Submission to the Capacity mechanism project initiation paper

by Dan Cass

The Australia Institute has been involved throughout the Energy Security Board’s (ESB) project to create a Post 2025 design for the National Electricity Market (NEM).

In this submission we address the ESB’s proposal to design a capacity market mechanism as a way of managing energy reliability as coal power stations retire.

The problem the ESB is seeking to solve is the increasingly rapid and disorderly retirement of coal generators. Coal has historically supplied three quarters of electricity generated and also provided essential security services, maintaining the frequency and voltage of the grid.

In this submission we argue that the capacity mechanism is a flawed design concept. It would provide a subsidy to existing coal generators and also a subsidy for new supply, which will increase competition that would push coal out of the market. Energy ministers provided design objectives to the ESB for the mechanism that are contradictory and make it hard to see how a policy solution could be formulated.

We build on previous submissions where we argued that the solution is not to prop up coal generation but build new renewable energy and storage resources to provide both reliability and security. A key aspect of our preferred approach is that rather than create a whole new market to manage retirements, the state governments are empowered to solve the issue.

Full submission