Generators warn power grid reforms will drive up bills

A controversial plan to shore up the east-coast grid by paying generators to be on standby has been dealt another blow as power giants AGL and Snowy Hydro reject the reform and warn it could result in excessive increases in customers’ bills.

Ahead of further negotiations between state and federal ministers on ways to avoid future energy shocks,a key proposal is for a “capacity mechanism” that would reward companies for guaranteeing power that can be called on when the wind isn’t blowing and the sun isn’t shining,rather than only paying them for the power they produce.

AGL’s power stations are Australia’s biggest source of greenhouse gas emissions.

AGL’s power stations are Australia’s biggest source of greenhouse gas emissions.Paul Jones

The reforms,which are being championed by federal Energy Minister Chris Bowen,are seen as a way to accelerate investment in projects capable of supplying energy on demand,such as big batteries or pumped hydro. But the design proposed by the nation’s Energy Security Board (ESB) has sparked concerns from some state governments and renewable energy advocates that it may prolong the lives of coal-fired power plants. Opponents of the proposal have called it “Coal Keeper”.

In the latest blow to the plan,power and gas supplier AGL said it did not believe the proposed mechanism would solve the challenges facing the energy system.

“While we agree with the ESB that there is some merit in considering additional incentives for dispatchable capacity,the ESB has not put forward a compelling case,” the company said in a submission released on Thursday.

“We are particularly concerned at the potential for the proposed design to result in excessive costs for energy customers.”

Snowy Hydro,the federal government-owned operator of hydro and gas power assets,said the proposed capacity mechanism would “almost certainly” prolong the lives of coal-fired power stations,as well as increase costs for consumers.

“Snowy Hydro is unaware of any jurisdiction in which the introduction of a capacity market has reduced energy prices,” it said.

“It is remarkable that the price outcomes of other capacity markets do not appear to have been considered by ESB ... the ESB should critically examine the price impact of capacity markets in jurisdictions such as France,the UK and Western Australia.”

Under the ESB’s proposal,retail companies would make the capacity payments to energy generators,which means the cost would be passed on to households and businesses. The board said it would avoid higher bills.

“This is clearly not the intent,and it will be avoided through careful design,” it said.

As coal-fired power stations face mounting financial pressure from cheaper-to-run renewable energy slashing daytime electricity prices,the ESB is worried that abrupt closures could jeopardise reliability and cause volatile prices.

“Wholesale prices in Victoria jumped 85 per cent following the sudden closure of the Hazelwood power station before any replacement capacity could be built,” it said in a report in June.

However,wind and solar farm operator Tilt Renewables cited modelling extrapolating the cost of Western Australia’s capacity market to the east-coast grid,which suggested residential consumers could pay up to $6.9 billion more for electricity each year.

“We agree with the minister that a capacity mechanism must be focussed on new technology and storage,” Tilt said.

“Unfortunately,the capacity market designed by the ESB does not focus on delivering new technology or storage ... instead,it is focussed on forcing electricity customers to pay billions of dollars in windfall bonus payments to existing generators.”

Tilt said the mechanism’s design could prompt a number of older coal-fired generators to decide to continue operating “for another year or two” beyond what they otherwise would have. As well,it could mean customers would pay existing generators that had no intention to exit the market to continue doing “exactly what they were going to do anyway”,Tilt added.

The debate over the proposed redesign comes after the east-coast energy market was thrown into chaos earlier this year,when a spate of coal-fired power plant failures collided with surging fossil fuel costs to push the wholesale electricity prices to their highest-ever levels.

After the Australian Energy Market Operator (AEMO) was forced to impose rarely used caps to halt runaway prices,many power generators said they could not remain viable and withdrew offers to dispatch into the grid,exacerbating the supply crunch. The situation led to AEMOseizing control of the market for the first time in history to stabilise supplies and avert the threat of blackouts in multiple states.

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Nick Toscano is a business reporter for The Age and Sydney Morning Herald.

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