NSW becomes the key to NEG 2.0

by Tony Wood

Published by the Australian Financial Review, Wednesday 19 December

Once upon a time, Australians could take pride in a winning men’s cricket team and a reliable supply of low cost energy. Both have taken a battering in recent times. Yet the events of this week might just provide some Christmas cheer for both.

Yesterday’s COAG Energy Council meeting in Adelaide delivered some welcome results and an intriguing twist.

Ministers agreed to proceed with the Retailer Reliability Obligation of the National Energy Guarantee (NEG), to commence by July 1 next year. This is a major step towards ensuring reliability during Australia’s energy transition.

The Energy Security Board’s proposal for accelerated implementation of the Integrated System Plan for the national transmission grid was endorsed. This will deliver investment in transmission links to support the transition where the benefits are uncontroversial. Ministers sensibly remain focused on ensuring that all proposals are subject to rigorous benefit-cost assessment.The ministers agreed to adopt the Australian Competition and Consumer Commission’s proposal for a retail electricity reference bill by July 1, 2019, in South Australia, NSW and south-east Queensland, and only with the agreement of the relevant state governments. The meeting’s communique was less clear on how that decision accommodates reports that the Australian Energy Market Commission has advised against any form of default offer that becomes an effective price cap. The commission is apparently concerned such a cap could mean higher prices and less competition.

And then there’s the curve ball. The federal minister, Angus Taylor, blocked a motion from the NSW Coalition government to ask the ESB to develop options for a national emissions reduction policy to be imbedded in the National Electricity Law. The compromise is that the request will be considered in February next year.

The NSW proposal avoids the need for Commonwealth legislation and could be the key that unlocks progress on integrated energy and climate change policy. It would be likely to attract enough support to progress through the council and would have overwhelming support from energy suppliers and customers.

If it gets the request, the ESB can be expected to recommend the emissions reduction obligation of the NEG as its preferred option – since it was their idea in the first place. Presumably, the emissions reduction target would be linked to Australia’s international Paris commitment. The federal government’s next move will be watched with great interest. A national approach to emissions reduction without the national government on board is hardly the preferred outcome.

Minister’s questionable logic

Updated emissions projections for Australia, to be released by the Commonwealth government soon, will show national emissions are not falling in line with our target of 26 per cent below 2005 levels by 2030. But the electricity sector is on track to deliver its pro-rata share.

On that basis, Minister Taylor argues no policy intervention is necessary for electricity. This logic is questionable for at least three reasons. First, industry is calling for clear policy to ensure investment flows to deliver the target. Second, international and domestic politics will almost certainly lead to higher targets being adopted well before 2030. And third, clear policy is more likely to deliver such targets at a lower cost than the current mix of subsidies focused only on renewable energy.

The week’s developments offer the prospect of a policy to deliver lower emissions and reliable supply being implemented in 2019. The intriguing question is whether the states and territories work on the emissions obligation without the Commonwealth government, at least until next year’s federal election.

To the high frustration of all governments, electricity prices are not yet moving down. But even here there are reasons to believe there is better news ahead.

First, recent decisions on network pricing will deliver real price reductions to consumers in 2019. Second, moves to improve the behaviour of electricity retailers will begin to bite. And third, a wave of new renewable supply, supported by government-sponsored subsidies, should hit the market over the next couple of years and push down wholesale prices. Direct government interventions of the sort being pursued by the federal Coalition and proposed by federal Labor, although driven by understandable frustration and political pressure, are likely to be counterproductive.

Sport deals its judgments harshly and quickly. Australia’s men’s cricket team will head to the MCG cauldron on Boxing Day and judgment will be passed within days. The blood sport that is energy and climate policy will take a little longer.

Over the holiday period, governments and oppositions should reflect on this week’s events. Clear, credible energy and climate policies, supported by well-regulated markets, remains the best option to deliver the results Australian homes and businesses need in 2019. On this outcome will our governments be judged.