The federal energy minister, Chris Bowen, says the states will be able to implement a new capacity mechanism in the national electricity market in ways appropriate for their needs as long as the arrangements are consistent with the Albanese government’s 2030 emissions reduction target.
Amid soaring energy prices, blackout threats in five states and the suspension of the wholesale electricity market, the Energy Security Board (ESB) has recommended that coal and gas plants be paid to have generation capacity available as the grid transitions to low-emissions alternatives.
The ESB’s proposal could have been controversial with states that have argued any capacity mechanism must favour renewable technologies but Bowen said on Monday the states would have discretion to implement the backup generation “in a way which is suitable for their particular purposes and needs”.
Bowen said the generation mix was different in different parts of the country, with Queensland having younger coal generation assets. “It’s appropriate that states can implement this in a way that is suitable for their needs, but it will be within that national framework and it will complement our emissions target,” he said.
Bowen said settling the design of the capacity mechanism was necessary to ensure an orderly transition to firmed renewable energy, providing the national policy framework that had been missing under the Morrison government and then energy minister Angus Taylor.
He said federal and state energy ministers had agreed to develop a cooperative roadmap for the transition to net zero emissions by 2050 and he said the agreement to provide stand-by generation from coal and gas would not disrupt Labor’s 2030 target, which is a 43% cut in emissions.
New South Wales and Victoria are among the states that have welcomed proposed changes to the market to pay for future idle capacity to reduce blackout risks, but analysts predict there will be heated debates over the final design and necessity of a new market.
The NSW energy minister, Matt Kean, said details of a capacity market, as outlined on Monday in a design paper by the ESB, appear to work “hand in glove” with the state’s Electricity Infrastructure Roadmap.
“We have a legislated requirement to deliver capacity,” Kean said. “We’re very, very happy with our plans to ensure that we maintain system stability as we transition [off fossil fuels]. But obviously our preference was always for this to be driven by the national energy market.”
The contentious parts of the ESB paper centre on whether consumers will end up paying to keep coal and gas-fired power plants operating, and how much they will pay. The national electricity market (NEM), which serves eastern states and South Australia, is now an “energy only” market, which does not formally reward spare capacity.
The recent turmoil in the NEM, which included soaring power prices and shortage of supplies that prompted the suspension of the wholesale market, has provided an early test for the Albanese government and Bowen. A key element of the market design would be to allow individual jurisdictions the ability to set their own paths, including avoiding support for old coal plants.
The prime minister, Anthony Albanese, said in Melbourne on Monday that a capacity market was “an insurance scheme into the energy system and that seems to me to be a bit of common sense”.
“States will make their own decisions and what I will do as prime minister is to consult and work collaboratively with state and territory governments,” he said.
The Victorian premier, Daniel Andrews, said the ESB paper’s design was “more technology agnostic than it might otherwise have been” because of insistence by states such as his that they would not be paying coal plants to extend their operations.
“Let’s be clear about this,” Andrews said. “The future is about renewables, whether it is wind or solar or battery storage, particularly when it can firm up and turn into baseload synchronous energy.”
Earlier, Victoria’s energy minister, Lily D’Ambrosio, welcomed the ESB’s design as confirming that her state’s approach would be able to proceed under the plans for a post-2025 market.
“We have always been clear that a capacity market operating in Victoria would make payments to zero emissions technologies and not fossil fuels,” she said.
Tennant Reed, a senior energy policy adviser to the AiGroup, said the last meeting of energy ministers during the Morrison government had agreed on the opt-out provisions for every jurisdiction. “How something would actually work in practice with a bunch of opt-outs, I don’t have my head around yet and I wouldn’t be surprised if nobody does,” he said.
The challenge for the final design will be minimising the eventual cost to consumers of any capacity support scheme but also tailoring the plan so that it deals efficiently with long- and short-duration storage, Reed said.
“We are going to need new flexible capacity to absorb the volume of renewables or the proportion of renewables that we can have,” he said.
In rare shortfall events – such as when a lack of wind occurs at the same time as reduced solar power – costly assets such as gas-fired plants may be needed. But for daily minor shortfalls of supply when the sun sets and households turn on appliances – batteries and gas-peaking generators will be able to fill the gap.
Either way, ageing and increasingly unreliable coal plants are unlikely to be the answer, Reed said. “Whether they’re formally included or not, it’s probably going to be mostly other assets that are the players.”
The ESB hopes to have a final design decision agreed by next February. One reason for haste will be any extended debate could discourage new investment, at least for the short term, as developers wait to see what the new rules will be. That could be “a big handbrake on anyone committing to new projects in the near term”, Dylan McConnell, an energy expert at Melbourne University said.
The ACT’s energy minister, Shane Rattenbury, said he did not believe paying additional money to coal and gas generators at this time was “in the best interests of the community or the environment”.
“If we are to invest resources in developing the mechanism, and asking energy customers to pay for it, then let’s make sure we get good value for money and that the mechanism actually drives investment in the renewable technologies we need,” Rattenbury said, adding that if fossil fuel plants were not excluded then zero emissions should have the highest priority and receive a higher payment.
In Queensland, a state which owns coal-fired power plants, the energy minister, Mick de Brenni, said any final proposal “must support the development of new renewable generation, pumped hydro and battery storage, and ultimately deliver lower prices and better reliability for Queenslanders”.
The lead analyst for the Institute for Energy Economics and Financial Analysis, Johanna Bowyer, said a capacity market would be paid for by consumers via retailers and “could put upward pressure on electricity bills at a time when bills are rising in many states”.
Payments that went to fossil fuel plants could “keep high emissions capacity in the system for longer, delaying the transition to a low emissions electricity system,” she said.
One industry veteran who wasn’t authorised to speak publicly said paying existing generators a windfall capacity bonus was “a lose-lose proposition for customers”.
“Most of the time consumers will be paying millions of dollars to generators for doing exactly what they were going to do anyway,” they said. “For the others, predominantly coal generators, consumers will be paying millions of dollars to enable them to pollute longer in the middle of a climate crisis. Either way, this is a terrible result.
“An intelligent energy policy would focus on getting more new storage (and clean generation) into the market ASAP – not waiting until mid-2025 to do anything.”
Ted O’Brien, the federal shadow energy minister, said “Labor doesn’t know what it’s doing, and households and businesses will pay the price”.
“The Energy Security Board has delivered a wake-up call to the new Albanese government by rejecting energy minister Chris Bowen’s request for the capacity mechanism to favour new technologies at the expense of gas and coal,” he said.
“Instead of trying to create a new climate war that pits technologies against each other, Labor needs to recognise that the answer lies in a balance of technologies.”
