Game-changing or game?

April 20 is now an important date on the Australian energy calendar for 2018. It is when the CoAG Energy Council, following the South Australian election on Saturday, will meet in Melbourne to next consider the “national energy guarantee,” which Josh Frydenberg described in the past week as a “critical component” of future policy.

The next card to be played in this process, due in the near future, will be the Australian Energy Market Operator’s evaluation for the federal government of AGL’s post-Liddell plan.

And not unimportant to the discussion will be a report the Australian Energy Regulator is to publish at the end of this month on the impact on the NEM supply/demand balance of the closure of Hazelwood power station.

Both reviews, one imagines, will feature in the Energy Security Board advice to the ministerial council as will the board’s reporting of its latest consultations on the NEG that finished last week.

What follows?  Providing that CoAG agrees to direct the ESB to continue its NEG work, a high-level design paper will need to be produced and then papers on specific elements over the next few months. The federal government’s aim is to finalise the design of the NEG before the end of the year to enable drafting of legislation and rules to begin.

In an op-ed in the Australian Financial Review, Environment & Energy Minister Frydenberg has continued his dogged advocacy for the measure. Its implementation, he says, “will have a significant impact on the wholesale market.” By integrating energy and climate policy, “we will have a mechanism that will bring more certainty for investment and at the same time put a premium on reliability which is needed to address the volatility plaguing South Australian and Victoria.”

In continuing to needle South Australia’s and Victoria’s Labor regimes over their renewables approach, he points out that “alarmingly” wholesale prices have spiked above $5,000 per megawatt hour nine times in the former State and six times in the latter – “and nowhere else in the NEM” – so far this financial year.

Responses to the ESB’s consultation paper are now starting to emerge: green-related interests continue to leap up and down about the NEG’s perceived support for coal power and others are fretting about the future state of competition in the east coast market.

A collective of 10 retailers representing 10 per cent of the NEM’s sales have voiced concerns about making “significant, costly changes that (may) have dire consequences.” Given the track record of intervention in the market over the past decade, this is a not unreasonable point.

The retail group sums up the challenge like this: “The problem policymakers are working to solve is the imbalance between electricity supply and demand, particularly diminishing reliable (firm or dispatchable) power over the next five years due to displacement of large, dispatchable, carbon-intensive power plants. This, and poor policy and planning, have led to market concentration in firm generation and price increases, exacerbated by gas availability and cost.”

The nub of their worries emerges as “(holding) retailers responsible for generator reliability, emissions and investment is a misplaced risk (with) a range of market implications.” One outcome they fear is that the NEG will see even more market power in the hands of the “big three” NEM gentailers.

ERM Power’s Jon Stretch offers their alternative view “We suggest a lighter touch safety net model which would ensure the benefits that liquid markets bring to price transparency and hedging efficiency remain for competition and consumer outcomes. It would avoid the risks and costs associated with change in law complexities to existing retail and wholesale electricity contract arrangements. Our model requires no penalties or costly compliance mechanism.”

He concedes that “like the current NEG, our alternative involves a degree of centralist planning and procurement that isn’t ideal” but argues “our proposal addresses the fact that loss of market liquidity and market power abuse are greater risks under the current option than is the risk of (generation) over-build.”

The Academy of Technology & Engineering (ATSE) says there are numerous design challenges facing the NEG, including minimizing the complexity of its mechanisms and their associated compliance costs and dealing with the “high risk” of increasing the power of the incumbent,vertically-integrated gentailers.

“It is important,” the academy adds, “to ensure that emerging technology-based solutions will be able to contribute to reducing prices through effective competition.”

One of the “big three” gentailers, AGL Energy, includes competition in its submission to the ESB, listing five principal design points it believes the measure must manage:

  1. The greatest regulatory efficiency possible, which consists of minimal disruption to existing markets at the lowest net cost to customers.
  2. Ensuring the NEM achieves its pro-rata share of Australia’s international commitment for emissions reductions with a view to ramping up to a potential of net zero emissions by 2050.
  3. Providing direction on the appropriate mechanisms by which market reliability can be maintained as a result of increasing amounts of intermittent generation.
  4. Enhancing existing operation of the market and also considering other market reforms and reviews.
  5. Delivering a competitive, transparent, efficient, and liquid market.

The company’s chief economist, Tim Nelson, in sending its submission to the ESB, writes that “in our view, there may not be a compelling need to make significant structural changes to the existing operation of the NEM to drive better reliability outcomes.”  He adds: “The best way of reducing wholesale prices over time is by increasing supply through policy certainty on emissions reductions, which may necessitate a further refinement of the existing market settings to ensure market reliability. In meeting these objectives, consideration of a lowest cost approach that utilizes improved market settings and existing market infrastructure should be a genuine option for policymakers to consider.”

For its part, Origin Energy, while saying the overall objectives of the NEG are “sound,” says that “placing the point of liability at the retail level for the reliability and emissions obligations adds a layer of complexity to the design which is unnecessary.”

And EnergyAustralia, declaring “we favor simplicity,” urges that the NEG should put the emissions guarantee on generators, not retailers; doing it the other way round will “threaten liquidity in the financial markets.”

Standing back and looking at what’s going on, it seems obvious that, while consumers are obsessed by the cost of their power – Energy Consumers Australia says the NEG “must be about delivering the transition in a way that lowers bills” – and environmentalists are obsessed about using the electricity market to meet a high level of carbon abatement, the chief issues for progressing the measure are complexity, time and politics.

With respect to the latter, it is interesting to see the Property Council, representing owners and investors in a $670 billion sector, expressing the view in its submission that the NEG is an opportunity to depoliticize energy policy in Australia. Seriously? Almost four decades of being involved in energy issues tells me that there is fat chance of this happening, no matter how right it is to wish it would.

As the council itself says in the same breath: “In the past decade Australia has lost its advantage in reliable and competitively priced energy due to the ongoing and highly partisan debate on energy and climate change policy.”

The national interest, for example, will not stop Labor working to thwart a win on energy for the federal government, so the immediate elections that matter are in South Australia next weekend and in Victoria in November while the standing of Turnbull’s administration (including public faith in its ability to cut energy costs) is being weakened opinion poll by opinion poll.

The NEG’s complexity plays in to this situation: the ESB has 79 questions in its discussion paper. Working through them in a way acceptable to all east coast governments by August (the Frydenberg/Turnbull aim) and capable of delivery through legislation before next summer (and the arrival of the campaign season for the New South Wales election) seems a tall order.

(As an indicator of public sentiment, a recent Essential Report opinion poll shows 73 per cent of respondents believe their cost of living has worsened in the past 12 months and 75 per cent say this is true of their electricity prices.)

Above all, with the NEG,  are politicians seeking a game-changer or continuing to play games?

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