Full absurdity of National Energy Guarantee laid bare

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The NEG is looking more and more like a fraud. It is one thing to have a policy that proudly boasts it will do nothing on emissions, but to produce a document that pretends to be able to halt the pace of technology change is barking mad.

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The full absurdity of the National Energy Guarantee has been laid bare by the final details of the proposed policy platform, its assumed and intended impact on large-scale renewables, and the Coalition response to it.

The NEG, as we all know, has been conceived and tailored to satisfy one group – the influential band of climate deniers and technology skeptics sitting on the back bench and within the cabinet of the federal Coalition government.

It promises to do little or nothing on emissions, it promises to stop investment in wind and solar in it tracks, and then promises, like magic, to deliver significant bill savings to consumers. And it is all based on modelling that is either incomplete, not released, or complete nonsense.

It was fascinating to see how mainstream media on Thursday characterised what the NEG is designed to do following the release of the Energy Security Board’s “final detailed design” and the drip-feed of some more modelling.

Both the ABC and The Australian pointed to the assumed doubling of the renewables share by 2030 (as a great achievement in the case of the ABC, and a very bad thing in the case of News Corp), while the AFR claimed that having no NEG would slow the pace of renewables.

But all of these reports missed the point. The “doubling” of renewables trumpeted in the media refers almost exclusively to what is built over the next two years to meet the renewable energy target.

The NEG itself is designed to bring new wind and solar development to a complete stop – the only difference is whether this occurs in 2021 (no-NEG) or in 2022 (with NEG).

Even this is too much for the Coalition right wing, led by former prime minister Tony Abbott, who doesn’t want any more renewables in the system, doesn’t believe that prices will fall at all, and wants Australia out of the Paris climate agreement.

“They say that there will be no new stations built, so in 50 years time it will be zero per cent reliance on coal but if we don’t rely on coal, what are we going to rely on?” Abbott said on 2GB radio

“The problem is you cannot get renewable power 24/7, you just can’t. We call it renewable energy but we really should call it unreliable energy because it only works when the sun shines and the wind blows.”

And this points to the many absurdities of the NEG, and the arguments and modelling presented by ESB – its assumed impact on price, on investment, and on emissions.

Energy minister Josh Frydenberg this week lamented the fact that so many independent energy analysts had been critical of the NEG from outset.

He shouldn’t be so surprised.

Their concerns were raised because, from the start, it looked like a do-nothing policy that would stop investment, cause a rise in emissions over most of the decade, and whose assumed cost reductions – beyond those expected from the influx of wind and solar farms under the RET – looked contentious and unlikely.

And those fears are not reduced by the release of the latest document. In fact, the ESB admitted as much, and the details only deepen the concerns, so much so that many are saying this policy is starting to look like a complete fraud. The anger is visceral.

As mentioned, from the outset, the aim of the NEG has been to pretend that it is something that it is not – and leaked emails from those involved in its initial formation confirm that.

Mostly, it is designed to try to hide the fact that something could be done about emissions by promising not to do anything about emissions. And then by disguising the fact that if any meaningful abatement was ever targeted, or achieved, then there would be some sort of price.

If that sounds like Orwellian double speak, then that is exactly the intent of the policy document.

The price of any abatement won’t be visible under the NEG because it will be buried by the hugely complex nature of the contracting that is required of it. One thing that can be sure, though, is that the complexity will be reflected in costs to consumers somewhere along the chain.

There are a whole series of assumptions underlined in the latest document that don’t stand up to scrutiny, which is possibly why the ESB has deliberately excluded the full modelling document – an extraordinary decision given what’s at stake here, and the extent of changes to the law that it proposes.

As ITK analyst David Leitch writes, much of the modelling is based on a number of deliberate omissions and heroic (or some would say, cowardly) assumptions made by the ESB.

The first is the deliberate omission of the state-based renewable energy targets. The intention is, of course, to hide the reality of the pace of transition to clean energy from the renewable technophobes on the Coalition back bench.

The second is the claim that the NEG will deliver savings of $150 a year to consumers – over and above the $400 a year savings to be delivered by the current build-out of renewables.

ESB chair Kerry Schott was quite forceful in her final letter to state energy ministers, who will meet next Friday (August 10) to either vote on the proposal or, more likely, kick it down the road.

“Any delay, or worse a failure to reach agreement, will simply prolong the current investment uncertainty and deny customers more affordable energy,” Schott wrote.

As Leitch points out, how a scenario that shows no visible difference in fuel mix out to 2030 can result in a such saving to consumers, simply because of the “certainty” of contacting, is a mystery.

Bruce Mountain, from the Victoria Energy Policy Centre, agrees.

“How can a policy that does nothing relative to business as usual lower wholesale prices by 35 per cent? How can a claim of investment certainty make any sense when it does not induce any new investment?”

