Australia should start work immediately on a new way to ensure reliable electricity supplies, according to a new Grattan Institute report.

Next Generation: the long-term future of the National Electricity Market calls for preparatory work on a ‘capacity mechanism’ to encourage investment in new electricity generation and reduce the threat of shortages and blackouts.

The report warns, however, that the costs of such peace of mind would ultimately fall on consumers through higher electricity prices. So a capacity mechanism should be introduced only if all other market reforms have been exhausted and supply is still under threat.

Through a capacity mechanism, generators would be paid not only for the electricity they produce to meet current demand, but for committing to provide power for years into the future. The market operator or retailers could contract for sufficient electricity to meet future demand, to ensure new generation and storage is built in time.

“Australians have endured a decade of toxic political debates about climate change policy, South Australians suffered a state-wide blackout last year, consumers across the country are screaming about skyrocketing electricity bills, and energy companies are shutting down big coal-fired power stations,” says Grattan Institute Energy Program Director Tony Wood.

“It is understandable that governments feel the need to ‘do something’. But the danger is they will rush in and make things worse. What Australia needs now is perspective, not panic.”

The Australian Energy Market Operator (AEMO) last week called for a ‘longer-term approach’ to ensure electricity supplies. The Grattan report identifies a capacity obligation on retailers as the most effective and lowest-cost approach.

The report calls for a three-step policy. First, the Federal Government should implement all recommendations of the June 2017 Finkel Review, including a Clean Energy Target or a similar mechanism to price greenhouse gas emissions.

Second, alongside the Australian Energy Market Commission’s work on the market’s reliability framework, AEMO’s annual assessment of future supply and demand should be extended to include a more comprehensive assessment of the future adequacy of generation supply.

And third, if the newly created Energy Security Board concludes that projected shortfalls are unlikely to be met under the current market design, AEMO should introduce a capacity mechanism.

“This pragmatic, planned approach offers the best prospect of affordable, reliable, secure and sustainable power for Australians,” Tony Wood says.