Forget the RET and the CET, now we’ve got the NEG. Confused? There’s a lot to digest in the Turnbull Government’s new energy policy, so it’s not surprising a lot of people are suffering from metaphorical reflux. Is the National Energy Guarantee a genuine attempt at improvement, or a political stunt? It depends who you ask, of course. So Australia21 Director Deborah Rice has distilled the commentary to help you out.
According to the Federal Government, the new energy policy will deliver a trifecta: no blackouts, significantly reduced carbon dioxide emissions and lower power prices. Better for families, better for businesses (no direct mention of the word ‘environment’ in the announcement).
- A Reliability Guarantee: retailers will be required to make available a proportion of electricity from dispatchable sources
- An Emissions Guarantee: retailers will be given targets to drive down greenhouse emissions by 26% on 2005 levels by 2030
- No adoption of the Clean Energy Target previously recommended by Chief Scientist Alan Finkel
- No extension to the Renewable Energy Target beyond 2020
- Abolition of the Limited Merits Review, which allows energy companies to appeal against Australian Energy Regulator decisions
- The NEG will only apply to the National Energy Market. That doesn’t include Western Australia or the Northern Territory, so after 2020 they may have no federal emissions reduction policy.
Energy Minister Josh Frydenberg says:
- By 2030, 28-36% of electricity generation will be from renewable energy, including 24% intermittent (wind, solar, etc) with the rest coming from hydro power.
- The NEG will ensure Australia’s Paris climate treaty commitments are met.
- Abolition of the Limited Merits Review will make it harder for energy companies to game the system by getting loans to build unnecessary infrastructure.
The Council of Australian Governments (COAG) Energy Security Board forecasts an average household will save $110-115 per year.
Yeah, about that…
The Federal Government is asking the the Opposition, the states, the stakeholders and ordinary Australians to accept the new policy in the absence of details or any serious modelling.
This is a scheme based on an eight-page letter, outlining the germ of an idea, from a little-known body established just two months ago — the Energy Security Board — which is largely comprised of representatives from energy regulators who are partly responsible for the mess we’re in.
The devil, always in the detail, is yet to come.
Or, as one public comment at the bottom of Stephen Long’s analysis phrased it, “Until there is meat on this bone, it looks sick.”
What we do know is that the NEG involves two interventions in the market, making retailers responsible both for delivering emissions reductions and making sure that the lights stay on.
Under the Reliability Guarantee, retailers and large electricity users will be required to contract (or own) a certain amount of ‘dispatchable’ generation. The precise definition of ‘dispatchable generation’ under this scheme is still to be worked out, but in general terms it refers to electricity that can be switched on at will, to meet peak demand in each state within the National Energy Market. It’s the opposite of ‘baseload’, the minimum supply of electricity that never goes away (which is often misunderstood to be the baseline of consumer demand).
In September 2017, the Australian Energy Market Operator (AEMO) reported that Australia’s National Electricity Market faced a capacity shortfall of up to 1,000 megawatts for the coming summer, and that older baseload power stations will struggle to cope.
The Government says the NEG “will keep the lights on.”
Prof John Quiggin, UQ School of Economics, in The Conversation: Clearly this situation called for more flexibility in dispatchable sources in the short term, and widespread investment in dispatchables for the long term.
The Reliability Guarantee appears to be a type of “capacity mechanism”, aimed at ensuring that generation can always meet demand.
David Blowers, Grattan Institute, in The Conversation: While reliability might be guaranteed under the new policy, it should be remembered that capacity mechanisms tend to be both complex and costly. The devil will of course be in the detail. But the fact the government has chosen to impose the obligation on retailers suggests the market will be given the opportunity to find the least-cost solutions to our reliability needs.
Stephen Long: Some executives from power companies assume that they will be able to include demand response technologies that give customers incentives to use less electricity during times of peak demand in the “reliability” guarantee — which would make great sense.
But that’s not what the policy says.
Retailers already use cap contracts to manage their risk exposure to the extreme peaks that only come a couple of times a year, if at all. They effectively insure themselves by paying a daily premium to generators which have invested huge capital in extra capacity. The cap contracts only come into play when high demand pushes energy prices over a certain pre-agreed level.
Dylan McConnell, Melb Uni Australian German Climate and Energy College, in The Conversation: If the new reliability standards are in line with retailers’ own internal guidelines, the impact on the market should be minimal. But if the government imposes higher standards, retailers will have to purchase more cap contracts (or build their own dispatchable power plants).
If demand for cap contracts increase, it would most likely encourage investment in gas and hydro power plants, energy storage technologies and demand response.
Under the Emissions Guarantee, electricity retailers and large users will be required to buy or generate electricity with a (as-yet unspecified) “certain average emissions level”. The allowable level of emissions intensity will be reduced each year, aiming to keep Australia on track to meet its commitment to the Paris climate target of global warming at less than 2 degrees above pre-industrial levels.
David Blowers: To meet this obligation, retailers will probably build or purchase their own generation assets, or sign contracts with other generators. Over time, retailers’ portfolios will become cleaner and cleaner, as new low-emission generators are built and more high-emission generators are shut off.
It should also be reasonably cost-effective. Rather than the government imposing quotas or limits for various types of technology, retailers will be given a free hand to pick the cheapest mix of generation that will meet their emissions obligations. It is genuinely technology-neutral.
This makes the Emissions Guarantee superior to Finkel’s Clean Energy Target. The CET would have acted as a mechanism to push clean energy technologies into the system, but it would not have cared which generators left the market as a consequence.
But will it be enough to meet Australia’a obligations?
