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Is there anything good to say about NEG? New report says no

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The Turnbull government’s proposed National Energy Guarantee would fail in almost all of its stated goals – including its core goal of boosting power system reliability – and would only benefit the owners of coal fired power generators, a new report has found.

In a stinging critique of the NEG prepared for the Australian Conservation Foundation, energy economics consultancy CME says the NEG – the detail of which remains scant – would deliver an inefficient and opaque electricity market that deliberately hides emission prices and undermines competition in wholesale and retail markets.

The report – co-authored by CME director Bruce Mountain, who has been vocal in his concerns about the NEG – also argues that the policy would deliver outcomes to protect coal generators from competition from increasingly cheap wind, solar and battery storage.

The “ultimate cost” of this inefficiency, the report warns, “will be borne by consumers in the form of higher electricity prices, in emission reductions that are more expensive and in a less secure power system.”

It is on this last point, system security, that the report is perhaps the most dismissive. Rather than delivering on the core Turnbull government promise of improved NEM reliability, CME says that the NEG will instead undermine it, “by introducing needless complexity and bureaucracy.”

As the report notes, the NEG proposes to boost power system security by making retailers individually and collectively liable for – that is, requiring them to buy “slow start” and “fast start” generation.

“This is a change from the existing situation where AEMO procures such services directly from generators (occasionally) or (mainly) through frequency control ancillary services markets where generators compete to meet demand that AEMO determines,” the report says.

“The implementation of the NEG’s dispatchability obligation will therefore require AEMO to procure the slow and fast start services it needs, not from the producers of such services – batteries, flexible demand and generators – but from retailers who in turn are required to procure such capacity.

“In effect the NEG imposes another layer of market participant – the retailers – between the producers of power system services (generators, batteries and flexible demand) and the customer of those power system services (AEMO). This serves no useful purpose.

“To the contrary, it will massively increase complexity and undermine AEMO’s ability to efficiently procure the services it needs to operate the power system,” the report continues.

“AEMO should be buying these services directly from the entities that supply them, not from passive intermediaries who themselves have no expertise (or interest) in procuring the most efficient or effective forms of “slow start” and “fast start” capacity.

“It can be no surprise that this approach has no precedent in any power system anywhere, ever.”

The following is a collection of key quotes taken from the CME report.

On market competition:

The NEG “will have a seriously detrimental effect on the competitiveness of wholesale and retail electricity markets,” the report says, by undermining entrant retailers who do not own or control the production that they sell, while at the same time “providing a competitive advantage to the dominant incumbent retailers who already control the majority of generation capacity in the NEM.” It will also undermine competition by discouraging merchant generation.

On coal:

“While the NEG will not necessarily delay coal generation closure relative to ‘business as usual’, it would be naïve to be blind to the government’s policy to prevent the closure of existing coal generation, when assessing the NEG. Indeed a plausible explanation for the dispatchable generation obligation is to secure the market for coal generators by securing a regulated income stream in the form of mandatory obligations on retailers to procure slow and fast start capacity from them.”

On emissions:

“We do not believe that the NEG will establish an effective market in emission reduction. The stated purpose of the policy is to not establish a price on emissions. The absence of an emission price, makes it harder for buyers and sellers to find each other and to find prices that they are willing to trade at. The resulting transaction costs and illiquidity undermines operational and investment efficiency.

“This makes the task of emission reduction more costly than it would be if mechanisms were designed with the intention of ensuring an efficient and transparent market. While customers are the common losers from this approach, it does nonetheless provide a relative advantage for incumbent vertically integrated producers relative to smaller new entrant generators and retailers.”

On renewables investment:

Will the NEG promote renewable investment? “The answer to this question … is surely not. The NEG sets out to deliver an inefficient and opaque market that hides emission prices. This will undermine competition in wholesale and retail markets and by definition this reduces investment efficiency.”  

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  • David leitch

    Way to go Bruce. Good point about the extra layer of bureaucracy introduced.

  • DJR96

    This is what you get when an industry gets to write its own rules. Self serving protectionism, anti-competitive market environments, and no incentive to innovate or transition to anything that would improve the outcomes of the industry.
    All that will only delay the inevitable and cause an expensive rush to change later rather than a moderate transition. The end scenario will not change. That is an electricity industry without coal.

