Australian Economy

Australia’s energy system is failing. It needs an ‘insurance’ fix to manage the green transition

Amid the din of a prolonged and sometimes bitter debate over Australia’s energy future, many proposed fixes have come and gone.

There was the then-Howard government’s planned emissions trading scheme, which an ageing Coalition took to the polls 15 years ago in acknowledgement of the need to put a price on carbon.

Then it was Kevin Rudd’s ill-fated carbon pollution reduction scheme, a measure strikingly similar to Mr Howard’s ETS which ultimately died when the Greens sided with a Tony Abbott-led opposition to kill it in parliament.

Fast forward a decade or so and there have been no fewer than three other proposals aimed at solving Australia’s energy dilemma.

Yet here we are, in 2022, still unable to decide on a course of action that can guide the inevitable decoupling of electricity generation — and so much of our economic growth — from greenhouse gas emissions.

In spite of it all, the system has still undergone the early stages of fundamental change, thanks largely to investor willingness to back increasingly competitive renewable energy.

Matthew Warren is a veteran journalist and energy observer who once led the Clean Energy Council and later the Australian Energy Council.

Dozens of wind turbines scattered across the horizon.
Renewable energy such as wind generation requires a complete rebuild of the national grid.(ABC News: Charles Brice)

Mr Warren said the fact that renewable energy’s share of the national electricity market on the east coast has risen from negligible levels 20 years ago to about a quarter of capacity now is remarkable.

He said the influx of solar and wind is pushing out coal-fired power and reducing emissions from an industry that has historically been Australia’s biggest source of greenhouse gases.

For all of those achievements, he said the chaos engulfing the market at the moment is a portent of what’s to come unless policymakers can find a way through the impasse.

“Something’s got to give. We can’t just keep talking in press release language,” Mr Warren said.

“We require machinery on the ground.

“Right now we don’t have it.”

Sitting in front of state and federal energy ministers now is the latest attempt to break the back of Australia’s debilitating energy wars.

It is known as a capacity market, or a capacity mechanism.

But what on earth is a capacity market, and can it solve the problems buffeting Australia’s largest and most important electricity grid?

Ensuring the lights stay on

Boiled down, a capacity market is tantamount to an insurance policy for the power grid.

It involves retailers — for which you can read consumers — paying generators of electricity to be available when the system needs them.

Power lines in outer Sydney, with houses behind them.
Australia’s network of poles and wires needs a massive upgrade to accommodate extra green power.(ABC News: Brendan Esposito)

Payments through the market can be valuable, potentially adding up to tens of millions of dollars a year for reasonable-size plants.

The payments are meant to send a clear signal to generators that their availability at times of strain on the grid is paramount and they will be rewarded for their investment.

“These generators … just wouldn’t be financially viable if they fire up three times a year, or every third year, to fill in these key gaps,” Mr Warren said.

“They’d go broke.

“[The arrangement says] ‘We don’t know what’s going to happen because there’s too much variability in the main generation forms, which is solar and wind, but we know we’re going to need you so you’ve got to hang around’.

“Here’s some money to stay afloat during that process.”

Just as importantly, however, those generators face stiff penalties if they are called on and cannot meet their obligations.

Their payments can also be discounted in future years, meaning the consequences of failing to show up are potentially disastrous.

Bitter divisions on scheme

As is the nature of any insurance, though, questions about its value will give you different answers depending on who you ask.

Some of the most senior energy planners in the country, such as former Energy Security Board chair Kerry Schott, say a capacity scheme is essential to safeguard the security of the system.

They make the point that many people might think of insurance policies as a waste of money — until you need them.

Pipes running down to water
Long-duration storage such as Snowy 2.0 is the big hope, but it’s costly and hard to build.(Supplied: Snowy Hydro )

But others argue that capacity markets can be used as a front for subsidies to fossil fuel-fired generators.

They say similar schemes in the UK have channelled large sums of money to coal-fired power stations while doing little to spur new, renewable energy.

In any case, they charge that the schemes are inherently wasteful and saddle consumers with needlessly high costs.

‘Appalling waste of money’

One prominent critic is Giles Parkinson, a former Fairfax journalist who founded and runs the pro-renewable energy website Renew Economy.

Mr Parkinson pointed out that in Western Australia, where a capacity market has been in place for almost 20 years, hundreds of millions of dollars have been wasted on inefficient investments for plants that have rarely, if ever, been required to generate.

Profile of a man.
Renewable energy advocate Giles Parkinson says capacity markets are wasteful and often dirty.(ABC News)

One example he gives involves a diesel-fired generator known as a peaking power plant which is supposed to fire up in emergencies or when the grid is stressed.

An analysis by Mr Parkinson showed the plant had almost never been called on by the body that runs the system, yet had collected about $150 million over 10 years.

“It has been, by the energy market’s own admission, an appalling waste of money,” Mr Parkinson wrote earlier this month.

“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.

People with a deep knowledge of WA’s capacity market say such criticisms are valid and are part of the reason the mechanism has been subject to change over its life.

A side on shot of Bowen standing in front of Australian flag, biting his tongue.
New federal Energy Minister Chris Bowen has his hands full solving the energy crisis.(ABC News: Ed Reading)

One change occurred in 2014 to slash the amount of money paid to so-called demand response customers, who receive capacity payments in exchange for agreeing to pare back demand or switch off entirely at those times of grid strain.

More recently, the WA government tweaked the market to ensure batteries could get capacity payments, officially bringing the technology into the fold.

Industry insiders say that for all the faults of the WA mechanism at times, its evolution shows how the policy can be tailored to achieve a desired outcome.

This could include emissions reduction targets for the industry, for example, or the exclusion of coal to promote cleaner options.

Best shot at a breakthrough

Critically, they say WA’s capacity market has been a major reason why the state has not suffered anywhere near the level of instability that has been characteristic of the east coast in recent years.

WA Energy Minister Bill Johnston said confidence that the state’s capacity market could help smooth the transition to renewable energy was a major reason why the government this week set a date to close its remaining two coal-fired power stations by 2029.

Mr Johnston said a combination of renewable energy and short and long-duration storage, backed by gas-fired turbines, would replace the coal.

But sitting behind it all would be a mechanism that would ensure the capacity was there when it was needed.

It was a point not lost on Matthew Warren, who said a capacity market may be the best shot Australia has got at getting the energy revolution in hand and managing it smoothly.

Australian Energy Council chief executive Matthew Warren.
Matthew Warren, a former boss of the Clean Energy Council, says something has to give.(ABC News: Alex Mann)

“How do we manage to keep building and financing billions of dollars of more renewable capacity and all the billions of dollars needed to support that with storage and transmission?” he said.

“And how we do it while we keep the existing generation fleet running in a way which doesn’t turn the lights out?

“It is completely outside our pay-grade, completely outside our lived experience.

“And that’s why it’s challenging.”

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