Turnbull to rely on state schemes he once rubbished as reckless

State government anger over the federal government’s new energy plan is reaching boiling point, both because of the Coalition’s co-opting of what is supposed to be an independent board, and its decision to essentially rely on state-based renewable targets that it once derided as reckless.

The seething anger from the states is completely overshadowing the proposal for the National Energy Guarantee, not least because it cannot be implemented without their approval.

But they have been astonished by the federal government’s decision to go behind their backs, obtain a policy proposal from the newly constituted Energy Security Board – which is supposed to report to the states through the COAG energy council – and then use the ESB directors to sell the idea to media, politicians and business.

South Australia energy minister Tom Koutsantonis tweeted this week that the ESB had effectively lost its independence. ACT minister Shane Rattenbury has questioned the whole process, wondering how it fits in with the rules governing the ESB.

The creation of the ESB had been viewed as an excellent initiative. But like other promising ideas, such as the Finkel Review, and before that the clean energy scheme, the Climate Change Authority, and the renewable energy target, it has been co-opted and bastardised by a Coalition seemingly determined to destroy the renewable energy industry.

Business likes the idea of imposing reliability and environmental guarantees into the energy market, and even Bloomberg New Energy Finance described it as “elegant” and “innovative” and potentially a game changer.

But that depends on the details. Most fear that it will miss environmental, renewable and cost targets, and the return of a regulated market will simply reinforce the dominance of the major utility incumbents, and put a stop to new large-scale renewable energy projects.

BNEF shared those concerns (see this story for more detail here).

Labor’s Mark Butler picked up on analysis from RenewEconomy and elsewhere over the last few days to note that the so-called National Energy Guarantee would require large-scale renewable energy projects to come to a halt, and even rooftop solar to be cut significantly.

“For Turnbull’s plan to work there would be no new large-scale renewable energy projects and a cut of at least two-thirds to current rates of rooftop solar installation,” Butler said.

That is a reaction to the numbers proposed by the ESB  – 28 per cent to 36 per cent renewable share by 2030 – which appear designed to mollify the Coalition right wing, which has already forced the government to can the carbon price, reduce the renewable energy target, reject an emissions trading scheme, and dump a clean energy target.

BNEF says the renewable share could actually be 42 per cent in 2030, although this depends on so many details – such as the nature of the reliability guarantee – that are not known. It says it will only be effective with a very strong emissions target.

But many are appalled, particularly by the use of the ESB, whose members have been paraded by the federal government to argue for what is, as yet, a half-baked and ill-defined policy. As one person noted, when your organisation is majority-owned by the government, as they are, you don’t say no to a minister.

The irony is that Turnbull needs the states’ approval for the new NEG to be put into place, because rather than legislation, the scheme requires significant changes to the National Electricity Market rules.

On top of that, Turnbull’s scheme will also rely on the state-based climate and clean energy initiatives, the ones that Turnbull has repeatedly decried as “reckless”, to meet the federal government’s own modest targets.

Even the ACT scheme to reach 100 per cent renewable energy by 2020, which was designed to be “additional” – at extra cost to the consumer because the renewable energy certificates were extinguished rather than sold – will be co-opted into the national scheme.

There are also concerns about how the scheme will reinforce the power of the big utilities. First is the fact that the  targets will be delivered through an opaque scheme of caps and hedges, controlled by the big utilities, and secondly because – if Turnbull is to be believed – it will effectively do away with the future market.

Turnbull told parliament that the new scheme would require physical delivery of contracts, in effect returning to a system of bilateral contracts, taking the industry back to the 1980s, delivering complete power to the big utilities, reducing competition, and making it virtually impossible for any new entrants.

“If you have big baseload generator, you are sitting quite happy right now,” said one market veteran.

James Waldren, the head of energy markets at Meridian Australia, said he was concerned by the fact that it was a market dominated by three large players controlling the majority of synchronous generation, and therefore the price of it and the majority of customers, which they will seek to protect.

