Though details of the National Energy Guarantee policy are still under discussion, the Japanese study is worth checking so that Australia doesn't fall into any of the pitfalls it warns of.
This is an extract with some of the warnings in the Japanese study.
The Ways
Forward for Japan EPCOs in the New Energy Paradigm
October 2017
Renewable Energy Institute, The Ways Forward for Japan EPCOs in the New Energy Paradigm (Tokyo: REI,
2017), 76 pp.
…
Executive Summary
…
Japan electric power companies(EPCOs)
have essentially been focusing on their domestic market so far. Yet, business opportunities
also exist overseas. ... Critical to successful internationalization of Japan
EPCOs business will be their ability to deploy cost efficient Renewable Energy
(RE).
To make their way through this new
energy paradigm, Japan EPCOs have the chance to learn critical lessons from
their European peers.
European EPCOs have already faced
similar challenges to those Japan EPCOs are now confronted with. And European
EPCOs have failed to adapt quickly. Japan is lagging behind, and that is not necessarily
a bad thing. Indeed, it means that Japan EPCOs may benefit from their European
peers painful experiences.
Struggling, several European EPCOs
posted record losses and saw their market capitalization collapse in recent
years. They were victims of low wholesale electricity prices resulting from sluggish
electricity demand and dramatic expansion of wind and solar power with lower
marginal cost, leading to overcapacity and pushing fossil power plants out in
the competitive market merit order. (page 1)
…
Key Challenges Faced by Japan’s EPCOs
…
European EPCOs Failed to Adapt Quickly
These overall negative performances result from the European EPCOs
failure to quickly adapt to the energy transition, at the generation level especially.
While electricity consumption stagnated, significant expansion of close to zero
marginal cost wind and solar power, in which European EPCOs did not
sufficiently invest, took place in Europe. The latter helped lowering wholesale
electricity prices due to the merit order effect. At the same time,
conventional power capacity did not significantly decrease which combined with stagnating
electricity consumption and the expansion of RE resulted in overcapacity further
reducing wholesale electricity prices (Chart 31). European EPCOs conventional
power plants were thus outcompeted due to their higher marginal costs and suffered
from low wholesale electricity prices, thus significantly affecting European
EPCOs profitability. (page 26-27)
…
In Europe, several EU Member States
including France, Germany, Italy, Spain, and the UK, notably, have introduced
rewards for making capacity available, in the form of capacity mechanisms.
However, capacity mechanisms are considered problematic because they risk distorting
electricity markets. Inappropriate designs of mechanisms may for instance result
in existing uneconomic power plants receiving financial support and disturbing the
transition to a low-carbon economy – a failure. 31 The UK and Germany offer telling examples of
far from perfect capacity mechanisms. (page 28)
…
In Germany, from this year 2.7GW of
largely inflexible and high-emitting lignite capacity will be placed into an
emergency stand-by reserve, only to be used as back-up when required for a period
of four years, after which these plants will be permanently retired. 33
This comes at an estimated cost of €1.6
billion to the German government to compensate for lost revenues from the
electricity market during these years of security stand-by. 34
These flawed designs are
unsurprising insofar as it has been found that many of EU Member States did not
adequately assess the need or cost-effectiveness before introducing such mechanisms.
35
In addition, it has also been recognized
that capacity mechanisms implementation must be accompanied by appropriate
market reforms. 36
Thus, before adding gigawatts of new conventional power plants and/or
pushing for the implementation of a capacity mechanism in Japan, Japan EPCOs
should thus be well aware of these painful lessons learnt in Europe (page
29)
ENDNOTES
31
European Parliament, “Capacity
mechanisms for electricity – May 2017” (accessed 28 August 2017)
33 The
Economist Intelligence Unit, “Is
Germany’s Energiewende cutting GHG emissions? – 20 March 2017” (accessed 31
August 2017)
34
Overseas Development Institute, Rethinking
Power Markets: Capacity mechanisms and decarbonisation (London, United
Kingdom: ODI, 2016), 46 pp
35
European Parliament, op. cit. note 31
36 Ibid.
