Submission on Underwriting New Generation

09.11.18 By

Submission to:

The Department of the Environment and Energy regarding the Underwriting New Generation Investments: Public Consultation Paper

Addressed to: [email protected]

Submission from:
Professor Andrew Stock, Climate Councillor
Greg Bourne, Climate Councillor

Email: [email protected]

9 November 2018

 

Climate Council Submission

The Climate Council proposes that four criteria apply to ensure the Federal Government’s program to support new generation meets its goal of reducing electricity prices and increasing competition, as well as ensuring that the program is consistent with Australia’s commitment under the Paris Climate Agreement to reducing greenhouse gas pollution.

 

  1. Greenhouse gas pollution

Criteria One: The program should be limited to new capacity, focused on zero emissions solutions.

This program to underwrite new generation should only be open to new capacity that does not generate greenhouse gas pollution. This includes wind, solar (photovoltaic and thermal), biomass and hydro as well as forms of energy storage, such as batteries and pumped hydro. It rules out support for new coal and gas power stations.

Limiting the program to new capacity focused on zero emissions solutions is consistent with commitments by all National Energy Market (NEM) state and territory governments to reaching net zero emissions economy wide by 2050, and with the Australian Government’s commitment to reducing greenhouse gas pollution under the Paris Climate Agreement.

With off-the-shelf technologies like renewable energy and storage, the electricity sector can reduce emissions more rapidly and cost effectively than other sectors of the economy such as transport and agriculture (ClimateWorks 2017).

  1. Lowest cost projects

Criteria Two: Projects should be awarded by competitive open tender process on a lowest cost to the Commonwealth basis.

This program should adopt a reverse auction[1] process to ensure the government contracts new capacity with the cheapest, zero emission sources of new generation, and that the selected projects have the lowest cost exposure to the Commonwealth and Australian taxpayers.

A reverse auction is a process to contract power from the lowest priced energy projects, locking in low prices for consumers and a fixed long-term price for new renewable energy projects. A reverse auction process will ensure that taxpayers are not footing the bill for uncompetitive, over-priced energy projects.

New wind and solar generation are the cheapest forms of new supply, while coal power stations are the most expensive (BNEF 2017). The Independent Review into the Future Security of the National Electricity Market (Finkel 2017) found that even with an additional cost for ‘firming’[2], renewable energy with storage is the cheapest source of new generation. A new coal power station would be very expensive to build and operate, (Climate Council 2018) while wind and solar coupled with storage have very low running costs which will put downward pressure on power prices.

 

  1. Carbon risk

Criteria Three: Any taxpayer underwriting of any project’s carbon risk should be explicitly excluded.

The Australian Government should not use this program to financially support a new generator that cannot otherwise secure commercial finance from the private sector, such as a new coal power station.

Some commentary in the media (e.g. SMH 2018) has suggested this process is targeting new or (life extensions to) existing coal power stations. If any coal power station is selected (which would be inconsistent with Criteria 1), there must be no taxpayer underwriting of any current or future project carbon risk. Contract terms should ensure these risks are explicitly excluded from any Commonwealth direct or indirect financial exposure, and the risks sit fully with the project sponsors, directors and owners.

 

  1. Competition

Criteria Four: Projects chosen should increase competition in the National Electricity Market (NEM).
The government should only provide support to generators with under 10% market share in any NEM region.
Extending the life of existing assets should be ruled out as this would not improve competition
.
Projects and regions selected for Commonwealth support should be consistent with AEMO’s Integrated System Plan forecast future capacity requirements.

The NEM is dominated by a few large energy companies. In their report, the Australian Competition and Consumer Commission (ACCC) states that this program should “not involve any existing retail or wholesale market participant with a significant market share (say a share of 10 per cent or more in any NEM region)”.

This would rule out the vast majority of Australia’s existing energy generation companies. Bringing in new generators will provide more competition to the electricity market in each state. It is vital that the ACCC’s recommendation is followed in order to increase competition and drive down electricity prices.

Support for extending the life of existing assets should be ruled out as this would do absolutely nothing to increase competition in the market. Support should be exclusively provided to new sources of generation.

