Australian Energy Market Operator advice is to hold a reverse auction, then pass costs on to consumers to help prevent blackouts

This article is more than 3 years old

This article is more than 3 years old

Energy regulators want to create a new strategic reserve mechanism to ensure there is enough dispatchable power available for emergencies, like heatwaves and storms – and are proposing a reverse auction system to bring sufficient back-up power into the grid.

The recommendations are contained in a new report from the Australian Energy Market Operator to the Turnbull government, which suggests that an additional gigawatt of incremental dispatchable power will be needed in the system when the ageing coal-fired Liddell power station closes in 2022.

After a week or more of speculation, the Turnbull government confirmed publicly on Tuesday that it was in talks with AGL to extend the operating life of Liddell. Malcolm Turnbull spoke to the AGL chief, Andy Vesey, on Tuesday.

But despite the conversation between the prime minister and the energy boss, AGL has shown absolutely no interest in extending the life of the New South Wales plant. In a statement, AGL insisted its plan was to close the power station in 2022.

Andy Vesey (@AndyVesey_AGL) Keeping old coal plants open won't deliver the reliable, affordable energy our customers need: https://t.co/vY0WJGkEBS

A statement issued by a spokesperson said: “AGL has committed to the closure of the Liddell power station in 2022, which is the end of its operating life.

“AGL has provided this advance notice to avoid the volatility created by the sudden exit of other coal-fired power stations. AGL is actively assessing what capacity will be needed post-2022 and we, along with other market participants, will consider Aemo’s report in light of these plans.”

When quizzed on Wednesday evening about the company’s obvious show of defiance, Turnbull told reporters Vesey had signalled AGL was “prepared to sell [Liddell] to a responsible party, and that’s what we’re talking about”.

Turnbull was then asked whether the government would buy the power station. He left that option open.

“I think it’s better that the private sector owns generators like that but I want to say that the vitally important thing for me is to ensure that Australians have affordable and reliable energy,” he said.

The prime minister said Vesey had told him he was “prepared to discuss selling to a responsible party who would be able to keep the power station going for a period”.

“I’ve suggested at least five years because we need to make sure that we maintain affordable and reliable electricity.”

AGL has been conveying a message to government for weeks that it is not interested in prolonging the life of the NSW plant, including during a meeting between energy retailers and the government in early August.

The company has a national marketing strategy predicated on exiting coal from 2022.

The government has been waiting on the Aemo assessment before pressing ahead with a number of internal deliberations to settle its energy policy after the Finkel review of the national electricity market.

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It has also grabbed the report in an effort to apply public pressure to AGL over the future of Liddell, using the data in the report to tie the closure of the plant to the overall stability of the electricity grid.

Turnbull attempted to turn up the heat on AGL. “Now Liddell going out in 2022 will leave, as Aemo has identified, a very big hole. About a gigawatt, about a thousand megawatts.”

He said the government had options to make up the shortfall other than prolonging the life of the Liddell plant “but one option clearly, that I responsibly as prime minister have to explore, is keeping Liddell going”.

Aemo, in the new advice to government, says it has a plan in place for the coming summer to ensure grid stability but it wants the new strategic reserve system in place for the summer of 2018-19 and 2020-21, until “a more wide-ranging and considered solution can be designed and implemented”.

It recommends a strategic reserve auction system be implemented to bring back-up power into the grid, such as electricity from gas peaking plants, or diesel generators.

It is unclear who would bear the costs of the proposed system, or how the mechanism would work, but officials said Aemo’s current energy reserve activities run on a cost-recovery basis. The report says energy customers would be willing to pay an additional $25m-$50m per year in order to avoid blackouts and supply disruptions.

The proposed auction system would work alongside a clean energy target, or whatever long-term policy mechanism the Turnbull government ultimately adopts in response to the Finkel review.

Aemo’s clear preference in the new report is to extend the life of existing coal plants to deal with the current problem rather than bringing on new investment, noting “investment in new power plants with uncertain long-term business viability” is problematic.

After Turnbull’s conversation with Vesey on Tuesday, the energy minister, Josh Frydenberg, told reporters the Aemo report “was a serious signal of our intent that we will do everything we can to keep sufficient base load in the system”.

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While the regulators have given the government a policy roadmap on dispatchability, the Coalition’s internal fight over the clean energy target still looms.

The chairman of the government’s backbench committee on climate and energy, Craig Kelly, told Guardian Australia he thought it would be best to dump the Finkel recommendation and rework the policy in light of the advice from Aemo.

Kelly said the government should consider building a clean energy mechanism into the auction system proposed by the regulator, leave the existing renewable energy target in place until 2030 and mothball the Finkel proposal.

He said the dispatchable power problem was clearly urgent but the resolution of the clean energy target was not.

Kelly said he had also heard that AGL would need “hundreds of millions” to refurbish the Liddell power plant and he predicted the company would “drive a hard bargain” with the Turnbull government in considering the future of the coal plant.