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National Energy Guarantee: What we know so far

Issued in mid-February, the National Energy Guarantee consultation paper provided a very high level description of how the scheme may work.  Its objectives are twofold; to promote system reliability by increasing the amount of plant on the system that can respond to unexpected fluctuations in demand, and to do so while recognising that the amount of renewables generation must increase if Australia is to meet its international commitments towards reducing the impact on climate change. Although there is a lot of blank space still to be filled in with the scheme, informed opinion has already highlighted some of the problems that will have to be overcome.

The timetable for the scheme’s development is quite aggressive. The ESB is targeting the second half of 2018 for completion of all legislative and rule changes needed to bring the Emission component of the scheme into effect sometime in 2019, and the Reliability component sometime in the following year. That will require sign off by COAG at its April meeting. South Australia and the ACT are known to be sceptical, partly because they are the two states with the largest proportions of wind and solar generation (by seeking to retain more fossil generation on the system under the Reliability component, renewables would be a loser under the scheme). It remains to be seen whether either of these states would be prepared to torpedo the ESB’s proposals, particularly as it is currently the only coherent policy option on the table for integrating electricity security and emissions reductions. Nevertheless, the second half of this year for completion looks to be a tight timeframe given the briefness of the proposal as it currently stands.

Regarding the Emissions component of the scheme, this is likely to be an emissions intensity target imposed on the retailers. The emissions path would be set by the Commonwealth and would be similar to what is expected under the current Renewable Energy Target (RET) scheme in terms of its effect on emissions reductions. A mechanism must be developed for determining the emissions intensity of electricity purchased by the retailers. Where the retailer owns the source of the generation this might be fairly straightforward, but where the electricity has no nominated generator (such as where it is purchased under a futures contract or it’s over the counter equivalent, a swap), there is currently no way of knowing what the emissions intensity of that electricity is. The ECB will have to come up with a solution to this problem.

For large energy intensive export exposed industries, their treatment will likely be to mirror how they are treated under the existing Commonwealth RET scheme and they will be exempted from the National Energy Guarantee’s requirements for emissions reductions. Regarding the RET itself, the Consultation paper expects that scheme to be undisturbed by the National Energy Guarantee, and that a retailer that purchases RET certificates from a renewable generator to remit against its RET liability will also be able to claim the same certificates towards its proof of emissions intensity.

General opinion on the street is that the Emissions component of the scheme would add an extra layer of administrative and compliance costs without necessarily delivering any additional savings in emissions. New build of renewable generation is currently being driven partly by the RET and increasingly by the declining costs of both wind and solar generation. With forward prices for Large Scale Renewable certificates falling the market believes that the 20% renewables target under the RET is going to be exceeded. For the Emissions component to have any effect, the emissions intensity target would have to be set low enough to increase the amount of low emissions generation beyond what the market is currently set to deliver. The target is unlikely to be set that low.

The Reliability component of the scheme is very sketchy. Here AEMO would look out over some timer period, maybe as long as 10 years, and forecast a required quantity of dispatchable MW that would be required for system reliability. As system demand moves up and down from minute to minute, generation must be also be able to move up and down in real time to match this requirement. The problem with renewables is that currently they can’t do this, only coal and gas fired generators can. Battery storage could change that though, as could new build wind generators which would have some limited ability to flex their output in very short time frames. If AEMO foresaw a shortfall in the quantity of dispatchable MW at some time in the future, it would then mandate that the retailers contract for additional dispatchable MW to fill the shortfall gap. Proving how many dispatchable MW each retailer has already contracted for before it enters into any additional contracts is a quandary that will have to be solved. There are also many other considerations that will have to be addressed such as how near in time must the forecast shortfall be before the retailers are required to act, one year, two years, longer? For how long would the shortfall contract be expected to run? Also, forecasts are prone to error, if AEMO were to over-forecast a shortfall in dispatchable MW which then did not eventuate, electricity consumers would end up paying for dispatchable MW that were never needed.

Another issue that has been raised with the Reliability component is whether or not this is the best way of delivering a reliable supply of electricity. In the run up to the current summer, and following the closure of the 1,600MW Hazelwood coal fired power in March of last year, demand was forecast to exceed supply in both Victoria and NSW. To manage this AEMO used its existing powers to purchase demand management form the market. Under those arrangements a small number of large customers were paid to reduce their load at times of highest demand. The result was that the system remained reliable and continued to supply power to all its customers. The costs were modest, with customers being charged an additional $27M in the summer to the end of January to fund these arrangements. Whilst costs will continue to accrue until the end of March, more than half of the total cost to customers has probably already been passed through to them. To put the cost to date of $27M in perspective, the total cost of electricity delivered to customers in Victoria and South Australia over the summer will be in the region of $2.5Bn. The current reserve trader arrangements are working and are cheap. Concerns exist that the National Energy Guarantee may be difficult to make work and will also prove to be much more expensive.

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