NEG: Irrelevant at best, harmful at worst | RenewEconomy

NEG: Irrelevant at best, harmful at worst

The NEG does nothing. It won’t lower prices, it won’t reduce the large gentailer influence, it won’t bring about new investment. In short, it’s fraud as far as policy goes.

AAP Image/Mick Tsikas

Australia’s electricity system needs policy, not politics. The current Queensland and Victorian state goverment policies and the closure of NSW coal stations are going to completely transform Australia’s generation.

The following figure puts the “generation supply drivers” into some context. The numbers are relative to total NEM supply in front of the meter of say 200-205 TWh.

New generation supply drivers
Figure 1 New generation supply drivers. Source: ITK

The influx of zero marginal cost variable renewable energy will make the spot price a bit of a sad joke.

Coal plant closures, concentrated around the early 2030s, but which the NEG does not contemplate, will cause price volatility and reliability concerns that could be avoided with better policy.

The lower but volatile pool prices that will result from the locked in 10% addition to NEM supply, coupled with high international coal prices, and the ever lower protection from existing coal contracts will mean that the current coal generation profits will be short lived.

Closures are more likely to be earlier than forecast, not later. Brian Flannery’s decision to try and sell 50 per cent of Vales Point B is as clear an indication of that as you are likely to see.

Coal closures

Whether we decarbonise or not much of the coal generation fleet needs to be replaced over the next fifteen years. Everyone from the Minerals Council to GetUp accepts this and some of the closure dates have already been announced.

There are only 8, count them 8, coal power stations located in the combined NSW, Victorian, South Australian and Tasmanian regions plus some limited import capability from Queensland.

We question whether Australia’s energy only market is a good enough policy to ensure that new generation is built before each of these coal plants close.

What we can say for sure is that the decarbonisation leg of the NEG will do nothing to induce sufficient new generation.

The table below shows 78 TWh more or less 40% of current total NEM supply as likely to close on  before 2035.

We show the table in date order but we think that for technical reasons Tarong might come before Gladstone. We note that Origin’s announcement is that “Eraring will close by 2032 at the latest”.

Of the list below Liddell, Vales Point, Eraring and Bayswater are all in NSW and represent over 70% of NSW’s supply. Neither the NSW Govt or the NSW opposition seem to have any clue about this.

Forseeable coal closures
Figure 2 Forseeable coal closures. Source: ITK

On paper the QLD renewable target is a large investment driver

Next we can look at the Victorian and Queensland renewable targets

State target renewable generation targets
Figure 3 State target renewable generation targets. Source: ITK

The table shows that if QLD achieves its target it requires around 22 TWh more renewable energy. The actual and committed line of the above table incorporates all announced projects that are either being built or are sufficiently “committed” including 650 MW of VRET (Victoria renewable energy target)..

QLD needs around 8 GW by 2030: That’s both an easy target,  ie about 750 MW a year and a hard one – who in the end will make that investment without the right price incentive?

The question is whether Labor in QLD is like Labor federally, loves to talk about 50% but not prepared to walk the walk to get there.

All talk and no action. QLD Govt controls much of the coal generation in QLD but has announced nothing about closures despite its 50% renewable commitment. It said it would look at starting a State owned Clean Gentailer but has deferred that.

In short if you were an investor looking at building a project in Qld would you believe the 50% commitment?

NEG requirement

We factor in all commissioning, under construction and other confirmed new supply and the 650 MW VRET auction as well as Liddell closure. The only thing we don’t have is the increase net exports of behind the meter PV. Our estimate is:

Figure 4 NEG Emission requirement. Source: ITK

NEG technical issues

Several technical issues have been raised with the NEG documents. These are far better covered by analysts such as Dylan McConnell and Bruce Mountain. However, my reading of their work leads me to believe that:

