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Investor confidence could be smashed without additional detail

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Broken_Solar_Panel_and_Solar_CellContrary to what Australia’s environment minister proclaimed on ABC TV program The Insiders on Sunday, the National Energy Guarantee provides no confidence for investment.

In fact, unless the government take swift action to address the total lack of detail it will have the opposite effect – and effectively freeze investment – just like it did when former prime minister Tony Abbott tried to scrap the renewable energy target. 

The letter of advice (LOA) issued by the Energy Security Board is another plan to produce a plan. It is not a policy. The only thing that it does do is to make certain that there will be no detailed policy on which to make investment decisions for more than 12 months . 

Think back. The government delayed policy awaiting the Finkel review. Then it delayed the decision on the clean energy target. Now it awaits another report that it could again reject, causing yet more delays. This plan to provide a plan is almost the worst outcome possible for investment certainty.

The NEG Plan is “ingenious” – as foreign minister Julie Bishop describes it – mostly for its ability go involve an emission trading scheme that will establish a carbon price, and without actually saying so.

Both an ETS and a carbon price have already rejected by the Liberal party room before, so the question remains: When the ESB return and make it clear in the final design that there is a form of carbon price, will it again be rejected? 

The NEG plan calls for energy retailers to create an “energy porridge”, which requires them to have just the right amount of dispatchable power with the right level of emissions – a requirement to be tested by yet another government beast that is to be formed called the Reliability Panel. As if we didn’t have enough regulators already.

You might think that having an emissions system in the proposal will ensure that emissions will actually be reduced as retailers will be required to buy clean energy.

Think again. Rather than making the electricity market clean up its own act in Australia, polluting generators can reduce their carbon intensity of electricity by buying carbon credits from Chinese wind projects or pig farms.

Therefore, to actually meet the intensity target you don’t need to reduce actual emissions at all, but can import carbon credits. That means that you can build a new coal-fired power station with impunity in Australia by buying 20 years of emissions for a few million dollars.  

That means that under this proposal there is no certainty that any renewables will need to be built to meet the emissions intensity terms of it, and therefore more investor uncertainty.

The LOA has numbers in it for fossil fuel generation that are totally inconsistent with the climate science or Australia’s fair carbon budget. It says that the best they can see is that fossil fuel generation will only fall to 62 percent of generation by 2030.
That is way off course, and it would mean other sectors of the economy would need to reduce emissions that the electricity sector won’t.
We know that reducing emissions in other sectors will be more expensive, so in effect the government is going to blow up costs in other areas of the economy to keep its friends in the electricity industry happy.

Governments can’t beat science and therefore any policy that is inconsistent with science will be discounted as credible by the investment community.

They will be uncertain when the government will have to change its mind, as they know governments can’t defeat science and they know that a Labor government would change the emissions intensity target anyway.  

This all leads to uncertainty about the correct emissions trajectory to assume for investment purposes … adding yet more uncertainty .

The only other numerical detail in the document is related to the level of expected future investment in renewables.  The NEG letter suggest that the amount of additional clean energy generations is about 6 per cent over the next 10 years, or 0.6 percent per annum. It may actually be less.

Worryingly, the government seems to have confirmed that they will not change the current RET, a lingering mechanism that allows any new projects to also generate certificates.

This decision seems intentional as the government is fully aware that not changing this aspect will cause a crash in the price of renewable energy certificates, effectively putting a stop to any merchant projects that might have been expected to help meet the actual target.
This will have a perverse effect – ensuring that the market price of RECs stays high for longer, adding to energy cost, before falling off a cliff. Has anyone told the minister that investors don’t like price volatility?
To win the support of state energy ministers, it appears the proposal allows each state to set their own emissions path. That could be a positive, as the proposed federal reduction of emissions expectation are far too low. Amazing. The feds one day claim states must not go it alone, and the next they say they can.

Finally, to put a nail in the coffin for investor confidence it appears that the government is planning to take the electricity market back to the 1980s.

Currently the wholesale power market lets anyone buy or sell power through the derivative and future market, creating a deep liquid market. That could all be undone by these proposed changes.

This proposal destroys the liquidity in the wholesale market and plays into the hands of the large retailers, as you need to trade in a bilateral contract with them – concentrating market power again.
It suits the large generators as they will be able to earn a return for stranded gas assets that they don’t currently operate because they will be able to sell the “dispatchability” value of these assets. This creates a de-facto “capacity market”. What this means for investors or the market is anyone’s guess, but you can imagine, it won’t be good.
That an environment minister can welcome the proposal proudly, saying on Insiders on Sunday that it “gives coal a very good chance of continuing and extending its existing life” is highly disappointing.
If the government or members of the ESB want community support for this plan they had better demonstrate that they understand the community expectation about having an energy system that is reliable and cheap without compromising the very moral responsibility we all hold to future citizens.
We need to get real on emissions pathways that are consistent with the critical need to address climate change risks. Make the electricity sector address its responsibilities itself, without resorting to including carbon credits from alternative systems.

