The consensus from large swathes of the mainstream media appears to be clear: the Turnbull government’s new climate and energy policy, known as the National Energy Guarantee, has been approved by the Coalition party room, therefore it must be OK.
It’s true that this is the first energy policy to be approved by the party room (apart from decisions to not do things, such as the canning of the carbon price and the attempts to destroy the renewable energy target). But that milestone does not make it good policy.
Yet, this is what the media would like us to believe. “At least for once, don’t let politicking kill off a workable energy policy,” wrote the Guardian’s Katharine Murphy. Paul Kelly in Weekend Australian took a similar line. The assumption being that the biggest threat to this “policy” is Labor not acting like “grown-ups”.
But that is the problem with the NEG. It is actually not policy at all, but just the idea of one. And attractive as it may be to some on a notional level, it is a long way short of being “workable”. It is actually just a political document, rather than a policy one, and it should be treated as such.
To suggest otherwise would mean that politics indeed has trumped over policy. What we need from media is critical analysis of the policy, not just a rubber-stamping of government assurances that say ‘trust us, we’ll be OK.’
So, here are 30 reasons why the NEG should be approached with caution. And they amount to 30 things that the Energy Security Board needs to take seriously and address if the policy – and the ESB itself – is to have any credibility at all.
1. The NEG is not “policy”, but a “political” delay: It’s the germ of an idea, and represent yet another delay. The Coalition delayed policy pending the Finkel Review, and then delayed it further pending consideration of his proposed CET. Now, presuming the states agree, the policy will be kicked further down the road, pending yet another detailed report from the Australian Energy Market Commission, which to the discomfort of many, emerges as the central design authority. How the reliability component will work won’t be known till late 2018, and the environmental component till 2019. By then, we would have had another federal election.
2. Low-ball environmental targets: The 26 per cent emissions reduction target below 2005 is at the lower end of the Coalition government’s own modest target, will put greater obligations on other sectors of the economy, and falls well short of what is needed to meet Paris climate targets (remember well below 2°C).
3. No long-term term target: There is no long-term environmental target, which is useless for investors making a decision for assets that are supposed to last for 20, 30, 40 or 50 years, and which has been the cause of their lack of investment in the last few years. Because of that …
4. It doesn’t address carbon risk: Any decision on climate targets could be reversed or augmented by a change of government, or policy. The only way to address that is to have a long-term target (Australia used to have one but it was dumped by the Abbott government).
5. ESB told to ignore environmental policies: The ESB has even been told that “modelling should also assume a constant target post-2030.” What does that mean? We asked Frydenberg’s office but got no response. It suggests that the ESB is being asked to ignore long term targets. Interestingly, the ESB’s charter says it should not look at environmental issues, but only reliability. Yet, this policy proposal suggests it should address both, but only the environmental targets given by the government, not the environmental targets it has signed up to on the international stage (Paris).
6. It may not even be scalable. BNEF says the scheme design may not be able to be scaled up, because it makes no difference between brown and black coal, and may not be able to stop retailers bidding in their coal assets at a low price, to ensure they get dispatched. “The mechanism may start to become ineffective with deeper emissions reductions targets,” it says. If this is the case, then what is the point? Apart from politics.
7. No long term investment certainty: The lack of a long-term target means that there is no certainty for investors, a point also underlined by Morgan Stanley. “The risk of political interference in the targets may reduce investor confidence in the scheme, particularly where there is no explicit linkage to Australia’s Paris Agreement commitments,” it says.
8. And it could also take away short-term market certainty too. This, at least, has been provided by the renewable energy target. But for reasons ex CEFC chief Oliver Yates explains here and here, it could mean that “merchant” projects – those built by independents, and relying on market prices – could actually be killed off.
9. What is reliable generation? As Bloomberg New Energy Finance noted, there is not even any indication of what constitutes a dispatchable generator. “Known unknowns” abound. Each are worthy of their own category.
10. What technologies will be categorised as dispatchable? Does this include coal, slow to respond; or batteries, fast to respond? Will the slow and fast response markets be segregated?
11. What type of contracts will be accepted as part of the guarantee? Will it only be bilateral contracts, entered into with the big retailers?
12. Will contracts will be based on rated capacity (MW) or generation (MWh). This is critical, as it will indicate how much the regulators want wind and solar to look and act like baseload, or whether they are looking to the new market design of dispatchability and flexibility.
13. Whether synchronous generation will be specifically required: This will be key for technologies like batteries. The South Australia government came up with a similar scheme called the energy security target. It defined the “security” as “synchronous” only. It was told that this did not reflect modern technology views, would favour gas over batteries, and would reinforce power of incumbents and send prices higher. It dropped the idea.
14. How much of each retailer’s peak demand forecast will need to be covered? A key issue and not necessarily one that we would want the retailers to decide for themselves.
