The Energy Security Board (ESB) is proposing to introduce a new obligation for retailers to buy and surrender physical generation certificates. In effect, this will force retailers to pay revenue to dispatchable generators, the majority of which are fossil-fuelled powered.
The proposed scheme is referred to as a Physical Retailer Reliability Obligation (PRRO) in the recently released ESB Post 2025 Market Design Options Paper1 (ESB Options Paper). However, it is clear the proposal intends to replace the existing Retailer Reliability Obligation (RRO) with a decentralised capacity market under the guise of a PRRO.
The ESB argues the scheme would address reliability concerns, despite providing no evidence these concerns aren’t already being addressed by the influx of renewables and storage.
In practice, this proposal is only going to result in energy consumers subsidising ageing thermal generators; a virtual tax on electricity aimed at prolonging the operation of coal generators beyond their efficient commercial lifetime. Investors do not see the proposed scheme will deliver new resources, and in fact implementing a complex new market would chill investment. With existing safety nets and new essential system services being implemented by the ESB, the market has and will continue to provide pricing and incentives for capacity and will be well suited to adapt to a rapidly changing environment.
The negative effects of this proposal are expected to fall most heavily on small retailers, harming innovation and slowing the growth of demand flexibility. Further, this proposal is likely to add significant new uncertainty to business cases for new dispatchable capacity, undermining new investment in storage needed to complement renewables. Not only will this be costly for energy consumers, but it will make meeting state environmental targets more difficult and costly and detract from long-term climate ambitions in Australia.
The key challenges presented by the transition to a low carbon power system can be addressed through a number of processes already in place or underway. The ESB and Australian Energy Market Commission (AEMC) are exploring and designing new markets for essential system services, such as system strength and inertia, which will be required as thermal generators retire. This will reward new technologies like batteries, which are able to provide fast frequency response and other valuable services.
Download the full version here – Dicussion paper- Physical RRO (FINAL)