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30 reasons to question the National Energy Guarantee. And it’s not just politics

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Minister for Energy Josh Frydenberg and Prime Minister Malcolm Turnbull during a press conference at Parliament House in Canberra, Tuesday, October 17, 2017. (AAP Image/Mick Tsikas) NO ARCHIVING

Minister for Energy Josh Frydenberg and Prime Minister Malcolm Turnbull during a press conference at Parliament House in Canberra, Tuesday, October 17, 2017. (AAP Image/Mick Tsikas) NO ARCHIVING

The consensus from large swathes of the mainstream media appears to be clear: the Turnbull government’s new climate and energy policy, known as the National Energy Guarantee, has been approved by the Coalition party room, therefore it must be OK.

It’s true that this is the first energy policy to be approved by the party room (apart from decisions to not do things, such as the canning of the carbon price and the attempts to destroy the renewable energy target). But that milestone does not make it good policy.

Yet, this is what the media would like us to believe. “At least for once, don’t let politicking kill off a workable energy policy,” wrote the Guardian’s Katharine Murphy. Paul Kelly in Weekend Australian took a similar line. The assumption being that the biggest threat to this “policy” is Labor not acting like “grown-ups”.

But that is the problem with the NEG. It is actually not policy at all, but just the idea of one. And attractive as it may be to some on a notional level, it is a long way short of being “workable”. It is actually just a political document, rather than a policy one, and it should be treated as such.

To suggest otherwise would mean that politics indeed has trumped over policy. What we need from media is critical analysis of the policy, not just a rubber-stamping of government assurances that say ‘trust us, we’ll be OK.’

So, here are 30 reasons why the NEG should be approached with caution. And they amount to 30 things that the Energy Security Board needs to take seriously and address if the policy – and the ESB itself – is to have any credibility at all.

1.  The NEG is not “policy”, but a “political” delay: It’s the germ of an idea, and represent yet another delay. The Coalition delayed policy pending the Finkel Review, and then delayed it further pending consideration of his proposed CET. Now, presuming the states agree, the policy will be kicked further down the road, pending yet another detailed report from the Australian Energy Market Commission, which to the discomfort of many, emerges as the central design authority. How the reliability component will work won’t be known till late 2018, and the environmental component till 2019. By then, we would have had another federal election.

2. Low-ball environmental targets: The 26 per cent emissions reduction target below 2005 is at the lower end of the Coalition government’s own modest target, will put greater obligations on other sectors of the economy, and falls well short of what is needed to meet Paris climate targets (remember well below 2°C).

3. No long-term term target: There is no long-term environmental target, which is useless for investors making a decision for assets that are supposed to last for 20, 30, 40 or 50 years, and which has been the cause of their lack of investment in the last few years. Because of that …

4. It doesn’t address carbon risk: Any decision on climate targets could be reversed or augmented by a change of government, or policy. The only way to address that is to have a long-term target (Australia used to have one but it was dumped by the Abbott government).

5. ESB told to ignore environmental policies: The ESB has even been told that “modelling should also assume a constant target post-2030.” What does that mean? We asked Frydenberg’s office but got no response. It suggests that the ESB is being asked to ignore long term targets. Interestingly, the ESB’s charter says it should not look at environmental issues, but only reliability. Yet, this policy proposal suggests it should address both, but only the environmental targets given by the government, not the environmental targets it has signed up to on the international stage (Paris).

6. It may not even be scalable. BNEF says the scheme design may not be able to be scaled up, because it makes no difference between brown and black coal, and may not be able to stop retailers bidding in their coal assets at a low price, to ensure they get dispatched. “The mechanism may start to become ineffective with deeper emissions reductions targets,” it says. If this is the case, then what is the point? Apart from politics.

7. No long term investment certainty: The lack of a long-term target means that there is no certainty for investors, a point also underlined by Morgan Stanley. “The risk of political interference in the targets may reduce investor confidence in the scheme, particularly where there is no explicit linkage to Australia’s Paris Agreement commitments,” it says.

