The market can generate a power supply fix without state involvement - Grattan Institute

Published in the Australian Financial Review, 4 May 2021

EnergyAustralia on Tuesday announced it will build a 316-megawatt, open-cycle gas turbine – gas peaking plant – in the Illawarra region of NSW.

This decision is an all-round win for industry, governments and consumers – an unusual outcome in a sector more often beset by uncertainty and animosity.

In 2015, AGL announced it planned to close the Liddell coal-fired plant in the Hunter region of NSW, and subsequently confirmed this would happen across 2022 and 2023.

This announcement triggered a war of words between the company and the Turnbull federal government over the closure of the plant and what would replace it.

The tension was not relieved by a change of prime minister. The Morrison government took a very strong stance in which it demanded that 1000 megawatts of new gas-fired investment be committed by April this year.

If the industry did not commit, the government would build the capacity through its wholly owned Snowy Hydro Corporation.

Since then, private companies have worked on several projects – AGL’s combination of gas and solar in Newcastle, EnergyAustralia’s Tallawarra B gas plant, and Squadron Energy’s gas plant planned for Port Kembla.

The federal government’s position, and the more recent commitment by the NSW government to drive 12 gigawatts of renewable power in the state, created significant investment risks for these projects.

After intensive discussions with the federal and NSW governments, EnergyAustralia (EA) announced that the Tallawarra B plant will proceed and be dual-fuelled with natural gas and hydrogen.

Further, this is intended to be a net-zero emissions plant, because EA will offset all the direct greenhouse gas emissions produced over the operational life of the plant.

The state government will provide $78 million in funding support and the federal government will provide $5 million to help make the plant hydrogen ready.

This decision shows that the private sector, working closely with governments, can deliver the investment in the cost-effective, reliable, and low-emissions power generation technologies that Australia needs to move to a net-zero economy.

The NSW government can be satisfied that it will see additional, reliable power generation that will not add to the state’s emissions, complementing its commitment to renewable generation.

The electrolysis process to make the hydrogen will provide new demand to support the government’s commitment to Renewable Energy Zones in the region, and the hydrogen supply is likely to be an important part of an Illawarra Hydrogen Hub.

The federal government should be satisfied that its public pressure and private negotiations have led to substantial, new, dispatchable power generation in NSW ahead of the closure of Liddell. As with all capital-intensive markets, the industry will absorb this decision, with implications for the other private sector gas projects.

In August last year, the Australian Energy Market Operator’s Electricity Statement of Opportunities concluded that no new capacity would be required to meet demand this decade under the current industry standard for reliability.

Ahead of that analysis, the federal, state, and territory governments asked the Energy Security Board to introduce an Interim Reliability Measure which sets a higher level of reliability.

With that higher standard in place and if nothing else happens, AEMO concluded that additional capacity would indeed be needed in NSW by the end of this decade: 150 megawatts in 2023-24, growing to about 1000 megawatts by 2028-29.

Yet, other things will happen. For example, the NSW government’s more recent renewables commitment will reduce this gap.

Yesterday’s EA announcement demonstrates that the market is more than capable of meeting future demand.

If the federal government goes ahead and builds additional capacity in the short term through Snowy Hydro, it might indeed put additional downward pressure on prices.

However, such a decision would be a very damaging market intervention. And, as with any over-supplied market, there would be a supply response to return the market to some rough balance.

Several next steps should follow EA’s announcement. The company will proceed with the investment and as it does so, innovative elements of the project – such as setting up the supply of renewable hydrogen and providing clarity on the nature and integrity of the proposed offsets – will become clear.

The NSW government can proceed with greater certainty to develop its renewable energy zones and, most interestingly, a hydrogen hub.

The federal government’s concern that there is still insufficient dispatchable power in NSW should be much less acute.

Ideally it should take a big step back; next best would be to maintain scrutiny on the market balance while keeping its powder dry.