The ESB’s report on the first-cut NEG modelling predicts:
BAU: no new coal, tiny bit more gas, a little extra renewables
NEG: no new coal, tiny bit more gas, quite a bit more renewables
The day has arrived —state energy ministers convened at COAG to discuss the next steps for the Energy Security Board’s proposed National Emissions Guarantee (NEG). But forget the energy ministers: as details emerge, how durable is Coalition support for the NEG?
Before this week, all anyone had seen was the ESB’s now famous eight-page NEG letter which the Coalition endorsed in record time.
When the NEG was nebulous, its boosters were able to promise all things to all people — a bright future for coal, more renewable energy, lower prices, high reliability, a pathway to meet Australia’s emissions commitments and peace in the party room.
The apparent (and much welcome) ceasefire in the backbench-led climate war that has been tearing the LNP apart since 2009 can only be maintained so long as each outspoken MP believes the NEG grinds the axe they personally bring to the party room.
Now we have a slightly more information — this week the ESB released the first modelling report to the states. Mainstream media have labelled this report as ‘modelling’, but alas, it is just a summary of modelling based on one set of assumptions, many of which have not been released.
(Based on what’s been released, it would not be possible to replicate the findings, and indeed Bloomberg New Energy Finance have produced their own modelling and arrived at different results.)
In a decade of reading almost every energy report from government, the ESB Report on the National Energy Guarantee is arguably the most unusual report to date. Here are the first 12 things that caught my attention:
- We’re apparently not going to get any new coal
Everyone in the energy sector already knew this, Professor Finkel reinforced it, Treasurer Scott Morrison has said effectively the same, as did AEMO in September, and now the ESB has delivered the message once again. (For those who think there’s a chance of new coal being built in Queensland, I’m offering 5-to-1 odds and you could probably twist my arm to 10-to-1.)
- We’re apparently not going to get much more gas
Under business as usual (BAU), we’ll only see a 263MW over a decade (less than South Australia installed last month) and 12MW less that that under the NEG.
- We’re going to get more renewables, how much is unclear
You can read the modelling report as claiming that the NEG will deliver a lot more renewables or conversely that it’ll put the brakes on. Either way, the modelling omits the fact that rooftop PV is growing at a massive rate and the economics make renewables largely unstoppable.
- The RET, not the ESB, brings down energy prices
By now it shouldn’t surprise anyone that Renewables put downward pressure on energy price — take your pick of reviews: Dick Warburton’s attempted renewables hatchet job, the Climate Change Authority’s or Finkel. They all say the same.
More than two-thirds of projected energy cost reductions over the next 13 years will be delivered by the federal RET and state renewable energy targets — in Victoria, ACT and Queensland.
- The NEG’s case for reducing prices is weak
The ESB argues that with more off-market contracts, generators will bid low to ensure they are dispatched and this will bring spot prices down. However, with less electricity ultimately settling at spot prices, this is a hard argument to follow. Try to make sense of this:
- It’ll take 13 years before wind energy prices fall to current levels!
In early 2017 we’ve already seen a wind farm contracted at $52/MWh, not predicted until 2030.
- Futures markets don’t buy the NEG
The green line below shows that the consensus opinion of energy futures traders is that either the NEG won’t reduce prices as much as claimed, or it won’t be implemented.
- Under the NEG Australia will renege on our Paris commitments
The modelling assumptions lock in a reduction of just 12 million tonnes of CO2 over the 2020s — from 142 Mtpa to 130 Mtpa — which is equivalent to just 0.75 Hazelwoods.
Every credible study shows we must reduce emissions in the electricity sector by more than twice as much between 2020 and 2030, and that’s assuming (heroically) that global ambition won’t increase over the next 13 years.
- The NEG “may resolve, to a great extent, most of” the reliability issues we haven’t been experiencing
Yes, it takes three qualifiers to claim that the NEG will address non-existent reliability issues.
- The operation of the reliability guarantee is still anyone’s guess
The scant half-page explanation of the reliability mechanism still leaves open the question of what ‘dispatchable’ actually means.
- Apparently Snowy 2.0 is locked in, but most of the VRET won’t happen
While there’s a lot to like about Snowy 2.0, it’s still in feasibility. We don’t know what it’ll cost and we don’t yet know how long it will take to build. Unless the federal government is an episode of Utopia — surely not! — there’s still quite a way to go before we make the investment decision to unleash the tunnel boring machines to carve 27km of tunnels through the mountains.
Meanwhile the Victorian Renewable Energy Target is modelled to peter out after just 650MW — likely only 20%–30% of the generation built under the legislated target.
- Finkel and the ESB don’t see eye to eye on project financing
The Finkel Review made a major contribution to the national debate by explaining the significant variance in project financing between different energy technologies.
The ESB see project financing quite differently — 8.3% (pre-tax real) under the NEG, regardless of technology, versus a 3% premium under BAU. Granted, Finkel was counting on the policy stability of a Clean Energy Target — still an option! — but the idea that project financiers are ‘technology neutral’ is not credible.
I could go on, but I reckon that’s enough of the minutia. Let’s bump up to a macro view.
While it apparently will take three years to make the relatively minor shift from 30-minute to 5-minute market settlements, the ESB is proposing to design and implement a major overhaul of NEM contractual arrangements in just 12–18 months on the back of rushed and opaque modelling.
I’ve introduced elsewhere the concept of the ‘energy quadlemma’ — the challenge of delivering reliable and affordable power while meeting our emissions reduction commitments and keeping the Coalition from blowing apart.
This first cut modelling shows that the NEG:
- brings in no new coal and only a tiny amount of gas to ‘address’ a reliability crisis we don’t have
- locks in failure of our 2030 emissions commitments
- relies on a weak case to produce bill savings smaller than the RET
- doesn’t deliver the goods for the ideologues on the backbench.
So what’s the NEG for again?