8. And it could also take away short-term market certainty too. This, at least, has been provided by the renewable energy target. But for reasons ex CEFC chief Oliver Yates explains here and here, it could mean that “merchant” projects – those built by independents, and relying on market prices – could actually be killed off.

9. What is reliable generation? As Bloomberg New Energy Finance noted, there is not even any indication of what constitutes a dispatchable generator. “Known unknowns” abound. Each are worthy of their own category.

10. What technologies will be categorised as dispatchable? Does this include coal, slow to respond; or batteries, fast to respond? Will the slow and fast response markets be segregated?

11. What type of contracts will be accepted as part of the guarantee? Will it only be bilateral contracts, entered into with the big retailers?

12. Will contracts will be based on rated capacity (MW) or generation (MWh). This is critical, as it will indicate how much the regulators want wind and solar to look and act like baseload, or whether they are looking to the new  market design of dispatchability and flexibility.

13. Whether synchronous generation will be specifically required: This will be key for technologies like batteries. The South Australia government came up with a similar scheme called the energy security target. It defined the “security” as “synchronous” only. It was told that this did not reflect modern technology views, would favour gas over batteries, and would reinforce power of incumbents and send prices higher. It dropped the idea.

14. How much of each retailer’s peak demand forecast will need to be covered? A key issue and not necessarily one that we would want the retailers to decide for themselves.

15. Will retailers will be able to utilise ‘behind-the-meter’ capacity? This is a question about both the possibilities of demand response and household batteries, now referred to as “virtual power plants.”

16. International permits: Giving access to international permits means that big retailers could invest in Peruvian landfill gas operations of Chinese wind farms to keep their coal or gas-fired plants operating in Australia.

17. Will there be a future for large-scale wind and solar?  The ESB numbers (28-36 per cent renewables by 2030) is most likely a political number designed to get through the Coalition party room, but it’s a frightening one, because it assumes a share of renewables lower than business as usual –and if including rooftop solar, then virtually static. BNEF says renewables will already be at 28 per cent by 2020 (including small-scale solar).  If coal generator exits are made as currently planned, then 4.8GW of new wind and solar could be built. But the scheme seems designed to keep the coal generators on longer than thought. That, combined with a potential push for demand response, etc, could kill the market for new wind and solar farms.

18. Snowy Hydro could also drive out competition: Snowy Hydro’s boss has been busy panning both battery storage (terribly expensive) and demand management (it’s like the lights going out). The proposal for the government-owned Snowy Hydro to build Snowy 2.0 could crowd out new wind and solar plants, turning it into a storage system for excess coal generation, and a return to regulated markets.

19. Lack of transparency: The Coalition doesn’t want to admit it, but the scheme proposes a form of carbon credit, but it would be hidden from view because it would be locked up in caps and hedges, and other instruments sold in the opaque energy markets.

20. Lock in power of incumbents and reduce competition: The fact that most of the targets will be met with bilateral contracts reminds most analysts of the regulated markets of the 1980s and will inevitably lock in the power of the incumbents. “These entities already wield considerable power in retail markets due to the benefits of incumbency and vertical integration, which has allowed them to achieve high margins, to the detriment of customers,” BNEF notes. “Increasing the advantages of incumbency, vertical integration and credit-worthiness by placing heavy obligations on generation purchases could exacerbate these problems.”

21. Power prices will not fall: If there is no additional competition, the chances of prices going down are minimal – even the ACCC makes that clear. The $110/year saving for consumers by 2030 cited by the Coalition is now revealed to be a made-up number. Even if that number was true, it would barely scratch the surface of the yearly bills consumers are now paying, mostly as the result of a lack of competition – monopoly networks and a generator oligopoly exercising their market power on prices.

22. The policy locks in current high prices as reference point: Asking consumers to continue paying the ridiculously high prices for grid power is asking for trouble. The CSIRO and the network owners have made that clear in their detailed report last year. It will simply push more people to go off-grid, taking advantage of lower solar prices and falling storage costs.