    • Steve159

      The unnecessary higher electricity prices that will result from said self-serving protectionism will likely precipitate a quickening of the “death spiral”. These stupid people in the LNP (a tautology?) just don’t get how angry a lot of electricity consumers are, or are becoming.

      The positive in all this is that people who are forced to install solar and batteries for their homes, vote. As well as business owners who’ve installed commercial solar.

      • MaxG

        There is no point in getting angry.
        Nobody cares about angry people.
        It will only become interesting when people change their voting behaviour, and take action.

        • Steve159

          “Nobody cares about angry people” … thank you, for speaking on my behalf, and for everyone else.

          I think the vernacular is “they’re waiting with base-ball bats for the next election” to highlight the underlying anger in the populace… so those politicians who don’t want to get walloped at the next election care quite a deal about angry voters.

        • Joe

          …the last Newspoll still showing 48% support for The COALition. And out comes the magic Pork Barrel at the election to bribe, buy and hoodwink the punters once again into voting The COAlition back into government with the Rupert leading the charge.

          • MaxG

            Yep, what I thought… like it was mentioned in some other article along the lines “does your party provide enough support for climate change?” and 45% (or so) said yes for the LNP.
            When I said: they do nothing and get 45%… but then, maybe these clowns believe what the LNP is doing is supporting climate change — making it worse.
            … and why I harp on about the ‘stupidity’ of the majority.

          • fehowarth

            Another handout today by PM. Is this year, the year of handing out bribes & pork barrelling?

          • Joe

            The Turnbull to make a run at The Poll, the only Poll that counts, by end of this year. The pork barrel is being readied as we speak speak.

    • stopt4

      If we’re going to insist that public policy is written by someone other than the folks the policies seek to regulate, the current Australian Government has a mighty challenge ahead. Aren’t all policies written that way?

      • DJR96

        No, we’re nowhere near as bad as the US yet. Their politicians don’t even read legislation they’re voting on…..

        Here at least usually there is some consultation with all parties affected plus a variety of legal opinions are sought, and debated within parliament too. All of which influence amendments to improve the legislation before it is voted on.

        However, this NEG abomination is ideologically driven by the far right conservatives, largely to oppose the ALP/Greens standpoint. Opposing for the sake of opposing is never good politics.

        • stopt4

          No – that’s not correct. In Victoria, licences for the 3 power stations are due for renewal. Until recently, the licences were being negotiated strictly between the polluters and the Vic Govt. Due to some spirited civil society intervention, that’s been opened up a little to include a small number of non government / non industry parties. Engagement practices for public policy are often this poor.

  • Chris Fraser

    There seems to be step missing in all this, and that may be the Productivity Commission. The PC verifies (if indeed it can) the macroeconomic result of such a Scheme. This step should be taken a step further and the Terms of Reference for the PC’s study of the NEG should be set by AEMO, the ACF, the Opposition, or somebody with a brain. At last a chance for an objective authority to rub those idiot faces in their own economic reality.

  • DJR96

    I told my federal MP just the other day that the coalition will have to accept and adopt the renewables transition to have any hope in being re-elected. They’re simply unsupportable currently. Qld LNP lost partly due to advocating a new coal-fired generator. I don’t think the Libs in Tassie have a hope if they don’t support efforts to become energy self-sufficient as planned by Labor there. It’s just untenable.
    So don’t just whinge here, make an effort and write to your coalition MPs and set them straight too.

    • Hettie

      No no! Don’t do that!
      Coalition policies are so destructive on so many fronts that the last thing we should be doing is urging them to change such an important vote loser!
      By all means write to ALP and Greens, to encourage them to oppose the NEG and support renewables as an important vote winner, but do NOT go giving the Coalition ideas that could help them win again.

      • Peter Campbell

        Let’s hope that after the election they come to realise that their fetishising of coal and knee-jerk rejection of any consequence of climate science is what caused them to lose badly. I am not optimistic that it will be so clear cut though. Lots of people are too tribally wedded to the LNP and will believe just about anything they say, no matter how nonsensical.

