NEG high level design document at a glance

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.