The ESB argues that the price reductions will be delivered because of investment “certainty”.

Rob Koh, the lead energy analyst from Morgan Stanley, reflects the view of many by questioning what sort of certainty could be delivered by such a weak policy.

“Schemes with low abatement additionality can be perceived as higher-risk by investors who view a scheme which does little as susceptible to further change,” he wrote in a report on Thursday.

Oliver Yates, the former head of the Clean Energy Finance Corporation, underlines this point, saying that most investors are actually taking into account what the scientists are saying, even if the Australian government and its key energy institutions are not.

“There is no way any investor will accept that this pathetic emission profile will remain, especially following the release of the IPCC 1.5°C report in October (that the government already has in its hands),” Yates says.

“Every investor expects a higher emission target so you have a policy that tries to freeze renewables when in reality investment in coal is frozen, as all investors know that it will be phased out fast.”

Even the ESB appears confused. On one hand, Schott says that “stakeholders” had told her that they had not committed to investments because of the lack of policy certainty. And on the other hand, its modelling shows that the “certainty” created by the NEG will deliver no new investment.

There is also controversy about the use of offsets, on one hand being allowed instead of investment in wind and solar, and on the other, stopping renewables from being able to access that same carbon credit market. It’s one of the many perverse details of the mechanism that are now emerging.

“It seems odd that the government would want to discriminate against renewables … but then it would not really, would it?” Yates says.

“No one in the investment community considered a world where saving carbon would not be rewarded more than not saving carbon. With the NEG’s woeful emissions targets, that is exactly what is proposed.”

Another claim from the ESB is that the policy is carefully designed to increase competition, rather than reduce it. Poppycock, say the analysts.

Morgan Stanley’s Koh makes another two points.

One is that the higher fixed compliance costs inherent in such a complex policy will give incumbent retailers an advantage in view of operating scale and vertical integration. That doesn’t bode well for competition.

Another one is the nature of the National Electricity Market, and its dominance by the big players.

“The NEG relies on market mechanisms to find optimal solutions, in the knowledge that the NEM is oligopolistic, oligopsonistic, and highly vertically integrated, with a mix of public and private ownership,” he notes.

And, Koh observes, “the scheme also contains a number of direct market interventions, e.g., the Market Liquidity Obligation, which are yet to be fully designed or modelled.” (Our emphasis).

And it gets worse. The modelling included in the final document shows emissions increasing after the reductions achieved by the influx of renewables under the RET. They only start falling again after the assumed departure of (presumably) the Vales Point coal generator in 2029.

(It’s probably worth mentioning here that Schott was one of the key advisors to the NSW Liberal government that sold Vales Point to some coal entrepreneurs for $1 million. It was later valued by those lucky investors at around $750 million, so they may want to keep it open).

The Labor states would be mad to agree to this nonsense. For a start, they have no reason to give Frydenberg or the Coalition any political favours.

If they wave this through, without ensuring a fully flexible scheme that allows for a quick ramp-up of ambition, they are selling the country short, and will be held accountable for their actions.

It is one thing for Turnbull to be scared to take on the right wing, and to dump his previous claims of being a climate and clean energy guru, it’s quite another for Labor to be intimidated and bow to the crazy ideas of Abbott, Kelly, Abetz, Joyce, Canavan and co.

And it is unconscionable that a policy seeks to achieve virtually no emissions reductions in a sector that has the potential to do so much, at little cost, particularly as the impacts climate are felt.

Most of all, to produce a policy document that pretends to be able to halt the pace of technology change is not just misleading, it is barking mad.

Just how AEMO boss Audrey Zibelman can sign this document a week after producing the infinitely more credible Integrated System Plan is a mystery.

Schott attempts to explain it this way – it’s a question of modelling inputs, she says. But that simply serves to underline the self-serving nature of the ESB modelling assumptions.

It should be said that it is quite conceivable that a National Energy Guarantee could be designed in a way that provides a policy platform that could serve the country well, if not as efficiently as the previously canvassed proposals such as the carbon price we once had, or an EIS.

But this is a long way short. For a start, as the ACT government notes, it needs to be able to ramp up quickly, and not lock in failure for a decade. That is obviously too much for the Coalition.

And as one analyst observed, even if this could be done, the finer details of the NEG mechanism reveal potential windfall gains for the big gen-tailers and hydro companies, like the federal government’s newly acquired Snowy Hydro and the Tasmanian government’s Hydro Tasmania.

The details need to be sorted and ironed out, because it is one thing to dupe the coalition party room, but another to deceive the whole country.

Should Labor get into power, and look to increase the emissions reductions, they would be better off not going through the NEG, but instead having a series of reverse auctions and contracts for difference.

Which is another way of saying: “Why have the NEG at all?”

The Labor states need to think about that.

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