The Energy Security Board released its latest update of the proposed National Energy Guarantee late on Friday, after a briefing of state and territory ministers who must give their approval of the mechanism in August if it is to be put in place.
The 52-page document puts some more meat on the skeleton of this policy mechanism, designed to impose emissions and reliability guarantees on the market, to ensure “the lights stay on” and prices stay low as the grid continues, and hopefully accelerates, its clean energy transition.
The problem is that the NEG – proposed by the ESB and enthusiastically supported by the federal government – is unlikely to see either obligation triggered under current policy settings.
Reliability won’t be triggered because the ESB now admits there is no reliability problem. “Despite this (addition of “intermittent” wind and solar, the current reliability standard is still not forecast to be breached,” it says.
Nor is the emissions obligation likely to be triggered because all independent analysis suggests that the government’s low-ball target will be met by 2020 through the renewable energy target, the mechanism that the Coalition tried to kill.
In a separate 20-page document, the government has reiterated its commitment to a 26 per cent target, exemptions for trade exposed industries, and the (potentially limited) use of offsets such as Australian carbon credits – much to the chagrin of many in the renewables industry.
And it is insisting that the targets be locked in for 2030, and then only changed with five years notice. It rejects “additionality” for state based targets.
However, the ESB has made its intent clear – should the emissions target ever be elevated – by recommending penalties of up to $100 million should obligated parties, namely retailers, fail to meet their obligations.
“That is causing a few people to focus,” ESB deputy chair Clare Savage told RenewEconomy in a phone interview late Friday (before we had completed our reading of document). “We do want to make sure that there is the right incentive to comply with the obligation.”
Savage says other new elements introduced in this report include a decision to make the Australian Energy Regulator the independent body to manage the reliability obligation, which will be based around forecasts and assessments from the Australian Energy Market Operator.
Contracting, when required of the reliability obligation, for instance, will need to be open and visible. In effect, a public auction. The ESB sees this a critical “to ensure liquidity and transparency in wholesale electricity markets to strengthen competition.” A “book build” run by AEMO is a possibility.
Other new features include more details of the proposed emissions registry to allocate generator output and its associated emissions to a market customer’s load. ITK analyst and RenewEconomy contributor David Leitch quipped after a quick read: “This looks complicated.”
The ESB says the amount that market customers can carry forward from a previous year’s over-achievement will be limited to around 5 per cent, and the amount that can be deferred to future compliance years, will be limited to around 10 per cent.
As foreshadowed in its previous document, the ESB proposes allowing retailers to calculate the output from rooftop solar systems for their emissions obligations. But this will be limited to exports back into the grid only, and will not be based on gross output. It will exclude voluntary “green power” load.
To help smaller retailers, the first 50,000Mwh of load will be exempt from the emissions reduction requirement, which the ESB says should reduce fears that the NEG would stamp out competition and create big hurdles for smaller organisations.
On the reliability obligation, Savage repeated her view that at current levels it would not be triggered, and hoped that it would never be, even if the level of renewables increased dramatically.
“This is always about being backstop,” Savage said. “Our hope is that markets do what they do best and invest, and hope that it doesn’t get triggered.”
They will be triggered if – three years out – AEMO sees a problem and decides more dispatchable capacity is needed. That will trigger a round of contracting – and presumably investment in new capacity on the supply side or demand side – until such time as it is met.
Savage said the phone hook-up with state and territory ministers on Friday had effectively been an information sessions. “Kerry (chair Kerry Schott) and I will meet with all of them in coming weeks,” Savage said. There will be public forums in the week beginning June 25.
The language in the document is also interesting:
“The National Energy Guarantee (the Guarantee) is a mechanism designed to integrate energy and emissions policy in a way that encourages new investment in clean and low emissions technologies while allowing the electricity system to continue to operate reliably.
“The Guarantee will provide a clear investment signal, so the cleanest, cheapest and most reliable generation (or demand response) gets built in the right place at the right time.”
The ESB also makes clear it is just as enthusiastic about “demand response” and other demand side technologies as it is about new generation and storage.
State and territory ministers are most concerned about the integration of state-based targets into the scheme, the treatment of “additionally”, and how quickly any targets can be revised.
ACT’s Shane Rattenbury said in a statement late Friday after the briefings from the ESB and energy minister Josh Frydenberg that the Federal Coalition’s refusal to negotiate on emissions targets could jeopardise the whole process.
“What’s clear out of today’s meeting is that the Commonwealth expects States and Territories to support woefully inadequate emissions reductions targets, or they will discard the whole NEG proposal,” he said.
“This target will not only endanger the environment, but will create a greater cost burden on Australians over time.
“The Coalition have yet to put forward any real evidence to suggest that the NEG will bring down costs for consumers. It’s more likely that this is a smoke-and-mirrors cost-shift from electricity to other sectors, such as transport and agriculture, that will likely see Australians paying more overall.
“This intransigence on part of the Commonwealth suggests the Coalition doesn’t even want an outcome on electricity reform, and would rather discard some of the good proposals the Energy Security Board has put forward on national energy laws.”
Labor’s Mark Butler said earlier this week that his party’s main concern was that even though the NEG may “do nothing”, it was important to ensure that it “does no harm.”
That reflects the view while the NEG may amount to little more than a safety net under current policy targets, it could serve a useful purpose – if properly designed – once Australia chooses to get serious about climate change and the energy transition.
Hear our podcast interview with Butler here.
That judgment – of doing no harm – will centre around the design of the scheme and the ability of any future government to quickly ramp up the emissions target, and to ensure that there are no roadblocks that would hinder competition, and new investment.
Many of the initial concerns about the details of the NEG mechanism (if not its ambition, which is not the ESB’s concern) were addressed in the updated version released in April and still more are dress in this document.
Savage says some 10 working papers on technical aspects will be released next week. Feedback is due by July 13, and a final policy document will be voted on at COAG on August 10.
New analysis from Erwin Jackson, a highly respected climate policy analyst now with Environment Victoria, echoes previous findings that the NEG, under the current policy targets, will simply shift the burden of emissions reduction to other sectors, such as farming, manufacturing and transport.
Despite this, the National Party, which claims to represent those sectors, says that even the 26 per cent reduction target by 2030 is too much. Key members of the Nationals, and the Liberals, want to wind back even the current emissions targets.
The only policy that is in place, the “Direct Action” plan put together by Greg Hunt under the leadership and vision of former prime minister Tony Abbott, is now all but exhausted.
On Friday, it released the results of its latest auction – the smallest on record. There is little left in the kitty, and no mechanism to take its place. The government is even baulking at emissions standards for cars for fear it is branded a “carbon tax on wheels.”
Analysts at Reputex say the latest auction shows that the heavy lifting on Australia’s modest 2030 emissions reduction target will be needed by the other “principal mechanisms”.
However, after five years in government, the Coalition still has no policy to address large scale emissions reductions in other sectors, and the country’s emissions are rising.