Will the NEG make the energy transition easier or harder?

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The ESB needs to go back to the drawing board and have another go at its National Energy Guarantee. They doesn’t understand what a bad solution they have proposed.

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It’s the job that has to be done.

By 2032, that is in just 14 years, three of NSW’s 5 coal power stations – Liddell, Vales Point B and Eraring – will be closed. Almost certainly one of 3 Victorian brown coal stations, Yallourn, will also have closed.

We expect that Gladstone in Queensland will also have closed (but for the sake of this argument you can ignore that).

In numbers, a reasonable analyst would look for about 50 per cent of NSW’s current supply to close over the next 14 years and about ¼ of Victoria’s.  Of those stations Liddell and Eraring have been announced by AGL and Origin respectively. The rest are my estimates.

Figure 1 Expected closures in NSW/Vic . Source: NEM Review, ITKe

Replacing that energy with wind & solar PV requires about 16GW of wind & solar PV, or about $30 billion of investment, and at say 2GW a year it’s entirely doable. However, this variable renewable energy is going to need firming up.

The trouble is we don’t know how much firming is going to be needed and other than Snowy 2.0 and AGL’s 250MW proposed fast start gas power station at Newcastle there are no firm plans. (Ed: There is some talk of battery storage, including by AGL, Neoen, and others).

Clearly what is needed is a number of studies, a strategic plan and appropriate government policy.

There is no vision, or understanding in the NEG

The reality is that as each coal fired plant closes it will be replaced by some combination of variable renewable energy [VRE] and some dispatchable energy.

The problem is the proposed National Energy Guarantee (NEG) is a mechanism really does not contemplate this. It has two seemingly unrelated guarantees which provide no interaction mechanism and no “vision”.

There are numerous technical difficulties recognised by many parties, some of which are discussed below and a short implementation time frame.

Our suggestion would be for the ESB (Energy Security Board) to go back to the drawing board and have another go. The ESB has still only been running for 12 months and frankly doesn’t have the experience to understand what a bad solution they have proposed.  We call time out.

NSW Deputy Premier John Barilaro . (AAP Image/Keri Megelus) NO ARCHIVING

NSW Nationals, particularly leader John Barilaro will have full responsibility for the mess unless they recognise this physical reality

The market and the ESB’s job would be a lot more doable if the NSW Government could stop hiding under a rock and make some public recognition of the problem and what to do about it. The trouble is the NSW Government is clearly split on the topic.

The divide is largely between the Nationals, with 10.5% of the NSW vote, 18% of seats  and some Liberals and the moderate wing of the Liberals.

The Greens get the same share of vote as the Nationals, but only 3% of the seats. The NSW Premier seems indecisive, and seems to prefer to avoid the topic altogether. The NSW opposition has not done much of a job either, preferring to play a small target.

The Nats in NSW are lead by John Barilaro who has argued for more coal stations, nuclear power and Snowy 2, all seemingly in the same breath.

With the exception of Snowy 2, close to his electorate, the utility industry offers zero support for his plans. So what we have is politicians, seemingly very poorly educated about matters utility, trying to set policy for an industry that has absolutely no intention of following that policy.

It’s obvious that the utility industry is going to factor in Govt policy when making investment decisions. However in this case they are not seeing Govt policy as a positive but as a negative. It’s not the utility industry, that needs to change its Govt policy.

It doesn’t matter how many diversions, smokescreens, road blocks, or political speeches are made, it won’t alter the fact that wind and solar PV are basically cheaper than coal, and are going to become more so.

The costs of carbon emissions are going to go up, and the existing power stations are going to close. It’s not the job of the NSW National leadership to whip up the worst instincts of naturally conservative, well meaning country people.

It’s their job to show them a rational, sensible way forward, and to give them the courage and the hope that not only can their way of life be maintained it can be improved.

Its true such a policy is controversial but that’s the essence of good leadership, working out the right thing, convincing the support base, building the team and getting it done.

Of course NSW is just an example of the same debate that goes on a  Federal level, but there is less overt policy in NSW, the largest consumer in the country, than in an other State.

Snowy 2, and the NEG put the cart before the horse

Our fundamental issue with things so far is that they are being done out of order, and the lack of clarity of vision required.

They solve problems which don’t exist and create problems that don’t need to be created. Our view is that a plan which explicitly factors in the closure of these power stations and provides a pathway to replacing them with a renewables dominated mix backed up by appropriate firming capacity should be developed first.

NEG provides an illusion of problem solving, but actually does little

It can and will be argued that the NEG provides a mechanism to accomplish the above but we see it as more likely to raise industry costs and increase difficulties rather than be a genuine part of the solution.

Its difficult to  prove this because the NEG is so vague, even now, as to be a motherhood solution. Perhaps motherhood is no longer a politically correct phrase.

