Energy ministers reject plea for coal power bailout

The energy ministers of the federal, state and territory governments met last week, delivering an unambiguous rebuff to AGL Energy as well as other owners of fossil fuel power plants looking for government to help them out of the pickle of declining demand and excess power supply.

The Council of Australian Government’s (COAG) Energy Council communique stated:

The energy-only market design of the National Electricity Market (NEM) has proven to be robust and efficient, and the Council does not support radical change to the market’s design. Nor does it support assistance to generators to exit the market. The Council considers it is for the market to provide signals for investment and de-investment for generation, and opposes the transferral of the costs of retiring assets onto consumers or taxpayers.

The words sounded eerily familiar to those of John Pierce, head of the Australian Energy Market Commission (AEMC), and represent a significant victory for him.

The communique also seemed to defend the Renewable Energy Target; although in a very vague way, open to varying interpretations:

The Council recognises the importance of clear and bipartisan agreement to emissions policies. Specifically, the Council notes the importance of a Renewable Energy Target policy which will remain credible, effective and supported and which has regard to the efficiency of the wholesale market.

A number of owners of fossil fuel generation including not just AGL, but also Energy Australia under its prior CEO, have suggested that there was a need for government to directly intervene to pay for the withdrawal of coal power capacity.

Owners of coal power plants are reluctant to shut them because:

– their operating costs are so low that they can still make a cash profit even with power prices declining to very low levels; and

– shutting them down will require the site to be cleaned-up including any associated coal mine, which can involve considerable cost.

So the argument was that coal generators would behave much like John Howard as prime minister, super-glued in place and refusing to cede position to fresh new talent. They would be stuck in a downward spiral grimly holding on as prices went lower and lower, frustrating attempts to reduce carbon emissions via gas and renewable energy.

And eventually, they argued, the system would snap. The very low power prices would lead to skimping on maintenance to preserve cash and these decades-old power plants would become less reliable and liable to break down suddenly, without warning.

The solution proposed was a contradictory blend of two measures:

– pay for some coal generation capacity to be closed to rebalance the market given a new paradigm of lowered power demand thanks to energy efficiency and extra supply from renewables.

– pay for other power generation capacity to just stick around even if it wasn’t necessarily needed or only needed infrequently so that it was available just in case we had problems with low wind and solar output.

– and there was a third component to it as well (which the AEMC was willing to endorse as it rejected the other two elements above); stop encouraging the addition of more renewable energy.

It’s an interesting and dramatic story, but energy ministers aren’t buying at least the first two components. It would essentially mean owners of power generators would get paid money no matter what, transferring the risk of misjudging supply and demand to taxpayers and consumers.

As to the third element – cut the RET – ministers’ views are harder to discern. The statement appears to be more supportive of the RET than what you’d have expected around a year ago. At that time we had premiers and energy ministers in NSW, Queensland and WA keen to shift the blame for power price rises onto the RET, which was a federal government policy.

Since then, though, NSW has lost its previous energy minister and premier and is making more positive sounds about the RET. In addition Labor has taken government in Victoria and is friendlier to the renewable energy sector.

Still the phrase that the RET policy “has regard to the efficiency of the wholesale market” is in line with the AEMC’s view that the RET be cut back because it is exacerbating an oversupply of generation.

Now that energy ministers have rejected a bailout of incumbent generators via payment for shutdown or the augmentation of the energy market with a payment for capacity, the pressure will all be on cutting the RET in order to lift power prices for incumbent generators.