First thing on Friday I opened my e-mail to see a new announcement from the Australian Energy Market Commission (AEMC), the rule maker governing our energy market.
The AEMC declared that “consumers have lost confidence” in the electricity market and electricity companies more generally.
Its research had found trust in electricity companies had plummeted, with just one in four consumers believing energy retailers are working in their best interests.
Indeed, consumers thought more poorly of electricity companies than even the banks , whose misdeeds to consumers are being exposed in shocking detail by no less than a Royal Commission.
AEMC Chairman John Pierce said competition in the retail energy sector was not delivering the expected benefits to consumers.
He noted that in the face of rising wholesale power costs and advancements in energy technology, retailers weren’t doing much to innovate and help consumers observing that, “retailers have been slow to change with opaque and inconsistent pricing.”
Pierce added:
“Complex pricing plans, conditional offers, discounts from bases that vary by retailer, and an increasing trend towards discretionary win-back marketing have created consumer confusion and dissatisfaction. Retailer inertia and a lack of transparency have emerged as significant barriers preventing consumers gaining the maximum benefits possible in terms of prices and services.”
What’s particularly interesting is that the AEMC has reluctantly acknowledged that the advent of cheap solar PV is a good thing for electricity consumers.
It observed:
“Electricity bill-shock and lack of trust in energy retailers are driving Australians to take control of their energy bills by generating their own electricity with rooftop solar”.
In case we didn’t get the message it had changed it’s mind it also said:
“With retailers being slow to innovate on tariff, pricing and products, consumers have also taken matters into their own hands, with increased investment in distributed energy resources, such as solar PV systems and batteries.”
Some might say finally our energy policy makers have acknowledged the obvious!
The AEMC has been incredibly reluctant to acknowledge problems surrounding trust, transparency, and competition in Australia’s energy market.
Just 12 months ago in the AEMC’s prior annual review of the retail market, the gist of its conclusion was the market was fine if it wasn’t for the Renewable Energy Target sabotaging the wholesale electricity market.
This past defence of existing regulatory structures, its resistance to demand management reforms and its criticism of solar PV and the RET left the distinct impression energy policy making institutions have selective hearing in favour of large incumbent energy companies.
Do regulators think rooftop solar is good or bad?
Now, if you’d thought we’d finally turned the corner you might be surprised to learn that a few hours later the Energy Security Board released another paper in the evening which seemed to completely forget everything the AEMC had said earlier that morning.
The NEG detailed design paper they released essentially lays out a plan for how we will decarbonise the electricity sector where:
- The emission reductions flowing from producing your own power from rooftop solar PV don’t exist and if they do, they belong to your electricity retailer;
- If you don’t wish to sell your low emission generation to a retailer by the end of the year then you will be fined and have the low emission abatement entitlements associated with that electricity confiscated and handed to retailers free of charge;
- You either have to be an electricity generator or electricity retailer to obtain direct access to information about allocation and transfer of electricity emissions within the NEG information registry. This is even though under the Renewable Energy Target – which operates a similar registry system – anyone can gain complete free access and transparency;
- If you wish to make voluntary efforts to reduce emissions that go beyond what your electricity company is obligated to do then you’ll have to do this with the co-operation of your electricity retailer or buy foreign carbon credits;
- If you’ve elected to contract several years in advance to purchase renewable energy rights known as LGCs to reduce emissions, you’ll find these emission reductions will be allowed to be sold twice, and your good intentions and money will count for nought as far as the environment is concerned.
It all sounds like it can’t possibly be true, but it is.
However, don’t misconstrue these comments as suggesting that the NEG is irretrievably flawed and should be rejected wholesale.
Nor is this intended as a political point scoring exercise against Minister Frydenberg or Prime Minister Turnbull, because I don’t think they had any role in these decisions.
