On 10th August COAG will meet to further discuss the Commonwealth government’s National Energy Guarantee scheme. Whilst the objective of the government is to seek approval of the scheme at this meeting it has been uncertain for many months whether or not all states would sign up to the scheme, or even if they did, would the pro-coal/anti-renewables faction of the Coalition prevent its implementation.
The NEG is one of the largest policy initiative in the electricity space since deregulation and creation of the National Electricity Market. Many business customers are concerned as to the impact of a go or a no-go decision on August 10th on their electricity procurement strategy. This note addresses that question.
The NEG has been debated for many months with arguments for and against being batted back and forth in the media on an almost daily basis. It is not the intention of this briefing note to judge the NEG as an item of government policy. Rather, this note is to assist customers developing their energy purchasing strategy under conditions of policy uncertainty. Here we believe that a number of factors are pertinent:
- Time to implementation: Changes to electricity law and to the National Electricity Rules will be required for implementation of the scheme, with these being slated for the end of this calendar year. Once that has been done, the effect of the scheme will not be felt for several more years, with the emissions reduction component commencing in 2019 and the reliability component commencing in 2020. Whilst foreknowledge of the scheme’s commencement will influence investment decisions that are currently under consideration, it is unlikely to effect the pipeline of projects that are currently committed for delivery over the next several years.
- Impact of the emissions reduction component: Expectations are for this component to be targeted at delivering a 26% reduction in electricity sector emissions by 2030. Current estimates are for existing and committed projects to deliver a reduction of 24% by that date, 2% less than the NEG target. However, given the growth in large scale renewables projects over the last two years, the continuing increase small scale p.v., the developing interest in corporate Power Purchase Agreements and the increasing level of innovation within the electricity market it is wholly possible that the market will deliver substantially more renewables than are required by the scheme, so making the NEG’s emissions target redundant.
- Impact of the reliability guarantee component: This requires retailers to enter into contracts for additional dispatchable generation or load management should the market operator forecast a deficit of this type of plant. However, to be triggered the forecast deficit must be no more than three years into the future, and even then, the AER must approve it for the requirement to become binding (this is to prevent the market operator from erring too much on the side of caution). Also, the market operator has already said that it does not foresee a shortage of total generation at any time within the next ten years.
All of this suggests that should the NEG be approved on August 10th it will not have any material effect on prices for several years if ever, and is of little consequence in formulating an energy purchasing strategy over the shorter time frame. Further, prices have been coming down slowly since the start of this calendar year, and the NEG has had nothing to do with that.