Capacity mechanism change may risk jeopardy: JP Morgan
A dismissal by energy ministers of the proposed capacity mechanism to fix Australia’s volatile power grid has put market reform in jeopardy, JP Morgan has warned.
A dismissal by energy ministers of the proposed capacity mechanism to fix Australia’s volatile power grid has put market reform in jeopardy, JP Morgan has warned.
The mechanism would pay companies for guaranteeing supply, avoiding blackouts and helping drive investment in new generation for the grid.
However, the Energy Security Board’s design for the mechanism was sidelined in August with states and federal Energy Minister Chris Bowen deciding to take control of the policy themselves.
“We believe the dismissal of the ESB’s proposal now puts market reform in jeopardy,” JP Morgan analyst Mark Busuttil said. ”We believe policy change to state and federal energy ministers will likely result in material delays despite the urgency that has been clearly evident in recent months.
“Given that ongoing government intervention has likely been the main cause of generation investment in recent years, this development could have major repercussions over the medium term.”
Risks also lie ahead given the broker’s view that while capacity markets soothe volatility, they also typically result in higher absolute prices.
“Designed properly, a change to a capacity market could address price volatility while also providing a pathway for investment in renewables. However, the disadvantage is that these markets typically result in higher power prices.”
Labor has pledged to slash $275 from household electricity bills by 2025.
While the ESB has rejected demands for the fossil fuels to be cut from its draft capacity mechanism, some of the most powerful energy companies in Australia are at odds over including the fuels.
Under the mechanism new back-up generation will be provided with extra financial support under the scheme in the form of longer-term contracts, a recognition of the challenges faced by the industry in bringing on new supply amid a highly volatile energy system.
Existing capacity providers would only be eligible for single-year contracts.