  • There is a penalty rather than reward for overachievement;
  • Lack of access to the registry to all but “customers” and generators is likely to reinforce market power of gentailers;
  • There is no provision for “additionality”. Ie NSW gets a free ride on the back of everyone else’s work;
  • Even at this stage the Federal Government’s position on international credits is not settled. This may be a bargaining chip Frydenberg is keeping in reserve but that’s for the politics section. Here, it’s just worth noting that (i) international credits can’t be policed and have a good track record of fraud and (ii) in any event they do nothing to help Australia decarbonsise or induce new supply in Australia. An aluminium smelter will not get cheaper electricity in Australia by buying international credits. It reduces potential supply in Australia likely making for higher prices.
  • If the NEG emissions reduction is written into law it will be difficult if not impossible to change. That’s a politics point so lets get onto them.

Politics: it’s now or never for the ALP

The question for the market is how serious is the ALP about its targets? Is it walking the walk or just talking the talk?

Federally, it requires policy commitment because the politics are not strong

Federally Bill Shorten talks about 50% renewable energy but few believe he wants to fight an election about electricity policy. Been there, done that. The ALP would be attacked on price and reliability fronts.

Of course, those arguments are nonsense and there is clear public support for renewable energy and decarbonisation, but it’s just not going to be the ALP’s best election battle ground.

On that basis there are grounds to think that from a politics point of view Federal Labor position will be “we will wave the NEG through, but the target is weak and when we get into power we will change it”.

However, the prospects of changing law are low. The ALP/Greens have only had a majority in the Senate twice since 1949.

Australian Senate composition
Figure 5: Australian Senate composition. Source: Wikipedia

For the States it’s different. Here, it’s about State’s rights

If the States wave through the NEG they are essentially ceding some electricity policy ground to the Feds. It should be remembered that COAG is a politics forum where the States as a group have more influence than the Federal Govt.

Perhaps most importantly, COAG represents a forum where there is more opportunity for policy. There is no upper house, generally it’s the major parties that are represented and with so few members, agreements can be hammered out.

In this case QLD, Victoria and the ACT form a powerful Group especially when a unanimous vote is desired. South Australia and Tasmania are Liberal but have strong renewable ambitions and the NEG will not help them.

Politically, QLD and Victoria have little to gain by waving the NEG through without extracting a pound of flesh along the way.

It’s true they can continue with their own policies, but these are watered down by the NEG.

There is nothing to gain because the NEG does nothing: It won’t lower prices, it won’t reduce the large gentailer influence, it won’t bring about the new investment required, it does nothing to integrate behind the meter with in front of the meter.

It has no commitment to change. In fact it tries to preserve as much of the existing system as possible and to require as little policy as possible. In short, it’s fraud as far as policy goes, or at best, a fix.

On the other hand the politics of rejecting the NEG outright are not all that good, putting Australia back in the “no national policy” group and leaving the federal government plenty of room to attack “backwards, recalcitrant states”.

Nevertheless, were I the QLD Premier I would reject the NEG. QLD has no election worries, its “greener” credentials were arguably the difference between winning and losing the last election and it has nothing to gain from NEG . Most importantly the NEG is a bad, inadequate policy.

However, I’m not the QLD Premier and its more likely that Victoria, QLD and the ACT will simply demand a price for letting the NEG through. In the end COAG members will choose  optics over hard work.

26% in each State, early review,  no international offsets, open access, additionality encouraged

What could the price be?

The most obvious one would be additionality. That is each region/State must separately meet the 26% target. In the long run this would be great for NSW consumers.

Secondly an earlier review of the 26% target with a wider window. So a commitment to review the 26% in say 2020 with a wind that could raise it to 35% or a more desirable 50%-60% in line with State targets (but still not enough for a 2 degree warming scenario). Either that or the 26% is not written into legislation.

Thirdly a commitment to deal to the technical deficiencies outlined above.

David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.

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  1. suthnsun 2 years ago

    Am l really the first to comment? Where are all the David Leitch (well deserved ) groupies and followers. Anyway great post, incredibly dense information with salient searching questions, commentary and detail.

