“It is remarkable that the price outcomes of other capacity markets do not appear to have been considered by ESB ... the ESB should critically examine the price impact of capacity markets in jurisdictions such as France, the UK and Western Australia.”

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Under the ESB’s proposal, retail companies would make the capacity payments to energy generators, which means the cost would be passed on to households and businesses. The board said it would avoid higher bills.

“This is clearly not the intent, and it will be avoided through careful design,” it said.

As coal-fired power stations face mounting financial pressure from cheaper-to-run renewable energy slashing daytime electricity prices, the ESB is worried that abrupt closures could jeopardise reliability and cause volatile prices.

“Wholesale prices in Victoria jumped 85 per cent following the sudden closure of the Hazelwood power station before any replacement capacity could be built,” it said in a report in June.

However, wind and solar farm operator Tilt Renewables cited modelling extrapolating the cost of Western Australia’s capacity market to the east-coast grid, which suggested residential consumers could pay up to $6.9 billion more for electricity each year.

“We agree with the minister that a capacity mechanism must be focussed on new technology and storage,” Tilt said.

“Unfortunately, the capacity market designed by the ESB does not focus on delivering new technology or storage ... instead, it is focussed on forcing electricity customers to pay billions of dollars in windfall bonus payments to existing generators.”

Tilt said the mechanism’s design could prompt a number of older coal-fired generators to decide to continue operating “for another year or two” beyond what they otherwise would have. As well, it could mean customers would pay existing generators that had no intention to exit the market to continue doing “exactly what they were going to do anyway”, Tilt added.

The debate over the proposed redesign comes after the east-coast energy market was thrown into chaos earlier this year, when a spate of coal-fired power plant failures collided with surging fossil fuel costs to push the wholesale electricity prices to their highest-ever levels.

After the Australian Energy Market Operator (AEMO) was forced to impose rarely used caps to halt runaway prices, many power generators said they could not remain viable and withdrew offers to dispatch into the grid, exacerbating the supply crunch. The situation led to AEMO seizing control of the market for the first time in history to stabilise supplies and avert the threat of blackouts in multiple states.

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