23. More gold plating? It could gold-plate generators in the same way that networks gold-plated the grid. BNEF notes the demand forecasts set by AEMO will be used as a reference point, taking away the ability of a retailer to form their own view of demand, and invest accordingly. “Given AEMO’s demand forecast has proven drastically wrong in the past, there is a significant risk of error.” Overshooting could result in excessive investment (gold plating) that could open up claims for compensation.

24. What happens to WA and the NT? This scheme only address the National Electricity Market, which is the eastern states and South Australia. It will mean there is no policy in WA or the NT. That could create particular problems for the huge pipeline of projects and opportunities in Western Australia.

25. What will happen to state targets? Ostensibly, the states will be able to continue with the individual targets, but the levels of “dispatchability” required under this new program could be an issue.

26. It doesn’t address technology risk: The lingering fear of investors in new or even existing coal and gas plants is that their investment will be made redundant by new technologies (batteries). One way to address this is reverse auctions, as David Leitch recommends (hear our podcast), but a market mechanism like this doesn’t address this issue.

27. Will it represent a threat to household solar? High prices mean one thing, that more consumers – both household and business – will continue to invest in rooftop solar. That’s a good thing, but not if it becomes part of the ESB’s dispatchability considerations and policies are put in place to limit or control the uptake.

28: Is the Energy Security Board an independent body? The states have questioned why the ESB, created as a COAG body, has been used to prepare a policy document with no consultation with the states, and then as a marketing body for the policy, and as a human shield for Turnbull. “We’re just doing what the experts tell us,” says Turnbull. It wasn’t such a convenient line when Finkel prepared his exhaustive report.

29. Will there be an oversight of the AEMC? The AEMC has upset many people in the industry with its endless delays to proposed rule changes and its rejections of others. Which makes many suspicious why it has acted with such alacrity proposing a re-write of the NEM rules in a matter of weeks.

30. Will it ever happen? Given the policy details are unlikely to be presented until the next election is due, it is debatable whether there is actually any commitment to the policy, and it may just be about politics after all. In which case, Labor has every right to call it out for what it is, and isn’t. And so do others.

And, oh, there’s more, much much more. But we’re running out of time, and virtual paper.

  

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  • Joe

    Giles, thank you for your analysis. So many questions and despite Turnbull holding that presser to publicly announce his ‘NEG’ we have few if any answers. How long before we actually see ‘a’ policy as opposed to the ESB media release that is just headline talking points for Turnbull & co. As Turnbull comes under more scrutiny about energy policy is he just going to keep waving that ESB media release as his policy…it won’t stick.

    • solarguy

      Mate the Murdoch media is already at work trying to make it stick.

      • Joe

        Perhaps we can stick the ESB media release up Turnbull’s cracker hole, its just more shite from The COALition.

        • solarguy

          Won’t work I’m afraid, others have already been there and he didn’t notice, until they pulled out and the cold air rushed up his arse.

      • Calamity_Jean

        Rupert Murdoch is harmful to every country where he operates. As far as I’m concerned, he can have a heart attack ASAP.

        • solarguy

          I wouldn’t shed a tear over the toxic bastard either.

  • Mike Westerman

    Giles you sum it up with your first point: it is not a policy. Any public servant who put up an idea so half baked would be shown the door in a normal government. More particularly, anything that only mentions 1/3 of the energy consumption in the country in isolation knowing that EVs are on the way is cynically trying to avoid responsibility for policy. But then, why should energy be different from gas reserves, the NBN, the banks, refugees, SSM and any other pending issue, when the standard procedure with the current government is obfuscation, procrastination and lack of accountability.

    • Kevan Daly

      I thought point 30 goes to the nub of the NEG – it’s just kicking a difficult political can down the road until the next election.

      • Calamity_Jean

        “…it’s just kicking a difficult political can down the road until the next election.”

        Or trying to kick the can past the next election, so even a new party taking over will be stuck with a lot of coal power.

