Be alert but not alarmed on NEG

Energy Alert

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To borrow from a national security phrase, Australian renewable energy market participants should be "alert but not alarmed" concerning the 17 October announcement of the new National Energy Guarantee (NEG).

Renewable energy participants should be alert because:

  • The policy is not adopting the Clean Energy Target, which was Chief Scientist Alan Finkel's key recommendation in his review (he has nonetheless cautiously welcomed the Government's suggested approach and the Government adopted his 49 other recommendations)
  • The policy will see two new guarantees targeted at electricity retailers (not generators): a reliability guarantee for retailers to source "dispatchable power", which includes coal, gas, pumped-hydro and batteries; and an emissions guarantee, which is designed to ensure Australia still meets its Paris emissions reduction target (26 percent to 28 percent reduction on 2005 levels by 2030)
  • The NEG is more fossil fuel-friendly than the post-2020 Clean Energy Target would have been. Depending on who you listen to, the NEG is either being seen to preserve a role for aging coal plants in Australia's future energy mix (and thereby limiting renewables uptake) or it is designed to avoid blackouts like those that plagued South Australia last summer (given the connections made by commentators at the time between the blackouts and high renewables uptake in the State)

Renewable energy participants should not be alarmed because:

  • The NEG is still at the policy stage, and will require the States' cooperation - several Premiers have so far criticized the policy which may prevent or limit the NEG's implementation in some States
  • At present, the policy is light on detail - its impact may largely be determined by the levels of the reliability and emissions guarantees. Further, we don't yet know whether these guarantees will be susceptible to sudden or gradual change depending on political vagaries of the day. Given the current imperative to keep electricity prices down, the emissions guarantee may, in the end, not be onerous but rather may shift the emissions reduction burden to other parts of the economy
  • At the earliest, the NEG will not come into effect until 2019 or 2020 (with a federal election before then)
  • The policy applies to the National Electricity Market, which does not include Western Australia and the Northern Territory
  • The Renewable Energy Target schemes remain open to new entrants until 2020, and according to the Energy Security Board which recommended the NEG, the Renewable Energy Target "should run its course" to 2030
  • Despite decades of protracted, bitter and somewhat frustrating partisanship on energy policy (which will likely continue), Australia's renewable energy investment continues to grow and prices continue to come down for solar and wind power. Australia remains a stable investment environment generally and is well-supported by energy bodies like the Australian Renewable Energy Agency as well as the States wishing to push large-scale solar, wind and battery power

Analysis

The NEG is undeniably subject to current political opinion.

For the Government, the NEG attempts to appease concerns about rising consumer prices, and to satisfy those who want coal to remain a key part of Australia's energy mix despite climate change emission reduction commitments. Prime Minister Malcolm Turnbull and Energy Minister Josh Frydenberg have somewhat reframed the debate from being about renewables / climate vs. fossil fuels, to reliability vs. intermittency.

Yet, the reality is that the Government is in a bind. There is strict ideological division on energy, within government and particularly between the ruling Coalition and opposition Labor parties. The Prime Minister's move to involve energy experts, like Dr Alan Finkel and Dr Kerry Schott, was perhaps designed to eschew the politics, but any policy directive on energy was always going to be a difficult sell.  The NEG may be Australia's best shot in years at bipartisanship on energy policy, but equally, it may not meet the bottom line for any side, and it may just stoke the flames of the debate.

What's next?

A meeting of the Council of Australian Governments (likely next month) will be crucial to the policy's success, as will the response of the opposition Labor party when more details of the policy are released (including what the guarantee levels will be and whether they can be changed).

If the NEG is implemented, Australia may still miss out on the long-term cost and emission reduction benefits that a Clean Energy Target would have reaped. Under the NEG, Australia's future renewables contributions will be well below countries like New Zealand, Vietnam, India and China, and be more comparable to Thailand, Japan and Indonesia. Whether Australia should even seek to be at the top of this list, is again subject to heated ideological division on renewable energy and prioritizing Australia's 2030 Paris commitments.

If there is no consensus and the NEG is not implemented, or implemented in only some States, Australia will see a highly fragmented energy policy, which will call into doubt Australia's ability to meet its Paris commitments, corral investors into certain States and lead to further debate on a unified approach.

Much is yet to be written and debated. We can only hope that whatever policy is introduced, it brings some certainty to energy investors, which is one thing everyone can agree on.

Further reading