Liddell ultimatum: good cop or bad cop?

The Morrison government yesterday issued Australia’s energy sector with an ultimatum: build 1000MW of new dispatchable capacity before the Liddell coal power station closes in 2023 or we’ll build it ourselves.

It’s a Category A political threat designed to split the Labor opposition over gas, signal to the electorate that the Morrison Government will stand up to the power companies and actively intervene in the electricity market to keep a lid on electricity prices.

But the easiest part of the Federal intervention was yesterday’s “bad cop” announcement. There isn’t much technical justification for taking such a hard line position and the oddly delayed release of the Liddell Taskforce provides little cover.

Can the Federal Government  get what it asked for without backing down or  forcing their fully owned energy company Snowy Hydro to build new capacity that loses money and nobody wants or needs?

The final report by the Liddell Taskforce was completed in April but is only leaking out now  in mid-September. It appears to be the technical basis for the Federal Government’s announcement yesterday and yet, like The Australian Energy Market Operator’s (AEMO) recent forecast, it is relatively sanguine on the impacts of the planned closure of Liddell by 2023.

The report notes that the final impacts on prices and reliability are dependent on market conditions and investment. Price modelling by Frontier Economics appears to have been done before the impact of COVID-19 as the final report models wholesale prices in the NEM falling “to the low $60s” by 2022, yet volume weighted average wholesale prices have been tracking below $50 per MWh for most of 2020. Oops.

It predicts prices increasing from $60 to $75 per MWh if Liddell’s capacity is replaced by a combination of transmission, batteries and gas, and then eases further as Snowy 2.0 pumped hydro comes on line. In the worst case without investment and with Snowy 2.0 delayed prices are modelled to increase to $80 per MWh. That’s a $5 per MWh difference.

The Liddell Taskforce refers to AEMO’s 2019 ESOO for an assessment of reliability impacts, which don’t make a compelling case either for 1000MW of new generation on reliability grounds.

In short, nowhere does the Liddell Taskforce recommend 1000MW of new gas peaking capacity by 2023.

There is a stack of approved and well progressed projects already lined up to fill the gap: demand side procurement, upgrades to Bayswater and Mt Piper coal power stations, upgrades to transmission into Queensland and Victoria plus new batteries and gas speakers that should do the job.

Proposed and confirmed new capacity in NSW: Liddell Taskforce

The challenge for the Federal Government will be if some, but not all of this proceeds. If investors fall 200MW short of the bad cop’s 1000MW target, will Snowy still be required to build its giant gas speaker at Kurri Kurri? of course not.

So the real trick from here is how Energy Minister Angus Taylor manages this from here. It will require a bit of” good cop”. It will be cheaper and politically more effective if they can claim victory via a consortia of technologies and investors rather than underwriting a giant uncommercial power station.

The real challenge for Minister Taylor is how he can most efficiently help ensure industry delivers the required capacity by the deadline. This process has been made all the more difficult by soft wholesale electricity prices caused by weak oil prices caused by the enduring COVID-19 global pandemic. With oil prices camped at $40 a barrel, these conditions don’t look like changing any time soon.

The market just might need a bit of help to get the job done.