  • howardpatr

    When might the public see a resume of ESB member, John Pierce, who it seems, has a long history of acting for the financial benefit of the fossil fuel corporations and demonstrating little interest and/or concern in anthropogenic climate change. Such a person seems ill-equipped to be positive towards renewable energy technologies; including the coming of EVs to the Australian market.

  • Cooma Doug

    So it becomes very clear why professionals involved in the grid management at all levels are confused. These points you raised are valid questions. When thinking about actually managing the system and designing the market rules, the appropriate constraints, the capability differences between fossils and new technologies, I can see this is a huge task.
    Then in a short while after they implement something reasonable, technology will have damaged the balance and there will be a better way and political interference.

    What I am thinking is the technology changes will be a bit like the IT boom. Computer prices and capabilty changes were hugely in favour of the user. Then the politicians get in there and castrate the NBN greatly shrinking our asset potential value. There may be no need for wires to the home in 20 years.
    How are they going to do an NBN job on the customers electricity grid? Is the plan they want to impose a FTTN kind of concept. They wont be able to shut down the sun. But they will have some interference in mind. Maybe it should be called:
    Coal…Replacement…Avoidance….Plan.

    • Richard

      The libs will F… the whole thing up by getting the tax payer to build the coal fired power stations. They will then use the tax payer to subsidize the price of power which will drive all the renewable energy projects in the country to the wall. Everyone will love it because their bills will be low.
      |We will then have a 100% coal fired power grid or possibly a portion shared with Nuclear, which will also be built by the tax payers.

      And Australians are so dumb once the media has gone to work on their minds, it will be a fait accompli. Climate change will be erased from our memories.

      Believe me, this is the future.

      • Cooma Doug

        Coal and Nuclear would greatly increase the cost of electricity.
        The new tecnologies could halve it but large base load eliminates the cheapest options.
        If cost reduction is the plan, they cant do large base load or nuclear. If that did happen, the average home in 10 years will be paying a lot more or be off the grid.

        • Richard

          The Libs aren’t going to care because the taxpayer will be covering the losses.

          As long as the rivers of gold keep flowing from big oil and the spruiker in chief Rupert Murdoch for their re-election campaigns, all is good with the world.
          They can kick back and smoke a few more cigars and wait for the golden parachute post-politics onto the boards of big oil. Where they will be welcomed with a rare and well-aged scotch, a fine Cuban and a -“You did well son, you did well”!

          That’s how the whole political/economic system works in the capitalist West.

      • RobertO

        Yes I agree and Serious Black is a JK Rowling and the Harry Potter series

  • bruce mountain

    Yes Giles, brilliant stuff. Real added value. Thank you.

  • Alex Hromas

    The Lib/Nats have sown confusion among the general public, as well as themselves, to the point where people ask me “how are we going to achieve a smooth transition between fossil fuel and renewables?” My answer has always been “You should get out more its already in progress and would happen much faster and smother if the Lib/Nats took their muddy boot off the break on renewables.”
    This policy appears to provide such a transition and like Snowy 2 is a smart political stunt and nothing else. Expect little except sound and fury off stage

  • Ken Dyer

    Thanks Giles, the article has provided a framework from which this Statement of Intent, and that is all the NEG is. The points brought forward would allow it to be developed in a coherent and useful way.

    Should all the probing questions be answered in any subsequent long winded position paper, or senate enquiry, or whatever the next step is to create the necessary documentation to plan, design and implement the NEG in any meaningful way, we can now look forward to many months of bulldust and obfuscation and downright bastardry by the Federal COALITION.

    Everybody knows what the answer is, the technology is there and proven, the economics are there and proven, the environmental benefits are there and proven. But as always, the politics will get in the way, and we can perhaps look forward to something useful in 2019, probably after the COALition has been reduced to an opposition rump. Roll on the next election.

    We also now know where some of the savings are coming from, at least in Queensland anyway.

