‘Drawing a line’: Victoria to oppose special payments for coal plants

Victoria will reject electricity market changes that prop up fossil-fuel power stations and any changes aimed at keeping the lights on must prioritise zero-emissions technologies, Energy Minister Lily D’Ambrosio says.

Ms D’Ambrosio told The Age and the Sydney Morning Herald she was “drawing a line” under any market revisions that would result in payments to existing coal and gas generators merely to be idle but available.

Lily D’Ambrosio, Victoria’s Minister for Energy, Environment & Climate, has made it clear that her state won’t support any redesign of the energy market that supports an extension of the life of coal or gas-fired power stations.Credit: Joe Armao

“Because of failures at a national level ... we have increased uncertainty amongst investors for new renewable energy projects,” Ms D’Ambrosio said. “I’m drawing a line under this right now.”

Most electricity in Australia is generated, bought, sold and transported in markets that need to match supply and demand in real time. The National Electricity Market (NEM) fills this role for the east coast and southern states.

“Victoria wants to reassure investors in wind and solar farms and storage such as giant batteries that it will not adopt any mechanism within the NEM that undermines the state’s ambition to cut carbon emissions,” Ms D’Ambrosio said.

“This is about absolutely giving certainty to the industry that Victoria is the preeminent place for investment in the new replacement energy supply that we need.”

Her comments are the clearest sign yet that federal Energy Minister Angus Taylor will face robust discussion from at least some states over his plan for a so-called capacity mechanism, which pays generators to have more capacity than they would otherwise maintain.

State and federal governments agreed on August 20 to co-operate on the development of the scheme, which could take 18 months to finalise. Environmental advocates have warned the capacity mechanism will be a “coal keeper” scheme to prop up uneconomic fossil fuel generators.

In August Mr Taylor said any mechanism design would be technology neutral and open to any form of dispatchable power.

Ms D’Ambrosio’s intervention also sets up a robust discussion for next week, when all state and territory energy ministers are scheduled to discuss the next design steps for such a capacity mechanism.

While Victoria has secured an agreement for EnergyAustralia’s Yallourn plant to run until 2028, it is four years earlier than the company originally earmarked as the closure date.Credit: Joe Armao

Australia’s grid is burdened with some of the oldest plants in the developed world as well as some of the fastest renewables growth, given the country’s rich wind and solar resources.

The challenge is to reduce the risk of sudden coal-fired power plant closures, such as Hazelwood’s exit in 2017, while also maintaining sufficient supplies when the wind isn’t blowing or the sun isn’t shining. Victoria may be joined by other jurisdictions, including the ACT, in opposing any beefed-up reliability obligations that extend the life of coal plants.

The Commonwealth’s advisory body, the Energy Security Board, last month issued its final recommendations on the future of the NEM. It backed a system that would make retailers pay generators to have enough so-called dispatchable energy capacity on standby to fill supply gaps.

Kerry Schott, chair of the Energy Security Board, has sought to allay concerns existing fossil fuel-fired generators will have their operational lives lengthened.

“One principle in the design of the mechanism, for example, could – and I would think, would – be that thermal ageing generators do not stay in the NEM one minute longer than necessary,” Ms Schott told the AFR last month.

Ms D’Ambrosio, though, made it clear that those assurances weren’t enough.

Victoria has sought further modelling from the board on what a capacity mechanism would mean for individual types of generation, such as coal or gas, but that work was not done.

“This is disappointing, and the longer this drags out the growth in uncertainty amongst renewable energy investors continues,” Ms D’Ambrosio said. “Will it actually deliver the smooth transition that we need? The jury’s still out on that.”

Costings of a capacity market have not been published, and final details may take 18 months of work.

Despite her warnings over the new scheme, Ms D’Ambrosio has already cut a deal to ensure one coal plant stayed open until 2028.

She revealed in May that EnergyAustralia had agreed to keep the Yallourn coal plant open until 2028, despite the challenging economic outlook, bringing the closure forward four years from its initial exit date in 2032. She did not reveal the details, citing commercial confidence.

Bruce Mountain, director of the Victoria Energy Policy Centre, said the board has been in the “invidious” position of trying to deliver an outcome that Mr Taylor wants that may not square with the states’ interests. “They have been trying to please two masters,” Professor Mountain said.

“If they take sides with the state governments they have the possibility of implementing something. But if they take sides with the Commonwealth the states will block it. The ESB is in an impossible position.”

From an engineering and economic perspective, relying on coal power to back up renewable variability made no sense because such generators cannot switch on and off rapidly, Professor Mountain said. Pumped hydro and batteries would be far more flexible.

The Morning Edition newsletter is our guide to the day’s most important and interesting stories, analysis and insights. Sign up here.