![Brown coal power needs to close but the market needs to know how and when.](/content/dam/images/g/j/e/3/g/k/image.related.afrArticleLead.620x350.goss66.png/1463047021380.jpg)
Brown coal power plants are on a limited lifespan, but just how they exit the market will be critical for electricity prices.
While there's general agreement that the Latrobe Valley plants need to lead the power sector's exit from coal, there's a worrying lack of consensus on how it will happen.
The stakes are high, with predictions of wild volatility in wholesale prices in the next few years if the market is left to its own devices.
AGL Energy and EnergyAustralia, both owners of brown coal plants, have been increasingly vocal on the need for government policy or a coordinated scheme to drive shutdowns. But the hurdles to any managed exit of one or more of the most polluting plants are high, starting with the competition watchdog.
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A government lead is needed, then, for any coordinated closure plan. Labor's climate-change policy takes up the challenge, voicing preference for a "market-based approach" to ensure an "orderly" withdrawal of the heaviest polluting plants. The Coalition, on the surface at least, has shown little appetite yet to step up on the issue, although plenty of deliberations are said to be going on behind the scenes.
Emissions targets
The electricity sector is responsible for more than a third of the country's greenhouse gas emissions and the brown coal plants in the Latrobe Valley, accounting for almost 6300 megawatts between them, are the major offenders. Australia's 2030 emissions reductions targets – even the Coalition's relatively modest 26-28 per cent cut by 2030 – are incompatible with their continued operation.
On paper, closing down one of the Latrobe Valley behemoths should be manageable from a market perspective. Overcapacity in the National Electricity Market is put at 4000 megawatts or more, with another 6000MW or so of wind capacity on the cards to meet the 2020 Renewable Energy Target.
Depressed wholesale power prices in several states should point to closure decisions. But it is not so simple, given the advantage that the company making the first move to close would hand to its rivals through terms of higher market prices, and the heavy price of site remediation.
Hence the need for a coordinated plan. In that scenario, the impact of a plant shutdown on electricity prices should be "negligible", emissions market advisory firm RepuTex found in a recent analysis. Shutting down a brown coal generator in 2017-18 would lead to just a 3 per cent increase in the average annual wholesale pool price, or just $2.20 to $3 per megawatt-hour, the firm found.
Rational basis
The worry for the market, however, is what may occur if the transition is not orderly and market participants do not act on the rational basis assumed in the RepuTex analysis.
Consultancy Oakley Greenwood fears it will be far more of a roller-coaster ride over the next 10 years as the country moves to a cleaner, more balanced power market where the long-run marginal cost of generation is set by gas, at about $70 a megawatt-hour. It is pointing to the probability of major price spikes and volatility in the absence of a policy overseeing an orderly exit.
In that scenario, the market is driven by a variety of factors all interacting with each other. Those might include policy measures such as a potential carbon price in Queensland, and the recently increased Victorian brown coal duty.
But with the ageing coal power fleet, the risk of unexpected, premature closures because of a major technical fault at a generator deemed too costly to repair looms large. Tasmania's power supply squeeze as a result of the failure of the Basslink cable is a sobering reminder of the consequences of a sudden outage.
"If there is no managed withdrawal it will be pretty wild," says Oakley Greenwood executive director Greg Thorpe. "A managed withdrawal will temperate that to some degree."
Twitter: @angelamacd