STILL TRYING TO GET YOUR HEAD AROUND THE NEW NATIONAL ENERGY GUARANTEE? HERE’S SOME HELP
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.
The aim
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).
The basics
A Reliability Guarantee: retailers will be required to make available a proportion of electricity from dispatchablesources
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 scope
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.
The claims 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. The detail 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. Stephen Long, Business & Finance Reporter, ABC Online: It’s impossible to make a definitive judgement because the policy, made on the run with obvious haste, is so sketchy. 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.” The mechanism 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.
The Reliability Guarantee 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.
The Emissions Guarantee 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.
The impact on prices 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.
The ‘dispatchable’ debate 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. “At night when wind in some areas is generating a lot [of power], it’s the coal-fired stations that don’t get dispatched and the price can drop negative — below zero dollars — and so the big [coal] generators end up having to pay for people to take their electricity,” Professor Vassallo said. So what does that mean in terms of the new NEG? John Quiggin: The government’s central problem is that, as well as being polluting, coal-fired power is not well suited to the problem of increasingly high peaks in power demand, combined with slow growth in total demand. Coal-fired plants can be adapted to be ‘load-following‘ which gives them some flexibility in their output. But this requires expensive investment and reduces the plants’ operating life. The process is particularly ill-suited to the so-called High Efficiency, Low Emissions (HELE) plants being pushed as a solution to the other half of the policy problem, reducing carbon dioxide emissions. HELE is just a fancy name for the marginal improvements made to coal-fired technology over the 30-50 years since most of our existing coal-fired plants were designed and built. The “low” emissions are far higher than those for gas-fired power, let alone renewables or, for that matter, nuclear energy. In practice the main source of dispatchable energy is gas, which is very costly — thanks to successive governments making a mess of policy by opening Australia’s gas reserves for export. Stephen Long: The bottom line? On the face of it the policy looks as if it will encourage more use of gas — which is very expensive and a significant source of greenhouse gas emissions — while also propping up polluting coal-fired power plants which are becoming increasingly expensive as they age. The NEG does nothing to make coal-fired power generators bear any cost for the emission of greenhouse gases which contribute to global warming, let alone the broader health impacts of air pollution from toxic chemicals and particulate matter in coal.
The renewables Assumptions and business models designed for the days of centralised coal-fired power stations should not be imported into policy for a modern electricity network which will inevitably have an increasing proportion of more agile sources of power. “Technology has moved on from base load, and now you want flexible power. And that’s what demand management, batteries and pumped hydro is,” Professor Andrew Blakers, director of the ANU Centre for Sustainable Energy Systems, told Nick Kilvert. “Pumped hydro is 100-year-old technology, completely off the shelf, and importantly you can get these pumped-hydro sites built before 2022,” he says. “A recent study that we published shows that there’s about 22,000 [potential] pumped-hydro sites on the east coast. We only need 20 or 30 of them.” Meanwhile, recent technological advances indicate that large-scale battery storage could soon be a feasible option. John Quiggin: The South Australian government reached this conclusion some time ago, making a decision to invest in its own battery storage. That move was roundly condemned by the federal government, which at the time was still focused on baseload. It’s not news that there are ways of limiting reliance upon coal and reducing electricity prices which are being ignored and even undermined by the climate deniers. Critics of renewables have noted that Germany, which is often used as an example of how they can be incorporated into a major energy network, still relies on very dirty coal fired and nuclear generation from surrounding countries when the renewables become unreliable. It’s true that Australia as a nation can’t import electricity or rely on any other country for backup. The virtue of the National Electricity Market is that it replicates the European situation, allowing power to be exchanged between states in accordance with changing needs: they all benefit from having a certain redundancy in their systems. A state which decided to go it alone would sacrifice that backup, which would seem a poor way of managing risk.
The experts Prime Minister Malcolm Turnbull has called on Australians to ‘trust the experts’. That’s caused more than a few sniggers. Critics say the electricity regulation agencies Mr Turnbull wants us to trust have a chequered history. Stephen Long: The irony is that, the day before the Prime Minister sat alongside officials from regulatory agencies at a media conference announcing the NEG, the Australian Competition and Consumer Commission delivered a report which examined how power companies gamed the energy regulators and drove up prices. Network operators, who receive a guaranteed return on their assets, overestimated future demand and got paid for putting in far more network capacity than needed under a flawed regulatory system that encouraged them to do so. Big power generators manipulated the rules of the wholesale market to push up prices and boost their margins at the expense of industry — exploiting a loophole that the Australian Energy Market Commission has been slow to close. The same regulators are now designing a new system which, on the face of it, gives enormous power to the big generators. So what about the expert who advised the Federal Government to introduce a Clean Energy Target? Australia’s Chief Scientist Alan Finkel has endorsed the Turnbull Government’s new energy policy although he was consulted only in the late stages of its rapid development, describing it as “logical”. This week he pointed out that 49 out of his 50 recommendations had been agreed to, except for the CET which he said had been “awkward for various reasons”. “I think we’ve got a strategy now that’s been adopted. What we had was a strategy that had been recommended.” Was that another way of saying the NEG was better than nothing? Dr Finkel said he was “absolutely confident” the NEG would enable Australia to meet its Paris commitment and he was optimistic power prices would also fall.
