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What Frydenberg was told about why NEG was bad policy

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Medium

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Lane Crockett at IIG’s Mount Majura Solar Farm.

By now, it’s clear that the government’s latest energy policy, the National Energy Guarantee (the “NEG”), is probably dead on arrival. That’s our assessment, and it gives us no pleasure.

There is a better alternative, taking the lead of the UK, Germany, Portugal and yes, even China, who have all set policy to move aggressively towards clean energy.

None-the-less; there are still good reasons to pick through this mess and understand why it’s so wrong-headed and why it won’t fly, not least because the stakes are so high. These high energy prices affect every home and business in Australia, and our current energy system is simply abhorrent.

It’s running up environmental debt our kids will pay, and quite literally killing people in each year we keep burning coal (keep reading for the evidence).

Earlier this month, the minister in charge, Josh Frydenberg, invited one of our friends and investors for a private briefing on the NEG. Our friend got in touch with us, so he could go into the meeting well-informed. Here’s what we told him about our view of the NEG.

* * *

We’re coming at this as an impact investor; a funds manager that looks for attractive returns on investments that have environmental and social benefits.

We’ve arranged successful investment products for solar farms, wind farms, and green buildings.

So, we deeply understand the economics of energy. We also agree with the overwhelming weight of evidence; Australia must reduce carbon emissions to avoid the expensive, harmful and worsening effects of climate change.

* * *

The NEG is bad policy, and it’s based on bad modelling. We don’t think it will ever be implemented, but perversely, that raises more problems. (Stick around for some happier ideas and the much better forward path. They’re coming, we promise.) But first, let us count the NEG’s wrong-headed ways.

Firstly, the NEG’s goals are woefully inadequate.

This is old news, and the world agrees. We must cut emissions to 40%-60% below our 2005 levels, by 2030. The NEG’s underlying model has us reducing by only 26% by that date and then flatlining.

That is climate malpractice. We won’t be able to hold global warming under 2°, and Australia would flunk the commitments we made to the world in Paris. You know who else doesn’t care about Paris? A clue: Rhymes with “rump”.

The NEG’s model implies that the proportion of renewable generation in Australia will rise until 2020 and then stay the same. Adopting those assumptions would send an incredibly strong signal to the renewable investors to hold their capital, or demand a high risk premium.

The result?

We hang on to our decrepit and harmful coal-fired power plants, and then — when those can’t be patched together anymore — the market will clamor for new renewable investment. Demand will force up the prices of capital, and the wholesale prices of electricity.

Even if the coal fired power plants were sparkling and new (they’re really not), we wouldn’t want to use them: Not only are they the worst, most climate-irresponsible form of electricity generation, they are hazards to human health. (Here comes the evidence we promised.)

The Lancet has published conclusions that coal-fired power plants cause around 24 deaths and 225 serious illnesses per terawatt hour of electricity, due to the small particles and toxic chemicals they pump out. In the UK, they’ve pledged to phase out coal by 2025, and they expect that will save thousands of lives each year, and save the NHS up to £3.1bn a year through prevented illnesses.

So, the NEG goals are unambitious at best, and plain wrong at worst.

* * *

Secondly, the NEG is very badly designed (even allowing for its meagre goals), so it would have smaller intended effects, and some nasty unintended ones.

Some of the problematic effects would come from the policy’s “dispatchability targets”. The policy would require every electricity retailer to buy from sources that can be ramped up or down depending on demand.

For practical purposes that’s mostly the coal, gas and pumped hydro that are controlled by the big, vertically integrated generator-retailers like AGL and Origin (aka the “gentailers”).

We think this requirement will have dreadfully anti-competitive outcomes; the smaller retailers, the ones expected to force innovation, improve service and reduce prices, would effectively be forced to buy power from these big gentailers. Those companies are their competition. Good luck with those negotiations.

Theoretically, the Minister holds a big stick to penalise any retailer who misses their emissions reduction target. The government, the NEG suggests, could take away their license.

But we find it inconceivable that a Minister would actually do that to a big retailer; what a brave and electorally secure person that Minister would have to be, to trigger the transfer of power accounts of millions of households.

The NEG envisions sweeping changes to fundamental elements of a highly sensitive sector with numerous diverse stakeholders. The policy would impact spot pricing and established hedging products and result in less transparent, and therefore less investable market.

It will require a perfect definition of important terms like “dispatchable” in a highly imperfect world. All of that would have to happen amidst rapid technological change.

Australia’s recent track record implementing just a small change in the timing of spot prices suggests we don’t move quickly when it comes to altering these kinds of mechanisms (stay tuned to further commentary from us regarding the 5-minute rule).

There is nothing in the NEG to incentivise new generation capacity. Australia isn’t going to need less electricity, so the market will provide those incentives on its own; but it won’t be pretty.

Expect severe price increases when old generators become too expensive to repair and run, get withdrawn, rapidly dropping supply in the face of steadily rising demand.