    • Ren Stimpy 2 years ago

      Always a good read, if not excellent like today.

    • Joe 2 years ago

      If The NEG is the best we can ever do under The COALition then Labor needs to draw the line in the sand, make a stand with its RE & Environment thinking /& policy and argue, argue and argue for it. People are not completely stupid. We live in an environment and NOT in an economy. We have a climate emergency on our hands. Its about time that the Environment and The Natural World that we all rely on to survive was Page 1 news every day of the week. In Sydney where I live, building a Westconnex and all the rest, knocking down Stadiums only to rebuild them again, etc, etc are not going to do a jot for our future wellbeing as the climate goes to shite.

      • suthnsun 2 years ago

        Agree. Across the board cultural re-education and re-definition is needed and in a time frame that counts. WRT time frame and culture, coalition should be dead, labour need to shift fast to be relevant. The culture is propping up a zombie. Prognosis is not good for genuine progress towards survival.

  2. Alastair Leith 2 years ago

    There’s a lot of effort going into focusing attention on energy and climate for the next federal election by climate and enviro groups large and small.

    It’s been starting to register as a top 3 issues in polling for the last couple of years and that potentially puts it inside Labor strategists circle of interest for election messaging and announcements/policy initiatives (typically electoral strategy is dominated by the right faction of the Labor party). However conservative Shorten is on Energy/Climate policy (and energy and climate advocate Mark Butler just lost the ALP presidency) they will follow wherever they see the majority votes, even if the messaging isn’t always simple. Any policy can be reduced to simple messaging if people are determined enough and creative enough.

    If Labor see the rebranding of Frydenberg as a Frydosaurus – and the LNP/Nats as energy dinosaurs — getting traction in the community then they are more likely to direct policy announcements and messaging to that tested hunting ground (if their polling concurs that it gets traction with voters). I hope it does get traction, as we are seeing in WA the State Labour Govt have shown total apathy to closing coal, providing a time table, or encouraging renewables. There’s so much policy work needed after years of neglect under Barnett, but things like having a freeze on new generation applications until 2022 so Western Power can transition to constrained access (lines shared by various generation dispatchers who may or mayn’t be able to export at any given time of the day) is bordering on a criminal-go-slow-bureaucratic-blocking of Renewables.

    Surely when the Renewables flood comes it will come big in WA with such good solar and wind resources to exploit and ~12% RE current level c.f. ~50% in neighbouring SA, but we could be excused, given Synergy, the Energy Minister (and Treasurer) and Premiers comments of late for assuming that the WA Government do not see it as their job to facilitate this transition. It feels like they consider the $60m they set aside in election commitments for the Collie region to transition (coal mining and power plants region) to be their end game on renewables at this stage. It isn’t even an opening gambit from what the markets are saying.

    • Joe 2 years ago

      I love your Frydosaurus. This is the bloke, The Energy and Environment Minister no less, who will not put the solar PV up on his own rooftop. ‘Messaging’…all Labor need to do is look at those info ( yes, they are also hugely funny as well ) videos made by Juice Media under their “Honest Government Ad” banner. These are brilliant and instantly cut to the chase.

      • Alastair Leith 2 years ago

        Sally Newell and friends from Stop Adani Kooyong conceived of this, I love it too. They spend every Friday crossing at the lights outside his Camberwell Electoral Office, and so far this govt haven’t made walking across the lights with a placard or costume illegal. No doubt someone at the LP is working on making that illegal too at some point on the slide to a privatised totalitarian state which some of them advocate for (giving the libertarian IPA less and less wiggle room!).

        Sally is involved in many Climate groups, not sure where this idea first came from but I agree it cuts right through, unlike talking about the impacts of catastrophic climate change or the relative merits of an ETS / CT / RET / NEG. The suits are available online so this can ‘scale’ effortlessly (unlike the climate angel costumes ClimActs make).

