Partner Mark Carkeet shares his thoughts on energy policy after the National Energy Guarantee

Once again, an attempt to deliver an holistic national energy policy that assigns relative priority between price, sustainability and reliability (this time in the form of the National Energy Guarantee or (NEG) has contributed to the demise of a relatively popular Australian political leader.

Last Wednesday's edition of the Financial Review (12 September 2018), reports that the NEG 'is officially pronounced dead on arrival by the Coalition'.

How did the NEG come about? What was it? What will replace it?

How did the NEG come about?

The NEG was a means of solving some of the problems highlighted by the South Australian blackout of September 2016. There were multiple causes for the blackout, among them the closure of an old coal fired power station, the mothballing of part of a gas fired power station, the presence of the system of relatively large quantities of asynchronous wind generation, and reliance on long distance interconnection. Most importantly, there was a 1 in 60 year storm.

The leading official response to the South Australian Blackout was the COAG Energy Council's Independent Review into the Future Security of the National Electricity Market (the Finkel Review). The Finkel review was asked to recommend 'enhancements to the National Electricity Market to optimise security and reliability'1. But it found that it could not do so without addressing emissions policy, as a transition to a lower emissions economy is now technologically driven and 'cannot be reversed'2.

After receiving 390 written submissions from all sides of the debate, it concluded:

'The overwhelming message was the call for Australia to adopt a single, nationally agreed plan to manage the transition to a lower emissions economy….business as usual is not an option. Policy reversals and piecemeal government interventions undermine investor confidence.'3

The cornerstone of the Finkel reform program was the establishment of an Energy Security Board (the ESB). The major component of the ESB's work to date has been the development (in consultation with the community) of an advanced model for the NEG.

What is, or was, the NEG?

The concept of the NEG is relatively simple. There are two key elements:

  1. an emissions requirement, which required electricity retailers, and others who purchased electricity direct from the NEM to purchase electricity from sources so as to meet Australia's Paris targets;
  2. a reliability requirement, which provided that if there was a forecast shortfall in reliable (as opposed to intermittent) load, then retailers and other market customers would be required to contract to purchase reliable load.

Once the NEG established the required level of emissions reduction and reliability, then market forces were to determine costs of renewable and reliable projects, and therefore price. In this way, energy and emissions policy were to be integrated, while remaining within the framework of a competitive market.

This isn't a new problem. As long ago as 2002, the Parer review, headed by a former Liberal Party Energy Minister, recognised that:

The lack of a single, national, long term greenhouse policy has created significant uncertainty for the energy industry and wider economy.'4

This uncertainty affects both investment in both fossil fuel and renewable generation. No new coal fired generation has been commissioned in the national electricity market since 2007.

The exposure draft of the NEG legislation, released on 15 August, envisaged that separate Commonwealth legislation would establish the level of the emissions requirement, and that co-operative scheme legislation between the states and territories would provide the machinery to implement it.

It was expected that the emissions requirement would be based on the commitment given by the Abbott administration, under the Paris Agreement of 2014, to an emissions reduction of 26-28% on 2005 levels by 2030.5

The NEG was widely supported

There were a large number of submissions at all stages of the NEG design process, representing viewpoints from all parts of the political spectrum, from the Clean Energy Council to the National Farmers Federation and the Minerals Council of Australia.

Only about 10 (out of more than 90) of the submissions expressed opposition to the concept of the NEG, for the most part on the grounds of complexity, or that the emissions requirement was not ambitious enough.

Overall, the submissions showed broad support across the political and economic spectrum, were characterised by a willingness to accommodate both an environmental and a reliability agenda, and endorsed the NEG as the appropriate place to start work on a coherent framework to manage the transition to renewables.

For example, the Business Council of Australia, (who preferred a 26% emissions target, rather than a 28% target) said:

The Business Council strongly supports the implementation of the National Energy Guarantee. The Guarantee provides a credible pathway forward by putting an end to the policy paralysis and providing a circuit-breaker for the stale energy and climate change policy debate in this country.6

But within 10 days of the release of the exposure draft of the NEG legislation, Australia had a new Prime Minister, and shortly after that, a new Energy Minister.

What of the NEG now?

As of today (12/9/18), the COAG Website still contains detailed information about the NEG, and consultation on the exposure draft remains open.7

Where do we stand? On 30 August, the incoming Energy Minister, the Hon Angus Taylor, MP, made his first public statement on energy policy. In it, the Minister acknowledged his 'concerns about climate change and the impact of CO2 ' and acknowledged 'a strong role for commercially viable renewables'. But he made it very clear that his focus was squarely on prices and reliability.

'As the new Energy Minister, my number one priority is very, very, simple. It is to reduce power prices, and to do this, well. we keep the lights on….. Prices are no longer sustainable for families, for pensioners, for businesses.'

He then announced a series of measures based on the ACCC's recently released report into electricity affordability8, including the establishment of a price safety net, government underwriting of 'new, stable, low-cost generation' and an end to 'price gouging by distribution and transmission businesses'.

The change in emphasis, and the various public statements that have been made since 30 August, suggests that at least for now, the Government's focus will be on prices.

Are electricity prices high? If so, why?

There is no doubt that for many households, the cost of electricity represents a very significant expense. According to Canstar, the average household electricity bill in the NEM is around $1675 (in NSW, Victoria and Queensland) and $1974 in South Australia9. This compares to an average annual expenditure on fuel of $1722 per vehicle.

Simple comparisons can be dangerous. Electricity is, after all, an essential service. Also, reliance on 'average costs' can be misleading, because family circumstances differ, government schemes such as solar subsidies can have unintended consequences, and the impact of price increases on business and industry isn't easily measured.

Prices have certainly increased. According to the ACCC, over the period between 2007/8 and 2017/8, average household electricity bills increased (real) by 35%, broken up in accordance with the chart below.10

The 'environmental costs' to which the ACCC refers are essentially the costs of federal and state based environmental schemes. They equate to 20% of an increase of 35%. That is, increases due to environmental scheme costs account for <7% of total bills.

However, the ACCC supported an appropriately designed NEG which dealt with both emissions and reliability.

The key advantage of the NEG is its integration of climate policy within broader energy policy. It will encourage investment in the market to be at a specified level of emissions intensity, but … that generation will need to rely on revenue in the market itself… The ACCC considers that provided the NEG is appropriately designed, it has the potential to address policy uncertainty concerns in the market.11

That is, policy certainty for both emissions reduction and reliability would create the opportunity for markets to work, and thus reduce cost.

What next?

The development of the NEG garnered a rare level of sector wide support from interests that are not generally aligned. It is most likely that any replacement scheme will not, at least for the time being, feature a mandated means of achieving a prescribed level of emissions reductions.

There may be a scheme which will focus on reliability only, and which might not be called an 'Energy Guarantee'. Alternatively, any reliability gap may be filled with Government sponsored dispatchable generation rather than market based solutions.

But if that is all that happens, then the pathway for transition to lower electricity emissions will (in the absence of direct Federal investment) primarily be laid by the States, and the present opportunity to make emissions reduction part of a national framework will be lost (at least for now).

There is also a real prospect that a Royal Commission will be established to investigate the electricity industry. It's to be hoped that such an investigation will not diffuse the momentum that has been achieved with the goodwill of virtually all stakeholders, by the Finkel Review, the work of the ESB, and the ACCC report.