  

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  • David leitch

    A number of excellent points. Its the international credits part that I personally dislike the most. The history of these is entirely scandalous with Europe wasting billions on schemes that were virtually fraudulent.

    I do think that uncertainty around the current RET could easily be fixed if the Govt wanted, just by announcing that new projects created after 2020 must be voluntary surrender. That would be a token of goodwill by the Govt and a sign that the Federal Govt proposal is intended properly.

    There clearly are other problems with the scheme and I trust the State Govt can stick to their targets and reverse auction programs. Australians deserve more supply and more competition and the State Govt are well placed to fulfil this role and thereby increase supply thereby enhancing security and lowering consumer prices to an extent.

  • Joe

    I watched Joshie F on ABC’s The Insiders last Sunday and he was good with his political spinning about The NEG. But when pinned about that $115.00 yearly savings, sometime next decade, the word games were a treat to hear. The whole exercise of The NEG is about conning the punters by telling them things that they want to hear. Let’s see the policy that Turnbull keeps trumpeting…..that media release by the ESB is headline talking points.

  • Mike Westerman

    Fortunately, the SA, Vic, Qld and even Tas governments have got too much to lose by delays, and with a restive population of voters many of whom know from first hand experience how much they can save with solar, without waiting for some nonsensical pie in the sky. The NEG even in its vague form will be forgotten about by next week, as the states get on with the job of delivering security and lower prices. Kidston is on the way, SA will soon announce projects under its Bulk Energy Storage funding, Tas needs to beat the next drought with wind projects. The Feds have just proven to everyone they are a waste of space, incapable of producing anything other than delay and waffle.

    • BushAxe

      I beg to differ, ultimately I think NSW has the most to lose being the biggest market with a fleet of coal generation on the way out and very little in the way of new proposals compared to market size. If they don’t start soon they will be dependent on the surrounding states feeding them.

      • Mike Westerman

        Sure but it’s already dependant on Qld

      • RobertO

        Hi BushAxe, I agree we have lots of small Solar and a few wind projects in the pipe line, but no where enough. We are going to need big Interconnects built, NSW to QLD, NSW to SA and NSW to VIC linked to Bass Link 2. In 2 years time things may change but the Interconnects take 5 or more years so were stuffed, prices will rise in NSW by about 20% pa for the next 4-5 years, and we will need Demand Management to stop blackouts on most occasions, we might have some blackouts if heat continues to rise, about 1 C is enough to put most of our thermal heat exchanges at risk.

  • howardpatr

    Turnbull and the Coalition will continue hiding behind the ESB and just watch the ESB hide behind the Prime Minister as he dances to the tune of Abbott and Co.

  • bruce mountain

    Thanks Oliver, great insights.

  • Ken Dyer

    I take the points raised in this article but tend to disagree based on the following:

    The Queensland government in Australia has submitted an open tender calling for the development of 400 MW of large-scale renewables and 100 MW of energy storage projects. It has received 115 proposals from 79 different companies for the program.
    Bids were placed on projects in a large range of technologies and energy storage projects. Among these were a 2200 MW wind energy project, a 6400 MW solar project, about 500 MW of other renewable energy technologies adding to 6,000 MW of energy storage projects. This is greater than the current 8,200 MW generated by coal-fired power stations and is further proof that Queensland does not need a new coal-fired power station being trumpeted by the LNP.

    The Unisuper fund in 2016-2017 returned 22.32% for Global Environmental Opportunities that comprise a diversified portfolio of international companies whose
    business activities seek to address current and emerging environmental
    issues and opportunities and make a profit from these activities.
    In contrast, the Balanced option returned 9.79%.
    https://www.unisuper.com.au/investments/investment-options-and-performance
    A return of over 20% makes more sense than all the bulldust emanating from Canberra. No wonder they want to nationalise our superannuation. It is an amazing Australian success story, no thanks to the COALition.

  • jm

    isn’t the point of the policy to cripple the confidence of investors in Renewable Energy while trying to encourage investors in coal and gas?

