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The NEG: A carbon price by any other name

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Assuming the effective design and implementation of a final policy framework, the government’s announced National Energy Guarantee (NEG) provides an alternate approach to maintain reliability in the NEM, and contribute to Australia’s emissions reduction commitment under the Paris Agreement.

Below we outline our initial analyst response and implications for energy and carbon market dynamics.

A CARBON PRICE BY ANOTHER NAME?

  • While it may be more efficient to establish a market mechanism with certificate prices for emissions reductions that could be traded transparently, the attributes of the NEG will in effect establish a de facto price on greenhouse gas emissions from the power sector, and provide a robust source of demand for Australian Carbon Credit Units (ACCUs).
  • A 26 per cent cut in electricity sector emissions (on 2005 levels) would not equate to Australia meeting its Paris commitment. Modelling indicates that such a cut would reduce national emissions by around 40 Mt of CO2e in 2030, an 8 per cent cut on 2005 emissions levels. This would leave a shortfall of 119 Mt to meet Australia’s 2030 target. The cumulative reduction from the electricity sector would therefore be approximate to forecast emissions growth from non-electricity sectors over the same period, leaving national emissions flat.
  • Nonetheless, should the NEG be designed and implemented to succeed, it is likely to be an effective mechanism to define an emissions reductions pathway for the electricity generation sector, while maintaining system reliably.
  • The availability of large volumes of domestic Australian Carbon Credit Units (ACCUs), at low prices, will provide Australian policymakers with significant flexibility in designing a mechanism that is able to keep compliance costs low for electricity retailers (and all sectors of the economy), while appealing to the environmental lobby’s desire for domestic action.

SUPPLY AND COST IMPLICATIONS FOR CARBON OFFSETS (ACCUS)

  • An obligation to reduce emissions in line with the Paris Agreement will place at least part of the compliance obligation to reduce emissions on participants active in wholesale electricity markets (e.g. retailers), establishing an effective source of demand for ACCUs.
  • Australia has ample domestic abatement to meet a 2-degree target under the Paris Agreement, with around 600 million tonnes (Mt) of emissions reductions available across the economy by 2030. This is equivalent to Australia’s emissions in 2005, the baseline year for Australia’s contribution to the Paris Agreement.
  • We continue to project rapid growth in ACCU generation, with issuance projected to double to approximately 20 million per annum to fulfil mandatory delivery contracts under the ERF. Without additional demand for ACCUs beyond the ERF, issuance is forecast to remain relatively stable beyond next year, with supply growing towards 2022 due to the accelerated growth of a number of sequestration projects.
  • Under current policy, ACCU issuance will be surrendered under the ERF rather than enter the wider supply pool. Subsequently, by entering into 7-10 year delivery contracts, the ERF will lock away ACCU supply away from high emitting companies. This is projected to heavily influence ACCU availability and prices. To access our full ACCU supply forecast, please click here.

RELIABILITY OBLIGATIONS MAY IMPOSE GREATER COSTS ON DEVELOPERS

  • How much dispatchable generation is required in any region will depend on many factors, with a minimum dispatchable capacity required to maintain system reliability likely to be defined for each region.
  • This is likely to encompass: capacity closure schedules, concentration of available generators, expected future trends in peak power demand, the extent of variation in VRE generation, penetration of behind-the-meter solar PV, size and interconnections with other NEM regions, strength of the network, the load profile, total regional VRE generation relative dispatchable capacity, wholesale and contract market considerations.
  • In practical terms, the GRO will impact investment decisions for new generation projects, potentially imposing greater costs on VRE generators to provide dispatchable capacity by pairing projects with flexible storage – or firm power contracts – when and where flexibility may be needed.
  • The constraints and objectives of the GRO will therefore need to be integrated into existing planning and investment decision making, meaning service providers, generators and large consumers must be able to make efficient decisions on the value, and optimal location and monetisation of flexible resources.
Hugh Grossman is executive director energy and carbon markets at RepuTex Advisory

  

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  • Craig Allen

    GRO?

  • Ray Miller

    Hugh this is a very optimistic assessment. I would not exclude this happening but is in congruent with the words and smiles on Tony’s face.
    The members who make up the ESB include the AEMC who have an extremely poor record of good independent decisions, siding more frequently with the large existing players protecting their interests and profits. If they would just pass the 5 minute rule I might have a different view. It would seem that the AEMC has done some “modelling” in record time and now Malcolm is promising some notional reduction to the customers next decade (very much smoke and mirrors).
    Then recall last summer which had a couple of very hot days on the eastern seaboard which added 14-20% increase on the bills of NSW and Qld for every day the next year! This is what our energy system is up against. Without dramatic improvements in energy efficiency in our buildings, appliances and industry it is going to be impossible to keep a lid on prices and emissions in a warming climate. Rearranging the deck chairs is where we appear to be.

    The bottom line is we need our energy systems to dramatically and quickly reduce our carbon emissions to be in keeping with the ‘physics’ and avoid smoke and mirrors. If what you are saying is true, I would need more faith in the current management system then has been earned by them so far.

    • solarguy

      I agree with you Ray. The fact the bastards are removing RE subsidies and capping RE generation is very concerning indeed. Abbott will be jerking off to this in the mirror.

      • Joe

        winky, wanky, winky, wanky…

  • howardpatr

    Reputex – are you suggesting that PM Turnbull is in the initial stages of stem cell therapy; aimed at restoring his spine?