Coalition seeks to lock in weak emission targets under NEG

The Coalition government has indicated it will seek to lock in its weak emissions reduction targets by requiring a five years notice period for any changes to electricity emissions targets that will be central to the proposed National Energy Guarantee.

The requirement was one of  number of new pieces of information revealed in a 56-page discussion paper released by the Energy Security Board on Thursday, with less than two months before it will present a draft of the new legislation to COAG energy ministers in early April.

The draft report reveals not only the complexity of the proposed NEG, which seeks to impose both “emissions and reliability” standards on the market, but also how much work is left to be done. Still, the ESB were seeking to downplay some of the worst fears about the mechanism.

The ESB – made up of the three key energy institutional bodies and two outside directors – is seeking responses on a whole range of issues, including how contracting should be done, how emissions and reliability should be measured, the treatment of “carryovers”, and the use of offsets, compliance, and penalties.

The details remain opaque – and on this occasion the ESB has omitted any modelling that could create further controversy over the amount of renewable energy that might be allowed under the NEG, or the amount of storage.

But a couple of clear pieces of information emerged:

One is that the reliability obligation will be set roughly along the lines of current AEMO forecasts, from its medium term MTPASA to its longer-term ESOO (statement of opportunities).

It does say that a new mechanism, or new approach, may be adopted, and it is still considering a time-frame for its forecast requirements – from three years to 10.

But based on the latest ESOO, then for most jurisdictions in the NEM, including the renewables rich South Australia, there may not be any reliability obligation.

“The hope of all ESB members is that we never trigger the reliability requirements,” Clare Savage, the ESB’s deputy chair, told RenewEconomy. “There will be a window of opportunity to fill any potential shortfall. The market will do what a market does best.”

How the market fills that shortfall is yet to be decided. It could be through contracts, it could be through swaps and caps, it could be through an auction (book-build) conducted by the Australian Energy Market Operator.

Reliability in terms of the NEG is considered to be adequate supply, having enough megawatts at a point in time to meet peak demand.

The ESB says it is not to be confused with energy “security” (inertia, frequency response, etc), which will be dealt with through different mechanisms. The reliability requirements will also need to take into account other key initiatives (day ahead markets, strategic reserves, and demand response).

Some of these issues have put two of the institutions that make up the ESB – AEMO, the operator, and the Australian Energy Market Commission (the rule maker) – at apparent loggerheads.

However, the prominence given to demand response – a technology strongly favoured by AEMO and so long-ignored by AEMC – will be pleasing to many (apart from those troglodytes that consider demand response to be the equivalent of mandated blackouts, which they are not).

One of the biggest criticisms of the NEG as originally unveiled, was the danger of entrenching market dominance by the big “gen-tailers” – the likes of AGL, EnergyAustralia, Origin and Snowy Hydro.

The ESB says it is confident that it won’t result in reduced competition, and is aware of the risks, but doesn’t exactly spell out how it will be avoided.

In fact, it says it won’t be able to do that until the scheme design is further developed.

“The (ESB) considers that the design of the Guarantee should make sure that it does not unintentionally further entrench market power and create barriers to entry for smaller players,” it writes.

“However, the Energy Security Board considers that further consideration cannot be given to these issues until the design of the Guarantee is further developed.”

That underlines how little the NEG has evolved, despite its apparent complexity. Yet it seeks stakeholder feedback in early March, will present a draft to COAG in early April, and hopes to have it all wrapped up, and potentially legislated, by the end of the year.

Isn’t that an awful lot to do in a short period of time? “My view is that we haven’t got time to waste,” Savage says. “We need to ensure we have got this mechanism up and running so it can provide investment signals to provide replacement capacity.”

The other main criticism of the NEG was the indication from its initial modelling that it would result in little new investment in renewables. There is still no clarity about how that will be achieved.

Savage said she has no doubt that wind and solar will form the cheapest form of new generation, and the addition of storage in new projects was encouraging.

Ultimately, however, that will come down to the government, which will have responsibility over the emissions levels to be met under the guarantee.

The government contributed a chapter, but gave little away. It is still thinking in terms of a 26 per cent reduction in emissions by 2030 (which most analysts and scientists say is completely inadequate to meet the Paris target it has signed up to), and says it will make a 10-year target before 2020.

The government also wants to insist that any change in the target – seemingly inevitable should the NEG be introduced and there is a change of government – must give five years’ notice before it is implemented.

To provide further investor certainty, changes to the target trajectory by the Commonwealth government could only apply with five years’ notice. For example, in 2025, no changes to targets from 2026 to 2030 could be made.

It is also looking to exempt emissions intensive trade exposed industries (as they were in the carbon price and RET), and is looking at up to 10 per cent of the emissions targets to be met by international offsets.

This emissions target remains the major point of contention, because while the ESB is promoting the NEG as a means of potentially bridging the policy chasm between right and left, it will remain largely ineffective if the federal emissions target is weak.

Federal environment minister Josh Frydenberg claimed on Thursday that the visiting head of the International Energy Agency, Fatih Birol, had endorsed the government’s approach, but that is not really what Birol said.

He had no comment on the NEG itself, reiterated his support for a carbon price (such as the one dumped by the Coalition), and reinforced the need for governments to recognise the plunging cost of new technologies, particularly solar.

And state and territory ministers whose support will be crucial at the April COAG meeting – where the ESB will seek approval for further design work – are still not convinced.

“In preventing us from making additional emissions reductions, it appears that the NEG will not allow progressive jurisdictions to continue getting on with the job of delivering clean, affordable and reliable energy,” ACT energy minister Shane Rattenbury said in a statement.

“This is an extraordinarily backward approach – one well out of step with the Finkel Review.

“In its current form, the NEG will stymie the development of renewable energy, and the modelling shows it will be a worse outcome for renewables compared to business as usual.

“As a jurisdiction that will have 100% of our electricity coming from renewables in two years time, under the proposal put forward, we would be doing the heavy lifting and allowing others off the hook. This is not something that we can accept.

“(The NEG) will do little to prevent potentially catastrophic climate change, given the emissions targets that are the foundation of the NEG are clearly incompatible with climate science, and with our Paris Commitments.”