The National Energy Guarantee (NEG) proposed by the Energy Security Board (ESB) and championed by the Federal Government is to be considered by the COAG Energy Council for possible approval on 10 August 2018. The detailed design has been developed over recent months in close consultation with expert Technical Working Groups in which Ai Group participated. The detail is extensive and complex, and Ai Group is continuing to consult with members to identify any last technical issues that need to be addressed.
The highest level design of the NEG is as follows:
- Emissions Obligation – direct customers in the National Electricity Market (“market customers” – electricity retailers and a handful of exceptionally large energy users) would have to ensure that the average emissions intensity of the generation they contract for is at or below a national target;
- Reliability Obligation – market customers and large energy users (above 5 megawatts of peak demand) would have to ensure that, if a shortfall in reliable supply looms, they cover their peak load with financial contracts or demand response to limit financial and physical risk;
- Liable parties under each obligation have flexibility to meet requirements at least cost, particularly through contracting.
The remaining issues with the NEG fall into three categories: the strategic context; technical issues; and political issues.
The strategic context for industry is that there is an increasingly urgent need to reduce the uncertainty of energy and climate policy in order to underpin investment by electricity suppliers and users. Forward prices are being reduced by the new generation capacity coming online over the next two years, but there is no clear pipeline beyond 2020. Old generation will continue to retire unless it is refurbished and extended, and the investment case for either new or upgraded assets can be heavily affected by the specifics of energy and climate policy.
Reducing the chaos and uncertainty of this policy space is essential to keep improving prices and maintaining supply security. The NEG is the only currently available opportunity to achieve agreement on a durable mechanism. Political disagreement is likely to persist for some time on the ambition of emissions targets – the Federal Coalition supports a 26% reduction off 2005 levels by 2030; the Federal ALP supports a 45% reduction by 2030; the Coalition and ALP States and Federal ALP support a goal of net zero emissions by 2050. Narrowing the range of uncertainty over mechanisms would be a tremendous advance for energy users and suppliers, even as the target debate continues.
The primary remaining technical issue on which Ai Group members have expressed concern so far is whether large energy users (defined as sites with peak demand of 5 megawatts or more) should be directly responsible for managing their share of the Reliability Obligation, with the ability to transfer this responsibility to a retailer by agreement (‘opt out’); or whether retailers should have this task by default, with the ability for users to take it on by agreement (‘opt in’).
There are arguments either way, but ultimately if the Reliability Obligation is triggered by a looming shortfall and substantive compliance costs result, all energy users will pay them – whether directly or to retailers managing the Obligation on their behalf. After consulting members, Ai Group has submitted that retailers should hold the liability by default but that all large energy users should have the freedom to opt in to manage this if they wish. The ESB has signalled that they are willing to agree to this.
The political issues in achieving a deal on the NEG are fraught:
- The mechanism requires the agreement of all NEM States in the COAG Energy Council.
- Passing a national target requires legislation – whether to specify the target or to establish a power for the Minister to issue targets.
- All the States have higher emissions reduction ambition than the Commonwealth, and any of the ALP States is potentially willing to block a deal without some sign of compromise on ambition, future target setting processes, and/or the scope for States to pursue additional emissions reductions beyond the national target.
- The Federal Opposition is unlikely to agree to target legislation that locks in substantially weaker emissions reduction goals than their own.
- The Federal Government faces pressure from a section of its backbench to drop the NEG, abandon the Paris Agreement, and offer public financial support and risk guarantees for new coal fired power stations.
- While resisting this pressure, the Federal Government has offered no flexibility on targets and proposes to lock in a 10 year trajectory to a 26% target through legislation; a future government would need to pass amending legislation to alter the target.
While the positions above look irreconcilable, there is still a strong desire among governments and stakeholders to achieve an agreement before the next Federal election (due by May 2019). Ai Group will remain closely involved in efforts to strike an agreement that meets the long-term interests of industry and helps continue the current trend of declining energy prices.
The Energy Security Board’s latest design documents on the NEG are here.
The Commonwealth’s latest paper, addressing targets, Emissions Intensive Trade Exposed, and offsets, is here.
Ai Group’s submission on the Draft Detailed Design is here.
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