New energy policy challenges state energy ministers
Two weeks ago, the chair of the Energy Security Board, Dr Kerry Schott handed the meeting of the state and feral energy ministers a three-volume report into the energy market operation after 2025 and announced that her work at the ESB was done. It was the equivalent of throwing a dead cat onto the table.
State ministers were gobsmacked. The renewables sector is up in arms, the climate change lobby claimed there was no hope of emission reductions, and economists of various descriptions claimed electricity prices would go through the roof.
So, what had Dr Schott done that was so egregious. She had recommended that the current spot market, whereby power is sold into the market at 15-minute intervals and the lowest price tendered sets the market price, should be replaced by a hybrid market that had both spot and capacity charging components.
The capacity charging arrangement is described in the report as a physical retailer reliability obligation (RRO). This imposes a downstream obligation on generators to guarantee supply up to a specified capacity. This has got renewables generators up in arms and they are demanding that the government subsidise their costs in guaranteeing this capacity. Given that the government already pays most of the cost of building the renewable generation capacity in the first place, this is a classic example of rent-seeking.
The green lobby is also outraged because at the moment the reserve capacity required can only be supplied by coal, gas or hydro.
The ESB itself reported that stakeholders were unhappy, noting:
“Stakeholders were largely unsupportive of modifications to the RRO as either the case for change had not been made or the risk of imposing costs on consumers for little benefit was considered to be high, without more analysis.
“Of those who believed modifications were necessary, there were mixed views on the shift to a triggerless financial vs a physical RRO.
“Some also noted that detailed design and analysis had not yet been conducted by the ESB and would be needed to properly assess the risks associated with each option.”
A statement from energy minister Angus Taylor’s office said the introduction of a so-called capacity mechanism:
“will be crucial to ensuring that we can absorb renewables into the grid without threatening reliability and affordability.”
Understandably, news the measures were being put forward to energy ministers, many of whom have states that remain heavily reliant on coal generation, was poorly received in the green energy sector. Smart Energy Council CEO John Grimes told The Guardian:
“What this will do is drive up the price of electricity for consumers and slow down the transition to renewables.”
“It will transfer wealth from electricity consumers to coal-fired power stations. It’s blatant and completely unacceptable.”
ESB chair Kerry Schott said in a statement that “resource adequacy is a real and present danger” and that the changes would restore confidence energy is available when needed:
“We have had a very mild summer, and everyone has got very complacent, but we only need one hot summer in three jurisdictions together or a major unexpected outage at a big coal plant and we’ve got a real resource adequacy issue right on top of us,” she said.
Other key areas of reform, Schott said, include backing up power system security to provide “inertia, voltage and frequency control” in the market, improving the use and incorporation of rooftop solar and batteries, and upgrading the transmission network to reduce congestions for new large-scale renewables.
Schott said the ESB will continue (even if she isn’t there) to work with the Australian Energy Market Commission, Australian Energy Market Operator and the Australian Energy Regulator to progress reforms to the National Electricity Rules while the advice is considered.
Energy minister, Angus Taylor, is coming under pressure to make a statement in response to the ESB report. At the moment he seems preoccupied with preparations for the global warming conference in Glasgow in November. However, a comprehensive statement on a national energy policy is long overdue.