Australia accelerates capacity mechanism plan 'for difficult times': energy minister

Australia is to accelerate plans for a capacity mechanism to prevent electricity shortages and encourage both renewables and storage, Climate Change and Energy Minister Chris Bowen said June 9.

Bowen was speaking after meeting state and territory energy ministers late June 8 to discuss potential responses to rising prices, sparked by gas shortages and coal-fired power plant outages.

Ministers agreed to bring forward the delivery date for a capacity mechanism "to ensure we have some back up for difficult times", Bowen said. "It was originally scheduled for 2025, we will work much more quickly than that."

As an immediate relief measure, meanwhile, ministers have empowered Australian Energy Market Operator to buy natural gas and store it for use during emergencies.

Bowen said Australia's Energy Security Board (ESB) had been instructed to publish an updated capacity market draft design in the next couple of days.

An initial market design document was published by the board in 2021, with the intention of finalizing a detailed design for agreement by ministers in mid-2023.

One goal of the mechanism is to ensure an orderly exit for ageing thermal generators -- essentially providing an incentive for coal plants to remain open.

Some 20% of Australia's coal-fired generation capacity has closed since 2010, with a further 69% expected to close by 2040.

The market operator forecast that up to 19 GW of fast, dispatchable generation, equivalent to more than six times the largest generator in Australia today, will be needed to firm up variable renewable energy.

Bowen said his priority, however, would be to support new technologies in the plan.

"We have said we want it to support new investments in renewables and storage ... that will be an important thing going forward," he said.

Capacity mechanisms procure availability of generation capacity for a fixed period of time, often one year for existing assets and multiple years for new assets. Competitive auctions award payments to generators who commit to be available for the specified period.

"The mechanism's intention is to create a clear, long-term signal for investment, in both existing and new dispatchable capacity (such as coal, gas, batteries and hydro)," the ESB said on its website.

Plan

Longer term, the country's Integrated Systems Plan for energy and electricity transmission would be strengthened to aid achievement of the Labor government's goal of 82% renewables in the electricity mix by 2030, Bowen said.

"I put to ministers that we needed ... an agreement to build entire transmission with infrastructure that supports green hydrogen ... and storage," he said, adding that had been agreed.

The ministers will meet again in July.

The price of New South Wales electrolytic hydrogen (PEM electrolysis, including capex) was assessed at A$26.98/kg ($19/kg) June 8, up 29% month on month, according to S&P Global Commodity Insights data.

Queensland hydrogen (alkaline electrolysis including capex) was assessed at A$30.15/kg, up 60% month on month.

The new Labor government's Powering Australia plan has increased the country's carbon emissions reduction target to 43% by 2030 on 2005 levels from the prior 26%-28% cut.