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Energy Security Board makes big concessions on NEG

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The Energy Security Board appears to have made several significant concessions in the design of the proposed and hotly debated National Energy Guarantee, that will be discussed by COAG energy ministers at their summit in a week’s time.

The biggest concessions is removing the need for “physical” rather than financial contracts, proposing government “emissions intensity” targets to manage the emissions obligation, and a “light touch” reliability obligation that will only be triggered if a shortfall arises. And there are none in view.

The shift is included in a 50-page “high level design document” for the NEG, circulated to state energy ministers ahead of the COAG meeting next Friday, where the ESB will be seeking an “amber light” to do further design before presenting a finalised version for a vote in August.

However, while the technical details of the proposed NEG are improved, key policy decisions such as the emissions reduction ambition, the use of offset, and “additionality” of state-based schemes are addressed in a separate, yet to be released document from the federal government.

The ESB, chaired by Kerrie Schott, and representing the country’s three key energy institutions – rule-maker, operator and regulator – still insists the NEG is the best opportunity to resolve 15 years of political impasse, and is needed to ensure a shift to a “cleaner, cheaper and more reliable grid”.

The new document makes particular mention of the role of consumers in generating and storing their own energy, of demand response, and the substantial change from the days when “supply-side solutions” were considered the answer to all energy challenges.

RenewEconomy has obtained a copy of the document, and a potted highlights of it can be found here.

The NEG is now likely to move into a phase of rapid evolution as it seeks a path through the political minefield, represented by right-wing conservatives defending coal on one side, and the need to get Labor states and territories across the line on the other.

In the meantime, it needs to design a scheme that provides a platform for something that actually works, and it appears to be shifting to a model of “do no harm” that addresses reliability and security issues, at the same time as leaving flexibility on emissions.

The removal of the need for physical contracts – in favour of financial swaps and caps and over the counter contracts – will be seen as a major step towards addressing issues of competition, and therefore prices, and could be enough to bring some states already faced with limited competitions, such as South Australia, across the line.

But there is still work to be done to win over those states with higher renewable energy targets, and emissions reduction targets. The ACT, Queensland and Victoria, for instance, are pushing hard for “additionality” – in other words, to ensure that their efforts are not used an excuse for others to do less.

One of the major stumbling blocks for the general acceptance of the NEG is the overall emissions reduction target, which at 26 per cent for the electricity sector by 2030 is seen as hopelessly inadequate, and imposing more effort on other sectors of the economy where reductions could be more expensive.

These policy questions are not addressed in the ESB paper, but apparently are addressed in a separate Commonwealth paper which is yet to be distributed to the states and territories, or even to the ESB (as of yesterday).

“The ESB paper starts to address the technical issues, but in the absence of significant policy issues, it is hard to draw a conclusion because it is the way they interact that will ensure the design is right,” said ACT energy minister Shane Rattenbury.

“We hope to see the Commonwealth paper before the COAG meeting.”

A spokesman for energy and environment minister Josh Frydenberg said the Commonwealth paper would be forwarded to the states “shortly”.

The removal of the physical contracting requirement is significant, however, given criticism was near unanimous – from regulators, consumer groups, retailers and network operators, and others – and which begs the question of why it was suggested in the first place.

The emissions guarantee will be based around an emissions intensity target to be set by the government, in line with its own long-term targets, meaning that it could well end up looking more like an EIS that the government had previously rejected.

This time, rather than having its own certificates, it would operate within the National Electricity Market, using NGERS and AEMO dispatch data, and allowing retailers to enter into caps and swaps and other contracts to meet that target.

The graph above illustrates the general principle. Emissions intensity will be decided by the emissions generated and contracted, and retailers will be required to meet those standards through financial contracts (existing ones and old ones) in any way the retailer deems appropriate.

A further illustration is included below.

Interestingly, all “behind the meter” generation – which means rooftop solar and storage on households and businesses – will be included in the retailer emissions calculations.

