing coal plants and unnecessarily prolong the life of these increasingly unreliable generators,” the group wrote.
“This would be a fundamental and unjustified change to the Australian energy market.
“Such a mechanism would fundamentally disrupt the energy system, critically undermining investment confidence in the new renewable energy generation and storage that is essential to providing reliability for the future.”
The group also aired concerns about the ESB’s proposed access reform – the proposed congestion management model that would result in charges for new generators connecting to the grid outside of designated Renewable Energy Zones (REZ).
“This mechanism could create uncertainty for investment in new generation and do nothing to support the development of a 21st century grid and much-needed investment in transmission,” the group wrote.
“We believe that there are far better approaches to addressing congestion in the energy system.”
The group did voice its support for the other reforms proposed by the ESB to improve reliability, saying they could help develop a modern energy system but warned going beyond these is entirely unjustified.
“The proposals for a capacity market and new access model would add to the risk and uncertainty facing clean energy investors,” the group said.
“This would exacerbate the slowdown in new large-scale renewable energy investment that has occurred over the past couple of years.”
Johanna Bowyer, co-author of the IEEFA report, was also critical of the ESB’s capacity mechanism proposal, saying it is likely to not only delay the exit of polluting coal plants, but is also poorly designed to support investment in new dispatchable and flexible capacity like batteries and pumped hydro.
“Further, it won’t address the investor uncertainty facing the National Electricity Market, as it will only push the coal exit uncertainty problem further into the future, will not lengthen contracting terms, does nothing to address early mover disadvantage, and does not address the underlying challenges in the market which are driving government intervention,” she said.
Report co-author Tristan Edis, from research and advisory firm Green Energy Markets, said there are more targeted and more cost-effective mechanisms that could be employed instead which address the ailments facing the national electricity market.
“A strengthened regulatory regime for ensuring owners of large and aged power stations give at least three and half years notice of exit based on providing an upfront bond could reduce the uncertainty around coal exit,” he said.
“Furthermore, legislation could also be enacted to set out a schedule for coal generating units to be steadily retired once set amounts of new reliable replacement capacity are built. This would increase certainty around the exit of coal capacity thereby encouraging investment in new capacity.”
Edis said government underwriting schemes could also reduce the early mover disadvantage in batteries and other technologies and encourage new entrants to build new dispatchable capacity.
“Furthermore, the introduction of an overarching emissions reduction policy for the national electricity market would be likely to reduce the extent of ad hoc and difficult to predict government interventions currently occurring to support renewable energy in order to reduce emissions,” he said.
Meeting key for market future
Clean Energy Council (CEC) chief executive Kane Thornton said today’s meeting of energy ministers looms as a “fork in the road” for the future of Australia’s electricity market.
“The rates of investment in large-scale wind and solar projects has fallen 29% in the last year and is down 70% on 2018, with risks and uncertainty continuing to mount for investors,” he said.
“Now is the time to be ensuring that Australia is a more welcome destination for clean energy investors. The Australian Energy Market Operator (AEMO) anticipates that between 6 GW and 19 GW of new dispatchable resources will be needed across the National Electricity Market (NEM) by 2040.
“The good news is that investment in utility-scale batteries is ramping up, with over 600 MW of capacity worth over $400 million committed in the first quarter of 2021. But investment confidence is fragile and requires a concerted set of policies and market reform.”
Thornton said investors are urging energy ministers to ensure that all market reforms help rather than hinder investment confidence for these much-needed clean solutions.
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