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NEG high level design document at a glance

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Here are some of the highlights of the high level National Energy Guarantee document that has been distributed to COAG energy ministers ahead of next Friday’s meeting.

This covers the main discussion of the Energy Security Board’s observations of the changing electricity market, and the details – such as they have been outlined – of the actual proposed policy.

Further details will be developed – should COAG ministers approve it next Friday – over the course of the following months, with a draft in July and final document to go to COAG in August.

Some of the key policy issues are addressed in a separate paper prepared by the federal government, which has yet to be released. Our take on the new paper can be found here: “Energy Security Board makes big concessions on NEG”

The highlights, as we found them, are:

The ESB says NEG still best way of resolving 15 years of political impasse on the issues of energy and emissions policy.

“The National Energy Guarantee provides the opportunity to resolve 15 years of energy and climate policy instability. … Providing long-term policy confidence is critical to lowering investment risk in the NEM and ultimately bringing down electricity prices.”

The document also says that the NEG – or “the Guarantee” as it calls it – is essential to ensure that “cleanest, cheapest and most reliable” generation (or demand response) gets built at the right place and the right time.

It notes that solar and wind costs have fallen dramatically, to around $50/MWh for solar and $70/MWh for wind. (We suspect they have got those figures wrong way round, and wind is still cheaper than solar).

It says the electricity market is changing from a supply-side system based around “back-up generation” to one where the consumer plays critical role, particularly with their own generation and storage. This will be a key factor in managing a future system.

“Consumers are becoming better equipped than ever to manage and control their energy use and contribute to reliability and this will only improve in the future. The demand-side is a key factor in driving the transformation of the energy sector.”

In particular, the NEG will require the retailers to support a range of different generation technologies through their contracting, it says.

“In general, the greater the extent of competition in the retail and generation sectors, the more likely consumers are to benefit from all three objectives of the Guarantee.”

It says the obligation has been specially designed to increase liquidity, transparency and the level of competition.

On reliability:

The document says the NEG will require retailers to achieve NEM-wide emissions reduction targets without compromising the reliability of the region/s in which they operate.

It says the reliability requirement is designed to “incentivise retailers and customers to support, through their contracting, investment in resource that maintain the reliability of the power system.”

It is triggered if a material reliability “gap” is identified in AEMO forecasts. If that happens, the market is expected to react. This could take the form of investments in new capacity, or to offer additional capacity to the market.

One year from the forecast reliability gap, AEMO will again review its forecast. If the reliability standard looks likely to be met, there is no further action. If the gap persists, AEMO will procure the remaining necessary resources via the RERT/Strategic Reserve mechanism.

At that point, the Australian Energy Regulator steps in, and liable entities are required to disclose their contract positions to the AER.

Penalties are then assigned to retailers assessed to have fallen short of their reliability obligation. The penalties will include the cost incurred by AEMO of procuring necessary back-up resources.

The ESB admits that the reliability standard is not forecast to be breached, although it says the increase in LOR (lack of reserve) notices should be seen as an early warning sign.

It also suggests that the current Renewable Energy Target remains unchanged, and without closure to new entrants as suggested by some (which will likely mean an LGC price of close to zero).

And while the ESB says states will be free to continue their own schemes, it suggests that those states which pursue their own renewable energy schemes could “increase the likelihood that a reliability obligation on retailers is triggered in a particular region.”

On emissions:

The document says the Guarantee requires retailers to ensure that the energy they are purchasing is in line with the emissions reduction targets set for the NEM.

It suggests that the emissions reduction requirement under the NEG will start to be implemented in 2020, when the RET “is likely to have been met”.

It says that “at the heart” of the NEG’s emissions reduction requirement is the need for an approach that matches retailers’ energy consumption with emissions produced on the NEM.

To this end, for each compliance year, each retailer will be required to meet the electricity emissions target in respect of its own load in that year. The load used for compliance will be based on a retailer’s wholesale purchases from AEMO, plus any non-market embedded generation or behind the meter generation (e.g. solar panels).

