17
Oct
2017

Energy Security Board offers the government a circuit-breaker for energy crisis

by Tony Wood


Published by the Australian Financial Review, Tuesday 17 October

The Turnbull government’s long-awaited National Energy Guarantee should be supported, not only within the Coalition but by Labor, the states, the energy industry and by electricity consumers.

It should be supported within the Coalition because it will reduce electricity prices, maintain reliable supply and meet Australia’s international commitment to reduce greenhouse gas emissions. It will do this without subsidies for renewable energy and without excluding coal. Indeed, this policy provides a case for maintaining existing coal generators through increasing their efficiency and reducing their emissions.

The policy should be supported by Labor because it will deliver an environmental outcome as good as the Clean Energy Target recommended by Chief Scientist Alan Finkel – and it can be scaled up by any future Labor government.

The Turnbull plan should be supported by the states and territories because it will provide the policy direction they have been seeking from the Commonwealth. State-based renewable energy targets can now become the industry support schemes they always should have been.

And the policy should be supported by the energy industry and its customers because it should lead to greater investment certainty – and consequently greater energy security and lower prices.

Only a week ago, Energy Minister Josh Frydenberg’s speech to The Australian Financial Review National Energy Summit led some commentators to believe the government was walking away from a credible energy and climate-change policy that would underpin affordable, reliable, secure and sustainable power. But now, Frydenberg and Prime Minister Malcolm Turnbull have put forward a very different proposition – the National Energy Guarantee (NEG).

In an eight-page letter to Frydenberg, the Energy Security Board has justified Finkel’s recommendation for its creation. This letter responds to concerns jointly raised by Finkel and the Australian Energy Market Operator (AEMO) about the National Electricity Market (NEM)’s ability to deliver enough new investment to meet changing circumstances – and it responds to the political difficulties the government was having with Finkel’s Clean Energy Target (CET). The Energy Security Board recommended a combination of guarantee obligations, and the government has immediately endorsed that recommendation.

In his blueprint for the security of the NEM, Finkel recommended a strategic reserve of generation capacity as an insurance against extreme events, and a generator reliability obligation to be imposed in states that had high levels of intermittent supply. More recently, AEMO concluded: “The current market design is unlikely to provide adequate and sustained signals to the market to incentivise development of new flexible dispatchable resources at the level required to maintain system reliability over the medium and long term.”

Demanding conditions

In response, the ESB has recommended a reliability obligation on electricity retailers to hold or contract a level of dispatchable capability that in total will meet the expected demand in each state. This mechanism is consistent with the “retailer capacity obligation” proposed in Grattan Institute’s September report Next Generation: the long-term future of the National Electricity Market. Detailed design will need to follow. In principle, this guarantee adopts the market elements of recent overseas models (for example, in France), while looking to avoid the negative aspects of centralised capacity markets (for example, in the UK) that tend to incur unnecessary costs.

On emissions reduction, the government sorely needed a circuit-breaker that Finkel’s CET didn’t provide. The ESB has recommended an emissions obligation on electricity retailers to hold or contract a portfolio of supply that in total matches the NEM’s share of Australia’s emissions reduction target.

In our 2015 report, Post Paris: Australia’s climate policy options, we laid down criteria against which Australia’s climate change policy should be assessed. The proposed mechanism meets those criteria. First, it is credible in that by design it can meet the volume of emissions reductions required to meet current and future targets. Second, it should be politically viable via bipartisan support.

Third, it can flexibly adjust to changes in targets, political developments and technological change. Fourth, it can evolve into an economy-wide, market-based scheme over time. Fifth, it should be easier to “sell” to the broader community than certificate or permit-trading schemes.

And finally, it will be low-cost, because it works through the market to deliver the widest portfolio of low-emission solutions. The suggested inclusion of international or domestic credits will support that objective.

The NEG links energy and climate change policies and works through the market by creating incentives for dispatchable supply and lower emissions. The ESB has advised the government that it expects wholesale and retail prices to fall because of this policy package.

The ESB has given the Turnbull government the last piece in the complex jigsaw puzzle of a credible energy and climate change policy for Australia. The task for Turnbull and Frydenberg is to take this leadership opportunity and craft a compelling narrative to unite disparate views and interests. This is their moment.