“How does his new energy policy promote a good deal for the customer through retail competition if there is the potential of shutting out other electricity retailers?”

Another head of energy trading was not so diplomatic. “The general market consensus is that it is a joke,” and unlikely to survive an electoral cycle even if it did get put in place.

There is particular concern about the role of some of the members of the ESB in this plan, particularly because of the ability for the incumbent generators to retain their dominance depends on the fine details of its design.

As we wrote on Thursday, the states have been stunned that John Pierce, the conservative and techno-skeptic AEMC chair, has produced the document in less than two weeks, and has emerged as such a central player who will essentially write the rules.

Over the past decade Pierce has defended the industry’s status quo, resisting even the smallest rule changes, arguing that they all needed careful consideration and review, mostly taking months or even years. The ESB was created to try to circumvent his obstinacy.

The proposed changes to the 5-minute law, designed to favour new technologies like batteries and eliminate the price manipulation of big utilities using peaking gas generators, took more than 18 months and will not be fully introduced for five years.

Yet the most substantial changes to the NEM – proposed under the NEG – were conjured up in less than two weeks, accepted by the PM and energy minister Josh Frydenberg on the same day they were (formally) received, and will be implemented in 18 months. It beggars belief.

The states fear they have been sidelined. But it is now clear that this was a long time in the making. The big utilities just took advantage of a Coalition government which found itself with its policy pants down around its ankles (thanks to Abbott) and no Plan B, C, D or E. They struck while the iron was hot.

It is thought that key executives in several of the big three utilities also played critical roles, liasing closely with the PM department. Another closely involved is Clare Savage, the newly appointed deputy chair of the ESB. She is highly regarded, but in the past decade has only acted as a lobbyist for the big utilities – at the industry association ESAA, then with EnergyAustralia, and latterly with the Business Council of Australia.

The new concerns add to the myriad issues surrounding the proposal, as we have outlined here and here.

The emissions targets are manifestly inadequate, require greater burden on other industries, have no long-term target beyond 2030, and will likely be “back-loaded”, meaning any reductions will be sought closer to 2030 rather than now.

It will require the trading of a kind of carbon credit that will be all but invisible, because it will be hidden in energy market contracts such as caps and hedges. It hands complete control to utilities.

The system will not encourage new competition, which seems to be the least bit necessary to moderate prices, and will make it extremely hard for new retailers. It may not even send a long-term price signal necessary for energy industry because there is no target beyond 2030.

On top of that, it will also allow big retailers to source credits from international projects rather than invest in wind and solar, and worse, it appears to lock in the absurdly high prices in Australia’s grid for at least another decade.

Roger Price, the head of Windlab, which will soon begin construction of Australia’s first wind, solar and battery storage hybrid project at the Kennedy Energy Park in north Queensland, says allowing regulators to set the energy mix is not an attractive idea.

“Regulators are not places where innovation thrives,” he told Reneweconomy. “Does Australia want to lead with innovative projects like the Kennedy energy park, or does it just want to be a regulated market.

“This just cements the market power of the three major gentailers. Regulated markets are neither efficient or very good at technology innovation, or of price reduction.

“Renewables will be part of the mix, it is just a question over the path to get there. And this is the fourth best option,” (after a carbon price, an emissions intensity scheme, and a clean energy target).

The ACT’s Rattenbury was also concerned about the nature of a regulated market: It reverses the whole policy direction of this space – which was to create targets for renewables and storage – now we have a guarantee for coal and gas. It’s a complete flip over from what we done for the last few decades.”

And, as BNEF’s Kobad Bhavnagri says, as innovative and elegant as it might be, it might only be successful if there are significant emission reduction targets (although even then it may not be able to scale).

And what chance of ambitious climate targets are there under this Coalition? Which is possibly why the Coalition has made such a mess of its presentation, putting nearly everyone offside when a little bit of thought and consultation could have been decisive.