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Ensuring reliable electricity supply in Victoria

By Bruce Mountain, VEPC Director, and Steven Percy, VEPC Research Fellow

The south and eastern states of Australia have been trapped in a poorly informed energy policy debate for the last decade. It is characterised by lazy half-truths and often false dichotomies: markets versus regulation, central versus distributed, fossil versus renewable and worst of all, a bizarre obsession with “baseload” generators. Not that this has hurt producers’ profits, but it has hurt consumers and wasted opportunities to decarbonise our economy.

To bring out the essential facts we modelled the power market over the coming decade using the Australian Energy Market Operator’s (AEMO) data and specification of the power system. The results provide conclusions that cut through the fog.

Firstly, we find that for the coming decade, Victoria’s three Latrobe Valley brown coal generators still have a place in the market and that this is largely unaffected by the expansion of renewables in Victoria and other states. In fact we think renewables can expand even more quickly than current policy commitments, without meaningfully affecting the demand for the brown coal generators’ production.

The reason for this is that although renewable generators displace brown coal generators, brown coal generators displaces much more expensive black coal generators in New South Wales and Queensland.

Second, it is quite clear that several black coal generators will be moth-balled or closed far sooner than has been announced by their owners. This conclusion seems to be privately shared by many of the owners of these assets.

It is important to understand this dynamic when considering the confused efforts to find ways to subsidise black coal generators in an effort to be ‘pro coal’.

Take for instance (Commonwealth) Energy Minister Angus Taylor’s desire that existing coal generators “run flat out”. Our modelling finds, as expected, that protecting black coal generators simply drives Victoria’s brown coal generators out of the market.

Third, protecting all coal generators by creating barriers to entry for new renewable generators will also fail. It will reduce competition, drive up prices and it will undermine reliability. If you owned a decrepit old coal-fired power station would you respond to protection by spending big to maintain reliable production capacity in a precarious market?

Fourth, though Victoria’s brown coal generators still have a place in the market by virtue of their low production costs, all three generators have proven to be highly unreliable and their social licence to operate is living on borrowed time. The reliability challenges in the transition are substantial and existing institutions will not deliver reliable supply.

Thankfully there are pragmatic proposals that rise above the chaos. Specifically, the Australian Energy Market Operator (AEMO) has suggested sensible changes to the reliability standards and the establishment of strategic reserves to ensure reliable supply.

Unfortunately the market’s rule-maker, the Australian Energy Markets Commission (AEMC), rejected AEMO’s proposals. The AEMC said that establishing reserves outside the market – just like the strategic oil reserves Australia maintains to insure against oil supply risks – would undermine the existing mandatory short-term market.

Here we see attachment to out-dated understanding of how markets and competition work. There can be no doubt that the current markets have failed badly and consumers rightly resent that this has been at their expense. Though big suppliers have profited greatly from the failure, they know that with renewable generation expansion, the game is up. No surprise then that if I had a penny for each time I heard a big supplier or its lobbyist demand that government do something to provide “investment certainty”, I would be a rich man.

We have wasted a decade having the wrong debates, with state governments often being held back by the Commonwealth Government and national agencies. AEMO has provided sound advice that will help to ensure reliable supply in what has been, and probably will continue to be, a chaotic transition. Ideally all states and the Commonwealth will now work together to ensure AEMO is put in the box seat and its proposals on ensuring reliability are implemented. But there is no need to wait on consensus: nothing is lost if Victoria takes the lead and works with AEMO directly to make this happen.


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