The National Energy Guarantee – good for customers and for the environment?

The Federal Government has floated a new energy and climate policy called the National Energy Guarantee (NEG), which is basically now the only policy gig in town. Powershop is committed to working with the Government, market regulators and other industry participants to ensure the design of the NEG delivers the best outcome for the market, customers, and the environment. So is the NEG a good thing?

Electricity prices and the need to spew less carbon into the atmosphere are front-page news almost every day. For all the wrong reasons, electricity is something that we often discuss at BBQs. The electricity system desperately needs two things.

Firstly, get more electricity supply into the market and prices will fall. Although the system is complex, wholesale electricity markets follow the basic rule of supply and demand. Because of a lack of stable Government policy for the last 10 years (who remembers Julia Gillard’s carbon tax and the fight that followed?), we have not had enough new generation coming into the system. At the same time, old coal-fired power stations have been closing down. These coal closures have been welcome from a carbon emissions point of view, but the result of this (combined with a few other factors) is that we have seen higher wholesale electricity prices in the last 12 months. At the same time, the cheapest form of new energy generation is now solar and wind1. The uncertain policy environment and the coal closures have meant that not only have we had less supply coming into the market, that could have driven down prices, we have had less renewable energy coming into the market that would drive down emissions – a double whammy!

Secondly, we need a price on carbon. Powershop and many others in the industry have been calling for an effective carbon policy for ages. This could be a simple carbon price, or a more complex emissions trading scheme. Either way, a carbon price of some kind would give some certainty to the industry so that we (and others) could invest in more renewable generation. Last year, the Government announced a review by our Chief Scientist, Dr Alan Finkel, to look at things like security, reliability and affordability of the electricity system. One of his recommendations was a Clean Energy Target (CET)2, (as an alternative to a carbon price). This mechanism was to form the basis for the transition of the electricity system to cleaner generation technologies as well as to lower wholesale electricity prices (ultimately lowering the electricity prices we all pay). We supported the CET in full, as well as the other 49 recommendations that came out of the Finkel review.

More recently though, the Energy Security Board (a new group, set up in response to another Finkel review recommendation) have recommended to the Federal Government that a National Energy Guarantee (NEG) be set up. As a result, the Federal Government has said they will not go ahead with the CET. In theory, at least the NEG allows for reliability to be maintained in the system, so the lights stay on, and emissions reduction occurs. The idea of a NEG has been met with scepticism from some and welcomed by others.

What’s Powershop’s view?

Right now, the NEG is the only policy option on the table. Would a carbon price or a CET be better? Probably, possibly, but that is mostly irrelevant because it is probably not going to happen, at least not in the near future. Every day that passes with further disagreement is another day where the level of investment in renewable generation that is needed is not happening. This means prices will stay higher and we are not getting enough renewables into the system to bring emissions down to the level we need. So where to from here?

Things we like about the NEG

  • It allows for reliability concerns that might emerge in the future to be managed.
  • On the odd occasion that we do see reliability issues, they do tend to be short-term in nature (such as the hour last summer in NSW where the supply of electricity got a bit tight). It is likely that the NEG will encourage new technologies such as batteries, pumped hydro and demand response programs that are suited to providing short-term energy needs over a period of minutes and hours.
  • It provides a mechanism to allow more renewables to come into the system to meet emissions reductions targets. While there will be debate as to the targeted level of emissions in the scheme and the target can be changed by any Government in the future, any change will not require a whole new scheme.
  • It puts the obligation to provide for reliability and emissions reductions on retailers. That is good because managing complicated (but boring) contracts is what we already do well today.

Some things we’ll be watching out for

  • There has been a suggestion that carbon credits can be used by a retailer to meet its emissions reduction obligations. At Powershop we already make all our customers’ electricity 100% carbon neutral through the use of carbon credits. Our concern is that we believe the focus of the emissions reductions efforts in the NEG should be driving more large-scale renewables into the Australian market. Apart from anything else, more renewables will keep wholesale prices down, meaning customers pay less for their power.
  • We need to make sure the reliability needs are not over-cooked. Today, the system target is to be 99.998% reliable3. The costs of going from 99.998% to 99.99999% reliable (meaning going from a reliability level where the lights almost never go out (10 minutes a year) to a level where the lights almost never ever, ever, go out) are enormous. We think that if you asked most people if they are happy with 99.998% reliability, or would they rather pay much, much more on their bill to go to 99.99999%, most people would say 99.998% is fine (and it is).
  • The scheme needs to be designed so that it does not advantage or disadvantage certain kinds of retailers, particularly small and new entrant retailers. Most of the badly needed innovation in the industry comes from the small retailers. We do our bit at Powershop, but it’s not all us. A scheme design that meant it was harder for small retailers to compete would be bad for innovation, bad for competition and very bad for prices. Ultimately, it’d be terrible for consumers.

At Powershop and Meridian we are keen to work with the Energy Security Board to get a scheme and a design that delivers the certainty to drive investment into the wholesale market, which will both bring prices down and help Australia meet our emissions target. We are planning to play a bigger part by bringing on more renewable generation ourselves soon, to service the needs of our over 100,000 customers. Stay tuned for more on that soon.

Ed McManus
CEO Powershop and Meridian Energy Australia

1 Trust us, we have checked.
2 Click here to read more on the CET
3 www.aemc.gov.au Fact Sheet: What is reliability

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