The Energy Security Board (ESB) has released a paper outlining its proposed high-level design of a capacity mechanism for the National Electricity Market (NEM) from 2025.
Under this scheme, electricity providers would be paid to have standby power available to meet demand. The ESB says all current power generators, including coal and gas, should be included. Decisions about which generators will receive the payments will be devolved to the states.
ESB Chair Anna Collyer said a capacity mechanism will be a key tool to ensure reliability as the NEM undergoes an unprecedented period of transition.
“A capacity mechanism – which pays providers to have capacity available during certain periods – will help reduce the risk of a disorderly transition,” Ms Collyer said. “It will provide a more direct and certain way to ensure we have the right amount of capacity and right mix of capacity available when and where we need it.”
“This is not a new concept – most markets in the world already operate markets that explicitly value capacity – but it is a big change for the NEM. So we are encouraging all stakeholders to participate in the design process so we can deliver a considered and collaborative design that is fit for the future.”
However, industry stakeholders say the scheme will not address the current energy market issues as it will take years to create, and it risks driving up power bills and delaying the transition to cheaper, clean renewables with storage. Major energy companies polled by the ESB in April showed greater support for incentivising new generation, rather than including coal in a capacity market mechanism.
Johanna Bowyer, lead analyst, Institute for Energy Economics and Financial Analysis said:
“The capacity mechanism proposal would see generators paid based on their availability during certain time periods. This payment would occur alongside the existing energy market – which pays generators based on their actual production of energy.
“The capacity payments would be paid for by the end energy user, via their retailers. It could put upward pressure on electricity bills at a time when bills are rising in many states.
“The proposal includes payments to existing coal and gas generators, which could keep high emissions capacity in the system for longer, delaying the transition to a low emissions electricity system.”
The ESB is seeking feedback on its proposed high level design and the issues raised in the paper with submissions due by 25 July 2022.
The ESB will develop a draft detailed design by the end of the year with a final recommendation due to ministers early in 2023.