  • Ian Smith

    So the Coalition dreams up the NEG. V2 is therefore called the RENEG. Bring it on!

    • Mike Westerman

      And reneg is another way of saying No, so Dr No is back in play! Brilliant!

  • RobertO

    Hi Giles, Point 27 Given that John Pierce has already suggested a charge domestic solar I believe that he will try a “Front Door Fee ” If you have ever been connected to the grid and you leave the grid we have the right to charge you, for not being connected to the grid, same as household sewage charge is leveied on sydneyhouse holds.

    • technerdx6000

      Just don’t pay it. It’s not like they can cut you off, because you’re not using the service

      • Andrew Thaler

        they put a charge upon your property and after 5 years take your property off you to discharge the ‘charge’.
        Trust me, they are more corrupt then you think and don’t care a fig for the general public.

  • Barri Mundee

    If you hate Australia vote Coalition!

  • David Rossiter

    I think the term dispatchable in this case needs to be more clearly defined as not all dispatchable power plants in this debate are created equal. Bear in mind the South Australian power system failure that started this most recent interest in energy policy, would have needed a very rapidly deployed energy source to prevent the blackout that occurred.
    Not only should such capacity be dispatchable but it should be able to be able to dispatch its full energy relatively rapidly. In other words it can rapidly reach full power.
    A coal fired power station may take 24 hours from cold to reach full energy output, even when it is running it may still take some time to follow the load as it needs time to generate more steam in its physically large boiler and then deliver that steam to its steam turbine to ramp up/down its output.
    Traditionally hydro storage power plants and gas turbines (gas or oil fired) have had the ability to accept/shed load rapidly and have been used to follow the load. Presumably batteries are also able to follow the load and ramp up and down rapidly.
    The definition of dispatchable should include what used to be called firm energy taken into consideration, that is if you want to turn on the plant at anytime you can rely on it producing full energy rating almost immediately when requested.
    Any steam generating power station be it coal fired, gas fired or liquid salt heat exchanger powered from a solar energy storage plant needs time to respond, unlike hydro with water storage be it pumped or not, open cycle gas turbines and batteries. Consequently steam generating power stations are not as dispatchable as hydro, gas turbines and batteries and probably of less us in providing reliability in instances such as last years South Australian black out.

    • Joe

      What power source would have been able to be transmitted after the SA tornado event crunched 23 powerline plyons ?

      • David Rossiter

        A very big one as it seems the state was split into two parts one that was generating and one that was consuming. And the regulator was asleep at the wheel unaware of the rare but potential danger, while wind was generating beautifully, too much wind was also destroying transmission lines.
        We talk of the SA event being rare but a similar event occurred in the 1980s when the gas supply accidentally was cut off by a maintenance error. Gas from the Cooper Basin in the north could not reach the gas power plants in the south and the entire system stalled.
        How would NEG solve either of these rare events??

        • Mike Westerman

          I think the real answer to Joe’s question is ‘lots of very small power stations ‘ ie distributed generation and storage.

  • solarguy

    Great work as usual Giles. There maybe 30 questions about the NEG, but there is one question that won’t be answered for a while. And that is whether the weak heads can be conned coming up to the election. God knows there are plenty of unengaged suckers out there that believe the media BS. That’s where the fight has to be taken and on all fronts.

  • Miles Harding

    Excellent comments, Giles.

    It is very possible that the NEG was invented on a smaller napkin than the NBN was.

    As another point: What is to stop cartels forming to exclude the disruptors?

  • riley222

    Re point 18. The fact that Snowy 2 could use coal fired power will always be a risk dependent on the attitude of the government of the day. But surely the potential gains to wind and solar allowing them to convert part of their energy into dispatchable power far outweigh the risk of the project being hijacked by the fossil fuelers.
    I can’t see how wind and solar can replace fossil fuels without pumped hydro , so even justified criticism of pumped hydro is playing right into the hands of the anti renewables brigade.

