Hazelwood closure adds urgency to an investable climate policy

by Tony Wood

Published by the Australian Financial Review, Wednesday 3 November

The announced closure of Victoria’s Hazelwood power station has been coming for so long and subject to so much speculation that it now feels like old news. Yet only now will the consequences for electricity supply, the local economy and environment, become clear. They will be material, but a bigger game will play out during the next few months and years.

The decision by joint-venture partners, led by Engie and Mitsui, to shut the 1600-megawatt coal-fired power station will have several immediate effects. Power prices in Victoria will rise and some rise has already been factored into forward prices in expectation of the closure. Yet rising prices are part of the transition to a low-emissions future, and it is a great pity that political leaders have been loath to acknowledge this reality.

As many as 1000 direct and indirect jobs will be lost. In the short term, supply should not be threatened as the market has underutilised capacity to replace Hazelwood. This brown coal plant has the highest emissions intensity in Australia. Replacing its output with black coal power from New South Wales will mean annual carbon emissions will fall about 5 million tonnes: good environmental news, delivered without any use of public funds.

Yet when Hazlewood’s end is seen in the light of the pending 2017 Climate Change Policy Review and recent events in South Australia, more-challenging problems emerge.

This year, major coal power stations in South Australia and Victoria have announced their closure. They will not be the last and they show that major structural transformation is never achieved painlessly. Yet cries by some environmental activists and energy industry participants for governments to manage an orderly transition is precisely the wrong response. It would almost certainly cost much more than developing policy that gave clear and consistent market signals for divestment and new investment decisions.

The federal government’s renewable energy target (RET) led directly to wind power providing 40 per cent of electricity in South Australia. Until the nasty price shock of July and the statewide blackout of September, few considered how to manage a world-leading proportion of intermittent power in a state with limited connection to outside supply in order to avoid threats to reliability or security of supply.

The federal government was wrong to blame renewable targets in South Australia for threats to electricity reliability and security. Yet all state governments should heed the lessons from South Australia, even as they may justifiably argue that their targets are needed in the absence of credible climate change policy from the federal government.

The international owners of Hazelwood will have based their closure decision on a view of current profitability and the future operating environment, further influenced by international pressure on coal generators. Power owners struggle to second guess Australia’s domestic climate change policies.

They are not alone. Australia urgently needs climate policy that is consistent with the 2030 emissions reduction targets the government has committed to, and that can be scaled up to meet tougher targets that will almost certainly be needed over time.

With such policy, owners of coal and gas power plants will be able to factor a cost into their decision-making with confidence. Potential investors in new plants will be able to factor a benefit for lower emissions into their investment decisions. Directly changing the relative costs of power sources according to their emissions intensity means that the policy works directly with the wholesale power market rather than outside it as the RET does.

Victoria central

Yet this is not enough. In February the Australian Energy Market Operator noted South Australia’s high dependence on a combination of intermittent wind power and the interstate transmission line from Victoria. After the blackout, an emergency meeting of the COAG Energy Council announced the Security Review of the national electricity market (NEM), to be chaired by Chief Scientist Alan Finkel.

Victoria is central to the NEM, with its large, low-cost but high-emissions power plants and connections to three neighbouring states. Its plants such as Hazelwood are not intermittent and contribute directly to grid stability, features that most wind and solar plants do not readily deliver. Hazelwood’s closure will have ramifications beyond Victoria’s borders.

Policymakers can no longer blithely assume that they can meet increasingly high targets for renewable energy with intermittent supply, without compromising power reliability or security. The Finkel Review will assess how flexibility and technical features such as frequency control can be valued and delivered through the NEM.

Minister for the Environment and Energy Josh Frydenberg described events in South Australia as a wake-up call. Until his government and the states can produce a clear, integrated approach to climate and energy policy, the closure of Hazelwood is more likely to keep him and his fellow COAG energy ministers awake at night.