MINERALS COUNCIL OF AUSTRALIA

Transcription

1 MINERALS COUNCIL OF AUSTRALIA DEPARTMENT OF ENVIRONMENT AND ENERGY UNDERWRITING NEW GENERATION INVESTMENTS 12 NOVEMBER 2018

2 TABLE OF CONTENTS OVERVIEW... 1 Specific Comments... 3 The MCA supports the policy intention behind the government s proposed approach Expanded range of financing options is supported... 3 Baseload power will continue to be critical for Australia... 4 The close of Liddell Power Station and its replacement must be a focus of the policy... 4 The needs of Australian industry involves lowering energy costs and ensuring reliability while meeting emissions reduction targets... 4 Technology neutrality and competitive markets should underpin the policy... 5 Contracts need to be honoured by future governments... 5 Minerals Council of Australia

3 OVERVIEW The Minerals Council of Australia (MCA) welcomes the opportunity to comment on the public consultation paper Underwriting New Generation Investments. The MCA supports the policy intention behind the government s proposed approach. As the MCA has consistently argued, there is a need to ensure adequate supplies of continuous dispatchable power available 24/7 at long run sustainable prices. The National Electricity Market (NEM) is facing serious challenges from the erosion of baseload power generation capacity, with this tightening of supply/demand balances driving price outcomes which are adversely impacting Australia s industrial sector and households. The lack of investment in power generation capable of delivering low-cost power 24/7 reflects what is now an unmanageable policy risk for investors in long life assets in the power generation sector. This risk has been caused by repeated pivots and a lack of consensus in energy and climate change policy by successive governments for well over a decade. The policy intent of the Underwriting New Generation Investments aims to address this by securing private sector investment in new power generation which meets the needs of Australian industry that is low cost and reliable. The expanded range of financing options is supported. The goal should be to support private sector investment which is technology neutral and delivers the capacity required for reliable and secure supply at a long run price that is sustainable for electricity producers and consumers. The closure of a substantial proportion of existing baseload plant in the near future underscores the importance of providing the policy stability to enable investors to deliver the right type, size and timing of generation capacity required for reliable, affordable and secure electricity supplies at lowest cost. By offering a range of potential financial and risk management instruments (including options, swaps, futures and contracts for difference, government loans or capacity payments) it is likely a greater range of project proposals could be brought forward. However, caution needs to be taken not to further undermine the energy only nature of the NEM, particularly where mechanisms limit price discovery and transparency. Baseload power will continue to be critical for Australia. A balance of energy technologies and technical capabilities, including baseload and dispatchable power generation, is critical in providing low cost reliable power. It ensures a supply/demand balance and efficient mix of technical capabilities to deliver the full range of ancillary services crucial for grid reliability and security at lowest sustainable cost. Ensuring that investors are able to replace Liddell Power Station s capacity with a technology mix that will maintain reliability and security at lowest sustainable cost must be the immediate focus. If the policy settings are unable to do this, the close of Liddell Power Station may well increase prices and the fragility of the power supply system in NSW, increasing the reliance on transmission of generation from elsewhere in the grid to meet demand. Wholesale prices are already rising in expectation of its close. Minerals Council of Australia 1

4 Australian industry needs clean, reliable, adequate and secure energy supplies at the lowest long-run sustainable prices and meet emission reduction targets to remain competitive in Australia. Reliable and affordable energy is central to our economy. Australian businesses consume around 70 percent of total energy consumption, with mining and resources representing around 12 per cent of demand. Any policy approach should lower investor risk (and therefore cost) through stability, clarity and technology neutrality. Consideration should be given to the unintended consequences of policy mechanisms, in particular the risk that a decrease in policy certainty and price transparency will further undermine or distort investment signals. Meeting Australia s current Paris Climate Change Commitment of per cent reduction in greenhouse emissions and supporting the competitiveness of Australian business and industry will require stable energy policies that minimise investor risk and deliver an adequate, reliable and secure supply at lowest sustainable cost. Technology neutrality and competitive markets should underpin the policy. In designing the Underwriting New Generation Investment program, governments should adopt a technology neutral approach. The policy should support positive investment decisions on projects which ensure a system wide supply/demand balance and technical capability that delivers the needs of Australian industry. Need for contracts issued under Underwriting New Generation Investments to be respected. The policy involves the creation of government contracts. These need to be transparent on price and quantity, and honoured by any future government. Without this, private sector investors will be wary of investing in any projects which may be proposed and the risk of market distortion increases substantially. Minerals Council of Australia 2