It will be interesting to see what the industry reaction is to that. Will households give the bigger retailers an easier ride. Shouldn’t they deserve some compensation for doing so?

The ESB appears to be resisting the push by some to shift the burden to generators, rather than retailers, and also leaves the question of offsets, and particularly international ones, to the government, at least at this stage.

It has also resisted a push to exempt small retailers from the scheme, possibly justifying this through the shift from burdensome and impractical “physical” contracts, to the financial ones.

The reliability mechanism, on the other hand, would only be triggered if the market failed to respond, three years out, to an identified “market gap”.

This will be decided by AEMO 10-year forecast contained in its annual Electricity State of Opportunities. So there will be time for the market to react, once the gap is identified. And the ESB sees no forecast gap now.

This will be subject to increase transparency, and annual review, and will also be updated in the case of sudden change, such as the closure of a major demand centre (factory or refinery), or the proposed closure of a major coal or gas generator.

Once triggered, all retailers will need to ensure they have sufficient contracts to ensure they can meet their share of the anticipated system peak. Those contracts will be underpinned by “dispatchable capacity”, although the exact nature is yet to be defined.

AEMO will assist the process by conducting a “book build” that can offer valid contracts, and it says that demand response will be “central to this process.”

If the market gap is still not met one year out, then AEMO will access an emergency reserve. The cost of that will be paid for by retailers who fail to meet their reliability obligations.

There is growing confidence that the reliability obligation will be very light-touch – a reflection of the fact that there is no fundamental reliability issue in the grid at the moment, although one could arise if there was a sudden rush to the exit of more major coal-fired generators.

Two reasons back this view: one, is that the contracts will not relate to individual generation, but system wide. This is a major advance from early last week when the government, even Alan Finkel, were seeking to burden individual wind and solar farms with their own battery storage. That doesn’t actually make much engineering sense.

However, there is a strong indication that the definition of a market gap may well be reviewed.

The ESB wants the reliability standard to reflect the “peakiness” of the grid from increased penetration of variable renewables, and changes in demand, reflecting the increase in heat waves. So it will be more focused on system peaks, than annual averages.

There also appears to be a recognition that AEMO must be left to decide on the system security issues, which are the sort of problems that can arise in the two to three hours a year when thing get really tight.

AEMO wants to address this through mechanisms that are outside of – but importantly linked to – the NEG. Think of day-ahead markets and reserve capacity.

The latest “high level document” also seems to represent a middle ground between the head of the Australian Energy Market Commission, John Pierce, and the head of the Australian Energy Market Operator, Audrey Zibelman, because it leaves the nature of the NEM more or less in-tact (happily for Pierce), but leaves special mechanisms in place for the AEMO (happily for  Zibelman).

Indeed, it is interesting to note the speed with which the AEMC has introduced more demand management options into the market – at the request of AEMO – and is now looking for feedback on AEMO’s favoured renewable energy zones.

This, though, reflects a potentially more interventionist role by AEMO, both in setting the criteria and technical requirements of new generation, but also where it is built. That would be an end to the free-for all that has existed till now.

Altogether, the NEG is now looking a little less scary, and could well get the amber light from the states and territories, although the devil for the industry and consumers will be in the detail, and subject to further analysis by those who know better.

The devil could also be in the Coalition party room, whose support will be needed to approve a few minor legislative changes to various acts. And on this point, it was interesting to note the intervention yesterday of Innes Willox, the head of the Australian Industry Group, in a speech in Adelaide.

“Energy policy has been driven into the ditch not just by ideological politics, but by personality politics, identity politics, and so-called hard-heads who keep seeing energy as something that can win them the next election, rather than something they will be held responsible for actually delivering afterwards.

“In the process we haven’t just burned our way through a dizzying succession of three letter acronyms. We’ve lost time and passed up opportunities.

“We’ve made investing in energy vastly more uncertain than it needs to be, just when it would have been good to get new assets into the grid and new gas resources producing. If we’re going to get out of the hole we are in, politics cannot remain as it is.”