An emissions registry will keep a record of all electricity production and associated emissions profile for each electricity generator by year.

The ESB stresses that the implementation of the emissions reduction requirement should not impose unnecessary complexity or harm the liquidity or competition in the electricity market, as this will be “detrimental to the affordability of electricity.”

It says the emissions reduction requirement is “intentionally designed to ensure there is sufficient flexibility for retailers to meet their compliance obligation at lowest possible cost.”

It says retailers and generators will continue to contract as they currently do – to manage price risk in the market for their customers and to meet their reliability requirement. As part of this, or separately, they will agree to re-allocate production and any associated emissions via the compliance registry.  

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  • mick

    this worries me because of complicated fudged language and figures,the reason i say this is because SA has been available to shit can bs policy!?! now we have marshall who is 1/2% above a dribbling idiot

  • Jon

    This is a major change in language to where the NEG started, be interesting to see where it goes from here.

  • Paul Surguy

    More regulation means less investment

    • Mike Westerman

      Not at all – evidence based regulation that responds to the limitations of markets encourages investment. Concentration is a market failure that should be addressed. Short term opportunism is likewise.

  • juxx0r

    Wow, that’s a whole lot of effort to go to to hide the simple fact that they want to prop up coal. It would be cheaper and easier if they just threw money at coal and tell everyone that their party donors made them do it.

  • Ray Miller

    A couple of points to consider:
    – Why is there no priority (or at least equal with security and emissions) obligation on the retailers to achieve energy efficiency targets of their customer’s loads? While we are going to considerable trouble to tie ourselves in knots at least going the whole way would be intelligent and may make the whole exercise worthwhile. If retailers only get rewarded for kWh sold, they have no incentive to encourage any beneficial system characteristic of the load. The latter is at odds with lowering Australia’s energy costs and competitiveness.
    – Why does behind the meter generation (mostly PV) count towards the retailer’s emissions obligation? I have no problem with “exported” energy being counted if that’s what is meant, but there is a significant difference between PV self consumption and exported officially metered (to the grid).
    – Why is the load profile of the loads not considered? Significant NEM issues (and costs) arise if the collective customers have their loads peaking at the same time, ie, during a heat wave. At present the temperature sensitivity of the geographic loads has a delayed liability for all, regardless if the individual customers contribute or not.

    – on the reliability obligation; Will a full annual, consistent and competent engineering assessment be made on all the generating plants on the NEM and measured against actual performance? This would need to be published openly on AEMO’s web site for all to see. This would also mean various generating plants would be valued and rewarded depending on reliability. Who wants to pay top $’s for an old unreliable polluting clunker which may or may not fail at a critical times?
    – attached to any generating obligation should be a full disclosure of any other liabilities, eg, site restoration costs. I suspect that many of our sites have liabilities far exceeding their book value.
    – on the Energy Security Board why do we not have an independent customer representative (with 2 votes)? I’m sure Professor Finkel would make a much valued addition.

    • Mike Westerman

      Of course Ray you could ask more generally why consumption is preferenced over conservation, why jobs are preferenced over activity, why individualism is preferenced over communalism?!? Clearly the political power of dollars has outranked the political power of voters.

      • Ray Miller

        Agree, but we need to fight for as good an outcome as we can. The fundamental problem is everyone in the NEM is rewarded for energy units, not efficiency of the overall energy “service” delivered.
        The only reason we have an electricity system was because Edison invented the energy meter and so was able to make money, likewise we need a “new meter” to measure the energy “service” delivered. Until this happens we have a significant problem, which highlights which entities in our country have the power.

  • DogzOwn

    And how about news that Scott Pruitt, EPS, USA likes Australia because our vehicle fuel prices are next cheapest after theirs(though 35% more) so this represents support for their killing of Obama measures to reduce fuel consumption and emissions. We might think we’re not so bed until you notice that muscle care utes are biggest sellers. Will they still be on the road in 10 years or gone to enforced early grave?