Coal closure scheme risks distorting market signals for energy transition: AGL
A scheme allowing state governments to delay the closure of coal-fired power stations would complicate the country’s energy transition, AGL Energy has warned.
A scheme allowing state governments to intervene and delay the closure of coal-fired power stations would distort market signals to would-be developers and complicate the country’s energy transition, AGL Energy has warned, with a federal government green scheme also adding to risks.
In a bid to mitigate the coal exit threat, state and federal governments are considering a scheme that would give those that opt in special powers to amend the closure dates, known as the orderly exit management framework. Currently owners and operators of coal power stations simply have to give a notice period of 3½ years before closure.
But AGL, the country’s second largest electricity and gas retailer, said the scheme risked being counter-productive.
“AGL considers further assessment is needed to ensure that, collectively, the market is not being presented with mixed incentives,” AGL said in a submission to the NSW state government, which is leading efforts to implement the scheme.
AGL said timing signals could also be distorted by Labor’s recently announced Capacity Investment Scheme (CIS), which guarantees developers a minimum return on new solar and wind projects.
The scheme is the centrepiece policy of federal Energy Minister Chris Bowen, who hopes that removing revenue uncertainty will spur a rapid deployment of new renewable energy deployments.
The CIS guarantees developers a minimum return – but AGL said the policy could hasten the pressure on coal generators and exacerbate their retirement, which in turn could force the use of the orderly exit management (OEM) framework.
“There is a risk that CIS investments could put more pressure on existing thermal assets and conversely extensions to the life of thermal assets could increase the risk to new investment driving up these costs,” said AGL.
AGL is the latest to warn of unintended consequences of the OEM, echoing the sentiments of the Australian Energy Council, which represents electricity and gas companies, and the Clean Energy Council.
All are deeply concerned about manipulating the timing signals. Currently electricity companies will look to develop new renewable energy sources as old generation assets such as coal reach the end of their lifespans.
The warning underscores the complexity of timing Australia’s energy transition. The federal government has set an aggressive target of having renewable energy generate more than 80 per cent of the country’s electricity by 2030, but there is widespread acceptance that an insufficient amount of zero emission sources of power are being built.
Without sufficient sources of replacement energy, there would be a heightened threat of blackouts and price rises.
Coal power stations – still the dominant source of electricity in Australia – are under pressure from a rapid influx of renewables which has seen the wholesale cost of electricity fall substantially, often to a point below the cost of fossil fuel production.
Coal power stations run consistently throughout the day and the influx of renewables means many are operating at a loss during sunny days before returning to profitability when the sun sets.
The trend is expected to exacerbate, particularly if the CIS is successful in leading to the rapid influx of new renewable projects, and heighten the demise of coal power stations. Already, Australia’s energy market operator expects all coal-fired power stations to have shuttered within 15 years.
But authorities are increasingly alarmed about how to guarantee the reliability of electricity.
The Australian Energy Market Operator last year warned that without urgent deployment of renewable energy projects, the country would face a decade of unreliable electricity supplies.
Works, however, remain hamstrung by opposition to high voltage transmission lines that will be needed to connect renewable energy projects into the grid, high interest rates – which undercuts the appeal of zero emission returns – and persistent inflation.
Without certainty that projects can connect into the grid, developers will not commit billions of dollars to building new renewable energy projects.
NSW is at the centre of the issue. An independent report last year said the state Labor government would need to strike a deal with Origin to keep the Eraring coal power station open to safeguard electricity supplies.
But negotiations have proven to be painfully slow, as the government struggles to find an agreement that would see taxpayer funds cover potential losses in a package that is politically palatable amid broad voter opposition to extending the lifespan of coal power stations,
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