Interestingly, Nelson and Dodd argue that if climate change mitigation risk is not considered, replacing a coal fired power station may have been the right investment choice in the energy market of 2007, but a decade later, two factors have changed the landscape significantly.

Firstly, the most economic energy source is now wind generation with a long-run marginal cost of around $60 per MWh, making it 12% cheaper than black coal and 22% cheaper than brown coal. Secondly, underlying demand for energy is falling while peak demand, for example during heatwaves, remains steady or is marginally rising. These two factors together mean Australia needs a far more flexible solution than coal fired power provides.

Nelson and Dodd explain that there are three categories of energy demand, baseload which is there pretty much all the time, intermediate (demand during the day when commercial and industrial use is higher) and peak demand which happens on very hot days when air conditioners are all on at the same time. Peak demand requires more than double the capacity needed for baseload demand.

They identify shortcomings in intermediate and peaking capacity, and an oversupply in baseload. The solution, they argue is a shift in investment which recognizes the logical growth of renewables as the least cost energy available and highly flexible capacity which can be switched on or off according to the more variable needs of the market given renewables aren’t always available.

Short-term that means open cycle gas turbines that can go from zero to full capacity in five minutes, longer term it’s likely to mean storage solutions like batteries and pumped hydro. Either way, our energy market is changing rapidly, and old technology is mismatched with the new market.

You can find out more about AGL’s plan to replace Liddell Power Station’s capacity here.