Energy security body planned to safeguard electricity

THE government will set up a high-level energy security council modelled on a 2009 deal struck between Kevin Rudd and Malcolm Turnbull as it seeks to avoid a catastrophic failure of the national electricity market from the carbon tax.
The Australian understands the council — to be announced in Sunday’s package — takes elements of an “energy security assurance mechanism” that helped secure Mr Turnbull’s support for the Rudd government’s emissions trading scheme in November 2009 and later cost him his Liberal leadership to Tony Abbott.

But it is believed the government will stop short of adopting a Reserve Bank of Australia-style model that could mean the council would be able to provide immediate bailouts to electricity businesses — despite advice from the government’s own advisers that it should do so.

Labor’s chief climate adviser Ross Garnaut recommended the government set up an energy security council to avoid “contagion” in the electricity market.

The Australian Energy Market Commission has recently criticised Professor Garnaut’s recommendation, declaring in publicly available advice that such a council should operate like the RBA so that it was not held up by bureaucratic delays.

As well as being able to operate speedily, the RBA has a “lender of last resort” facility that gives it the power to make loans to banks if there is an emergency that would lead to a financial crisis.

The government is concerned to maintain the security of power supplies when the carbon tax starts next year, but there are fears there could be disruption in the national electricity market — the world’s longest interconnected power grid that delivers power to more than eight million consumers in the eastern and southern states — when carbon pricing starts.

The concern is that there could be higher prices and volatility, particularly during the years it will take to build new baseload gas-fired power stations to replace coal generators expected to close in areas such as Victoria’s Latrobe Valley.

In Western Australia, Roy Zylstra, manager of Verve Energy’s adjoining Kwinana and Cockburn power stations, said the carbon price was a challenge the industry — which he has been in for 20 years — had to deal with.

He said Kwinana was an older power station, but crucial to maintaining secure supplies of power in the state, particularly as WA was not part of the national electricity market that allowed the eastern and southern states to trade power.

Kwinana runs on coal and gas.

“If something goes wrong with the gas, it’s important we have coal available at a reasonable price,” Mr Zylstra said

He said the carbon tax would add to the costs of electricity production, which would need to be passed on to his customers (energy retailer Synergy) and in turn to their customers.

Verve estimates the carbon tax would add $200 million annually to the costs of generation.

Mr Zylstra stressed the company had been working hard to manage costs. “This carbon tax is not going to help that process at all.” .

The government’s Investment Reference Group report found there could be “significant concerns” about the reliability of supply if new investments could not replace the baseload power that is shut down quickly enough.

Australia will need to build two power stations the size of Origin Energy’s Mortlake power station in south Queensland just to keep pace with the demand for power — before even starting to replace power stations that are shut down.

The Australian Energy Market Operator estimates the nation needs an extra 700 to 900 megawatts of power annually, just to accommodate rising energy demand.

Professor Garnaut concluded that a carbon price was “highly unlikely to threaten physical energy security” but he concluded it was prudent to introduce an energy security council to “counter energy market instability regardless of the source”.

However, an AEMC analysis of Professor Garnaut’s recommendations said the council would have to be carefully designed so as “not be unduly bureaucratic and be able to operate quickly enough”.