The federal government’s energy security policies fly in the face of a private sector solution to post-coal power.
Australia’s coal-fired power stations are struggling yet we have no national plan to achieve the transition to renewables. Threatening electricity-generating businesses with a new, big stick might serve a naked political purpose but it is not a plan for cheaper, reliable electricity.
A stable policy framework is essential for investor confidence, but the federal government seems intent on bludgeoning Australia’s public companies into doing what it wants.
If private investors were left to their own devices, they would solve the problem, but the risk of taxpayer-subsidised rival projects emerging at any time is elevating commercial risk to prohibitive levels.
Consider a few examples. The federal government has an Underwriting New Generation Investment (UNGI) program. In December 2019 it announced it had agreed initial terms with two projects and shortlisted another 10, but more than a year later no firm agreements have been negotiated.
Instead, the main development with UNGI has been its inclusion by the Australian National Audit Office in its 2020-21 annual audit work program – presumably because the program’s integrity and transparency are under a cloud.
The Audit Office has already ruled adversely on the government’s funding of an incomplete feasibility study for a new coal-fired power station at Gladstone https://www.afr.com/politics/federal/power-station-feasibility-grant-broke-funding-rules-auditor-general-20210318-p57c24
Taxpayer-underwritten electricity generating projects could pop out of UNGI at any time without anyone outside the government knowing how they were selected.
Private investors can’t be expected to invest in new generating capacity when they face the risk of a subsidised competitor emerging from a ministerial office.
In the Hunter Valley, the ageing Liddell power station has been slated for closure in the next couple of years, leaving a gaping hole from around April 2023 in the state’s firming capacity at times of intermediate and peak demand when renewables aren’t available.
As a component of its gas-led recovery, the federal government has threatened to use its own corporation – Snowy Hydro Limited – to build a 1,000 megawatt gas-fired generator at Kurri if the private sector does not reach a final investment decision by the end of next month.
The government has foreshadowed a taxpayer-funded subsidy would be provided either through the underwriting of the gas-fired project or a special purpose vehicle with a taxpayer contribution.
Liberal governments are supposed to embrace free-market ideology but this one seems fonder of socialist interventions in the private sector.
Energy minister Angus Taylor is pressuring Squadron Energy and EnergyAustralia to make commitments by end-April to build their respective gas fired power plants at Port Kembla and in the Shoalhaven region https://www.afr.com/companies/energy/taylor-ups-pressure-on-generators-to-commit-to-new-plants-20210319-p57c69
Squadron Energy’s fast-start gas-fired plant is one of the shortlisted projects for UNGI. It is reportedly set to meet minister Taylor’s deadline – as long as UNGI underwriting is confirmed https://www.afr.com/companies/energy/forrest-commits-to-fast-track-for-nsw-green-power-20210321-p57cok
Commitments from the several proposed large batteries in NSW are also needed by April to ensure they count towards the government’s target for 1,000 megawatts of capacity.
It’s a race against time; if 1,000 megawatts of private-sector capacity isn’t committed by end-April for operation in time for the Liddell closure, the government will step in with Snowy Hydro.
Several large grid-scale batteries are under contemplation for the Hunter region. These include AGL’s grid-scale battery of up to 500 megawatts on the Liddell site, Origin Energy’s proposed 700 megawatt battery at its coal-fired power station at Eraring and CEP Energy’s planned 1,200 megawatt battery at Kurri. In addition, Neoen plans to build a 500 megawatt battery at the site of the former Wallerawang power plant.
These announcements of plans for massive grid-scale batteries tell us that the private sector is more than capable of providing the firming capacity needed when the Liddell power station closes.
But with ongoing threats of government intervention that could at any time undermine the business case for investment, private sector reticence continues and April 2023 moves ever nearer.
Meanwhile, EnergyAustralia has announced it is bringing forward by four years the closure of the Yallourn power station in the Latrobe Valley. Again, the government has threatened the industry, minister Taylor telling Sky News: “We’re not going to stand by idly and watch a loss of reliability and affordability” https://www.afr.com/companies/energy/energyaustralia-to-close-yallourn-early-20210310-p579by
During the day, when the sun is shining and the wind is blowing, renewables, with their zero fuel costs, are smashing coal-fired generators in the market. Coal-fired generators cannot turn on and off at short notice. Therefore, they must burn coal whether they are making money or not.
Lots more renewable energy is heading into the grid, so the situation for coal generators will only get worse.
If one of the units on ageing coal-fired power stations were to break down, requiring replacement, the operators of these power stations are likely to struggle to justify to their boards the $100+ million to replace a unit. Yet the government seems to expect companies to impose losses on their shareholders at its instruction.
A realistic scenario is one where older coal-fired power stations limp along and then fail.
The chair of the Energy Security Board, Kerry Schott, has warned that it would not be surprising to see the early closure of more coal-fired power stations and that by the mid-2030s only Mt Piper is likely to be operating in NSW https://www.afr.com/companies/energy/coal-power-stations-going-broke-schott-20210216-p572xn
Dr Schott is working on rule changes to address these realities.
A government threatening private investors if they don’t do what it says – and promptly – will only make a difficult situation impossible.
The market has worked out that renewables, supported by gas peaking plant, grid-scale batteries and pumped hydro, will fill the hole being left as Australia’s coal-fired power stations retire earlier than previously anticipated.
The biggest threat to Australia’s energy security and competitiveness is not the private sector but the federal government.
Craig Emerson is managing director of Emerson Economics. He is a distinguished fellow at the ANU, director of the APEC Study Centre at RMIT and adjunct professor at Victoria University’s College of Business.