On 16 June 2015 the Australian Energy Market Commission provided advice to the Council of Australian Governments (COAG) Energy Council on the factors involved in a decision to retire or decommission generation assets and whether there are any material barriers to orderly exit by generators from the National Electricity Market (NEM) in response to market signals.

Specifically, the Energy Council requested advice in relation to:

• the factors considered by a generator when making a decision to retire or decommission assets;
• whether there is anything in the National Electricity Law and Rules which might constitute a barrier to an efficient exit decision by a generator; and
• potential barriers outside the national energy legislation.

Having reviewed the factors that generators may consider in deciding whether or not to exit the market, the advice concludes that there is nothing in the National Electricity Law or Rules which would constitute a barrier to efficient exit decisions by generators in the NEM.

Final Advice

Factors considered by generators in deciding whether to exit the market can be complex and apply differently depending on the generator technology type, site and location specific factors and the stage of exit being considered. Stages of exit vary from reduced operation or temporary withdrawal from the market to decommissioning plant.

This advice also considered whether any factors outside the National Electricity Law or Rules could constitute a barrier to efficient exit decisions. It is important to recognise that just because there is a cost in exiting the market does not mean that it is a barrier to an efficient exit decision.

The key issue affecting exit decisions is uncertainty. Uncertainty manifests in two ways: The current costs to exit the market, such as site-specific remediation obligations may not be specified and hence the associated costs are uncertain. Policy uncertainty will make future net revenues from remaining in the market or the consequences of exiting difficult to ascertain. It may be an efficient decision by a generator to stay in the market, delay the exit decision and wait for more certainty.

The significant level of uncertainty around exit costs makes it difficult for policymakers to know what costs are faced by which generators upon exit, and therefore what would constitute efficient exit behaviour from the NEM.

Recent evidence suggests that generators are not deterred from exit. In 2012-13, over 2000 MW of coal plant was shut down or periodically taken offline. In 2015, Alinta Energy announced that the Northern and Playford B power stations would not operate beyond March 2017 and may be closed earlier.

To promote efficient exit decisions, where there is uncertainty in policy settings or remediation obligations, governments should continue to try to overcome this to the extent that is practical. For example, governments can continue to stress that they do not support assistance to generators to exit the market as the COAG Energy Council did in its December 2014 Communique.

Background

The COAG Energy Council agreed in December 2014 that the energy only market design of the NEM has proven to be robust and efficient, and the Council did not support radical change to the market’s design, or assistance to generators to exit the market. The Council considered it was for the market to provide signals for investment and de-investment for generation, and opposed the transfer of the costs of retiring assets to consumers.

The Council sought advice from both the AEMC on whether there are material barriers to orderly exit of generators from the NEM and from AEMO on pathways to ensure exit of generators does not jeopardise power system security.