Large companies with coal fired generation are pushing for the market to pay them to remain operational rather than retiring their assets. As profit margins fall across the industry, owners of coal fired assets are hoping that households and businesses could pay them to stay available. End users would be hit with increases to their electricity bill if the proposed new subsidy is approved by state and federal energy ministers.
The Institute for Energy Economics and Financial Analysis (IEEFA) and Green Energy Markets have released costings for capacity payments made to thermal generators, under the proposed plan. The report indicates it could cost end users as much as $6.9B. Previous estimates put a cost on end users of between $182 and $430 a year.
Federal and state energy ministers met on Friday to discuss the Energy Security Boards (ESB) proposal for a ‘Physical Retailer Reliability Obligation’. The capacity payment would see large coal and gas generators receive payments to remain operational. The Morrison government hopes the capacity payment will prevent the early retirement of Australia’s fleet of coal fired generators.
The ESB developed the new mechanism following consultation with industry. In previous weeks the owners of the coal fired generators have been very supportive of the concept as many are facing financial difficulties on the back of falling wholesale electricity prices.
Apart from the physical presence of the coal fired generators on the grid to provide system security services it is also hoped that any payments could be used to improve reliability of the assets. Recently the AER raised concerns over forced outages of thermal generators.
Following the energy Ministers meeting it is understood that each state has a different view of the market post 2025.
The biggest areas of concern are over the concept of the capacity market and the proposal for a physical retailer reliability obligation. The states are concerned that end users will pay for the capacity and obligations, but the companies will spend excessive amounts of money on aging assets and the reliability of these assets will not improve.
AEMOs latest plans include a scenario to decarbonise the grid by around 2040 and is now putting together a more ambitious plan to meet the targets by mid-2030. A key to the success of AEMOs plan is the utilisation of new and existing transmission assets.
While AEMO pushes forward a plan for a grid capable of reaching 100% renewables, the federal government is lobbying the CEOs of the large coal fired generators to support the ESBs proposals and the inclusion of capacity payments.
Industry has labelled the capacity payments as “coal-keeper”, but a growing number of companies are pushing back on the concept. Even companies like Snowy Hydro, which is owned by the federal government fear an incentive like this will discourage investment in renewable energy and more new flexible technologies like battery storage.
The Clean Energy Council cautioned the market to look beyond the capacity markets and PRRO, and the “congestion management model”, and said it wanted to see more clarity about what is proposed for distributed energy resources.
On the flip side, the coal generation companies wrote to ministers urging that an “appropriate body” draft new rules on the PRRO or alternatives by June 30 next year.
The Minister for Energy and Emissions Reduction, Angus Taylor, released a statement late Friday saying that ministers agreed on the need for more design work on the mechanisms to support “dispatchability”, and a “final package” of reforms would be presented to ministers in late September.