We can fix these problems above. It just requires policy makers to put themselves in the shoes not of big energy companies or big energy consumers who they hear from all the time, but instead those of smaller energy players, the new entrants, the upstarts, those trying to deliver energy differently to the way it’s been done in the past, and consumers themselves.
To explain why we’ve got this ridiculous situation and what we can do to fix it, I need several pages.
You might want to print this out to read it at your leisure, or feel free to jump to whatever heading most interests or concerns you the most. If you aren’t much interested in policy detail feel free to take me on trust and just get angry.
Point 1 – the emission reductions flowing from producing your own power from solar PV don’t exist and if they do they belong to your electricity retailer.
Within the NEG design paper it contains the following paragraph:
Rooftop and other small-scale solar PV will be captured by adding the net exports from PV installations to the relevant market customer’s load, and will also be automatically allocated to that market customer in the registry as zero emissions generation.
There are two words within this paragraph that you need to focus on. Unless you are a big industrial consumer of electricity, Market customer actually means the electricity retailer, not the end consumer.
The other key one is “net exports” which means the power generated by the solar system that is not consumed by the end consumer and is exported to the grid.
The way I read this section of the report is that the portion of solar PV generation that is self-consumed by the owner of the system will be for all intents ignored by the NEG as worthy of being recognised and rewarded for its abatement.
Meanwhile the abatement delivered by the exported electricity will be automatically bestowed to your electricity retailer and you will not be allowed to sell this to someone else who may offer you a better price.
This is a really big deal. Rooftop solar PV installed behind the consumer’s meter is one of the lowest cost options to meet any government emission reduction target.
And it is already very significant in the scheme of things with close to 1700MW likely to be installed this year alone.
If Bloomberg New Energy Finance (Ed: Or the Australian Energy Market Operator) are to be believed, behind the meter solar coupled with batteries will be the largest source of generating capacity in the country in a few decades.
At present residential consumers probably self consume approximately 20% of their generation, although if batteries or electric vehicles become commonplace this will rise dramatically.
For commercial installations – which represent about 30% of capacity and growing – they often consume all the generation. Indeed in many cases businesses are not allowed to export solar generation by the electricity network.
While the Government will no doubt take this zero emission generation into account in evaluating achievement of its emission targets, the Energy Security Board is proposing to give solar owners zero recognition of this contribution.
What’s extraordinary is that black coal generators will likely get a financial benefit under the NEG for the fact they are a little less polluting than brown coal generation, but solar will get none where it is self-consumed.
Some may point out that solar will still are eligible to for government financial incentives via LGCs or STCs.
LGCs will be worthless soon after the NEG commences due to double dipping which I explain under point 5 below.
STCs decline every year and within a few years will be quite likely worth less than NEG abatement – if our government finally decides to put its long-term, economy-wide Paris Emission Commitments into law, rather than an empty platitude.
Point 2 – If you don’t wish to sell your low emission generation to a retailer by the end of the year you will be fined and have the low emission abatement entitlements associated with that electricity confiscated and handed to retailers free of charge.
Due to a complication in the design of the National Energy Guarantee where the liability is tied to matching up load with generation, it is not possible for generators or anyone else to bank low emission generation in the registry from one year to the next.
This is quite unlike the Renewable Energy Target. So let’s say you owned a solar farm and were unhappy with the price retailers were willing to pay to get the abatement benefit from your generation in a year and wanted to hold onto it to wait for a better price in a year’s time you’d have to become an electricity retailer.
While that itself is a significant (and in fact unnecessary) administrative burden it still doesn’t get you out of the pickle of being forced to sell your generation abatement benefit even if the price is unsatisfactory.
The ESB paper states,
In the event that a market customer has an over-allocation of generation against its load after the compliance year …. it would be assigned a deemed emissions intensity for the over-allocated amount. The deemed emissions intensity will be set at the level of the highest emissions intensity generator in the NEM. In addition, the market customer would face a civil penalty.
“Overallocation” essentially means that at the end of the year you are holding more megawatt-hours in the NEG registry than your liable electricity consumption for the year.