We mean that the NEG, if you ignore the detail, and ignore the complexity, can be taken as capable of solving any problem. Want less emissions, just increase the guarantee, want more reliability just increase the Guarantee. See you later I’m off to walk the dog.

Snowy 2 seen through the NEG lens

Take Snowy 2. Never mind the economics of Snowy 2, we can say with confidence that Snowy 2 will be a net consumer of electricity. It takes more energy to pump water up hill than can be generated by the water falling down hill.

Under the renewable targets proposed for stage 1 of the NEG the majority of energy used to pump the water up hill will come from coal. That will be the case until NSW gets to more than 50% of its energy coming from renewables.

The NEG’s renewable guarantee, with its limiting 5 year fixed targets, does not contemplate 50% renewables.

Reliability under the NEG model – 8 steps, but might as well be 39

According to the consultation paper reliability under the NEG works as a series of steps, the paper uses 8 but we condense.

  1. Forecast and keep updated the “reliability gap”
  2. Trigger a requirement
  3. Retailers get told which instruments qualify to meet gap
  4. Shortfall is proportionately allocated to retailers
  5. AEMO procures any remaining shortfall if retailers don’t comply
  6. Compliance measurement and sanctions

Reliability is to be defined, somehow, by AEMO forecasts

The gap is defined as the difference capacity  (as estimated by the AEMO) and demand for a 10% POE (probability of occurrence ) day. This is done region by region.

The AEMO will forecast the gap in advance giving the sector, in theory, time to fix it before the gap is formally pronounced.

We note is that the gap and opportunity is in the present system measured by looking at spot  and futures prices in the current market. If someone perceives an opportunity in the price forecasts to build dispatchable capacity then they do so.

The fact that no one has actually pushed the button in the past couple of years indicates that either there is no perceived gap, or that the gap is not forecast to be enough to enable investors to earn a risk adjusted return.

By introducing the AEMO as the “judge” and in our opinion a biased “judge” the messages are:

  1. The market doesn’t work
  2. The AEMO is a better judge than the market;

Some issues

The ESB paper raises many questions about the gap and the steps to fix it. We also looked at a paper by leading law firm King Wood Mallesons [KWM] which raised a number of points.

In looking at the issues we bear in mind at how the process might get Snowy 2 built as an answer to “the gap”.

There is obviously a difference between short term gaps, such as potentially existed in the current summer, and more enduring gaps such as when Eraring closes.

Triggering a gap too early means not leaving enough time for things to sort themselves out and too short a time has obvious problems.

Bruce Mountain has already pointed to the complexity around the use of financial contracts to fulfil a reliability obligation. Even this does not cover the issues of MW (power) and energy (MWh) gaps. A battery might fix one but not the other.

The gap can either be directly allocated to retailers or the AEMO could run a book. The AEMO would match retailers with insufficient or excess capacity with retailers who wish to invest in new capacity.

As an aside is anyone else confused by the concept of “retailers investing in new generation capacity”? KWM says in their view this does not seem workable “as we doubt that contracts for the duration of the gap will be sufficient to underwrite new capacity

But consider Snowy 2. How long a contract would the private sector require to undertake that investment? We suggest 15-25 years.

In the NEM as it exists at the moment most of these contracts would have to be taken up by the likes of small retailers, or those that are less vertically integrated.

If you look at it from ORG’s point of view, once they close Eraring, they may prefer their own solution to buying Snowy 2 contracts. If all the big gentailers decided that would there be enough demand for Snowy 2?

KWM goes on to say:

If the gap is to be allocated to individual retailers, it is not clear how.  There is also a question posed of whether large customers who are not registered in the market (ie who buy through a retailer) should have direct obligations. 

The concern is that such customers contract cyclically with retailers (eg every 3 years) or have spot price pass through arrangements and so retailers will be unlikely to invest in capacity based on those customers.  We agree with the ESB’s concerns about the legal complexity and impacts of such an approach.”

KWM summaries its article by saying there are a number of “fundamental issues”. They list five and that is just on the reliability guarantee.

Emissions intensity guarantee is fairly meaningless

The main technical issue with the emissions guarantee is probably just measuring the actual emissions intensity of a retailer. This requires understand the emissions intensity of all their contracts, generation and residual interactions with the pool.

However the more fundamental problem is that the target 26%-28% below 2006 emissions. The fundamental issue is that far more renewable energy needs to be built to supply the bulk of the energy from all the coal stations that are going to close.

The emissions guarantee does not provide a mechanism for this to happen and the implicit understanding must be that the market signal will get it done.

However we wouldn’t be thinking about the NEG if the market signals were enough.

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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13 Comments
  1. Rod 2 years ago

    Surely the acronym for (probability of occurrence ) is POO
    i wonder why they don’t use that. And yes, don’t mention baby Barnyard.