The impact on confidence Industry and experts had hoped bipartisan support for the CET would bring an end to the energy policy wars, providing the market with certainty in order to stimulate investment and in turn bring down prices. The Government shifted away from the CET amid public criticism of the proposal from Coalition backbenchers including former prime minister Tony Abbott. Will the NEG now provide confidence? Once again, the answer depends on who you ask. David Blowers: No, it’s not Chief Scientist Alan Finkel’s Clean Energy Target. But it is a policy that will drive down emissions in the electricity sector after 2020 and can be adapted by the Labor Party to hit the emissions-reduction target of any future Labor government. In other words, the NEG can offer the previously elusive prospect of a bipartisan and credible emissions reduction policy, of the kind that industry has been crying out for. So this is not a perfect solution, but it is better than what we have now. And importantly, it is supported by all members of the newly formed Energy Security Board. Opportunity knocks for this nation’s politicians. Alan Pears: Business, state governments and the energy industry have been clamouring for more certainty from the federal government. Now they have it: the federal government will be even less important in shaping energy and climate policy than in the past, leaving states and territories, local government, business and households to focus on driving the energy revolution and cutting emissions. John Quiggin: The most important thing to understand about the federal government’s new National Energy Guarantee is that it is designed not to produce a sustainable and reliable electricity supply system for the future, but to meet purely political objectives for the current term of parliament. Those political objectives are: to provide a point of policy difference with the Labor Party; to meet the demands of the government’s backbench to provide support for coal-fired electricity; and to be seen to be acting to hold power prices down. Given that the policy is unlikely to survive beyond the next election, it’s unlikely that it will prompt anyone to build a new gas-fired power station, let alone a coal-fired plant. So the only real effect will be to discourage investment in renewables and create yet further policy uncertainty. If the government had wanted policy certainty it could have accepted Labor’s offer to support the Clean Energy Target.
The politics It’s hard not to be cynical, in a world of rampant opportunism. Being asked to trust, to believe, to support… Has this energy policy been made on the run by a leader terrified of the far-right of his party? When you take criticisms like those of John Quiggins together with commentary by Liberal insider Nikki Savva, it’s almost impossible to accept that the new energy policy solves anything much, or is even really intended to. Writing in The Australian this week, Nikki Savva addressed one of the Government’s biggest potential problems in selling the NEG: being undermined by Tony Abbott. She noted that the embittered former Prime Minister is doing a lot of the Opposition’s work for them. “For us, it is a great environment,” a senior Labor figure observed before the government revealed its energy policy. “If anything good is happening for the government, we know Abbott will blow it up. It is not just that he times it to coincide with Newspoll, he does it whenever the opportunity presents itself. “Take energy, which is a difficult issue for the left side of politics. Abbott has succeeded in making it unclear what the government’s position is. It should be a great issue for them, and he is destroying it.” Josh Frydenberg was an Abbott protege. As Environment and Energy Minister, Frydenberg has worked hard, winning over even factional brethren once personally antipathetic to him. At each point he has been undercut or undermined by Abbott or one of his few remaining acolytes. Frydenberg’s challenge, as he worked hand in glove with the Prime Minister and his office, was to devise a policy that was saleable, sensible, acceptable to his partyroom and provided points of difference with Labor. The overwhelming consensus at Tuesday’s party meeting was that those objectives had been achieved, and what remained was for the government to get the sales job right by keeping the messages simple — not an easy task with such a complex issue. Abbott was not alone in asking questions about the new approach, but he was Robinson Crusoe in seeming to want to prolong the uncertainty.
The end of the climate wars? ABC political correspondent David Lipson is calling it a breakthrough for Malcolm Turnbull. Just getting his party onside is a major achievement. There was a very real risk the issue would explode in the joint party room on Tuesday. In the end, the only person asking for more time to debate it was Tony Abbott and, so settled was the matter, his plea was met with silence. Business groups and big industrial energy users have also welcomed the National Energy Guarantee (NEG). Even AGL, publicly shamed for its perfectly legitimate plans to shut down its Liddell power plant, is onboard. When the Chief Scientist Alan Finkel swung behind the policy (despite the fact it killed off his Clean Energy Target) you started to get the sense everyone was bending over backwards to support something, anything that will deliver the certainty that industry so desperately needs. But already, conservative Liberal MPs are saying they will only accept settings that follow a ‘hockey-stick’ trajectory, flatlining for a few years but trending rapidly upwards towards the end of the next decade. This is either a clever plan to minimise costs but still achieve emissions reductions or a cynical way to allow business as usual indefinitely. David Lipson notes that Labor has been appropriately critical of the lack of modelling and will have very different ideas about how to implement the NEG, but instead of campaigning to axe it the policy they could accept it while promising to reset the emissions levels determined by the government of the day. Far from ending the climate wars, the policy allows the climate wars to continue, but do so within an agreed framework. So the Opposition needs to decide whether to negotiate and at least get something on the statute books, even though adopting the NEG could leave Australia in a worse position in 2030 in terms of renewables than if we did absolutely nothing. The conclusion The new energy policy seems to be a Rorschach inkblot with different expert observers seeing very different things in the eight page document. So at Australia21 we find ourselves returning to the evidence: what we know is that we need to get our emissions down, fast. Australia should not be constrained in our choice of instruments by discomfort in any political party room — we should be able to choose the most efficient and effective way of at least meeting our modest Paris commitment to reducing carbon emissions, if not exceeding it. We should be able to do that from the full range of available policy instruments. If, as a result of the current discussions, there is bipartisan agreement to water down our Paris commitments, we should jump up and down very vigorously. The community should reject firmly and categorically any attempt by politicians to resile even in part from the accord. We should point to the floods and fires affecting US cities and communities as being precisely what climatologists have anticipated would be the price of rising emissions, as we try to force a greater focus in the debate on climate change. Yes, it may take some short term pain for long term gain. Unquestionably electricity prices are a serious problem, but emissions reduction must not be sacrificed on that basis. It is up to the Government to inform the public, rather than misinform is, about what is needed for a long-term solution to our problems in energy and climate policy.