It is also important that project selection criteria should focus on identified needs. This program should support projects in NEM regions that are in the most need of new capacity, and states where the ACCC has identified lack of competition as a key issue. In addition, the Australian Energy Market Operator’s Integrated System Plan (2018) should be used to determine which regions of the NEM are most in need of new generation and greater competition.

About the Climate Council

The Climate Council is an independent non-profit organisation that provides authoritative, expert advice to the Australian public on climate change impacts and solutions.

To find out more about the Climate Council’s work, visit www.climatecouncil.org.au

 

About the Climate Councillors

Professor Andrew Stock

Andrew Stock is a Climate Councillor and energy expert with over 40 years experience in executive roles in energy businesses, spanning traditional energy supplies, emerging energy technologies and renewables, including managing billion dollar energy developments.

Andrew is a former Board Member of the Clean Energy Finance Corporation, and

past director of numerous energy companies including Alinta, APLNG and Horizon Oil. In his executive career at Origin Energy, he was responsible for the company’s major project developments including 3000MW of power generation, major gas transmission pipelines and oil and gas projects. Currently Chair of the Melbourne Energy Institute Advisory Board at the University of Melbourne, he was the founding National President of the Australian Business Council for Sustainable Energy (now Clean Energy Council) and has served on numerous research and energy advisory committees and other university advisory boards.

With an honours Chemical Engineering degree from the University of Adelaide, Andrew is an Enterprise Professor at the University of Melbourne, and has completed postgraduate courses at IMD, Switzerland, and the University of Western Australia. He is a Fellow of the Institution of Engineers Australia, and a Graduate Member of the Australian Institute of Company Directors.

Greg Bourne

Greg Bourne is a Climate Councillor who has worked at the nexus of climate change, energy business and policy for over 30 years. With BP Greg lived and worked in the UK, Middle East, USA, Canada, Ireland, Brazil, China, Venezuela and Australia. For two years he was Special Adviser on Energy and Transport to Prime Minister Margaret Thatcher. He returned to Australia in 1999 as Regional President, BP Australasia and worked with business and governments on the climate change agenda.

Greg is the former Chair of the Australian Renewable Energy Agency.

A Fellow of the Australian Institute of Company Directors and a Member of the Australian Institute of Energy Greg was awarded the Centenary Medal for services to the environment and an Honorary Doctorate from the University of Western Australia for services to international business.

 

References:

AEMO (Australian Energy Market Operator) (2018) Integrated System Plan. Accessed at: https://www.aemo.com.au/-/media/Files/Electricity/NEM/Planning_and_Forecasting/ISP/2018/Integrated-System-Plan-2018_final.pdf

BNEF (Bloomberg New Energy Finance) (2017) BNEF Research – New coal the most expensive form of new supply.

Climate Council (2018) End of the Line: Coal in Australia. Accessed at: https://www.climatecouncil.org.au/wp-content/uploads/2018/07/CC_MVSA0148-Report-End-of-the-Line-Coal_V3-FA_Low-Res_Single-Pages.pdf

ClimateWorks (2017) Power Up: Australia’s electricity sector can and should do more to deliver on our climate commitments. Accessed at: https://www.climateworks.com.au/sites/default/files/documents/publications/cwa_power_ up_report_final_12_jul.pdf

Finkel A (2017) Independent Review into the Future Security of the National Electricity Market. Accessed at https://www.energy.gov.au/sites/g/files/net3411/f/independent-review-future-nem-blueprint-for-the-future-2017.pdf

SMH (2018) Former official criticises Angus Taylor over ‘extraordinary’ coal protection measure. Accessed at https://www.smh.com.au/politics/federal/former-official-criticises-angus-taylor-over-extraordinary-coal-protection-measure-20181106-p50ebw.html

[1] A reverse auction is a process to contract power from the lowest priced energy projects, locking in low prices for consumers and a fixed long-term price for new renewable energy projects.

[2] Firming capacity is the amount of energy available for production which can be guaranteed to be available at a given time.