By Tom Barrett (Operations Associate & Researcher) and Mark Ouliaris (Policy Associate)
The AEMO's latest forecast underlines the rapidly changing energy market. Australia’s most likely timeline for energy moving forwards is now what was considered an outlier two years ago—the Step Change scenario. The Step Change scenario charts a path vastly different from what was predicted previously, and is far removed from the Progressive Change scenario, which reflects the Government's current policies.
In particular, the Step Change scenario notes a rapid decline of coal-fired generation, which when compared against the current closure dates below, highlights the disparity between what the AEMO expects, and what owners and investors are saying publicly.
AEMO is predicting that a power station—likely Yallourn, Callide B, Vales Point B, or a combination—will begin to close from 2025. Given there is a 42-month, or 3.5-year notice period for an operator to announce a change in closure date, a closure will either be announced in the coming six months, or the operator will face potential penalties—and communities will have little warning. Clearly, the commercial reality predicted by AEMO, and the current public knowledge of closure dates, are far apart.
It could be argued that if the AEMO is simply predicting a decline in coal-fired generation, we should just let it happen. But we believe that communities, and investors, deserve true certainty over when and how operators will close. The current Step Change scenario presents a likely future where communities and workers are caught off guard by the closure of important employers; investors have little clarity on when to initiate the creation of alternative supply or investments; and the NEM cannot plan accordingly—complicating reliability and putting our electricity prices at risk. All of this a result of limited forward planning and an ad-hoc, scattershot approach to our changing energy mix.
We believe that with the Safeguard Mechanism placing a sectoral cap on emissions, the adoption of a reverse auction system—where generator owners bid for the right to close at certain time intervals, based on their valuations for generating quantities of emissions for each timeframe—would incentivise the most emissions-intensive generators to close. At the same time, the system would allow for the consideration of geographical distribution of supply, reliability, and consumer price stability. We termed this the Coal Phasedown Mechanism in our Phasing down gracefully paper.
As highlighted in the graph below, implementing our initial version of this mechanism—targeting a reduction of coal emission to 50% by 2030—would bring closures roughly in line with the AEMO forecast. This target could, of course, be adjusted to suit ongoing policy and energy needs.
Clearly, the AEMO's expectation is a rapid decline in coal-fired generation. But neither current public closure dates nor government policy reflects that. Unplanned plant closures not only threaten prices for consumers and reliability of supply, but also curtail the ability of regions, or investors, to seize the potential alternative opportunities that these ageing coal assets can be replaced by. Exactly what these opportunities can be—including renewable energy projects, storage, and critical minerals—is what our upcoming 2022 work will address.