    • Mike Westerman

      Riley I think you are right that pumped hydro will be necessary, but the question is then which pumped hydros? When Turnbull announced Snowy 2 he knew the most pressing need was pumped hydros to stabilise and support the SA grid. But instead of supporting those, he spread lies about SA and trumpeted a project that was judged uneconomic in 1982 and reviewed similarly many times since with the same outcome. Meanwhile the host of other potential sites that are outside national parks and closer to critical infrastructure are left unsupported, the market design still doesn’t properly value storage and fast response reserve and the Snowy is still waiting for transmission constraints that hinder its operations to be resolved.

      • riley222

        Mike hopefully Snowy 2 if it goes ahead will be one of many. Given the political situation any start is better than ‘ situation normal’.
        Ideally a government would be facilitating and encouraging pumped hydro in locations around the country, but Snowy 2 seems to be it at the moment. We should be doing everything to encourage it, the chances of the government coming up with another big pumped hydro project they’re willing to push is not high, so if we want something to get going we need to be positive about this one, even if there are alternative projects that may have merit.
        I think we’ve all been around long enough to know how easily these projects can be abandoned, so let’s go easy on the criticism, we need something to happen in this area.

        • Mike Westerman

          Riley the SA government reportedly received strong submissions to their funding round for bulk storage with inertia, many of which will be pumped hydro I suspect, and several of which I believe will be strong and financeable. These are being supported by ARENA and CEFC both of which the LNP tried to kill off. We see similar sectoral interests that strangle maximisation of benefits to the many are seen in transport policy as well. IMO we need government that actually focuses on benefits to the most, and listens to the expert advice it is given on how to do that. Generally, such advice does not come from bankers and lawyers!

    • Joe

      Snowy 2.0 with Coal usage = Clean Coal ?……The COALition’s wet dream for sure.

      • Calamity_Jean

        Not even a river can wash away coal’s sins.

        • Joe

          Certainly not The Murray – Darling Rivers…Bananabee Joyce our now ex – Water Minister has waved through to the cotton farmers water that was meant for environmental flows / health of the river system.

  • Andrew Thaler

    The LNP’s and Turnbull’s technology-neutral NBN was such a raging success, that we should let him loose on the policy levers of a ‘technology-neutral’ National Electricity Market.

    Yeah right.
    Its just madness.

  • Ian Porter

    Great points Giles. Its clear the lobbyists and vested interests are not just influencing policy guidelines, they are buying time for themselves. “Running the regulators” is a classic trick for the concentration of wealth by the powerful. The ploy is clearly to lock in long term futures for incumbents and at the end of the day, the excesses of funding will be born by the taxpayers. Fear campaigns melding energy security with implausible promises of lower costs all of course with low low emissions keeping the country compliant with its Paris ‘obligations’, which are actually non-binding self imposed targets by each country. The really bad thing is the impact on the wealth of the nation.

    The rules for the NEM were put together with the objective of providing secure centrally generated power across a broad geographic area. It was largely successful and worked – but only in the past. Since that time, the game has changed and power networks have since fallen into the hands of private companies who utilise their position of incumbency to their advantage. They are running the regulators now by installing cronies to re-write the rules to keep them in and the threats away. Renewables represent that threat but they are also the key to a future not only of low carbon intensity but of lower cost – distancing consumers from the stranglehold of cartels and the price of fuel. Its bad for them when the price of the resource is sun and wind. How to gouge money out of people for what nature gives us for free. The fight has to be fought quickly. The prosperity of the nation depends on the outcome of this fight.

  • JR

    You forgot an important one – NEG seeks to be ‘technology agnostic’ (they say) so removes subsidies on renewables. But it does not price the externalities of coal and gas, that is, health effects and climate change effects. So the ‘competition’ is not fair since fossil fuels will cost society significantly more than the cash price. The advantages of renewable are not being counted, while they are forced to pay for their disadvantages i.e. dispatchability and the need for storage.

    • Calamity_Jean

      And despite that handicap, renewables are still whipping coal’s backside.