15. Will retailers will be able to utilise ‘behind-the-meter’ capacity? This is a question about both the possibilities of demand response and household batteries, now referred to as “virtual power plants.”
16. International permits: Giving access to international permits means that big retailers could invest in Peruvian landfill gas operations of Chinese wind farms to keep their coal or gas-fired plants operating in Australia.
17. Will there be a future for large-scale wind and solar? The ESB numbers (28-36 per cent renewables by 2030) is most likely a political number designed to get through the Coalition party room, but it’s a frightening one, because it assumes a share of renewables lower than business as usual –and if including rooftop solar, then virtually static. BNEF says renewables will already be at 28 per cent by 2020 (including small-scale solar). If coal generator exits are made as currently planned, then 4.8GW of new wind and solar could be built. But the scheme seems designed to keep the coal generators on longer than thought. That, combined with a potential push for demand response, etc, could kill the market for new wind and solar farms.
18. Snowy Hydro could also drive out competition: Snowy Hydro’s boss has been busy panning both battery storage (terribly expensive) and demand management (it’s like the lights going out). The proposal for the government-owned Snowy Hydro to build Snowy 2.0 could crowd out new wind and solar plants, turning it into a storage system for excess coal generation, and a return to regulated markets.
19. Lack of transparency: The Coalition doesn’t want to admit it, but the scheme proposes a form of carbon credit, but it would be hidden from view because it would be locked up in caps and hedges, and other instruments sold in the opaque energy markets.
20. Lock in power of incumbents and reduce competition: The fact that most of the targets will be met with bilateral contracts reminds most analysts of the regulated markets of the 1980s and will inevitably lock in the power of the incumbents. “These entities already wield considerable power in retail markets due to the benefits of incumbency and vertical integration, which has allowed them to achieve high margins, to the detriment of customers,” BNEF notes. “Increasing the advantages of incumbency, vertical integration and credit-worthiness by placing heavy obligations on generation purchases could exacerbate these problems.”
21. Power prices will not fall: If there is no additional competition, the chances of prices going down are minimal – even the ACCC makes that clear. The $110/year saving for consumers by 2030 cited by the Coalition is now revealed to be a made-up number. Even if that number was true, it would barely scratch the surface of the yearly bills consumers are now paying, mostly as the result of a lack of competition – monopoly networks and a generator oligopoly exercising their market power on prices.
22. The policy locks in current high prices as reference point: Asking consumers to continue paying the ridiculously high prices for grid power is asking for trouble. The CSIRO and the network owners have made that clear in their detailed report last year. It will simply push more people to go off-grid, taking advantage of lower solar prices and falling storage costs.
23. More gold plating? It could gold-plate generators in the same way that networks gold-plated the grid. BNEF notes the demand forecasts set by AEMO will be used as a reference point, taking away the ability of a retailer to form their own view of demand, and invest accordingly. “Given AEMO’s demand forecast has proven drastically wrong in the past, there is a significant risk of error.” Overshooting could result in excessive investment (gold plating) that could open up claims for compensation.
24. What happens to WA and the NT? This scheme only address the National Electricity Market, which is the eastern states and South Australia. It will mean there is no policy in WA or the NT. That could create particular problems for the huge pipeline of projects and opportunities in Western Australia.
25. What will happen to state targets? Ostensibly, the states will be able to continue with the individual targets, but the levels of “dispatchability” required under this new program could be an issue.
26. It doesn’t address technology risk: The lingering fear of investors in new or even existing coal and gas plants is that their investment will be made redundant by new technologies (batteries). One way to address this is reverse auctions, as David Leitch recommends (hear our podcast), but a market mechanism like this doesn’t address this issue.
27. Will it represent a threat to household solar? High prices mean one thing, that more consumers – both household and business – will continue to invest in rooftop solar. That’s a good thing, but not if it becomes part of the ESB’s dispatchability considerations and policies are put in place to limit or control the uptake.
28: Is the Energy Security Board an independent body? The states have questioned why the ESB, created as a COAG body, has been used to prepare a policy document with no consultation with the states, and then as a marketing body for the policy, and as a human shield for Turnbull. “We’re just doing what the experts tell us,” says Turnbull. It wasn’t such a convenient line when Finkel prepared his exhaustive report.
29. Will there be an oversight of the AEMC? The AEMC has upset many people in the industry with its endless delays to proposed rule changes and its rejections of others. Which makes many suspicious why it has acted with such alacrity proposing a re-write of the NEM rules in a matter of weeks.
30. Will it ever happen? Given the policy details are unlikely to be presented until the next election is due, it is debatable whether there is actually any commitment to the policy, and it may just be about politics after all. In which case, Labor has every right to call it out for what it is, and isn’t. And so do others.
And, oh, there’s more, much much more. But we’re running out of time, and virtual paper.