Federal, state and territory governments have agreed to create a new capacity mechanism to make fresh investments in renewable energy in a bid to protect Australians from soaring power bills.
Federal Energy Minister Chris Bowen on Thursday announced changes he says will help “keep the lights on”, ahead of a national cabinet meeting on Friday that is expected to outline tougher measures.
The capacity mechanism will see taxpayers hold auctions to underwrite six gigawatts of new renewable energy into the Australian power grid.
The $10 billion investment plan will be supported by federal and state governments, Mr Bowen said.
“This is a sensible, carefully designed mechanism which will unleash investment in clean energy right across Australia,” he said.
“It will firm up our grids, providing extra capacity as more and more power stations leave the power grid, as more and more coal-fired power stations … close, we will firm the grid going forward.”
After years of talk, Australia’s energy ministers today decided on the capacity scheme to unleash billions of dollars of investment in dispatchable renewable energy.
Thanks to my state and territory colleagues for unanimously agreeing to get on with the renewables job. pic.twitter.com/PYQGZRpFeE
— Chris Bowen (@Bowenchris) December 8, 2022
The announcement on Thursday came just hours after the competition regulator warned that households are paying more and facing fewer choices after power prices skyrocketed about $300 a year since April.
The Australian Competition and Consumer Commission (ACCC) said it sees signs that prices will stay high for years, driven by the Ukraine war.
It warned pressures are now so acute that smaller retailers, who were previously undercutting giants like AGL, Origin and Energy Australia, are now exiting the market, raising the risk of even higher prices for families.
Reforms push bills lower: Bowen
Mr Bowen said the capacity mechanism agreed to on Thursday will help drive bills lower by ensuring more renewable energy made its way to the grid sooner.
The mechanism will see governments step in and back green energy projects on a case-by-case basis, based on advice from regulators.
It will focus on dispatchable power, which Mr Bowen explained would mean batteries and other storage options for renewable technologies.
The mechanism is being modelled on a similar NSW program that uses auctions to determine prices ahead of time, providing investor certainty.
Governments will step in and fund projects where revenues fall short of actual operating costs and debt repayments faced by these projects.
Crucially, the plan means that an earlier Coalition government proposal for an electricity capacity mechanism that could have been supported by fossil fuels will not proceed.
Renewable energy consultant Stephanie Bashir said that was positive.
“Clean energy transition in Australia is critical to meeting our climate targets, ensuring energy security and supply stability, and controlling and abating cost-of-living pressures on households and business,” she said.
“The previously proposed ESB capacity mechanism would never actually solve supply and cost-of-living pressures.”
Second plank coming
Mr Bowen said that the mechanism is just one part of government plans to protect households from higher costs.
The second stage of reforms are due to be unveiled on Friday after the Prime Minister Anthony Albanese meets with state and territory leaders at national cabinet over whether to cap wholesale coal and gas prices.
A breakthrough in those negotiations came on Thursday, when NSW Energy Minister Matt Kean said the state was “prepared to take the hit”, and not seek compensation for foregone coal royalties under any plan.
Monash University professor Ariel Liebman said a wholesale price cap could help lower household bills in the short run, but reiterated his view that such a policy was not the best option to lower prices.
“They’re going for the easiest single option that might have the most impact,” he said. “That will generate other challenges down the track.”
‘Existential’ electricity crisis
The ACCC drew a line under the urgency of problems in the energy market on Thursday, warning small retailers are being squeezed by a combination of higher contract prices and retail price caps, which are restricting their ability to pass on soaring costs.
“We understand that much higher energy prices are already hurting Australian households,” ACCC commissioner Anna Brakey said.
“We’re drawing attention to the challenges facing smaller retailers, because we know if we lose retail competition everyone will pay more for electricity over the long term.”
Following a massive increase in electricity costs earlier this year, many smaller retailers either went bust or told their customers to flee to bigger companies, reducing the number of deals that were being sold at a discount to default market offers – which operate as a price cap.
It’s so bad that there is now little difference between the market offers customers can get by shopping around and the default offer handed to those who don’t negotiate, the ACCC said.
“Many smaller retailers currently do not have any market offers below the default offers,” it said.
Victoria University energy expert Bruce Mountain said the analysis pointed to an “existential” crisis facing Australia’s electricity market as high commodity prices push up household bills.
He said the types of longer term contracts retailers sign with electricity generators to protect them from extreme shocks like the Ukraine war are increasingly unavailable to small retailers, or are too costly to access.
Larger retailers, meanwhile, either own their power generation or are more likely to access cheaper contracts to hedge against volatility.
“If you own the upstream supply, the physical generation assets, that’s strategically very important, as is now evident,” Professor Mountain said.
“The new entrant retailers, the ones that have been offering the best deals, don’t have access to those resources, so they find it difficult to discount against the big retailers.”
The ACCC is sounding the alarm about the plight of small retailers because they have played a big role in driving down prices for households in recent years (before the price explosion in 2022).
ACCC analysis shows average retail margins have declined from $145 per customer (inflation adjusted) in 2016-17 to just $35 in 2021-22. Slimmer retail profits mean savings for customers.
“We don’t want to lose the competition gains we’ve made in recent years,” Ms Brakey said.
“Increasing market concentration is in no-one’s interest, other than the big three energy companies.”
