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Forget COAG – how durable is Coalition support for the NEG?

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The ESB’s report on the first-cut NEG modelling predicts:

  • BAU: no new coal, tiny bit more gas, a little extra renewables

  • NEG: no new coal, tiny bit more gas, quite a bit more renewables

The day has arrived —state energy ministers convened at COAG to discuss the next steps for the Energy Security Board’s proposed National Emissions Guarantee (NEG). But forget the energy ministers: as details emerge, how durable is Coalition support for the NEG?

Before this week, all anyone had seen was the ESB’s now famous eight-page NEG letter which the Coalition endorsed in record time.

When the NEG was nebulous, its boosters were able to promise all things to all people — a bright future for coal, more renewable energy, lower prices, high reliability, a pathway to meet Australia’s emissions commitments and peace in the party room.

The apparent (and much welcome) ceasefire in the backbench-led climate war that has been tearing the LNP apart since 2009 can only be maintained so long as each outspoken MP believes the NEG grinds the axe they personally bring to the party room.

Now we have a slightly more information — this week the ESB released the first modelling report to the states. Mainstream media have labelled this report as ‘modelling’, but alas, it is just a summary of modelling based on one set of assumptions, many of which have not been released.

(Based on what’s been released, it would not be possible to replicate the findings, and indeed Bloomberg New Energy Finance have produced their own modelling and arrived at different results.)

In a decade of reading almost every energy report from government, the ESB Report on the National Energy Guarantee is arguably the most unusual report to date. Here are the first 12 things that caught my attention:

  • We’re apparently not going to get any new coal

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Everyone in the energy sector already knew this, Professor Finkel reinforced it, Treasurer Scott Morrison has said effectively the same, as did AEMO in September, and now the ESB has delivered the message once again. (For those who think there’s a chance of new coal being built in Queensland, I’m offering 5-to-1 odds and you could probably twist my arm to 10-to-1.)

  • We’re apparently not going to get much more gas

Under business as usual (BAU), we’ll only see a 263MW over a decade (less than South Australia installed last month) and 12MW less that that under the NEG.

  • We’re going to get more renewables, how much is unclear

You can read the modelling report as claiming that the NEG will deliver a lot more renewables or conversely that it’ll put the brakes on. Either way, the modelling omits the fact that rooftop PV is growing at a massive rate and the economics make renewables largely unstoppable.

  • The RET, not the ESB, brings down energy prices

By now it shouldn’t surprise anyone that Renewables put downward pressure on energy price — take your pick of reviews: Dick Warburton’s attempted renewables hatchet job, the Climate Change Authority’s or Finkel. They all say the same.

More than two-thirds of projected energy cost reductions over the next 13 years will be delivered by the federal RET and state renewable energy targets — in Victoria, ACT and Queensland.

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  • The NEG’s case for reducing prices is weak

The ESB argues that with more off-market contracts, generators will bid low to ensure they are dispatched and this will bring spot prices down. However, with less electricity ultimately settling at spot prices, this is a hard argument to follow. Try to make sense of this:

  • It’ll take 13 years before wind energy prices fall to current levels!

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In early 2017 we’ve already seen a wind farm contracted at $52/MWh, not predicted until 2030.

  • Futures markets don’t buy the NEG

The green line below shows that the consensus opinion of energy futures traders is that either the NEG won’t reduce prices as much as claimed, or it won’t be implemented.

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  • Under the NEG Australia will renege on our Paris commitments

The modelling assumptions lock in a reduction of just 12 million tonnes of CO2 over the 2020s — from 142 Mtpa to 130 Mtpa — which is equivalent to just 0.75 Hazelwoods.

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Every credible study shows we must reduce emissions in the electricity sector by more than twice as much between 2020 and 2030, and that’s assuming (heroically) that global ambition won’t increase over the next 13 years.

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  • The NEG “may resolve, to a great extent, most of” the reliability issues we haven’t been experiencing

Yes, it takes three qualifiers to claim that the NEG will address non-existent reliability issues.

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  • The operation of the reliability guarantee is still anyone’s guess

The scant half-page explanation of the reliability mechanism still leaves open the question of what ‘dispatchable’ actually means.

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  • Apparently Snowy 2.0 is locked in, but most of the VRET won’t happen

While there’s a lot to like about Snowy 2.0, it’s still in feasibility. We don’t know what it’ll cost and we don’t yet know how long it will take to build. Unless the federal government is an episode of Utopia — surely not! — there’s still quite a way to go before we make the investment decision to unleash the tunnel boring machines to carve 27km of tunnels through the mountains.

Meanwhile the Victorian Renewable Energy Target is modelled to peter out after just 650MW — likely only 20%–30% of the generation built under the legislated target.