So if you went through the hassle of becoming a retailer, unless you simultaneously capture some customer load as large as the amount of your generation, you’ll find yourself with left over generation in the registry.
At which point you won’t just have that low emission generation forcibly taken away from you to help other retailers comply with their emission obligations, you’ll also be fined to boot.
This clearly acts to hand power away from pure play renewable energy generators and to large vertically integrated retailers.
These big retailers can then snap up your abatement at a discount and then they will be allowed to bank any excess emission credits they might accumulate to use or even sell to someone else later at a higher price if they please.
At this point you might be asking why make this so restrictive, why can’t anyone, not just retailers convert their low emission generation into a bankable emission credit in this market?
We are told by the ESB that it is to ensure we avoid abuse of market power.
At this point many will probably think “fair enough we probably need a bit of protection from those big retailers and generators that the AEMC and the ACCC have fingered as taking advantage of energy consumers”.
But who are these companies that consumers need to be protected from who could exercise market power?
Based on analysis we’ve made of the market in renewable energy as well other generator ownership we know that it isn’t the companies the ACCC, the Federal Government or Giles Parkinson often accuse of exercising market power at the expense of consumers – AGL, Origin, Stanwell or EnergyAustralia.
These companies do dominate generation and/or retail markets in a number of states.
But none of them have enough low emission generators owned or contracted to meet the current Renewable Energy Target let alone any future more stringent broad-based emission obligation.
What’s more, because they also get a lot of their generation from emission intensive coal generators they are going to be needy buyers of abatement credits.
They can’t exercise market power in the supply of low emission generation because they don’t have enough for their own needs let alone extra to with-hold from others so they can push up prices for others.
So actually the ESB is being very anxious to protect these companies from exercise of market power by companies that have excess low emission generation. Yet almost all of the companies with surplus low emission generation are far too small to exercise any kind of market power.
There are just two I can think of, and both are wholly owned by taxpayers: Hydro Tasmania and Snowy Hydro.
Instead of putting all sellers of low emission generation at a disadvantage to the benefit of electricity retailers, couldn’t the Commonwealth and Tasmanian Governments agree to not manipulate the market?
Better still, we might ask whether is it in consumers’ interests to potentially pay an abatement premium to the Commonwealth and Tasmanian Governments to generate power from hydro generators that will be no different to what their generation would be if we didn’t pay them the premium?
They claim they might do upgrades that could increase their generation – history has shown this to be at best immaterial.
Point 3: You either have to be an electricity generator or electricity retailer to obtain direct access to information about allocation and trade of electricity generation emission rights.
The ESB’s recent paper states:
“The registry will only be accessible to market customers and generators. Some information will be made public at given intervals.”
This represents a complete about face from what exists for the RET, where anyone at all can access the entire transaction history of every MWh in its registry.
What’s extraordinary is that the ESB provides not one single justification for this lack of transparency.
We all know that sunlight is the best disinfectant against government incompetence, dishonesty and, potentially at extremes, corruption.
It is also well accepted that the free flow of market information acts to maximise market efficiency and avoid situations of sudden abrupt movements in price and market manipulation.
Freely available information about the scheme also acts to support potential new entrants and competition by levelling the scales against dominant incumbents.
This is because dominant incumbents by virtue of their experience being involved in large volumes of trades gather extensive information that is not accessible to outsiders or smaller players in the natural course of events.
,Quite frankly I don’t trust the ESB, the AER, the AEMC or any other government institution to decide what information I should or shouldn’t know about how the emissions obligation is operating.
The default should be full transparency of the registry, just as what occurs now under the RET registry. If the ESB thinks this isn’t a wise idea they better provide an incredibly thorough justification for such a change in approach.
Point 4: If you wish to make voluntary efforts to reduce emissions that go beyond what your electricity company is obligated to do then you’ll have to do this with the co-operation of your electricity retailer.