* * *

Here’s the upside: Policy like this, that has been so roundly criticised, doesn’t stand much chance of getting passed into law. Not least because the States need to co-operate via COAG, and that’s highly unlikely (although it could cause a Frydenberg v Weatherill rematch).

That must mean that when some truly nation-building energy policy comes along, the contrast will be stark. It will be based in evidence, and the understanding that Australia will inevitably make a transition away from last century’s toxic, irresponsible, fossil fuel-fired power.

The right policy for Australia will recognise the fortunate reality of energy and economics at this point in history. The world in 2017 has the components for a clean, healthy, and robust alternative energy system. A generator mix of solar, wind and hydro can provide clean electricity in abundance.

This will replace the generators that emit pollutants that are damaging the health of their local communities.

The remarkable innovation in demand-side management and the plummeting costs of battery storage, in combination with pumped hydro, means we can complement the clean generators to balance supply and demand, and provide a truly reliable network.

Famously, renewable generation is already the cheapest form of new generation to build, and without fuel bills, the ongoing costs are negligible. These fundamental trends will not reverse. Now is the time to double down.

The article represents the views of Impact Investment Group and is opinion only. This article does not necessarily represent the views of our investors and is not investment, financial or product advice of any kind. We provide no warranties or representations whatsoever as to the accuracy, reliability or completeness of the information and accept no liability for any loss or damage suffered as a result of any reliance upon any statements herein.

Source: Medium. Reproduced with permission.

  

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  • solarguy

    This article is so obviously correct, that the only one’s who would disagree are the coal industry and their political puppets, the LNP, One Nation and the ignorant weak heads who vote for them.

    • Joe

      And QLD will be the test. QLD Labor is becoming more public in moving away from Coal. The opposing LNP and ON are 100% for Coal and building new Coalers with private money ( The LNP ) or public / taxpayer money ( ON ). Now it is over to the QLD punters on election day, there are no excuses anymore.

  • Robin_Harrison

    Of course there are profound environmental reasons why this energy transition is vital. Unfortunately in our political system the environment has been reduced to an ideological bunfight because our democratic political systems operate almost entirely on ideology. When ideology rules logic, reason, facts and truth are the first casualty, in fact they seem to be prohibited.
    Fortunately the economic argument is becoming irresistible and getting more so. That should be a philosophical nightmare for their ideologies. A chance to seriously mess with their heads if we stop referring to the environment and concentrate on the superior economics.

    • Alastair Leith

      Concentrating only on the economics doesn’t win over all neo-liberals. They counter that if the economics are so great we don’t need govt subsidies or policy to bring deployment forward. Climate is the urgency factor, even if the economics are now also superior (certainly to a high penetration like 80% or more of the NEM/WEM).

      Fact is we still do need mechanisms to get renewables and storage deployed, and to plan for the transition. For one thing because energy is not a level playing field like a high street market for widgets and there gentailers have been instrumental in blocking renewables even under an otherwise successful RET to engage in profit taking at a direct environmental cost (which they dont pay of course, we do and people in poorer parts of the world exposed to droughts, floods and sea level rise do).

      • Robin_Harrison

        After more than a decade of the, now ideological, climate debate the deniers have the ascendancy resulting in some of the highest energy prices in the world and, subsequently, one of the highest uptakes of domestic and now commercial renewables. Despite any machinations of the political puppets on either side, economics is ruling the day.
        A sustainable future for our species is the urgency factor and, whatever it takes, that’s what we have to win.

      • technerdx6000

        The issue is, if there were no subsidies for any form of generation renewables would be so far ahead cost-wise you would have to be Tony Abbott to think otherwise.
        So when the the right wing say they want a level playing field, they mean only subsidies for fossil fuels which isn’t a level playing field at all!

  • Chris Fraser

    Excellent. Hope your friend gave the Minister a red-hot poker.

  • Ralph Buttigieg

    It would have been helpful if the author proposed an alternative policy, something which he did not do.

    • Lightfoot

      The proposed alternative to the NEG is the POS – Photovoltaic Omnipresent Synergy. So far the only details for it are the 3 words in it’s title – so about as much depth as the Liberals put into their NEG.

      • Ralph Buttigieg

        Thanks for admitting the writer has hasn’t got one

        • Steve

          Well the Finkel Review spent some time coming up with a well reasoned, science based set of proposals…

          • Alastair Leith

            The CET ambition on climate was also found to be wanting and not in accordance with Australia’s INDC for Paris let alone useful in getting us global warming peak of not more than 2.0 ºC.

        • Alastair Leith

          Gezz how many policies did Abbott axe or talk down to? Please keep up.

  • Jodie Green

    There will be a boom in demand for our emerging clean energy products, obviously, but it does still need sympathetic domestic energy policy, and NEG, it seems, aint it. Maybe the government does not yet understand the opportunity? How can that be remedied?