Are we going to renew Australia’s coal-fired electricity generators? It doesn’t seem likely. Here’s why.



Australians want three things from their electricity system: costs they can afford, supply they can rely on, and environmental sustainability. It’s easy to trade off one of these goals against the others, and tough to maximise them all. Right now, wholesale electricity prices are soaring and the reliability and security of supply are under increasing strain in South Australia and soon Victoria.

Price changes have been largely driven by the exit of older coal-fired generators and the surging price of fuel for gas-fired generators. The exit of coal and the rise of gas are both accelerated by the increasing role of renewable energy. But our electricity system isn’t yet set up to integrate very high levels of variable renewables. It will take a lot of reform to moderate costs and encourage sufficient flexibility in generation, networks, storage and demand.

Many people will naturally ask: if our old coal-fired generators delivered affordable, reliable energy, why not stick with coal? Surely replacing old coal plants as they retire with new ones will be simpler and more effective than moving to a radically different energy system? And surely new coal will be much cleaner and more efficient than old plants?

As it turns out, new-for-old replacement of our coal fleet does not look like a good solution for price, reliability or the environment. Electricity sector investors are unlikely to finance a new coal-fired power station in Australia again – and if they do, it will probably look very different to anything built before. The reasons are only partly to do with climate change. Competing technologies and the changing electricity market are even bigger factors.

Let’s start with price

Our benchmark for cheap power is the wholesale price of around $40 a megawatt hour that we’ve enjoyed – with a few bumps – over most of the past two decades. The forward prices that are worrying industry have now hit around $75/MWh. But recent projections put the lifetime cost of power from a new efficient “ultrasupercritical” (USC) coal plant at around $80/MWh, including both operating costs with modest fuel prices, and the capital cost of building and financing the plant. To build a coal plant with such costs, investors would need to expect wholesale prices to rise even above looming levels and stay there for decades. The costs of new-build generation of all sorts will continue to evolve – more on that later.

Sources: AER (NEM 2014), ASXenergy (futures), ACT wind auction, Arena solar round, remainder CO2CRC Australian Power Generation Technology report. Fuel cost assumptions: gas $8/GJ, black coal $4/GJ, brown coal $1.75/GJ. Illustration: Tennant Reed/Ai Group

What about reliability?

While coal plants are vulnerable to weather and labour problems, they provide a very constant supply of high quality power. They perform well if they are able to service “base load”, working near full capacity all the time. But they are not very flexible: they can’t rapidly ramp supply up and down without damage, they are expensive to start, and their high capital costs mean that the less often they run, the higher the price they need to secure when they do run.

The electricity market is clearly becoming very unfriendly for such inflexible generators: much of the time there is an abundance of power from solar or wind, with rooftop solar taking a lot of demand out of the market entirely. When the sun goes down or the wind slackens other sources of power are badly needed – but conventional coal plants often can’t respond fast enough to serve as backup, nor can they afford to sit around waiting to be called on.

For instance, if an ultrasupercritical coal plant generates at an average of 60% of its capacity instead of the 80% or so usually assumed, its levelised cost rises from $80/MWh to $100/MWh. The impact can be the same whether plants actually generate less often, or bid into the market below their long-run cost in order to keep operating in the short term. Nuclear energy, which is much more capital intensive, would see costs rise even more steeply at lower utilisation rates.

Combined cycle gas generators have much lower capital costs and higher fuel costs, so lower capacity factors have less impact on the price they need to secure. Gas generators are also physically suited to rapidly ramp supply in a more dynamic market.

Baseload vulnerable to loss of volumes Illustration: Tennant Reed/Ai Group

Can we still meet our emissions targets using coal?

Emissions for new coal plants can be significantly lower than old ones but they are still substantial. The average emissions intensity of the National Electricity Market (NEM) in 2016 was around 0.8 tonnes of carbon dioxide per MWh, though that includes some very high emitters like Victoria’s retiring Hazelwood plant (1.4 t/MWh).

A new ultrasupercritical plant burning brown coal at much higher temperatures and pressures than Hazelwood could get emissions down to 0.9 t/MWh. Burning black coal would produce about 0.8 t/MWh. Thus replacing the highest emitting current plants with new coal could reduce emissions somewhat below the current average.

However, Australia has committed to reduce national emissions by 26%-28% by 2030, and to help achieve global net zero emissions beyond that. Investors will expect public policies to meet those goals. While Australia can use international emissions units to help achieve its targets, policy is still likely to impose regulatory or price burdens on new coal plants during their 30 to 50-year life. Those burdens would reduce the expected return for new coal versus other investment options, making it a doubtful choice. For instance, a simple carbon price of $20 per tonne would raise the levelised cost of ultrasupercritical black coal from $81 to $97 per MWh, but gas from $80 to just $88 per MWh, and leave wind unchanged at $75 per MWh.

Power generation emissions Photograph: Tennant Reed/Ai Group

Putting these perspectives together, new coal-fired generators are unlikely to bring current prices down because they require even higher prices to be bankable; they are a poor fit to stabilise the grid because they are less flexible than gas and more expensive to operate as backup; and their long asset life and limited ability to reduce emissions sits badly with Australia’s commitments to steep emissions reductions in coming decades.

New technology could change the picture. Carbon capture and storage (CCS) can greatly reduce the emissions from coal and gas plants, albeit at a very large cost premium; as the small number of CCS plants grows, experience and innovation should reduce this premium.

Different approaches to generation could also help. Direct Injection Carbon Engines (Dice) operate like diesel generators but are fuelled with a slurry of ground coal and water. Dice could be very flexible, and potentially combinable with CCS, but the technology is still too early in its development for price or performance estimates to be robust.

But competing technologies are not standing still. Costs continue to fall for wind and, especially, solar photovoltaic power. Forecasters have so often underestimated renewable cost reductions that we should be cautious about putting too much weight on new projections; but the following chart gives some sense of where costs may be going. It combines old cost estimates from the time of Australia’s 2003 Energy White Paper; the 2015 Australian Power Generation Technology estimates for costs in 2015 and projections for 2030; updated information for actual wind and solar projects in 2016; and adapted International Renewable Energy Agency projections for likely progress by 2025.

Costs are declining for renewables Illustration: Tennant Reed/Ai Group

If the latest projections are close to the mark, coal technologies will have a very tough time competing with wind and solar for the cheapest source of energy. Gas will have a much better shot as a provider of flexibility to support the grid, depending on progress with competing sources like energy storage, demand management, smart networks and more.

Existing coal-fired power stations face different cost structures and will continue to play an important role in the grid for some time to come, even as they gradually fall victim to age, declining volumes, and potentially climate policy. But it seems unlikely that replacing them like-for-like would be a viable solution to any of our energy challenges.

This article first appeared on Ai Group’s blog. It is republished here with permission.