  2. Hettie 2 years ago

    Thanks David.
    Seems to me, the 3 word summary is, “NEG’s a dog.”
    The sooner we get a rational group of people on the Treasury Benches, the better.
    A return to the old style of public service, with permanent department heads who can give informed advice to Minister’s, that would be good too.
    Currently, we have ignorance advising ideology. How could that result in anything but idiocy?

    • Ren Stimpy 2 years ago

      …informed and fearless advice

  3. Peter Todd 2 years ago

    David Leitch just does not seem to understand what the free market is capable of. All the NEG has to do is set the framework for emission levels, reliability and of how the energy market player can make money in the future. The investments will happen. The important thing is to get the framework to the point of being workable and locked down securely enough to support low risk level investments. This article seems to add nothing substantial to task of getting the framework right. It is just negativity.

    • David leitch 2 years ago

      Peter

      I must have written badly, not unusual. I like to think i know a bit about what the “free” market can do. One point made in the article, is that the NEG moves away from the “free” market particularly in regard to reliability. Another point made in this article, and by other commentators in other articles, is to question whether the NEG does provide the right framework.

      • Peter Todd 2 years ago

        Being a reliability engineer, I agree with you that the reliability component needs some work. There may be many potential frameworks that are conceptually better than what the ESB has put together but we need one that can make it through the LNP right wing filter. Many seem to be happy to wait till the next election, hope LNP goes and then start again. I want real progress now. There is nothing in NEG that I can see that can’t be fixed either now or later. I feel NEG needs detailed improvement input now. Not more criticisms.

        • Steve 2 years ago

          It’s not clear to me that implementing (?) a NEG now is better than doing nothing. I like to think of these kinds of initiatives in terms of Adam Smith’s canon’s for a good taxation system.

          “Canon of Equity” : Does the NEG favour certain constituents (large encumbent gentailers) above others?

          “Canon of Certainty” Will the NEG as it is currently thought bubbled make it easy to know who has to do what? Will the NEG end up being quite opaque?

          “Canon of Convenience” / “Canon of Economy” Will the NEG be an even remotely efficient way to solve the trilemma, or wil it be a further impediment?

          I give the NEG as currently envisaged a fail on these, though you may disagree.

          Also, I really have problems thinking that a system designed to assuage the RWNJ of the LNP will be better than nothing at all. Like other religous zealots they just want 10% more than is on offer, regardless of what that is.

          My tuppence ha’penny worth is that if the federal government continues as it is then the Qld, Vic and SA governments will all continue to design energy systems to encourage cheap renewables. Reliability will proceed – as it is in SA – with various schemes to encourage firming. NSW will run out of power and will be importing more and more electricity from our sister states.

          Once that’s sorted Snowy 2 will eventually come on line…

          • Peter Todd 2 years ago

            To improve things you need a starting point. Many people like yourself just hate the idea of giving the large incumbent gentailers an advantage The problem is they already have the advantage. We need to put a stake in the ground, get it agreed by the key political players and get going on the investment we need so desperately. As long as the system rewards smart initiatives to achieve low cost, specified emissions and acceptable reliability electricity, then Australia will get what it needs. if the incumbent gentailers can provide this, I am fine with that. If other energy players can do a better and they are thwarted, then the Energy Security Board and the NEMO will have failed and major changes will again be required.

          • Steve 2 years ago

            I don’t think it’s about what I like or hate. I am not sure how that is relevant. It’s more that against objective criteria the NEG may not stack up.

            Also I see elsewhere on this site around 30 GW of solar ‘in the pipeline’ so I don’t see how investment needs to be jump started when it is taking place.

            Finally agreed emissions are useless if they are inadequate.

          • Phil NSW 2 years ago

            Simply the NEG requires a register for all qualifying generators and any new investment to have:
            a) A registered supply contract with a retailer
            b) Zero emissions
            b) Offset capacity to ensure a reliable supply sealing of say 80% of average output.

          • Robert Shippen 2 years ago

            Neg is really rushed; going to fix it after its implementation? Political folly. This new idea is broke from the start.

  4. Ken Dyer 2 years ago

    The NEG, lousy thought bubble it is, is designed to benefit COAL, not renewables. And the Guvmint better start planning for life after coal, because exports are about to take a $6 billion dollar hit from South Korea who do not want Australian coal any more.

  5. RobertO 2 years ago

    Hi All, The NEG is equal to the CDO offered by the free market (money markets). Very valuable to large coal generators (reliability factor of some 53% charging large amounts of money) from RE generators. It will protect coal (larger incomes for FF generators) and us poor customers will pay more for our power. Given that batteries + solar panels more will leave the grid and less customers will pay more (very good for “Free Market”)
    The NEG is a con job!

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