Gas misfire: the Federal Government’s $600m intervention in the energy market

by Tony Wood

19.05.2021 News

Published in The Sydney Morning Herald and The Age, 19 May 2021

The federal government has announced it will invest up to $600 million in Snowy Hydro to build a new 660-megawatt gas-fired power plant at Kurri Kurri in the Hunter Valley. This is an extraordinary intervention by a Liberal-led government that is not justified by the needs of the market.

The investment is not needed to maintain reliable electricity in NSW after the Liddell coal-fired plant closes in 2023. When the Australian Energy Market Operator published its Electricity Statement of Opportunities in mid-2020, it was clear that there would be no supply gap in NSW or the rest of the National Electricity Market for the remainder of this decade. Under a more stringent, Interim Reliability Standard, there would be a gap of about 150 megawatts in 2023-24, rising to 2000 megawatts by the end of the decade. The basic point of the statement is to advise the market of possible gaps and opportunities to be filled.

Since that analysis, the NSW government has committed to an additional 12,000 megawatts of renewable generation and 2000 megawatts of storage this decade. Energy Australia has committed to a gas-fired plant. And there have been several other announcements of very big batteries and commitments to additional transmission. The market has not been sitting on its hands.

Gas-fired power has a role in backing up the market and that role will become only more important as the share of wind and solar generation grows. Yet, the actions already taken by the market mean there is more than enough time to deliver the investments needed by the market.

The federal government has identified several events where a short-term, but significant, supply problem required the Tomago aluminium smelter to reduce its power demand. To a degree this is covered by the commercial arrangements between the smelter and its power supplier.

If the problem is beyond that arrangement, then the Australian Energy Market Operator has other ways to overcome the problem and avoid any major issue for the smelter.

The proposed investment is not needed to deliver lower carbon emissions. Emissions have been falling consistently over the past five-to-six years. But gas will become a high-emissions source of electricity and because the role of gas will be to support high levels of renewables, it becomes important to limit that role or to offset these emissions as proposed by Energy Australia for its Tallawarra B plant.

Finally, the project is not needed for lower prices. It will result in an over-supplied market and it is true that an oversupplied market generally leads to lower prices. However, as with any functioning market, the oversupply is likely to be followed by withdrawal of the least competitive supply, and prices returning to levels consistent with a balanced market. In NSW, this will likely be through earlier closure of coal-fired power plants.

Early last year, the federal government’s Liddell taskforce found that prices could indeed increase after the closure of Liddell, but that would be true regardless of what replaced it. And the timing of the Snowy Hydro 2.0 storage project and transmission upgrades would be important in the second half of the decade to keep prices down and ensure reliability. Again, this analysis does not point to an immediate need for an additional gas plant.

If it were a private sector company proposing this plant, then the company and its investors would take the market risk it would be fair to let them do so. When public funds are put at risk, greater scrutiny is needed. Among the issues that deserve greater consideration are: why does Snowy Hydro need an injection of additional equity, and can the project really be delivered as claimed? The above assessment leads to the conclusion that no further investment is justified in the short-term. It is therefore hard to understand why the government has doubled down on its threat to force an additional 1000 megawatts of gas supply into the market.

Energy Minister Angus Taylor is on firm ground when he identifies concerns that the current market structure may not provide sufficient price signals to deliver the investments that Australia will need in the coming years. The work that his government, with the states and territories, is driving through the Energy Security Board to ensure the market is fit for purpose is critical to delivering reliable, affordable electricity as Australia transitions to a net-zero economy.

That’s where the efforts of governments should really be focused – on a comprehensive policy framework that drives Australia to net zero, rather than on a grab-bag of individual funding mechanisms.