Willox noted that the Paris climate commitments must be met, and renewables are clearly the future. “There is a plausible vision for an energy system that is both heavily renewable and cheap,” he said.

No prizes, then, for guessing where his invective about political hard-heads is directed. And from the head of a reasonably conservative business lobby group.

  

Pocket
  • Ken Dyer

    It is pretty clear that the NEG pays no credence to global warming – weak/non existent penalties for emissions, and pays lip service to the idea of renewable energy. It is an utter waste of time and taxpayer money.

  • Ben Dixon

    Looks to be still worse than doing nothing, still focussed on retail and no meaningful target.

  • Robert Shippen

    If they accept the Neg, will it stay that way or will it suddenly become the old Neg again. Thin wedge. Skeptical me.

  • Peter Campbell

    Why and how do they drag in behind-the-meter solar into the calculations? Looks like a way to try to minimise the amount of new renewables by counting everything possible towards a total. A lot of those who have behind the meter solar could have been prepared to pay a bit extra because they thought it would add to the total of renewables. They might not have had the idea of ‘additionality’ fully formed but they would not be happy to be told that their outlay means that less large scale solar will be built.

    • Chris Fraser

      Solar owners could have been included with opting into demand response. But I’m not getting a strong message they want to empower solar owners.
      Also, ‘dispatchability’ seems to be poorly defined, and the definition may well resort to a meaning the hard right wishes it to have. The meaning must still be contained, in a document they don’t wish us to see.

      • baseload renewables

        Yes, hopefully dispatchability will be clearly defined in a quantitative manner with reference to sound engineering principles. There’s always hope.

  • Cooma Doug

    If the Monash team read this information as it emerges in the next few months, they will have some amazing dillusional thoughts. But, having been in the middle of market changes in the past, i know that everyone will have some wierd visions that will look really dumb by 2020.
    The inclusion of load side options introduces a huge number of new products. The new technologies in computing and system monitering make possible effective actions that have never been in place. All these things when emerging from consumer homes, turn the market we think we undersrand on its head.

    So if there are people arranging the NEG as a means of promoting and sustaining fossil fuel generation, I would suggest they have no level of certainty in their actions so far.

    If on the other hand, they are totally committed to elimination of fossil fuel, they too have no level of certainty.
    Ultimately the cost of generation and management will drive us all
    vaguely down the right track.
    So the stand out issue here is the cost of pollution and emmissions has to br included in the market process.

    I believe it to be the major anchor for market certainty. I believe they took it out for the wrong reasons and its absence is a really bad idea.

    • Alastair Leith

      “If on the other hand, they are totally committed to elimination of fossil fuel, they too have no level of certainty.”

      There’s no point in having cheap energy on a dead planet. We already have ~1.8 ºC of warming locked in even if all humans vacated earth by 6AM tomorrow morning. Livelihood of staying below the 2.0 ºC is much lower than statistical RCPs suggest given Paris committent which fall well short of the impossible aspirations of closer to 1.5 ºC unless we think overshoot and drawdown to 1.5 ºC or lower this century is feasible.

      Total committent to ‘beyond’ zero emissions is called for. Sure, it wont happen by 2020 like we needed it to, but it still needs to be an end goal for the power sector, then the energy sector next.

  • Andy Saunders

    I guess a more interventionist role was probably inevitable, given both the desirability of generation build ahead of supply shortfalls, and the benefit of geographic diversity of renewables generation (to minimise cross-correlation and hence the need for storage/firming).

  • technerdx6000

    Giles, how will the NEG even take the behind-the -meter generation and storage into account? They wouldn’t be able to detect how much behind the meter energy is being consumed!

    • Phil NSW

      Damm good question. I believe the opportunity was lost when my solar system was wired up so the grid had no awareness of my total production. I would of assumed total production should go to the grid first but not so. The meters are capable of gathering the statistics if wired to the correct registers.

