18
Jun
2018

There is no Plan B if the states fail to approve the NEG

by Tony Wood


Published by the Australian Financial Review, Monday 18 June

If criticism from both extremes of the political spectrum is a measure of good policy, the Turnbull government’s National Energy Guarantee (NEG) should be one for the ages.

Last Friday, federal, state and territory ministers reviewed a draft consultation paper on the detailed design of the proposed NEG. It appears progress was made towards a final detailed design for endorsement at the COAG Energy Council’s August meeting.

Much progress has been made since April when the council endorsed moving to detailed design. This progress is partly down to a sound decision by the Energy Security Board to engage a wide cross-section of bureaucrats and industry stakeholders to thrash through the detailed design. This decision was criticised as inviting foxes into the hen house. But involving a broad stakeholder group at the design stage is far more likely than a closed process to produce a workable design with less chance of unexpected outcomes.

Broadly, emissions reduction and reliability obligations on energy retailers continue to form the central design concept of the NEG. Most of the substantive issues have been resolved.

Environmental groups have criticised the emissions reduction target as inadequate, and they have a case on two levels. First, Australia’s national emissions reduction target falls short as an effective contribution to the Paris Agreement objective of containing global temperature increases due to climate change to well below two degrees. Second, applying a simple proportion of the 26 per cent reduction target to the electricity sector leads to an inefficient Australian response, because achieving reductions in other sectors is likely be more expensive.

But these inadequacies are not the fault of the NEG; they are the result of political choices by the current federal government. The critical point is that the NEG’s emissions target can be “scaled up” by future governments.

In the meantime, states that adopt aggressive renewable energy targets may argue, or be encouraged to argue, that they will be taking on a disproportionate share of Australia’s emissions reduction task. Two points should be made in response to this superficially appealing argument. First, states such as Victoria and Queensland have usually justified their higher targets by pointing to the economic development and jobs created by renewable energy projects. Those benefits are unaffected by the NEG. Second, these “fairness” arguments become less compelling when it is recognised that Victoria has had a relatively high level of per capita emissions and that Queensland has contributed to a large recent increase in electricity sector emissions through its CSG/LNG projects.

Business groups such as the Minerals Council, and some Coalition MPs, are concerned that the NEG is driven by an ill-considered commitment to intermittent renewable energy, and that this will inexorably mean less base-load, coal-fired power and therefore a less reliable electricity system.

Balancing an increasing share of intermittent renewable energy with storage, demand-response, gas, coal with CCS or nuclear power is a globally recognised challenge. There is progress on all fronts, and each country will have its own best solution. That does not reduce the need for Australia to find its lowest-cost energy mix. The design of the NEG’s reliability requirement meets this challenge head-on and in a technologically agnostic way.

We should not be surprised that the detailed design of a major change to Australia’s 20-year old National Electricity Market is complex. But we can be reassured that active engagement with a wide cross-section of industry and its customers is likely to produce a workable model.

The detailed design now includes changes and mechanisms to address earlier concerns about the potential for reduced market competition. The proposed models for allocating emissions and for ensuring liquidity in the contract market look robust. Giving large consumers the option of managing their reliability requirement directly or via a retailer should contribute to more competition.

There are several pragmatic compromises, for example the limited option to carry-forward over-achievement on emissions reductions. And several detailed issues, such as the benefit of establishing a publishable repository of data on reliability contracts and trading, are yet to be fully addressed. But all seem capable of pragmatic solutions. A final judgment will rest on the technical working papers, which are yet to be published.

The NEG is not perfect, but its evolving detail offers a credible, low-cost path to meeting Australia’s emissions reduction target while maintaining a reliable power supply. The imperfections are likely to be reduced or eliminated over time. Critics have demonstrated no fatal flaws and have failed to present a credible alternative. The NEG gets my vote.