We just need to do things in the right order, at the right time.

As the pace of coal generation exit accelerates, we must accelerate investment in renewables, storage and transmission. Getting this right means maintaining reliability, getting it wrong means higher prices and blackouts. The ESB’s proposed capacity mechanism is too complex to deliver on this task. Instead we need targeted, quick to implement policies to drive clean energy investment.

Our power system is going through a process of industrial transition. At its core, this is about stopping the use of one fuel type and replacing it with another. While challenging, it’s a manageable industrial change process – we just need to do things in the right order, at the right time.?

This means building renewables, storage and transmission, before we switch off the coal and gas. Getting this process right means we maintain a reliable supply of energy and minimise cost impacts for consumers. However, as the recent energy crisis demonstrates, getting it wrong means severe price spikes and increased reliability risks. Ultimately, consumers bear all these costs.

The ESB’s proposed ‘capacity mechanism’ is intended to manage this transition. While the clean energy industry welcomes the ESB acknowledging the rapid pace of change, the proposed capacity mechanism is too complex and isn’t up to the task at hand. Given the speed of the transition, a fundamental market redesign is not the way to go.?

The ESB’s proposed mechanism seeks to do too many things at once. In particular, it tries to control the exit of coal generation, while also sending investment signals for replacement renewable capacity.?A single mechanism cannot do both of these things. In fact, by prolonging the life of coal generation, it’s actually likely to delay investment in replacement renewables and storage.

It's also unlikely such a complex mechanism can be implemented quickly enough. Major market reforms like 5 minute settlement or the system strength frameworks have typically taken around five years to fully implement. Given the capacity mechanism is an order of magnitude more complex, its hard to see how it could be introduced in under 10 years.?

There’s a real risk the problems the mechanism is designed to manage will already have occurred by then, particularly unplanned and unco-ordinated exit of coal generators.

Clean energy investors need certainty, to bring forward the buildout of renewables, storage and transmission, before the coal generation exits. A complex market redesign that takes many years to implement is not the way to provide this certainty. Instead, we need simpler, targeted policy mechanisms that can be rolled out quickly and which are easy for investors to understand.

The Clean Energy Council has proposed a suite of targeted reforms to achieve this. Firstly, we consider mechanisms to control coal exit should be separate to those that incentivise renewable investment. Secondly, targeted mechanisms to support renewable investment can be based on existing frameworks that are proven effective. Lastly, existing processes should be fully leveraged to speed up the buildout of transmission, which is the natural complement to renewables and storage.

A storage target represents an obvious and sensible mechanism to deliver much needed storage capacity. AEMO has already advised we need an additional 46 gigawatts of storage by 2050. Building storage is a no regrets solution; it helps firm up renewables, enables REZ development and allows for better utilisation of transmission networks. Most importantly, storage is a key element in maintaining reliability in coming years, as the share of variable renewables increases.

However, storage remains a relatively new technology and it can be challenging to make an investment case. A predictable revenue stream from a storage target mechanism would help address this and would bring forward investment in this essential part of the transition.

A storage target mechanism could be implemented quickly, as it can be leveraged off existing frameworks. For example, a design proposed by the Victorian Energy Policy Centre is based around the existing LRET mechanism. Using existing regulatory frameworks allows a storage target to be rolled out sooner than a redesign of the market as envisioned by the ESBs capacity mechanism.

An ’operating reserve’ mechanism could also help maintain reliability in coming years. An operating reserve is basically a ‘buffer’ of spare capacity that can be used to manage fluctuations in energy demand and supply, such as dealing with the sudden decreases in energy availability that can occur when wind speeds change, or when the sun sets.?

An operating reserve could also be implemented quickly, given there is already a perfectly good ‘off the shelf’ solution ready to go. CEC member Ibedrola, formerly Infigen Energy, proposed this model back in March 2020, but it has been delayed while the ESB considered other options. This rule change should be reinitiated, and development of an operating reserve brought back to consideration, as soon as possible.

The Clean Energy Council considers that the ESB’s proposed capacity mechanism could be adapted to resemble a storage target or equally focussed mechanism, if it was sufficiently simplified and internalised carbon costs.?The CEC will work collaboratively with governments and the ESB, to see whether this can be achieved.

In addition to these targeted mechanisms to support storage and renewable generation, other policy reforms can help accelerate transmission investment. Transmission is the natural complement to renewables and storage, with AEMO and market experts clearly showing that bringing forward transmission investment can help save consumers money.

The federal government’s announced Rewiring the Nation funding can play a key role here. As analysis commissioned by the CEC shows, government funding can be leveraged to speed up the buildout, and bring down the costs, of critical transmission projects. This funding could therefore be used to accelerate and complement state led renewable energy zones, or to bring forward actionable projects as identified in AEMO’s Integrated System Plan.

Successfully decarbonising the power system is fundamentally an industrial process. Like any process, it’s important to get orders of operation right. In practice, this means bringing forward investment in renewables before coal generation exits. Regulatory design must follow this basic requirement; in the NEM, this means quick, targeted policy reform is the way to deliver the investment so desperately needed in renewable generation, transmission and storage.