David Blowers: Like an emissions intensity scheme and the CET, the Emissions Guarantee is not linked directly to the absolute emissions that need to be abated if Australia is to meet its Paris targets. But this problem can be overcome if the mechanism allows some flexibility around the setting of the emissions intensity target – which it appears to do.
Stephen Long: On its estimates, renewables would comprise 28 per cent to 36 per cent of the power mix including hydro and rooftop solar systems designed to supply individual premises. Large-scale wind and solar would make up just 18 per cent to 24 per cent of the mix.
Compare that to 42 per cent clean energy mix projected in the Finkel Review, Labor’s 50 per cent target, or the 66 per cent to 75 per cent clean energy target that some modelling suggests Australia needs to meet its Paris climate change commitments.
The NEG targets are based on electricity delivering just a third of the emissions reductions needed to meet Australia’s target.
Stephen Long: That places a huge burden for emissions reduction on manufacturing and agriculture and increases the likelihood the emission reductions target will not be met.
Anna Skarbek, CEO Monash Uni ClimateWorks, in The Conversation: Electricity creates more than one-third of Australia’s total emissions. If we don’t reduce the emissions in our electricity, then we don’t unlock other emissions reduction opportunities such as electric vehicles.
If the National Energy Guarantee aims at cutting emissions by only 26% by 2030 then other sectors across the economy would have to make greater emissions reductions sooner.
But our research shows that Australia’s electricity sector can cut emissions by 60% below 2005 levels by 2030. Harnessing this potential will help us to reach future targets that progressively increase under the Paris Agreement.
If you don’t achieve deep emissions reductions in the electricity sector, a major strengthening of policy will be needed for the other sectors where there is less momentum currently. For example, stronger action would be needed in transport, buildings, industry and land.
Australia’s climate policy, which is being reviewed before the end of the year, will need to cover more than just the electricity sector. Other measures should include the introduction of vehicle emissions standards, a more stringent national building code, a dramatic improvement in the uptake of energy efficiency measures across industry and stronger incentives for reforestation.
A lot of people are alarmed about the prospect of power prices rising further. Take, for example, ‘SensibleMatt’, who left a comment at the bottom of Stephen Long’s analysis piece this week:
The majority of people want pressure taken off electricity prices as first priority. I know this is a bitter pill to swallow for the upper middle class eco warriors out there. But us mere low income earners do not want to bear the brunt of your social policies. id prefer not to have to choose between feeding my kids healthy food or paying the electricity bill… Because the RET and the CET will GUARANTEE that prices rise!!!
But will the NEG’s twin guarantees cut household electricity bills by up to $115 a year and lower wholesale electricity prices by up to 25 per cent? No modelling has been provided to support the claim and other savings estimates from the ESB were reportedly as low as $25 a year or 50 cents a week.
Stephen Long: The assumption seems to be that, by forcing electricity retailers to enter contracts for dispatchable energy and low emissions energy, the policy will encourage new generators to enter the market, pushing down prices.
Maybe. On the other hand, why won’t forcing energy buyers to sign contracts for certain types of energy shift the bargaining power to the sellers and push up prices?
Alan Pears, Snr Industry Fellow RMIT University, in The Conversation: If the required proportion of dispatchable electricity is reasonable, and if retailers and new renewable energy generators are free to decide how to deliver it, then the cost and difficulty of compliance may be modest.
For example, retailers and generators could piggyback on the demand response capacity volunteered for the Renewable Energy Agency’s Demand Response project. This could help accelerate the rollout of a variety of energy storage solutions, in turn reducing the market power of the big generators and driving down energy prices.
On the other hand, if the options are limited, the obligation could increase the market power of the gas industry, meaning no relief from high wholesale prices.
It will also be interesting to see if the obligation is applied across all new generation. If so, it could significantly increase the cost of new coal generation, as retailers would have to cover the risk of failure of a large generation unit, as well as managing its slow response to changing demand.
John Quiggin: The (unreleased) modelling supposedly [shows] that household electricity costs will fall. These savings are supposed to arise from the investment certainty resulting from bipartisan agreement. But the political imperative for the government is to put forward a policy Labor can’t support, to provide leverage in an election campaign.
There’s also an issue around the Government defining coal as ready-to-use ‘dispatchable‘ generation (along with gas, pumped hydro and batteries) – not to mention the other questionable definition of HELE power: High Efficiency Low Emission ‘clean’ coal.
‘Dispatchable’ means available in minutes to meet demand as required, which does NOT describe coal-fired power plants. They can take days to fire up from cold to full capacity and when demand slumps during off-peak periods, shutting down is not an option; they are engineered to run constantly once operating.
Until recently, coal-fired power plants have been promoted for quite the opposite quality: being the backbone of Australian industry and consumers by providing reliable ‘baseload’ supply.
Nick Kilvert, Environment reporter, in ABC Online: Because wind and solar are intermittent, the argument goes, we need a constant power source chugging away in the background to cover supply when the sun goes down and the wind stops.
But energy researchers say the term is a “dinosaur” that has been misunderstood, and that it no longer applies to our dynamic energy market.
Don’t be fooled: baseline consumer demand is not the same as baseload supply. The old coal-fired power stations don’t support consumers, it’s the other way around.
As Professor Anthony Vassallo, Chair of Sustainable Energy Development at the University of Sydney, explained to Nick Kilvert, baseload power is an artefact of inflexible plants which needed to even-out demand and claw back off-peak losses.
“In the 70s, to stop them from having to turn off overnight, the regulators and the operators offered very, very-low-cost electricity for consumers to run their hot-water systems, which in turn sustained the ‘base load’ on the power station,” Professor Vassallo said.
“[Base load] refers to the minimum level of output that these big power generators could go to, before they turned off.”
These days, as more renewables are feeding the grid, coal-fired power stations are often forced to pay to keep their turbines running.