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  • Finkel and the ESB don’t see eye to eye on project financing

The Finkel Review made a major contribution to the national debate by explaining the significant variance in project financing between different energy technologies.

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The ESB see project financing quite differently — 8.3% (pre-tax real) under the NEG, regardless of technology, versus a 3% premium under BAU. Granted, Finkel was counting on the policy stability of a Clean Energy Target — still an option! — but the idea that project financiers are ‘technology neutral’ is not credible.

I could go on, but I reckon that’s enough of the minutia. Let’s bump up to a macro view.

While it apparently will take three years to make the relatively minor shift from 30-minute to 5-minute market settlements, the ESB is proposing to design and implement a major overhaul of NEM contractual arrangements in just 12–18 months on the back of rushed and opaque modelling.

I’ve introduced elsewhere the concept of the ‘energy quadlemma’ — the challenge of delivering reliable and affordable power while meeting our emissions reduction commitments and keeping the Coalition from blowing apart.

This first cut modelling shows that the NEG:

  • brings in no new coal and only a tiny amount of gas to ‘address’ a reliability crisis we don’t have
  • locks in failure of our 2030 emissions commitments
  • relies on a weak case to produce bill savings smaller than the RET
  • doesn’t deliver the goods for the ideologues on the backbench.

So what’s the NEG for again?  

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  • Peter F

    The NEG is a form of lie to keep things quiet in the Australian and on the back bench.
    Kerry Schott is a competent independent person but admits she knows little about the industry. That “independence” appears to be why she was picked so the old “experts” could bamboozle her. In her favour, I suspect she might be a bit quicker on the uptake than they would like.

    In the meantime there are three logical responses from the generators.
    1. Do nothing till the dust settles, we aren’t actually short of capacity as long as what we have and what is already coming on stream is managed properly.
    2. Continue building renewables particularly in NSW and Queensland where the full cost of new wind and solar is lower than the marginal cost of coal or gas for any generator coming off supply contract, and in Victoria where OC gas is now regularly supplying base load. At $8/GJ the marginal cost of OC gas generation is A$85-95/MWhr. Wind and solar can make good money at those prices even without RECs. Doing a swap with Southern hydro means that they both get higher prices for their power.
    3. Go ahead build the renewables and when (if) the NEG comes into force, build/contract some storage. The best solution would be storage factories around town that would be recharged off peak when line losses are lower, but failing that a 200 MW/400 MWhr battery farm added to a 500 MW wind farm would allow almost constant 24/7 200 MW production. Based on prices for Zinth and others and allowing for 30% cost reduction over the next few years the total investment would be about $1.3/1.5b. At current prices that is a break-even of A$70-80/MWhr including interest, depreciation and operating costs. If you can get o/s financing at 3% for 85% of the project then you can earn about 10% on your equity at an average power price of $60-65/MWhr not including REC’s. If you can sell RECs for even for the next 10 years at an average of $15 that would actually more than repay the entire equity and then you can sell wholesale Caps as well as receive “reliability” payments whatever they are.

    So the economic case for more renewables is still compelling even if the NEG was to be implemented, because even coal plants will have to add insurance costs to their contracts, because if they “burst a boiler” when they have contracted to supply they will have to pay for the peaking power at up to $14,000/MWhr to replace what they have not delivered.

  • Patrick Comerford

    You can view the NEG as a glass half full or a glass half empty situation. Me I’m a glass half full kind of guy. What do I mean by that, well Turnbull and co have monstered everything they have touched so far. The chances of this NEG ever seeing the light of day are slim at best and in its current edition zilch. So there is cause for optimism Turnbull and Fybro’s incompetence will ensure this little con will be stillborn. Technological development as ever will continue to lead the way into the future which is just as well because this Turnbull mob sure as hell are leading us up the garden path.

    • solarguy

      Yep, Turdbull definitely has sexy fingers.

      • mick

        passion fingers

      • rob

        and you would like that HEY!

  • Chris Fraser

    Such painful bureaucracy. We could simply replace all this guff with three words … 2040 RET 100%.

  • George Michaelson

    Is this really just a story (I mean the coal thing, not this article) about the debt to equity ratio? The only big variance I can see is that coal has this huge imputed equity which I guess is the implied value of the miners investment in plant. But would a HELE get that? Surely even new build (fantasy time…) Coal will be debt financed. No hele happening. Nobody wants to buy. How so? Well the cost of capital says the money people think it’s a colossal lemon.

    So this is a shitfight about sunk cost. Is that it? Somebody’s KPI is wired into an income projection off sunk cost, and the CFO refuses to write down the imputed income so we all die of asthma so they can meet their financials!