At the moment the ESB paper is non-committal about how it will accommodate the Greenpower scheme’s current ability for consumers to purchase an amount of renewable energy that goes beyond legal obligations.
But it at least says it will try to do something. However the Greenpower scheme, which operates through electricity retailers, is not the only way that consumers can ensure extra electricity comes from renewable energy to reduce emissions.
Under the current functionality of the Renewable Energy Target registry consumers are free to purchase renewable energy independent of their electricity retailer which they can then retire from being used by anyone else to meet legal obligations.
This is via the voluntary surrender function within the registry.
This is important because retailers charge excessive premiums for renewable energy under the Greenpower scheme that are far higher than the price you can get if you contract directly with a renewable energy generator.
In addition, voluntary surrender of renewable energy is used by a number of entities to meet emission abatement commitments outside of the electricity they consume, such offsets under the NABERS green buildings scheme.
Just as under point 2 there is a need to allow parties other than retailers to be granted the abatement rights to their low emission generation by the regulator so they can be free to do with it what they wish.
This includes voluntarily extinguishing it so that retailers have to make extra efforts to reduce emissions.
Point 5: If you’ve elected to contract several years in advance to purchase renewable energy via LGCs to reduce emissions, you’ll find these emission reductions will be allowed be sold twice, and your good intentions and money will count for nought as far as the environment is concerned.
All the big electricity retailers get most of the renewable energy to comply with the Renewable Energy Target by contracting directly with large wind and solar farms and hydro generators.
However, for small retailers or those individuals or companies that wish to buy renewable energy either to comply with RET or to make a voluntary contribution to reducing emissions the amount they need typically isn’t big enough to justify a direct, bespoke contract with a renewable energy generator.
Instead these smaller players will typically need to engage in what is often called the secondary market that provides standardised contracts that simply acquires the LGC (which represents a MWh from a renewable energy generator).
In some cases people have elected to lock-in purchases of these LGCs for several years into the future in order to lock in prices.
Unfortunately for these people, particularly those that bought them to reduce emissions, they are about to find the designers of the NEG have decided that the renewable energy and the associated abatement they thought they bought can be sold twice.
While the Government is saying that they won’t actually be unwinding the Renewable Energy Target and will be leaving it in place, the design of the NEG will make the Renewable Energy Target largely meaningless.
Under the NEG retailers will be able to purchase MWhs in the registry from renewable energy power plants that may have also used that same MWh to also produce an LGC.
Now for all the big retailers this isn’t much of problem because their bespoke contracts with the wind and solar farms entitle them to both the LGC and any other abatement entitlement. It’s just all those other bunnies that a left in the lurch.
There is a solution and in fact it came from the AEMC.
Back a few years ago the AEMC suggested that the Government put in place an emissions intensity scheme where renewable energy generators would be allowed to produce either an LGC or an emissions credit flowing from a MWh of generation but they couldn’t create both.
The LGCs and the emission credits would both be counted towards the overarching electricity emissions target. Such an approach would leave both the retailers that have direct contracts with generators and those that bought LGCs on level pegging.
In particular it would ensure those that have contracted LGCs in future years to achieve voluntary abatement goals will not have the rug pulled from underneath them. And at the same time such a change will make precisely no difference to end consumer bills
All of these issues can be fixed. But if they aren’t then I worry key stakeholder support for the NEG will collapse.
Tony Abbott is not the only person NEG designers should be worried about. In fact he has already mislabelled this as a carbon tax, as he was always going to do. How this can be a tax when it raises zero revenue for the government?
Abbott will never be satisfied and should be ignored. We cannot let him and his allies dictate inefficiencies in the design of the NEG when all they really want to do is tear it down and thereby also tear down Prime Minister Turnbull.
Tristan Edis is Director – Analysis & Advisory with Green Energy Markets. Green Energy Markets assists clients make informed investment, trading and policy decisions in the areas of clean energy and carbon abatement.
