Capacity Investment Scheme – Public Consultation paper

APA Group Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

APA submission
Capacity Investment Scheme
Consultation Paper
August 2023

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APA Group Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

Mr Simon Duggan
Department of Climate Change, Energy, the Environment and Water
GPO Box 3090
CANBERRA ACT 2601

Lodged online

31 August 2023

RE: APA Submission to the Capacity Investment Scheme Consultation Paper

Dear Mr Duggan,

Thank you for the opportunity to comment on the Capacity Investment Scheme (CIS) Public
Consultation Paper (the Consultation Paper).

APA is an Australian Securities Exchange (ASX) listed owner, operator, and developer of energy infrastructure assets across Australia. Through a diverse portfolio of assets, we provide energy to customers in every state and territory on mainland Australia. As well as an extensive network of natural gas pipelines, we own or have interests in gas storage and generation facilities, electricity transmission networks, and over 681 MW of renewable generation.

Energy Ministers recognise that gas will play a crucial role in the energy transition. As coal power stations retire and become less reliable, Gas Powered Generation (GPG) will have an increasingly important role in supporting the security and reliability of the energy system.

The Energy Security Board has stated that the National Energy Market’s energy only design may not encourage sufficient investment to maintain a reliable system. Energy Ministers should consider whether existing market arrangements will be sufficient to support continued investment in GPG.

Our submission below provides views on matters raised in the Consultation Paper. If you wish to discuss our submission in further detail, please contact John Skinner on 02 9693 0009 or john.skinner2@apa.com.au.

Kind regards,

Beth Griggs
General Manager Economic Regulation and External Policy
Strategy and Commercial

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1 Submission

Key points

• As coal power stations retire and become less reliable, GPG will have an increasingly
important role in supporting the security and reliability of the energy system.

• It is unclear whether the National Electricity Market’s energy only design and existing
Market Price Cap will support continued investment in GPG.

• Energy Ministers should consider whether existing market arrangements are sufficient
to maintain a reliable energy system.

APA is a leading ASX listed energy infrastructure business. Consistent with our purpose to
strengthen communities through responsible energy, our diverse portfolio of energy
infrastructure delivers energy to customers in every state and territory on mainland Australia.

Our 15,000 kilometres of Figure 1
natural gas pipelines connect
sources of supply and
markets across mainland
Australia. We operate and
maintain networks
connecting 1.4 million
Australian homes and
businesses to natural gas.
We also own or have
interests in gas storage
facilities and gas-fired power
stations.

We operate and have
interests in 681 MW of
renewable generation infrastructure. Our asset portfolio also includes high voltage electricity
transmission assets that connect Victoria with South Australia, and NSW with Queensland.

In October 2022 we completed the acquisition of Basslink Pty Ltd, which owns and operates
the 370km high voltage direct current (HVDC) electricity interconnector between Victoria and
Tasmania. The acquisition adds a third electricity interconnector to APA’s infrastructure
portfolio and is consistent with our strategy to play a leading role in the energy transition.

APA actively supports the transition to a lower carbon future. In August 2022, we published
our inaugural Climate Transition Plan (our Plan) which outlines our commitments to support
Australia’s energy transition and pathway to achieve net zero operations emissions by 2050.

Through our Pathfinder Program, we are investigating how hydrogen and other technologies,
such as batteries and microgrids, can support a lower carbon future. Current Pathfinder
initiatives include the Parmelia Gas Pipeline hydrogen conversion project in Western Australia,
and the Mid-West Blue Hydrogen Project.
APA Group Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

As coal power stations retire, GPG will have an increasingly important role to play in supporting
the security and reliability of the energy system. However, as recognised by the Energy
Security Board, it is unclear whether existing market settings will encourage the necessary
new investment in GPG.

Our submission below outlines some of the issues that arise from the exclusion of thermal
generation from CIS tender processes. Competitive market settings, rather than ad hoc
bilateral contracting with operators, will ensure the most efficient and low cost outcomes for
consumers in the long run.

1.1 Gas is essential for energy security during the energy market transition
In navigating the energy market transition, gas infrastructure will have an essential role to play
in helping Australia meet its net zero ambition targets. Replacing ageing coal generation with
large volumes of renewable energy is not without its challenges. Gas is key to ensuring the
transition to low and ultimately net zero emissions can be achieved with minimal disruption
and cost to the community.

