Chris Bowen needs flexibility to avoid capacity market trap set by fossil fuel lobby
The energy ministers’ meeting hosted on Wednesday by new federal minister Chris Bowen appears to have been held in a renewed spirit of co-operation, and a determination to fast-track the switch to green energy.
That’s a great relief, and it highlights, as much as anything, the great big policy bollard that was his predecessor Angus Taylor and the Coalition government, for nine long years.
The agreed push to “supercharge” AEMO’s 20-year blueprint for the grid – the Integrated System Plan – is very welcome, as long as they don’t forget about social licence in the rush. But there are valid concerns about the other key part of the minister’s communique – the fast-tracking of the so-called capacity mechanism.
Bowen says an updated proposal will be released by the Energy Security Board “within a few days”. This almost certainly means that it will be little changed from the previous offering served up under the Taylor regime and its so-called “Coal-keeper”.
The latest offering is unlikely to be so gauche, but if it is focused on legacy rather than new dispatchable generation, then it could be a disaster and serve nothing but the interests of the fossil fuel lobby.
As Declan Kelly from Flow Power wrote in RenewEconomy on Wednesday, a capacity market will have done little or nothing to prevent the current crisis. Capacity payments to coal and gas generators don’t stop flood waters or fix mining issues. They don’t allow more gas to be transported on gas lines that are already full.
On Wednesday I also heard ABC’s chief energy reporter Daniel Mercer praising capacity markets on radio, telling listeners there was nothing controversial about the mechanism in place in Western Australia. That’s what the fossil fuel industry wants you to think, but Mercer should do some digging.
It has been, by the energy market’s own admission, an appalling waste of money. As we wrote back in 2014, a government report found that more than $1 billion had been spent on WA’s capacity mechanism, too much of it on fossil fuel plants that have never been switched on.
Just for context, the WA market is less than one-tenth the size of the National Electricity Market. So $1 billion is a lot of money. And it hasn’t changed much since then, and it highlights just how disastrous a badly designed mechanism can be.
Take the 82MW Merredin Energy peaking generator as an example. It was built almost exactly 10 years ago – June 22, 2012 it came “on line” – and they might just as well have built a Lego set for all the good it’s done.
It has run – on average – about five hours a year, according to AEMO data, and most of that was just for testing. And this outcome was entirely predictable, and predicted, as RenewEconomy observed at the time: Dumb and dumber energy choices in the wild West.
An audit report has since found that the energy market authority didn’t even have the plant’s phone number, and one of the two generators couldn’t be made to start 40 per cent of the time. But its licence was renewed anyway.
This year, Merredin Energy’s allocation under the capacity mechanism has been trimmed slightly to around $12 million for the year. Its total payments in the 10 years it has been sitting around doing sweet FA must now be close to $150 million. The plant cost $95 million to build and plans to “operate”, or at least be there, for 30 years.
This is not exactly efficient policy. But Merredin even had the chutzpah to complain and whinge earlier this year that its payments should be closer to $14.5 million, because …. wait for it …. $12 million wasn’t enough to encourage other such plants to be built. Well, thank goodness for that.
Merredin should be very thankful they received $12 million for operating for just five hours in the last 12 months – that’s a rate of around $28,000 for every megawatt-hour produced, and most of that was probably for testing.
The UK also has a capacity market. It was introduced in 2014 and – according to Tesla – created overly generous payments to existing large coal and gas facilities at the expense of other flexible new technologies such as battery storage and demand response.
According to a Tesla submission to the ESB earlier this year, the UK mechanism ultimately led to a demand response provider suing the UK government for a bias to incumbent fossil fuel technologies.
Similar proposals in the US also favoured coal and gas and effectively stopped investment in technologies such as battery storage. At least the UK mechanism was tweaked and has now seen an increase in payments to battery storage.
Tesla is keen for the ESB to build on these lessons. It says – and its views are widely supported – that if you are going to have a capacity mechanism, then make it a “flexibility” mechanism, and don’t just make it a blunt payment of so much for a MW of installed capacity. The recipient has to be able to actually “do something.”
Tesla – and others – insist that such payments not be made to existing emissions intensive thermal plants. It should only be used to encourage new, low emissions – or even better, emissions free – dispatchable capacity.
Bowen appears to agree with the first bit, but it’s not clear he agrees with the second bit. It’s unclear also where some of the other state Labor ministers – such as South Australia, Queensland, and of course Western Australia and the Northern Territory, sit on this issue.
“It seems completely backwards to provide capacity payments to prolong the life of a coal plant that is already a sunk asset, when those funds could otherwise be used to incentivise and accelerate the entry of the additional capacity actually required, ahead of said coal plant retiring,” Tesla says.
Tesla says a new “Flexibility Market” should be designed in a way that strengthens investment signals for new, flexible capacity only, and not existing generators, and can be tied in with proposed renewable energy zones and new markets for fast frequency response and other system services.
“Tesla recommends the introduction of a Flexibility Market to target additional revenue for new generation, storage and demand response capacity that is both fast-ramping and able to provide defined services to support the grid (as opposed to simply rewarding registered ‘peak MW’ capacity),” it says.
“This approach would provide transparent, efficient, and predictable price signals for new capacity at all scales. This would also address the risks of disorderly coal plant exits by ensuring new capacity is incentivised to enter the market before old plants are retired.”
The message from Tesla, Flow Power and others is clear: The new market will be devilishly complex, but it needs to be done properly to ensure it helps, rather than hinders, the switch to green energy.
There’s been enough hindrance in the past decade, and the fossil fuel lobby – sensing its own mortality – will try not to waste this energy crisis. They may not have another opportunity.
That means that the ESB, and the state and federal energy ministers, must resist a rushed compromise deal that locks in polluting failure, just for the sake of a favourable headline in mainstream media. There really is too much at stake to go off with a half baked offering.
- ^ other key part of the minister’s communique (reneweconomy.com.au)
- ^ Declan Kelly from Flow Power wrote in RenewEconomy (reneweconomy.com.au)
- ^ energy market’s own admission, (reneweconomy.com.au)
- ^ a government report found that (reneweconomy.com.au)
- ^ The madness of WA’s multi-billion fossil fuel energy disaster (reneweconomy.com.au)
- ^ June 22, 2012 it came “on line” (reneweconomy.com.au)
- ^ Dumb and dumber energy choices in the wild West. (reneweconomy.com.au)
- ^ audit report has since found (www.erawa.com.au)
- ^ chutzpah to complain and whinge earlier this year (www.erawa.com.au)
- ^ according to Tesla – (www.energy.gov.au)
- ^ Ship’s crew and its cartogropher:” AEMO maps out priorities for 100 pct renewable grid (reneweconomy.com.au)
- ^ Renew Economy (reneweconomy.wpengine.com)
- ^ One Step Off The Grid (onestepoffthegrid.com.au)
- ^ The Driven (thedriven.io)