        • Hettie

          Peter, there are a couple of things to ponder, here.
          1. There is a very strong Australian pattern of not sacking a first term government. I think it’s related to the fair go. Give them another chance.
          Despite that, 2016 was very close run.
          2. In recent years, the polls have shown Coalition supporters to be concentrated among older voters. Not all older voters are Coalition supporters, but many Coalition voters are older Australians. And older people die. Every year, more of those rusted on don’t need to think about it my family have always voted Liberal/ Country Party robots die. The working class ones.
          They are the generation that left scool at 14, never learned about critical thinking, or evidence, or anything much except what will the neighbours think.

          I’m 72, and I grew up in NZ, came here as an adult, and was astonished by the fact that there had been virtually no preparation by Australia for Britain joining the Common Market, which had just happened.
          NZ had been developing alternative markets for nearly 10 years, and was ready. Australia had said nope. Won’t happen. They won’t do that to us, she’ll be right. Whaaaaaaaat? ?.
          They can’t do that.
          Sorry, mate, they did.

          And it is exactly that attitude which is part of the support for the coalition.
          But the younger, better educated, critical thinkers are gaining ground.
          So don’t give up hope.
          There are still a great many sheeple out there, and Rupert tries very hard to keep them ignorant, but he is losing.
          Be of good heart.
          The ALP lead is substantial. Shorten has just about promised, in launching Ged what’s her face for Batman that he will kill off Adani.
          We have to have an election soon.
          The good news is, this mob are so incompetent and divided they struggle to get anything done. So the amout of damage they can do in the next few months, with a hostile Senate, is pretty limited.
          Cheers.

          • Marcus L

            Nicely said, Hettie.

    • mick

      what she said dont help them

  • Ken Dyer

    The NEG does nothing to reduce the use of fossil fuels. The NEG entrenches power and privilege for the few, and favors fossil fuels that are owned by a few very rich people. Now we see the consequences from using fossil fuels in global warming, pollution, early death, etc. The NEG is complicit in this.

    • Hettie

      That is exactly what it was designed to do.

  • Rob G

    Crafted for the LNP and their coal buddies meant it was always going to be a lemon. Only a couple punishing elections will teach the LNP that Australians need and want certainty and a positive shift to renewables.

  • Hettie

    How pleasant it is to be vindicated.
    To have an expert body confirm that the NEG is a very smelly brainfart, designed to protect coal at the expense of renewables, reliability, security and consumer dollars.
    Now it’s up to COAG to keep delaying it as long as possible, rather than block it decisively. That way, we get to the next election without a decision being made, and a new government will not have to undo a whole lot of new regulations, just axe all fossil fuel subsidies and rebates for off road use of fuel (except perhaps for farmers), and get serious about an ETS, mandate EVs for all Gov’t fleets, immediate tax write off for high speed charging points in petrol stations – say one for every 4 or 5 petrol pumps in metro areas, and more incentive for isolated places. Some petrol retailers run on very low margins, so will need more help to over come the great range anxiety issue.

  • john

    I feel that getting agreement from the states to implement the NEG is going to be difficult.
    There has been a strong push by some sections of the LNP to build a new HELE plant and the supporting information used is incorrect as to the relative prices of both RE and for the HELE as well.
    Attached is the information and notice the fuzzy layout to further ensure that it is hard to work out.
    Click to enlarge then click again so that it is easier to work out: just look at the figures wind is over 100MWh

    https://uploads.disquscdn.com/images/31e8e1edbeb2acca38f5c74fcbb64e4d592f9ea797ffcb2711f64943ddc3c618.jpg

    • Hettie

      Yes well. Hele seems to be something of an urban myth.

    • Jo

      Can you see that the costs for solar are from yesteryear?
      Cost of solar is less than half of that now. and falling ….

  • howardpatr

    When will the chairman of the AEMC, John Pierce, be forced before a Senate Estimates Committee to answer some well thought out question about his role in representing the interests of the fossil fuel industry?

    • Hettie

      Soon, please dog, soon

  • Robert Comerford

    HELE … does that stand for ‘high emissions large expense’??