How Australia’s energy crisis can be solved with a focus on renewables, not a capacity market

Wind farm at sunset (world-first system)
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Australia’a energy ministers have put forward multiple initiatives to drive faster decarbonisation and reduce Australia’s exposure to volatile fossil fuel prices including a National Transition Plan, however, an analyst for the Institute for Energy Economics and Financial Analysis (IEEFA) says their proposal to further explore a capacity mechanism could actually further increase electricity bills and delay the energy transition. 

IEEFA electricity analyst Johanna Bowyer said instead of a capacity mechanism where electricity customers would pay old power plant generators to keep going, a better idea would be to introduce a Renewable Electricity Storage Target

“A Renewable Electricity Storage Target would add new storage into the grid to complement renewables,” Bowyer said.

“This would encourage investment in new energy storage resources, rather than locking in payments to legacy assets—thereby accelerating the transition to a low emissions electricity system.

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“In its current form, the capacity mechanism could delay the energy transition as it’s likely to provide payments to coal and gas generators which will keep them in the system for longer. 

“The capacity mechanism would have to be substantially redesigned to make sure high emissions generators do not remain in the system for longer than needed, at the same time as incentivising investment in new, flexible, low emissions energy resources like batteries.” 

Bowyer said other initiatives to reduce bills in the short term could include reserving east coast gas for domestic use, a windfall profit tax on LNG exporters, commissioning wind and solar plants more quickly, and implementing energy efficiency benchmarks.

“Australia is currently seeing astronomical energy prices largely due to high international coal and gas prices—driven by sanctions on Russia,” Bowyer said. 

“Both gas and coal miners are charging very high prices for their products because that’s what they can sell them for into international markets. This is resulting in rising gas and electricity prices.”

The ALP was elected with a plan to get the National Electricity Market on the east coast of Australia from 31 per cent renewables in 2021, to 82 per cent renewables in 2030.

The energy ministers last week proposed to develop a National Transition Plan to build-out renewables, transmission and storage for a low emissions electricity system. 

The Australian Energy Market Operator’s (AEMO’s) Draft 2022 Integrated System Plan shows the pace of change Australia is expecting—including a tripling of renewables capacity and managing the exit of 14 gigawatts (GW) of coal-fired generation by 2030.

“To manage this scale and speed of transition, a transition plan as put forward by energy ministers is key,” Bowyer said.

The energy ministers also tasked energy senior officials with bringing forward gas market proposals in July. 

Bowyer said one mechanism they should look to improve is the Australian Domestic Gas Security Mechanism (ADGSM or “gas trigger”). 

“While there are issues with this mechanism currently preventing its immediate use—it has a delay and also is triggered based on supply shortfall rather than price—this mechanism could be strengthened and used to reserve low cost domestic gas for the east coast of Australia.” 

Gas reservation policies are used around the world in gas exporting markets, including Western Australia, to keep prices low for domestic users.

While it has been stated there is no “quick fix” to high energy prices, Bowyer says there’s some additional initiatives which could be implemented relatively quickly to provide relief to energy users.

“LNG exporters are currently making large profits due to high international gas prices. A windfall profit tax on LNG exporters could be introduced and the funds directed to providing a short-term relief cash payment to vulnerable energy users.”

In May, the UK Government introduced an Energy Profits Levy, a 25 per cent surcharge on the extraordinary profits the oil and gas sector is making, to fund cost of living support for UK families.

Bowyer said attention should also be focused on ensuring consumers can access more energy efficient equipment and housing—particularly for renters. 

“At present, there are almost no meaningful standards for ensuring the energy efficiency of rental properties in Australia. These could be introduced to protect renters from high energy bills.

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“Further, the government could speed up the commissioning of new wind and solar plants.”

At present there are many hundreds of megawatts of fully built wind and solar plants that are constrained from exporting their full output due to what has become a very drawn-out grid connection commissioning process.

Bowyer said in the long term, focus should be on reducing exposure to volatile international coal and gas prices which have pushed up energy prices in Australia, and reducing fossil fuel use to reduce emissions. 

“This can be done by transitioning to a low emissions electricity system with low-cost renewables, storage and transmission. 

“The uptake of distributed energy resources like rooftop solar, electric vehicles and demand response should be accelerated to reduce consumer exposure to volatile fossil fuel prices. 

“An orderly exit of ageing and increasingly unreliable coal-fired power plants should also be facilitated in the longer term—rather than paying to delay the exits through a capacity payment.”