Today's announced Capacity Investment Scheme has the critical features necessary to provide investment certainty.
The Capacity Investment Scheme will enable the accelerated build-out of energy storage and renewables projects required to reach net zero emission goals.
Importantly, the Capacity Investment Scheme should also keep costs low.
Today was a significant day for rebuilding Australia’s electricity system to become more reliable, affordable and less polluting.
As detailed in IEEFA’s research report which foreshadowed the closure of Victoria’s Yallourn and New South Wales’ Eraring power stations back in February 2021, Australia desperately needed a policy framework to support the mass replacement of ageing and increasingly unreliable coal generators with energy storage and renewables.
The announcement by Energy Ministers that they will implement a Capacity Investment Scheme “to accelerate the deployment of firmed renewable power” is a pivotal step forward in implementing such a framework.
The core components outlined today make for a strong foundation
While much work remains to be done to flesh out the details of this scheme, the core components outlined today make for a strong foundation.
The Capacity Investment Scheme – “a Commonwealth revenue underwriting scheme available to all jurisdictions nationally” - has the critical features necessary to provide investment certainty that will enable the accelerated build-out of energy storage and renewables projects required to reach net zero emission goals.
Importantly, it should also keep costs low, as auction competition is likely to be fierce to win long-term contracts that provide stable revenue. In addition, the fact that the contracts will be able to claw back any windfall gains projects might capture from events such as those unfolding at present, will also lower costs for taxpayers.
The Ministers’ decision to focus this capacity mechanism on supporting only new capacity is vastly better for consumers than the original version of a capacity mechanism designed by the Energy Security Board (ESB). This proposal would have required consumers to pay considerable fees mainly to existing coal and gas generators just for being available to potentially generate, on top of payments for the electricity they actually generated.
Instead, Ministers have thankfully acted on the findings of IEEFA’s previous analysis which indicated that the ESB’s original proposed mechanism would be costly and had the potential to undermine emission reduction efforts while deterring new investment.
Ministers have thankfully acted on the findings of IEEFA’s previous analysis
Instead, IEEFA recommended a focus on underwriting new generation and managing the risk of disorderly coal exit through a more targeted mechanism.
Today, the Energy Minister’s Communique stated that Senior Officials would continue working on an orderly exit management framework – presumably to manage the risk of disorderly coal exit. In 2021 IEEFA laid out various options for managing coal exit – though undoubtedly the landscape has changed considerably since then.
2022 has seen skyrocketing wholesale electricity prices in National Electricity Market prices on the east coast of Australia, driven by high coal and gas prices, coal-fired power plant outages and coal fuel supply issues.
The Capacity Investment Scheme is set up to build a renewables and storage dominated electricity system. This will insulate Australians against volatile fossil fuel prices and put downward pressure on prices, and enable emissions reductions.