The federal government has announced a new energy policy, after deciding against adopting the Clean Energy Target recommended by chief scientist Alan Finkel.
The new plan, called the National Energy Guarantee, will require electricity retailers to make a certain amount of “dispatchable” power available at all times, and also to reduce the electricity sector’s greenhouse emissions by 26% relative to 2005 levels by 2030.
The government says it will save the average household up to A$115 a year after 2020, while also ensuring reliability. Below, our experts react to the new policy.
“The federal government will be even less important in energy policy”
Alan Pears, Senior Industry Fellow, RMIT University
Business, state governments and the energy industry have been clamouring for more certainty from the federal government. Now they have it: the federal government will be even less important in shaping energy and climate policy than in the past, leaving states and territories, local government, business and households to focus on driving the energy revolution and cutting emissions.
The new policy will impose a reliability obligation on energy retailers, who will presumably have to select an appropriate mix of energy suppliers to meet it, and the devil will be in the detail. If the required proportion of dispatchable electricity is reasonable, and if retailers and new renewable energy generators are free to decide how to deliver it, then the cost and difficulty of compliance may be modest.
For example, retailers and generators could piggyback on the demand response capacity volunteered for the ARENA Demand Response project. This could help accelerate the rollout of a variety of energy storage solutions, in turn reducing the market power of the big generators and driving down energy prices.
On the other hand, if the options are limited, the obligation could increase the market power of the gas industry, meaning no relief from high wholesale prices.
It will also be interesting to see if the obligation is applied across all new generation. If so, it could significantly increase the cost of new coal generation, as retailers would have to cover the risk of failure of a large generation unit, as well as managing its slow response to changing demand.
“Australia’s electricity sector can cut emissions more”
Anna Skarbek, Chief Executive, ClimateWorks Australia, Monash University
The key question is whether the emissions guarantee will be strong enough for Australia to meet its current and future climate obligations under the Paris Agreement.
Electricity creates more than one-third of Australia’s total emissions. If we don’t reduce the emissions in our electricity, then we don’t unlock other emissions reduction opportunities such as electric vehicles.
If the National Energy Guarantee aims at cutting emissions by only 26% by 2030 then other sectors across the economy would have to make greater emissions reductions sooner.
But our research shows that Australia’s electricity sector can cut emissions by 60% below 2005 levels by 2030. Harnessing this potential will help us to reach future targets that progressively increase under the Paris Agreement.
If you don’t achieve deep emissions reductions in the electricity sector, a major strengthening of policy will be needed for the other sectors where there is less momentum currently. For example, stronger action would be needed in transport, buildings, industry and land.
Australia’s climate policy, which is being reviewed before the end of the year, will need to cover more than just the electricity sector. Other measures should include the introduction of vehicle emissions standards, a more stringent national building code, a dramatic improvement in the uptake of energy efficiency measures across industry and stronger incentives for reforestation.
How the reliability guarantee will work
Dylan McConnell, Researcher at the Australian German Climate and Energy College, University of Melbourne
Under the NEG retailers are responsible for ensuring continuous supply of energy. But retailers don’t always generate the energy they sell. In order to meet the NEG’s reliability obligation retailers will most likely enter into cap contracts with generators.
Unlike other kinds of contracts, which impose a fixed price, cap contracts only come into play when high demand pushes energy prices over a certain pre-agreed level. At that point, generators with flexible dispatchable power guarantee that they will provide extra energy.
The extreme peaks, where the price heads to A$14,000 per megawatt hour - only come a couple of times a year, if at all. To compensate generators for building all that extra capacity, retailers pay a daily premium. Cap contracts essentially act as insurance: they protect retailers from extremely high prices during intense demand, and they offer generators the chance of steep profits.
Cap contracts are a standard part of the market, and retailers already used them to manage their risk exposure. The Energy Security Board has said:
This reliability guarantee would require retailers to hold forward contracts with dispatchable resources that cover a predetermined percentage of their forecast peak load.
If the new reliability standards are in line with retailers own internal guidelines, the impact on the market should be minimal. But if the government imposes higher standards, retailers will have to purchase more cap contracts (or build their own dispatchable power plants).
If demand for cap contracts increase, it would most likely encourage investment in gas and hydro power plants, energy storage technologies and demand response.
This article was updated on October 18.
Authors: Alan Pears, Senior Industry Fellow, RMIT University