    • baseload renewables

      I’m thinking that gross-metering is going to make a comeback. Perhaps all new installations will require it. Those that want to take advantage of any new financial incentives offered by the retailers to meet whatever (hopefully high) emissions-intensity requirements they have will need to have their existing meter re-wired. Perhaps it would even be in the interest of the retailer to do it for them free of charge.

      So…this is going to make for some interesting valuations on self-consumed v exported electrons. Will they be valued differently? Will they be valued differently at different times?

      • baseload renewables

        Even though I like WR’s solution, I’m just wondering if anyone knows if a(ny) smart meter can be wired to do simultaneous gross and net metering. If not, then the question is how to get the gross production values from the inverter to the meter. I’m no expert on comms nor inverter specs, but my Sunny Boy has an optional RS485 which should interface with RS485 on an EDMI Mk10A meter. And would such an arrangement be suitable to the retailer?

      • solarguy

        GROSS METERING WOULD BE A BACKWARD STEP!

        • baseload renewables

          I agree. But anything’s possible with this unknown unknown.

      • Ray Miller

        The problem not having gross metering is essentially in the NEM the exact contribution of rooftop solar is unknown.
        In the early days in QLD we had gross metered solar but with net billing. So this outcome was closer to the ideal if the reward is enough for PV generation if it is above the retail price. This was eventually changed by Ergon and Energex to net metering. As with anything battles are had to determine advantage, the problem is in the current system the customer/consumer has little power or representation. Go figure, as without the “customer” none of the NEM would exist! So the best outcome should be all the customers running the NEM not the collection of large companies.

        • Alastair Leith

          Unknown but the STC should, if installers are not rorting the system, be fairly good ball park figures for capacity which can be multiplied by weather data. That’s how CEC and others generate their numbers for BTM PV output is my understanding, outsourced to consultants who pull the RECs market data feed, as anybody can with software. I wrote my own JS routine to pull any given day’s trades (with some help from a friend).

    • WR

      They don’t need to work out self-consumption. All they need is an estimate of rooftop-PV generation. This is what is currently being shown in the two generation widgets displayed on this website. See the following linked website for how these estimates are made. http://pv-map.apvi.org.au/live

      • baseload renewables

        So just multiply the regional 15-minute performance percentages by the individually rated system sizes registered with the distributors, apply a de-rating factor based on system age, subtract the metered export and get … behind the meter consumption. Nice. Sounds like a lovely database design.

  • Jon

    A step in the right direction, there’s more to go but it’s a step none the less.
    It takes reliability to AEMOs control, it allows swaps rather than binding contract and it opens up business opportunities for pumped hydro and “big batteries” rather than each renewable generator needing its own.
    Be very interesting to see the “Commonwealth Paper”,

    Behind the meter will need to be included as it will become a much bigger contributor, domestic solar is already 4% across the NEM and now there is a lot of bigger behind the meter systems being put in on shopping centres etc. I believe Sun Metals is behind the meter as well as some other large installs.

    • Mike Westerman

      Very true, and shifts the emphasis thereby towards holding generators accountable for the characteristics of their generation, including rooftop. We are at the point where an impost on new RE projects (including rooftop) to provide an incentive to also include a degree of controllability is warranted. Of course the NEG is a complete deception as it is solely focussed on electricity dispatchability, rather than focussing on control, and allowing the full range of means of controlling the supply/demand dynamic, including thermal storage, demand response and means of storage electricity.

  • solarguy

    We need Labor to win the next election and take a big stick to this bloody NEG nonsense. Finkel has pointed the way.

  • Edgar

    This is starting to look like what you get when a commitee designs a horse…
    …a camel.

    • Alastair Leith

      Well at least the ESB have come back to earth and decided on four legs! That’s an improvement on their pencil sketch for a Pterodactyl.

  • Eric

    the market is already fixing the problem. Consumers are turning to their own generation.
    And now they have batteries to back them up.

    It’s called giving the finger to energy politics and the fossil fools.