Do Australia’s coal generators need another subsidy?

Mr Reliable. That's what I'll call you. (AAP Image/Lukas Coch)Print Friendly, PDF & EmailThe owners of Australia’s coal generators might have gotten a little excited over the weekend if they took a headline in Murdoch’s The Australian newspaper at its word: “Power pricing overhaul ‘should reward coal’.”The story focused on a speech by Australian Energy Market Operator chief executive Audrey Zibelman at the Committee for Economic Development in Australia in Sydney on Friday. But the headline appears more a reflection of the Murdoch media’s ideological intent. The wording supporting the headline does not appear in the article, and according to AEMO spokespeople, were not words uttered by Zibelman herself.So, what’s going on? It would be tempting to say “just the usual” energy wars, but we are now embarking on a fascinating new period in Australia’s energy market, where the design and the rules of the market may be completely re-written. Who will they get to favour? Will they be truly technology-neutral? Will the redesign look to the future, or to the past?
As RenewEconomy reported on Friday, the Energy Security Board is calling for submissions – by the end of this month – from market players, analysts, observers and consumers and anyone else who could be bothered about what they think the energy market design should look like from 2025 on.It’s going to make fascinating reading. Some will be talking their book and looking to shore up their creaking business models. Hopefully, most will focus on the new technologies and what is good for the future, the integrity of the energy system, the consumer and – just as importantly – the environmental considerations that are currently excluded from the National Electricity Rules.

One wind turbine can produce enough electricity to power up to 300 homes.

The AEMO has already made its case clear.

It wants a review of the reliability standard to take into account of “tail risk” events, and in its recent Electricity Statement of Opportunities repeated that it is pushing for new market measures such as short-term forward markets, firming and security services markets, and markets to support investments at the right time and the right location, including nodal pricing and improved reliability mechanisms.

One confusing thing attributed to Zibelman last Friday, and which may have been the cause of the excitement at The Australian and the AFR, was this:

“Unless we get the markets right — and we continue to see the emergence of rooftop solar as well as variable renewable energy — we’ll see even earlier coal retirements than anticipated because the economics of plants won’t be viable,” Zibelman was quoted as saying. “What I would hate to see happen is that the plants actually retire earlier than we anticipate and suddenly we’re not ready.”

That’s kind of stating the obvious though. AEMO has been pushing for short term, medium term and long term investments in its Integrated System Plan to deal with the changing energy system.

It’s been pushed by the major players to model a “step change” scenario that models what would happen if coal generators retire much earlier than expected, either because they can’t go on, or climate and environment issues take priority. Chief among the AEMO solutions are much needed investments in energy infrastructure, which have been hampered by slow moving regulators and reviews.

Zibelman was also quoted as saying:

These power plants, as we’ve been seeing the last few days when you’ve had negative pricing, that wasn’t because the cost of energy was negative or zero, it was because we weren’t paying for reliability, the firming capacity, the way we should,” Zibelman said. “We need to start recognising that resources that provide that important dispatchability need to be paid for differently than resources that are just providing energy.”

But it is not strictly true that energy only markets do not recognise firming capacity. One quick look at any day, week, month or year of trading will tell you that, on average, wind and solar generation attracts a lower price than “base-load”, and particularly the gas and diesel “peaking” plants whose responsibility it is to provide that dispatchability to respond to changes in demand, supply and for peak periods.

This graph reveals pricing in South Australia for various technologies over the last year.

This reflects the ability of individual technologies to generate in peak events, and contribute to to reliability. “That’s how different services are value in an energy only market – they receive different prices for the energy , that ‘recognised that resources’ contribution to the system ,” says Dylan McConnell, from the Climate and Energy College in Melbourne.

And, as Zibelman herself has pointed out on many an occasion, you are more likely to get a cheaper option from demand management, and other demand-side measures, than switching on a diesel plant.

Grid-tied photovoltaic (PV) capacity increased 58% in 2008 and solar water heating capacity increased 40%; the PV industry today is 10 times larger than 1998 and likely to grow by 50% annually in the coming years; solar thermal plants covering an area equal to 9% of Nevada could generate enough electricity to power the nation; solar power is on the verge of reaching cost parity with conventional energy sources.

So where are we heading on this? Are we going towards capacity markets that provide a blunt instrument that acts as an effective subsidy, or flexibility markets that reflect what a grid dominates by renewables actually needs – flexibility rather than “base-load.”

And do coal generators need any further subsidy? The environment cost of coal generation is already being carried by the whole community because they are not asked to pay a price on carbon, or their other air pollution. Unlike the price of renewable energy certificates, this subsidy is ongoing, and growing more costly.

As well, many coal generators, particularly in NSW and Queensland, have had legacy contracts from state governments that have delivered subsidised coal below market prices.Some, like Trevor St Baker and partners, have enjoyed the largesse of state governments by buying coal plants at a peppercorn price ($1 million for Vales Point) and with the government generously offering to retain most of the future liabilities.

Now they are back in the market, arguing for further payments, and direct intervention into the energy market.

AngusTaylor, the federal minister for energy, appears happy to oblige. Taylor has made it clear that he wants everything done to either encourage or force coal-fired generators to keep open, and is currently working through a short-list of projects that could provide “dispatchability”.Every one of them – St Baker’s coal plant, various gas units and a handful of pumped hydro plants – reflects last century technology. To borrow a Commons reference to Jacob Rees Mogg (he is known as the Honourable Member for the 18th century), perhaps Taylor could be better described as the minister for 20th century energy technologies (or 20CET for short).

In the end though, AEMO has made it clear that by dispatchability, it means being able to source the power when it counts. As if to illustrate the problem, Mt Piper coal generator in NSW looked to have difficulty digesting its breakfast over the weekend, tripping off on two occasions. (See graph above). The other unit is also out of action.

And given the poor performance of many thermal generators when it really counts – at high demand in the middle of a heat-wave – it’s unlikely that over the long term the market operator is going to want to put all its reliability eggs into one coal basket. The designers of the new market rules need to know that and take that into account.

Renewable Energy Market Will Be Worth US$ 777.6 Billion By 2019. In a research done by BusinessWire, the world’s renewable energy market is expected to increase to $777.6 Billion by this year, enjoying an annual compounded growth rate of 10.3% since 2014. At this rate, it might break past a trillion dollars before 2025!

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