"While the risks are most acute for energy-intensive industries, they have implications for businesses along all domestic supply chains, their employees as well as for households. In the absence of convincing and appropriately sequenced alternative strategies, the state and federal governments should remain open to finding an 11th hour solution to keeping Hazelwood operating in some form.
"Hazelwood is a major source of supply in the National Electricity Market. The tightening of electricity supply and demand, which has increased the significance of natural gas-fired electricity generation even as gas prices soar, has seen the electricity futures price double across most of the market over the past year. The price rises are putting all energy users, especially trade-exposed manufacturers, under mounting pressure, and the Hazelwood closure is clearly a part of this.
"Reliability of supply is also a concern. The Australian Energy Market Operator (AEMO) projects that the Hazelwood closure will not lead to a breach of the reliability standard – but only if there is a market response to fill the gap. And a lot hangs on that 'if'.
"The response could come from other generators, including the generators in NSW that have been running at well below full capacity and the re-opening of some gas-fired generators shuttered in recent years – provided those generators can secure gas. It could also come from the demand side, where there is scope for much greater flexibility and responsiveness to price and supply movements – but this is too rarely rewarded or encouraged at present.
"The Federal Government has made a welcome intervention in encouraging the gas industry to guarantee supply for electricity generation. COAG, and particularly the federal and South Australian governments have moved to bring new generation and storage projects online to improve security. But it is far from clear that these initiatives will succeed, and industry has no assurance that the necessary market response from other coal, gas and hydro generators is underway.
"Additional options include:
- Securing gas supply by ensuring that gas producers negotiate a 'swap' arrangement to put additional gas into the domestic market while meeting a portion of their export commitments using gas sourced on international markets;
- Removing excessive regulatory barriers to the development of new sources of gas (while this will take years to deliver, action should not be delayed);
- Pursuing more flexible demand response by promptly establishing competitive tenders for individual and aggregated energy users to deliver energy demand reductions at critical times (together with longer-term market reforms to sustain higher levels of demand participation); and
- An ambitious program to assist energy users to identify and implement energy efficiency improvements, building on recent information provision and capital grants programs (and making existing efficiency schemes in NSW, Victoria and SA more accessible).
"The Federal and Victorian governments and AEMO need to rapidly reassess their confidence that the hole in our generation sector left by Hazelwood will be filled before demand peaks again next summer. They may well need to either intensify their efforts or be open to an emergency intervention to keep Hazelwood available to support the market in some form and for a limited period.
"We appreciate that this would be a major and costly step. It appears that substantial and expensive upgrades would be required to keep the ageing plant going even in the near term, in addition to the large decommissioning bill at end of life. Arrangements for contractors, workers and the community would be disrupted. And continuing interventions and reversals are damaging to confidence and certainty across the electricity sector, which is responsible for making the investments and operational decisions that keep the lights on.
"These costs need to be weighed – and fast – against the current status of efforts to secure our grid and the risks if those efforts fail. Industry is facing an energy crisis with many causes. We need urgent action, and all options should be on the table," Mr Willox said.
Media Enquiries: Tony Melville – 0419 190 347