New ‘capacity mechanism’ could pay coal and gas producers for reliable electricity supply

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A draft plan for a new “capacity mechanism”, aimed at ensuring the stability of the national power grid, could see coal and gas producers paid for a reliable power supply.

The federal government’s Energy Security Board (ESB) was tasked with designing the new mechanism, which would pay producers through an auction process for the capacity they can provide.

Currently, generators in the National Electricity Market – which serves the East Coast and South Australia – are only paid for the electricity they produce.

The new system would also pay for generators to be available when needed.

The ESB said the introduction of such a tool by mid-2025 was going to be vital to ensure that much more capacity enters the network in the coming decades and a smooth transition to net zero emissions. by 2050.

There have been calls for the new mechanism to exclude existing producers, particularly coal and gas.

But the council argued it was important the mechanism could access a mix of technologies and discourage the early exit of existing generators before new generators – like more renewables – were ready to take their place.

States and territories would still have the final say on which producers are eligible for payments in their jurisdiction.

The Victorian government had previously insisted that states have the right to determine which technologies were supported, arguing that incentives should only be directed towards zero-emissions technology.

Victoria’s Energy Minister Lily D’Ambrosio said the ESB plan offered the flexibility they wanted to see.

“We have always been clear that a capacity market operating in Victoria would make payments for zero-emission technologies and not for fossil fuels,” Ms D’Ambrosio said.

The council’s draft plan said the mechanism could actually see net zero emissions in energy achieved sooner than expected.

“Well-designed, the capacity mechanism will allow for a faster, less risky and more orderly transition to a net-zero emissions energy system,” he said.

Huge demand for more power in the coming decades

The board warned that there would be significant demand for more electricity to enter the national grid in the coming decades, meaning stability and certainty will be essential to encourage new investment.

He warned that many coal-fired generators were reaching the end of their useful life, while demand for electricity was expected to more than double over the next 30 years.

Forecasting to 2050, he said the network would require the equivalent of 50 new Snowy Hydro projects to enter the market.

He also responded to concerns that the cost of paying generators to provide capacity would be passed on to consumers and drive up electricity prices.

BSE said the result could be avoided.

“From a customer perspective, the risks of a disorderly transition would be reduced, including avoiding high prices due to scarcity and disruption and offload costs,” he said.

“That is clearly not the intention, and will be avoided through careful design.”

The current draft is now open for public comment and a detailed plan will be submitted to energy ministers later this year.

Energy Minister Chris Bowen said the council’s proposal was a positive step forward.

“The release of this consultation paper by the Energy Security Board is welcome,” Mr. Bowen said.

“This follows the agreement of all energy ministers earlier this month that ESB should undertake this next stage of energy market reform.

“While there is still some way to go, this will allow market players and experts to express their views and put us back on track to reform an energy market that has undergone rapid change, but which has been neglected by the Commonwealth in recent years.”

Greens leader Adam Bandt said any program to keep coal and gas generators running longer could not be supported.

“Paying them to stay longer in the system will only prolong the problems, and will also prolong the transition to renewables,” Bandt said.

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