As recent experience in South Australia has shown, periods of low wind and solar require
significant volumes of dispatchable resources to be available to support the reliability and
security of the system. Similar issues are likely to be experienced in other states as coal power
stations retire. This role will become critical if there are delays in building electricity
transmission and storage to support renewable energy projects.

Despite the introduction of synchronous condensers in South Australia, GPG remains critical
in ensuring sufficient electricity supply during periods of low wind and solar generation. For
example, in the period from 28 April 2023 to 2 May 2023, GPG provided critical supply during
periods of low wind and solar generation. On three out of five days, GPG provided over 65%
of peak electricity consumption at 7pm.

Figure 2: GPG supporting energy reliability in South Australia from 28 April to 2 May 2023

Source: OpenNEM

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APA Group Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

Events in Queensland and Victoria over recent years have also demonstrated the flexibility
and security offered by GPG and gas infrastructure:

• Flexibility and energy security

On 25 May 2021, a failure of one of the generation units at Callide Power Station in
Queensland caused 477,000 customers to lose power.

In mid-June 2021, Yallourn Power Station in Victoria reduced electricity generation to
approximately 20% capacity due to the threat of floodwater from the Morwell River.

Following both these events, GPG stepped up to help provide crucial electricity
generation in both Queensland and Victoria. GPG doubled its output while not
increasing overall emissions. The ability of gas turbines to quickly ramp up and provide
long term dispatchable generation shows they will be a critical part of the energy
system for many years to come.

• Addressing shortfalls through the gas network

In mid-July 2021, the Longford gas plant in Victoria suffered a reduction in production
due to technical problems, significantly reducing the amount of gas being supplied to
the Victorian market. This led to AEMO issuing a notice of threat to system security.1

In response to this event, it was the flexibility of APA’s 7,500 kilometres of
interconnected gas transmission pipelines that form East Coast Gas Grid that enabled
APA to get gas from the north to the south, helping to rapidly address these shortfalls.

The gas network is a flexible, affordable and safe store of energy, making it ideal to help
support energy supply during extreme weather or periods of reduced supply. Locating GPG
close to major demand centres also reduces exposure to electricity transmission capacity
constraints often experienced by the overconcentration of renewable generation in common
areas of the grid. This advantage may become critical if there are delays in building the
necessary transmission investment to support renewable energy.

Gas infrastructure will play an important role for many decades to come, and therefore
regulatory settings must support continued investment in gas infrastructure, including GPG.
This will ensure that consumers continue to receive both reliable gas and electricity as the
energy market transitions.

1.2 Maintaining investment in GPG
It is well documented that the economics of coal and GPG are under pressure due to the lower
marginal cost of wind and solar generation. This is leading to announcements about the
closure of thermal assets:

1
AER, AER gas weekly report – 20-26 June 2021 (14 July 2021) .

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APA Group Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

• In February 2022 Origin submitted notice to AEMO for the potential early retirement (in
2025) of Eraring Power Station. Origin stated that this decision reflected the continuing,
rapid transition of the NEM as we move to cleaner sources of energy.2

• In November 2022 AGL announced that it will close one of its South Australian GPG
plants due to challenging economic conditions.3

As increasing volumes of renewable energy come online, the pressure on GPG and coal operators is expected to increase. The completion of the NSW to South Australian interconnector (Project Energy Connect) and other interconnectors, which will increase the amount of energy that can be imported between jurisdictions, will compound the problem.

Given the delays in building renewables and electricity transmission, we are seeing governments take steps to keep firm generation in the system. In August 2023 the Victorian
Government announced a Structure Transition Agreement with AGL that will keep Loy Yang
A open until 2035.4 The NSW Government is also reported to be considering steps to keep the Eraring power station open beyond 2025.5

The CIS is effectively an underwriting scheme through which projects are offered long term
Commonwealth underwriting agreements. Consistent with Energy Ministers’ decision, the
Consultation Paper states that thermal generation such as coal and gas is not eligible in CIS tenders.6

Once of the key implications of excluding gas from the CIS is that in the absence of any form of long-term availability or capacity payments, GPG operators may be unable or unwilling to remain in the market. This issue also arises in the context of the Commonwealth Government’s
Stage 2 Reliability and Supply Adequacy reforms.7

Coal power generation emits approximately twice the emissions of GPG.8 Paying coal power stations to remain open for longer than necessary will keep emissions higher than necessary and increase the risk of jurisdictions missing their interim emissions targets.

