NSW will need extra generation capacity unless AGL rolls out all three stages of its transition

This article is more than 2 years old

This article is more than 2 years old

Australia’s energy market operator says an additional 850 megawatts of dispatchable generation capacity will be needed in New South Wales after the closure of the ageing Liddell power plant if AGL Energy fails to complete all three stages of its transition plan.

Last December AGL confirmed it would close Liddell in 2022 and replace the coal plant with a mix of renewables, gas power for peak periods and battery storage.

The company’s decision to retire the coal plant defied extraordinary public pressure from the Turnbull government. The Coalition wanted AGL to prolong the operating life of Liddell a further five years.

Replacing Liddell coal plant with clean energy $1.3bn cheaper – analysis Read more

AGL rebuffed Canberra’s request and is proceeding with its own plan. The company says the extra capacity to replace Liddell will come from: a gas peaker power plant at Newcastle or another New South Wales site (250MW); an upgrade of the Bayswater coal plant (100MW); a Liddell battery (250MW); demand response (up to 150MW); a second gas peaker (500MW); and renewables (1,600MW).

The energy minister, Josh Frydenberg, sought advice from the Australian Energy Market Operator after AGL made its decision public, and that advice will be released by the government on Friday.

Aemo concludes that extra generation capacity will be required in NSW unless AGL rolls out all three stages of its transition plan, or a competitor steps into the breach. It says without full commitment from AGL or new capacity from elsewhere “there remains a high risk of load shedding following the closure of Liddell”.

It says if an additional 850MW of dispatchable power resources is added to the electricity market by 2026-27, that will reduce the risk of load shedding to a one-in-10-year likelihood after the closure of the coal plant.

While there is a significant level of contracted capacity for renewable generation coming on stream over the next few years, Aemo says more dispatchable power is required because there is insufficient interconnector capability to ensure the reliable delivery of new electricity supply into NSW from other regions during periods of peak demand.

There is also a risk that generators underperform in high-demand conditions.

The impact of climate change is another factor. Aemo has told the government that the number of days each year involving “extreme peak temperatures” are increasing, requiring the market operator to work with the Bureau of Meteorology on its modelling and forecasting methods.

It says its experience in running the national electricity market over the past two summers indicates that a combination of higher-than-average temperatures, unplanned generation outages and loss of generation owing to weather conditions have pushed the grid into “lack of reserve” conditions.

Another factor is the increasing penetration of solar panels. Aemo says embedded solar PV generation across the national electricity market is leading to a later and shorter peak in operation demand.

The change in the generation mix is impacting the market operator’s forecasting models, as well as leaving the grid more exposed to prevailing weather conditions.

Aemo says if governments can agree on the government’s proposed national energy guarantee, that will provide the underlying policy framework to drive the necessary investments in disptachable generation in NSW.

It says if governments don’t sign off on the national energy guarantee and have the mechanism in place by next December, an alternative process to contract the 850MW of capacity will need to be pursued. It recommends a mechanism that can be used specifically in NSW, that is consistent with a pending national energy guarantee, be agreed by the end of 2018.

The national energy guarantee, if it is adopted by governments, would impose new reliability and emissions reduction guarantees on energy retailers and large energy users from 2020.

Turnbull's national energy guarantee a step closer after Jay Weatherill's exit Read more

The Energy Security Board is leading consultations with a range of stakeholders about the design of the policy, which will be considered by federal and state energy ministers on 20 April.

While environment groups and several market analysts have significant concerns about the Turnbull policy, the government’s chances of securing support for the national energy guarantee have improved courtesy of Jay Weatherill’s departure as the South Australian premier after Saturday’s state election.

Frydenberg says the Aemo advice reinforces the need for “governments at federal, state and territory level to get behind the national energy guarantee as our pathway to a more reliable and affordable energy system”.

He is calling on AGL “to commit as soon as possible to the next stages of their plan”, saying “the existence of a major shortfall in dispatchable power following Liddell’s closure would clearly present an unacceptable situation undermining the stability of the system”.

AGL welcomed the Aemo advice, saying it confirmed the NSW generation plan “addresses the potential shortfall” that may follow the closure of Liddell.

“We also welcome the market operator’s view that a competitive market approach to deliver the required resources is best for consumers,” AGL said in a statement.

It noted an independent assessment of AGL’s plan found the replacement generation would cost $83/MWh, compared with extending Liddell at $106/MWh.

On Friday Frydenberg told Radio National those figures only reflected “the costs to them as a company in terms of maintaining Liddell staying open”.

“What they’re not talking about is the cost to the market of having greater volatility in it,” he said.