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Australia’s energy crisis can be solved with a focus on renewables, not a capacity market that locks in high emissions electricity

June 09, 2022

Key Takeaways:

Australia is seeing astronomical energy prices due to high international coal and gas prices driven by sanctions on Russia, outages at Australian coal fired power plants, and Australian coal supply issues.

 

Ministers have recommended a National Transition Plan, a capacity mechanism, further exploration of gas market policies and other initiatives. 

A capacity mechanism could see payments go to coal and gas generators, so has the potential to delay decarbonisation. A Renewable Electricity Storage Target (REST) could be used in its place to incentivise new low emissions capacity to firm up renewables.

Other short-term solutions include reserving east coast gas for domestic use, a windfall profit tax on LNG exporters, and implementing energy efficiency measures.

In the long term, the focus should be on accelerating the transition to a renewables-based grid with storage, and managing the orderly exit of increasingly unreliable coal generators to keep cost and emissions down.

9 June 2022 (IEEFA Australia): Yesterday, Energy Ministers put forward multiple initiatives to drive faster decarbonisation and reduce Australia’s exposure to volatile fossil fuel prices including a National Transition Plan, however their proposal to further explore a capacity mechanism could actually further increase electricity bills and delay the energy transition. 

Johanna Bowyer, IEEFA’s Australian electricity analyst says instead of a capacity mechanism where electricity customers would pay old power plant generators to keep going, a better idea would be to introduce a Renewable Electricity Storage Target

“A Renewable Electricity Storage Target would add new storage into the grid to complement renewables,” says Bowyer.

A Renewable Electricity Storage Target would add new storage into the grid

“This would encourage investment in new energy storage resources, rather than locking in payments to legacy assets - thereby accelerating the transition to a low emissions electricity system.

“In its current form, the capacity mechanism could delay the energy transition as it’s likely to provide payments to coal and gas generators which will keep them in the system for longer. 

“The capacity mechanism would have to be substantially redesigned to make sure high emissions generators do not remain in the system for longer than needed, at the same time as incentivising investment in new, flexible, low emissions energy resources like batteries.” 

Bowyer says other initiatives to reduce bills in the short term could include reserving east coast gas for domestic use, a windfall profit tax on LNG exporters, commissioning wind and solar plants more quickly, and implementing energy efficiency benchmarks.

“Australia is currently seeing astronomical energy prices largely due to high international coal and gas prices -- driven by sanctions on Russia,” says Bowyer. 

Both gas and coal miners are charging very high prices for their products

“Both gas and coal miners are charging very high prices for their products because that’s what they can sell them for into international markets. This is resulting in rising gas and electricity prices.”

The ALP was elected with a plan to get the National Electricity Market on the east coast of Australia from 31% renewables in 2021, to 82% renewables in 2030.

The Energy Ministers yesterday proposed to develop a National Transition Plan to build-out renewables, transmission and storage for a low emissions electricity system. 

The Australian Energy Market Operator’s (AEMO’s) Draft 2022 Integrated System Plan shows the pace of change Australia is expecting – including a tripling of renewables capacity and managing the exit of 14 gigawatts (GW) of coal-fired generation by 2030.

“To manage this scale and speed of transition, a transition plan as put forward by Energy Ministers is key,” says Bowyer.

The Energy Ministers also tasked Energy Senior Officials with bringing forward gas market proposals in July. 

While it has been stated there is no “quick fix” to high energy prices, Bowyer says there’s some additional initiatives which could be implemented relatively quickly to provide relief to energy users.

"Attention should be focused on ensuring consumers can access more energy efficient equipment and housing – particularly for renters. 

“At present, there are almost no meaningful standards for ensuring the energy efficiency of rental properties in Australia. These could be introduced to protect renters from high energy bills.

The Government could speed up the commissioning of new wind and solar plants

“Further, the Government could speed up the commissioning of new wind and solar plants.”

At present there are many hundreds of megawatts of fully built wind and solar plants that are constrained from exporting their full output due to what has become a very drawn-out grid connection commissioning process.

Bowyer says in the long term, focus should be on reducing exposure to volatile international coal and gas prices which have pushed up energy prices in Australia, and reducing fossil fuel use to reduce emissions. 

“This can be done by transitioning to a low emissions electricity system with low-cost renewables, storage and transmission. 

“The uptake of distributed energy resources like rooftop solar, electric vehicles and demand response should be accelerated to reduce consumer exposure to volatile fossil fuel prices. 

“An orderly exit of ageing and increasingly unreliable coal-fired power plants should also be facilitated in the longer term - rather than paying to delay the exits through a capacity payment.” 

Media contact: Kate Finlayson ([email protected]) +61 418 254 237

Author contact: Johanna Bowyer ([email protected])

About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends, and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. (ieefa.org)

Johanna Bowyer

Johanna Bowyer is the Lead Research Analyst for Australian Electricity at IEEFA. Her research is focused on trends in the National Electricity Market, energy policy and decarbonisation.

Prior to joining IEEFA, Johanna researched distribution networks at CSIRO, worked as an engineer at Solar Analytics and Suntech and worked as a management consultant at Kearney.

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