  • “Mr Coal” Josh Frydenberg, Calculates that $3 billion subsidies to renewable energy amounts to a subsidy of $66 billion up to 2030. He claims he is removing subsidies to make ‘Renewables’ operate on a level playing field.
    Unfortunately for Josh Frydenberg the International Monetary Fund has calculated Australia’s subsidies to the fossil fuel industry is $41 Billion per year amounting to $533 billion by 2030.

    Corporations have, because of the growing treasure accumulating and the political power they have gained, plus annually some $6 trillion of subsidies paid by world governments to keep the provision of a unit of fossil fuel energy, at an apparent but illusionary moderate price to the consumer.
    Minister Frydenberg, claims “Coal is reliable and affordable,” that is only if you don’t count the $41 billion per year subsidies Australian taxpayers ‘give’ to Fossil fuel corporations on top of their power bills. That amounts to $1,712 for every man woman and child in Australia, according to the IMF.
    Air pollution caused by burning Coal contains 92 toxic chemicals and micro particles that penetrate straight into the blood stream through the walls of your lungs.

    In addition, toxic metals and POPs have severe impacts on ecosystems. This is mainly because of their environmental toxicity and, in some cases, their tendency to bioaccumulate, a process whereby the toxin cannot be digested and excreted by an animal and, therefore, slowly accumulates in the animal’s system, causing chronic health problems.

    Biomagnification within the food chain also occurs, thereby increasing concentrations of a pollutant in the tissues of organisms at successively higher levels in the food chain.
    This is how, coal created air pollution kills 11 million people world wide each year.

    What dollar value would you put on that if one of those dead was someone you love?
    Shelagh Whitley, a subsidies expert at the Overseas Development Institute, said: “The IMF report is yet another reminder that governments around the world are propping up a century-old energy model. Compounding the issue, our research shows that many of the energy subsidies highlighted by the IMF go toward finding new reserves of oil, gas and coal, which we know must be left in the ground if we are to avoid catastrophic, irreversible climate change.”

    This is real money which could be put into schools or hospitals. It is simply not economic to invest like this. This is the insanity of the situation.

    They are diverting investment from economic low-carbon alternatives such as solar, wind, wave or tidal power and hydro-power and they are undermining the prospects for an ambitious UN climate deal.To Create a level playing Field all Fossil fuel subsidies must go.

    Further, a person in high office using the power of that office, to create a benefit for one sector and a deficit for another, is committing a wrong or tort, known as Misfeasance. A very serious matter, because only Minister or Prime Ministers and public official at the highest level can be charged with this crime.

    Prime Minister Turnbull and Minister Frydenberg committed misfeasance at the press conference on national TV in Canberra on Tuesday the S of September, being recklessly indifferent as to whether they were exceeding or abusing their public power or position thereby risking harm; they both did this by declaring renewable subsidies to be soon abolished (they have been trying to do this since 2013) to create a level playing field but leaving subsidies for Coal fired power ten times larger unchanged.
    The level of misfeasance and political corruption, in the Federal and State Governments will someday soon be addressed by the courts as a matter of urgency.
    The High Court and Federal Courts, are the only Judicial bodies with the constitutional authority to address executive levels of wrongdoing.

    All donations to the LNP by Coal and Oil industry players must be traceable back to subsidies received out of taxpayers funds.

    After 16 years of the Iraq war, we find it has cost $6 trillion. Now we know the level of corruption, “Political donations” and back handers between the Fossil Fuel industry and political leaders has reached $6 trillion every year, all around the world.

    Its’ time, for a fresh election.

    John Ward

  • John

    No doubt the aim is to cripple confidence.

    The thing that is different now is renewables (generally) are cheap enough to undercut fossil fuels. This was not the case when Abbott was in charge.

    My question… Is the NEG even relevant?

    I’d like to see any NEM related body say NO to new renewables connecting to the grid. They might do it once. If the public outcry doesn’t stop them the crowd funded law suit for anticompetitive behaviour will.

    Remember public outcry killed the solar tax.

    Appreciate hearing any counter argument.

    Enjoy your day

    • Mike Westerman

      No doubt this is their aim, but the outcome may be perverse. It will not affect rooftop, and with large scale solar and wind prices dropping so low, owners will continue to bid them at zero or negative knowing that the interval price will continue to be set by very high priced gas. When pumped hydro starts to displace gas in the merit order, solar will be by then cheap enough that the firmed up price thru pumped hydro will be below gas or new coal. With gas out of the market, the question will be how long coal can stay afloat with low prices set by excess solar during the day so their market is only overnight, where they periodically will be displaced by wind. I think wind will be the trickier investment over the medium term.