The federal Shadow Energy Minister has described the latest iteration of the National Energy Guarantee as akin to an emission intensity scheme. This is an approach he has supported in the past.
But would the current federal Energy Minister describe the NEG in the same way – his Government has not supported emission intensity schemes? If the Government and Opposition agree on the approach but call it different things does it matter?
Alternatively, is there a substantive difference here that matters?
The latest iteration of the NEG might be described as a quantity-based obligation on retailers, measured in terms of the emission intensity of the electricity they sell (except to emission intensive trade exposed electricity consumers).
Under this approach generators and retailers will be required to contract with each other, separately from the NEM, to assign the right to have electricity from a particular source associated with one retailer and not others.
Retailers will pay generators for such association, and then seek to claim the cost of this back from their customers.
The approach does not directly establish a price on emissions, but instead stimulates demand for lower emission electricity production and reduces demand for higher emission electricity production.
As we understand it, the Federal Energy Minister likes this approach because it might be said the policy is not pricing emissions, it is simply placing emission intensity obligations on retailers. But, of course, it is indirectly pricing emissions by preferring lower emission electricity production.
There is an important difference between this approach and what is commonly understood by emission intensity schemes.
Intensity schemes typically start with an emission price, which is then applied to production, creating credits for plant whose emission intensity is below athreshold and debits for plant whose emission intensity is above the threshold.
With an intensity scheme the price is established by regulation, and the burden (or bonus) that it places on generators depends on their emission intensity.
With the NEG, the price is not established by regulation and it does not directly place a burden (or a bonus) on generators. Instead it places a burden on retailers.
While the two approaches are quite different, it might be argued that they come to the same thing. But I think there is good reason to be concerned that this will not be the case.
Firstly, unlike an emission intensity scheme, the NEG provides no incentive for retailers to reduce their emissions below the threshold. Secondly, and more importantly to my mind, the NEG imposes significant transaction costs that other approaches do not.
The process of assigning production from specific production sources to specific retailers is not likely to be trivial. At first glance I would imagine that vertically integrated players would find it easier.
On account of the transaction costs, and their possible distribution, I think there is reason to be concerned that a transparent, liquid and tradable market in such assignment will not arise.
Markets that are not transparent, liquid or tradable undermine the ability of those capable of reducing emissions more cheaply than others from gaining a competitive advantage to their benefit and to the benefit of consumers and the environment.
Certainly, such an approach has not been adopted elsewhere. Where market solutions to emission reduction in electricity production are implemented, the approach always is to place obligations on the producers directly, rather than on the retailers.
In its short life, there have already been many twists and turns in the NEG. The latest iteration while possibly more plausible than previous, still suffers from the political imperative that the policy must not directly price emissions.
Indeed, the most valuable information obtained from a market – i.e. prices – are exactly what the policy seeks to obscure. Needless complexity and cost arises, pursuant to this political objective.
Returning to the original question, I think the Shadow Energy Minister is being somewhat optimistic in describing the latest iteration of the NEG as akin to an emission intensity scheme.
Intensity schemes or certificate schemes such as the RET have their share of wrinkles but they are much simpler, and are much cheaper to implement and, demonstrably in the case of the RET, have delivered workable markets.
If the NEG in its latest iteration is to progress to further examination, it will be valuable to examine its likely transaction costs and whether, when everything is said and done, it will be better than nothing.
Bruce Mountain is director of energy consultancy CME
