We should mourn the NEG, latest victim of the ‘political slaughterhouse’

by Tony Wood

Published by The Sydney Morning Herald, Tuesday 21 August

For more than a decade, integrated energy and climate policy has been the desired pathway to affordable, reliable and low-emissions electricity.

One of the more credible vehicles to get us on that pathway, the National Energy Guarantee (NEG), is the latest victim of the political slaughterhouse in Canberra that passes for government.

Its death should be mourned by us all.

The NEG was a creation of the Energy Security Board (ESB), itself recommended by the Finkel Review and created by the COAG Energy Council of the nation’s energy ministers.

Its central design was remarkably simple: one obligation on energy retailers to ensure they have secured enough electricity to meet the demands of their customers and a second that those retailers source the electricity from a mix of technologies consistent with meeting a national emissions reduction target.

The initial emissions reduction target was always too low to deliver serious climate outcomes, and the structure of the obligation too clunky since any form of emissions trading had been abandoned.

But the industry and its customers had worked intensively with the ESB to secure broad support for the NEG. Now, the NEG is dead – and there will be consequences.

First, there will be consequences for reliability.

Since the South Australian blackout of 2016, the Australian Energy Market Operator has worked tirelessly to secure enough supply to deal with the consequences of the shutdown of Victoria’s Hazelwood power station and the increasing share of generation coming from intermittent sources such as wind and solar.

These efforts, with some help from benign weather conditions and no major plant failures at critical times, have worked.

But the Australian Energy Market Operator has indicated that without the NEG, the scheduled 2022 closure of the Liddell power station in NSW could mean that once every three years around 200,000 households in that state could lose power for as long as five hours.

In March, AEMO wrote to Energy Minister Josh Frydenberg, proposing that it would have to work with the ESB and the NSW government to establish a NEG-like alternative if the NEG was not in place by the end of the year.

Such actions taken across the market will come at higher cost than would flow from a consistent, integrated reliability mechanism such as the NEG.

Second, there will be consequences for prices.

The ongoing uncertainty for investment in electricity generation means greater risk. And greater risk for investors means higher costs for consumers.

Talk of an investment strike may be alarmist, but it will be heard.

Third, there will be consequences for the environment. The NEG would have provided a platform to deliver the electricity sector’s share of Australia’s international emissions reduction commitment.

More work was going to be needed to establish an efficient, economy-wide framework, and the target would have to be increased by an Australian government serious about tackling climate change over the longer term.

The corpse of the NEG is only the latest in a graveyard of failed climate policies.

And yet, total failure on all these fronts is not inevitable.

The federal government could secure the COAG Energy Council’s support for the reliability obligation of the NEG.

Or it could revert to something more akin to the reliability obligation proposed by the Finkel Review, which would be imposed on the generators rather than the retailers.

Implementing, as the government now proposes, the Australian Competition and Consumer Commission’s recommendations on electricity affordability will deliver lower prices (although it should be noted that the ACCC was one of the many voices calling for the NEG).

And, in the short term, emissions in the energy sector are falling, mainly courtesy of the federal government’s Renewable Energy Target. The RET, combined with the renewable energy policies of the Victorian and Queensland governments, means the target of 26 per cent reductions in the sector’s emissions by 2030 is likely to be achieved early next decade.

The next step would be for the next federal government to start from scratch and build a credible climate policy that actually gets implemented. Sadly, history suggests we should not hold our breath. The sky hasn’t fallen on Australia’s energy sector, and it won’t. But the death of the NEG means the storm clouds of uncertainty are likely to remain for no one knows how long.