Energy Action : Implications of Yallourn's Unexpectedly Early Closure

Yallourn power plant's earlier than planned closure will help Victorian businesses to meet carbon emissions targets but may also lead to higher electricity prices.

EnergyAustralia will close Yallourn, its coal-fired power plant in Victoria's Latrobe Valley in mid-2028, four years earlier than planned. The early closure announced on 10 March, is due to the growing volume of renewable energy in the system, which is resulting in very low daytime electricity prices. Low-priced renewables are putting pressure on the margins and market shares of Yallourn and other coal-fired power plants in Australia.

With many coal-fired plants approaching the end of their planned life, maintenance costs are high. Brown coal-fired plants such as Yallourn are also less flexible than New South Wales' more expensive black coal-fired plants. They can't readily ramp up and down in response to the more volatile demand and low daytime electricity prices that renewable power introduces to the system.

Reduction in greenhouse gas emissions

The 1,480 MW/h plant supplies around 20% of Victoria's energy. It is one of the oldest still operating in Australia and a high emitter of greenhouse gases, representing 13% of Victoria's emissions. Yallourn's closure will cut Australia's emissions by 12.36 million tonnes and EnergyAustralia's carbon footprint by more than 60%.

To help compensate for Yallourn's exit from the grid, EnergyAustralia will build a 350MW four-hour battery at its Jeeralang facility in the Latrobe Valley. It will be operational in 2026, but its capacity is only a fraction of Yallourn's and is not a direct substitute.

While the battery will certainly help support the additional 5,000 MW of renewable power planned for Victoria by 2028, the source of the required gas power and firming generation isn't clear. Onshore unconventional gas exploration is banned in Victoria, and with the state government's focus on renewables and batteries, AGL Energy is still awaiting approval to import LNG at Westernport Bay.

Wholesale electricity prices rising

We have previously flagged the risks that the generation sector faces if prices remained so low. Such depressed prices could not continue beyond the short-term without having significant implications for the National Energy Market. Further market rationalisation is likely, which will place more significant upward pressure on longer-term wholesale electricity pricing.

Contract electricity prices have risen across the forward curve from recent lows since the announcement regarding Yallourn. Because the forward curve only extends to 2024, we are unable to see how prices will be affected out to 2028.

As a result, we recommend that clients take advantage of the current forward pricing out to 2024 and consider contracting out to 2025.

Please contact your Account Manager at Energy Action on 1300 553 551 should you wish to discuss.