5 SPECIFIC COMMENTS The MCA welcomes the opportunity to comment on the public consultation paper Underwriting New Generation Investments. The MCA supports the policy intention behind the government s proposed approach. When the Australian Competition and Consumer Commission s (ACCC) Retail Electricity Pricing Inquiry Final Report proposed Recommendation 4 1, the MCA noted this was a a welcome reality check to address policy risks stopping investment in least cost power supplies which are available 24/7. 2 The lack of investment in power generation capable of delivering low cost power 24/7 reflects what is now an unmanageable policy risk of investing in long life assets. The policy intent of the Underwriting New Generation Investments builds on the ACCC s Recommendation 4 by seeking to secure private sector investment in new low-cost power generation. The MCA supports this approach. The MCA has consistently highlighted the challenge confronting the National Electricity Market (NEM) the expected retirement by 2030 of around 33 per cent of low-cost baseload plant. These include Liddell Power Station (2022), Vales Point (potentially 2025), Torrens B (potentially 2027), Gladstone C (potentially 2028) and Yallourn (potentially in the early 2020s 3.) In particular, the MCA has highlighted the impact recent retirements of baseload plant without sufficient notice and ancillary benefits already provided by the retired assets have had on Australian energy prices and system reliability. The close of Hazelwood power station in 2017 offered a salutary reminder of what happens when large baseload plants close. It led to an 80 per cent increase in wholesale prices as supply stopped from what was Victoria s second largest baseload plant (1600MW), with very little new generation capable of replacing its output and technical contribution to the generation fleet (dispatchable or intermittent). The MCA remains concerned that further retirements of baseload plant will continue to place additional pressure on wholesale prices. Expanded range of financing options is supported While the ACCC s Recommendation 4 focused on the government entering into fixed-price energy offtake agreements for the latter years of a suitable new generation project (effectively a floor price), the consultation paper expands this to include: Contract for Difference. Cap and Floor (Collar) contract. Government loans. Capacity payments. The goal should be to increase the availability of lowest cost dispatchable power available 24/7 in the context that a substantial proportion of existing baseload plant has or is likely to close in the near future. By expanding the range of financing options, it is likely a greater range of project proposals could be brought forward. The MCA supports this approach. 1 Australian Competition and Consumer Commission, Retail Electricity Pricing Inquiry Final Report, June 2018, p. xvii. 2 MCA Media Release, ACCC proposes sensible approach to secure more affordable energy, 11 July Frontier Economics, Analysis of the Victorian Power Market, November 2018, pp.5-6. Minerals Council of Australia 3

6 Similarly, subject to integrity measures the MCA supports avoiding restrictions as to who can participate in the programme. The aim should be to encourage the greatest number of high-quality projects capable of delivering low cost power which meets the needs of Australian industry. However, care needs to be taken that in whatever financing mechanism is chosen, the energy only aspects of the NEM are not further undermined. Capacity payments, for instance, have a mixed track-record internationally, where they impose significant additional costs on energy consumers 4 and in some cases limit price discovery and therefore investment signals. Baseload power will continue to be critical for Australia Irrespective of what projects come forward whether upgrades to existing thermal plants, new thermal facilities or renewables combined with firm capacity, the policy should aim to deliver low cost power which meets the needs of Australian industry. The importance of baseload power generation cannot be overstated, especially in the context of providing the full range of ancillary services crucial for grid reliability and security. That is, the type of electricity which can only come from large generators, usually 30MVA or larger in size 5. In the Australian context that means coal, gas and hydro. Internationally, it also includes nuclear. Baseload generators in Australia have also underpinned the provision of cheap, reliable and secure energy supplies. The close of Hazelwood Power Station in 2017 saw wholesale energy costs increase more than 80 per cent in Victoria. The close of Liddell Power Station and its replacement must be a focus of the policy The MCA is concerned the close of Liddell Power Station will expose the fragility of the power supply system in NSW. In the first six months of 2018 Liddell power station produced 4.8 TWh of baseload generation that is available 24/7. Its removal will make a tight market for dispatchable power even tighter in this State something acknowledged by AEMO. There are currently no investments being considered which are capable of replacing that level of 24/7 power output prior to This is already having an impact on wholesale energy market prices. Future baseload prices in 2022 are already rising in Queensland and Victoria. However the biggest increase is in New South Wales, where future prices jump almost 37 per cent from December 2020 to June The focus for the Underwriting New Generation Investment program must be to replace the capacity and output that is about to be lost with the close of Liddell power station. The needs of Australian industry involves lowering energy costs and ensuring reliability while meeting emissions reduction targets Reliable and affordable energy is central to our economy. That is why the MCA supports efforts to ensure adequate supplies of low cost reliable power which meets the needs of Australian industry. Any policy approach should aim to reduce energy costs in Australia and retain a focus on securing reliable lowest cost dispatchable energy supply that is available 24/7, while meeting Australia s challenging Paris Climate Change Commitment of per cent reduction in greenhouse emissions. 4 BAEconomics, Generation Capacity Mechanisms Briefing Paper, April 2018 produced for the Minerals Council of Australia. 5 Australian Energy Market Operator, South Australia System Strength Assessment, September 2017, p Minerals Council of Australia 4

7 Australia has lost its international comparative advantage of low-cost energy. Over the past decade, Australia has moved from having some of the lowest to some of the highest energy costs in the developed world. Australian manufacturing, minerals processing and other energy intensive activities are increasingly finding themselves priced out of international markets. Aging baseload (24/7) generation should be replaced with lowest cost dispatchable energy supplies available 24/7 with almost 40 per cent of low cost baseload plant likely to retire between 2012 and In the absence of investment in 24/7 dispatchable electricity supply to replace retiring plant, Australia will become more reliant on intermittent energy sources which may impact the security and reliability of the NEM. Technology neutrality and competitive markets should underpin the policy In designing the Underwriting New Generation Investment policy, government should avoid providing subsidies, quotas or other non-market-oriented interventions to favour specific technologies. The policy should select projects which clearly meet the needs of Australian industry, irrespective of technology and fuel type. A competitive energy market is the best way to deliver affordable, reliable and lower emissions energy. However, policy interventions by successive ffederal and state governments have distorted market signals and led to increased prices and reduced reliability. While the Underwriting New Generation Investment policy is government intervention, the MCA considers this necessary to address what is now clearly an unmanageable investment risk which is undermining the supply of low cost and reliable power. Contracts need to be honoured by future governments The policy involves the creation of government contracts. These need to be honoured by any future government. Without this, private sector investors will be wary of investing in any projects which may be proposed. Potential policy changes need to be addressed in the contracts, with the investor capable of managing the impact of policy changes. This is central to the policy intent of providing an investment environment capable of supporting long-life assets. Minerals Council of Australia 5