AGL keeping Liddell power station open wouldn’t have worked

by Tony Wood

Published by Australian Financial Review, Wednesday 13 December

Last Saturday AGL delivered an early Christmas present to the federal government. Its plan to replace its ageing Liddell power station in NSW is a commercial example of the transition the government wants to deliver through the proposed National Energy Guarantee (NEG). It has been welcomed by the NEG’s supporters and detractors.

Two years ago, AGL announced its intention to shut the 42-year old Liddell power station in 2022. Since then the closure of two big coal-fired power stations – South Australia’s Northern in 2016 and Victoria’s Hazelwood in 2017 – raised concerns about whether Australia would have enough dispatchable power.

At the request of the federal government, the Australian Energy Market Operator (AEMO) assessed this concern in the context of Australia meeting its commitment to emissions reduction under the Paris Agreement. AEMO identified there would be a shortfall after the closure of Liddell, and recommended design work be done on a policy to ensure adequate future capacity.

Energy Board concerns

This year, the COAG Energy Council established the Energy Security Board (ESB) to drive implementation of the Finkel review’s blueprint for the future of the national electricity market. The ESB’s first action was to propose a mechanism to Energy and Environment Minster Josh Frydenberg, for emissions reduction that would deliver the orderly transition proposed by Finkel and could be supported politically.

Just as important, the ESB responded to AEMO’s concern by recommending a “reliability guarantee” on energy retailers to complement the “emissions guarantee”, thereby creating the long-sought nexus between energy and climate policy. Together, this combination was labelled the National Energy Guarantee.

At the November meeting of the COAG Energy Council, the ESB secured a mandate to do more work on the design of the NEG, before presenting a preliminary design in April 2018. This was not a unanimous decision. Some states had concerns. They were sceptical of the NEG’s climate-change credentials, and what it would mean for their own renewable energy targets. They were concerned that a shift in the balance from a spot to a contract market could lead to a greater concentration of market power in the electricity sector. And they were angry that the ESB had provided advice directly to the federal minister rather than to the council, which had set it up.

The ESB now has to deliver.

Market design

The design of the “emissions guarantee” should be reasonably straightforward, despite concerns it is inferior to alternative mechanisms such as the Clean Energy Target proposed by the Finkel review. Given a common emissions reduction target and common assumptions about future technology costs, economic modelling is unlikely to reveal any material difference between the mechanisms. ESB chairman Kerry Schott, has been clear that the emissions guarantee does not impede states or territories pursuing renewable energy targets. But they can hardly deny her cautionary point that higher renewable targets will trigger higher requirements via the reliability obligation.

The hard work will be on designing that “reliability guarantee”. There will be no single index of reliability capable of driving investment in a generation supply-and-demand mix to efficiently meet all the short, medium and long-term market requirements. Global experience underscores that reality.

The danger of market concentration remains a concern. The nature of a shift to more renewables – more supply with zero marginal cost – tends to favour contract over spot markets. The domestic gas market and the federal renewable energy target are two areas where the adverse consequences of contract markets on market concentration have become clear. The ESB should work hard and consult widely to reconcile this tension.

Extending Liddell would not have worked

A well-designed NEG can deliver the reliable, affordable and low-emissions electricity Australian homes and businesses need so urgently. AGL’s plan provides a practical example of the combination of renewable and fossil-fuel (new gas and upgraded coal) generation balanced by storage (battery and pumped hydro) that such a policy should deliver nationally.

And, AGL made it clear this plan was developed to align with the NEG. Extending the life of Liddell or replacing it with a new coal plant would not have worked.

The nature of the COAG Energy Council, redolent with political and commercial conflicts, creates challenges for effective decision-making and market reform. Those challenges have not been met in recent years – Australia has had unaffordable and unreliable power, lack of agreement on emissions reduction and a toxic political environment.

It remains possible that council members will find a way to snatch defeat from the jaws of victory. Yet, the commercial announcement by AGL may complement the policy design work of the ESB to finally produce the opposite.