        • Mike Westerman 2 years ago


  3. RobertO 2 years ago

    Hi David, I agree with this article. I also suspect that Snowy 2 has set prices for the coal to charge on the NEG for security of supply (Snowy $40 for Wind and Solar).

  4. Andy Saunders 2 years ago

    I wonder what 26% in each state works out to be overall? I’m guessing somewhere closer to 30% due to overs in the committed pipeline….?

  5. Chris Fraser 2 years ago

    Pragmatic heads in COAG need to come into play. Say no to NEG – as close to the 2019 Federal election as possible, to do Big Mal a bit of damage …

    • Paul Surguy 2 years ago

      The by elections in July will set the ball rolling

  6. Pete 2 years ago

    Great analysis. I would have thought for an energy policy to have value at this time it would need to clearly assist the coordinated transition that is occurring anyway and reduce the cost of doing it. I don’t see how the NEG informs or assists the transition. In fact, any benefits of the NEG are so opaque, no matter someone’s point of view, is evidence in itself that this policy does not add value to the transition process. Rather I get the sense they are creating a costly administrative burden that we will be paying for through higher power prices, lost jobs and reduced opportunity for the young.

  7. oakleighpark 2 years ago

    When is Australia going to face the following facts: it has a lousy energy efficient building standard; buildings need to be factored in as a core component of the future grid; a distributed, onsite energy generation approach, based on microgrids is feasible and returning to DC is the desired end state.

    • Alastair Leith 2 years ago

      Not just buildings either. Industrial processes also. During the gas supply crisis of 2008 in WA following the Varanus Island explosion, off the state’s north west coast there was rationing of gas supplies. An aluminium smelter decided to keep less pots hot and ready for use. Turned out it saved them so many millions of dollars a week that they continued the change to their process after supply returned to normal. It didn’t effect productivity much at all and was a big energy (money) saver for them and emissions mitigation for the highest emissions per capita state in Australia.

  8. Les Johnston 2 years ago

    I agree that the NEG is like flogging a dead horse. However, NSW is sitting quiet hoping to avoid the energy issue in that State. It provides a leadership based upon factual evidence instead of ideology and ignorance. The Table on future fossil plant closures is blunt and must at least provide some realisation that energy generation policy cannot be ignored. Reactive policy will deliver the continuing increase in electricity prices. It is in the public interest to get the energy transformation at least cost to the consumer in place of ideology.

  9. Albert Lightfoot 2 years ago

    The one thing that is missing from these supply and demand discussions is the imminent onset of the electric vehicle disruption. Electric vehicles require electricity, a lot of electricity. This could see the demand for grid electricity double or triple in the next 10-15 years. EVs are generally flexible as to the time of charging, so can fit in with diurnal and even meteorological variations in generation, long-haul highway traffic excepted. Their is no doubt whatsoever that anyone investing in zero marginal cost (read renewable) electricity generation will get their money back and make an ongoing profit in the rapidly expanding electricity market.

    • Mike Westerman 2 years ago

      Australia has about the same input energy to its transport sector, including coastal and inland water transport, rail and air, as the electricity sector (about 1600PJ). About 80% could be electrified (ie all but air) but the input energy is expected to fall very significantly because of the 3-4x greater efficiency. Several estimates indicate about a 25% max rise in energy consumption, but if well managed, the maximum demand may not be significantly higher than now.

      Furthermore they would add significant storage, and as you say, load management if set up properly.

      • Albert Lightfoot 2 years ago

        Thanks for your input, Mike. I accept your figures. My own figures were extrapolated from my personal situation where, as a conservative driver and domestic electricity user, I have calculated that an electric vehicle would approximately double my electricity consumption from 7kWh/day to 13kWh/day. Taking into account the 3-4x greater efficiency of the EV over the ICE, plus the fact that nearly all the charging energy is coming from my own roof at zero marginal cost, this is a huge saving on fuel. Most, however, would be relying on primarily on grid energy, which is what would give investment certainty for utility-scale renewable energy generation.

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