In contrast to coal power, which is expected to retire from the system and not be replaced,
GPG’s role will become more important as coal power retires. As AEMO points out, this is because GPG will provide flexible and firm electricity supply, albeit less frequently than historically, but with greater importance to maintain reliability of the system.9

While renewable energy projects are being underwritten by the CIS, GPG is not being included in the scheme’s design. This means that GPG operators will need to recover their costs and risk premium through high prices in the NEM. Often, this will involve bidding in capacity at the
Market Price Cap (MPC), which as of 1 July 2022 is $15,500/MWh. When the NEM dispatches

2
Origin Energy, Media Release, Origin Proposes to accelerate exit from coal generation, 17 February 2022
3
Sydney Morning Herald, AGL to close SA gas power plant in 2026 as renewables accelerate, 24 November 2022
4
Premier of Victoria, Media Release, Agreement Secures Transition for Loy Yang A, 21 August 2023
5
The Australian, Eraring report release delayed, 29 August 2023
6
Energy Ministers, Consultation Paper, p16
7 Energy Ministers, Stage 2 of the Reliability and Supply Adequacy Framework Consultation Paper, June 2023
8
BCG, The Role of Gas Infrastructure in Australia’s Energy Transition, June 2023, p5
9 AEMO, Gas Statement of Opportunities, March 2023, p23

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APA Group Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

capacity at the MPC, all capacity is dispatched at that price, regardless of whether the capacity
is underwritten or not.

In its July 2022 Consultation Paper, the Energy Security Board (ESB) recognised that the
NEM’s energy only design and existing MPC may not be sufficient to encourage investment
in enough generation to maintain a reliable system.10 The ESB’s modelling suggested that the
existing MPC is materially too low to give a high likelihood of meeting the current reliability
standard.

Energy Ministers are encouraging more wind and solar through the CIS underwriting scheme.
GPG however, will rely on the MPC to allow it to recover its costs. The running profile of GPG
is very uncertain, and many factors will influence the utilisation of GPG, including:

• the weather

• outages at coal power stations

• the cost of gas

• delays in building electricity assets

It is unclear whether the MPC and energy only market will encourage sufficient new investment
in GPG and prevent the disorderly exit of GPG from the system. Consistent with the ESB’s
findings, Energy Ministers should consider whether alternative arrangements are required to
ensure we maintain a reliable energy system.

1.3 Improving Australia’s domestic gas security

The CIS forms part of the Commonwealth Government’s broader body of work aimed at
improving the reliability and affordability of energy during the energy transition.

Given the important role that gas will play during the transition, APA supports measures that
will deliver more gas to the domestic market. To support future investment in gas
infrastructure, including GPG, businesses need confidence that there will be sufficient
affordable gas to meet current and future needs. Domestic gas security relies on such future
investments.

Gas is essential for Australia’s energy transition. In their December 2022 consultation papers,
Energy Ministers recognised that gas will play a crucial role in the transition, and that the
continuing use or repurposing of gas infrastructure could therefore be important for both gas
and electricity users.11

Similarly, the ACCC has also acknowledged that timely investment and advancement of gas
basins and upstream infrastructure are critical to maintain gas security and avoid gas supply
shortfalls (particularly in southern markets).12

10 Energy Security Board, Capacity Mechanism, High-level Design Paper, June 2022, p13
11
Australian Government, Incorporating an emissions reduction objective into national energy objectives (Consultation
Paper, December 2022) 8.
12
ACCC, Gas inquiry 2017-2025 (Interim Report, January 2022) 23.

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APA Group Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

There is currently a structural deficit in domestically sourced gas. To improve the reliability and affordability of gas supply, developing upstream gas resources and new gas supplies should be prioritised. By removing impediments and streamlining approvals, new gas supplies would be brought to market as quickly as possible.

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APA Group Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

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