Explained: how the National Energy Guarantee works
The National Energy Guarantee (NEG) aims to combine the goals of reliable electricity and lower carbon emissions in a single policy.
The Energy Security Board (ESB) has bent over backwards in its draft "high-level" design to accommodate fears that the NEG would destroy the electricity contracts market and entrench the market dominance of big power – EnergyAustralia, Origin Energy and AGL Energy.
The ESB says its draft NEG design builds as much as possible on the existing rules and practices of the National Electricity Market (NEM) and aims to trigger investments in "dispatchable" supply capacity to firm up wind and solar energy at lowest cost, reduce blackouts and lower prices.
How the NEG works
The NEG requires energy retailers and big energy users to write contracts to meet emissions reduction and reliability obligations.
Retailers will have to comply with the emissions obligation – currently a 26 per cent reduction in carbon emissions by 2030 – each year from 2020.
But they will only have to comply with the reliability obligation if a strict set of preconditions – checks and balances – are met, starting with the NEM's existing Reliability Standard.
This is a big concession by the ESB to industry fears that the NEG could be too heavy-handed. The Reliability Standard – no more than 0.002 per cent of "unserved energy" – is rarely breached, even in summers when there are blackouts like in 2016-17.
Retailers will only have to worry about the reliability obligation if the Australian Energy Market Operator (AEMO) forecasts that the Reliability Standard might not be met, starting 10 years out. Retailers and energy users will have seven years to fill the gap voluntarily before the reliability obligation can be triggered.
Only if the gap is still not filled after seven years – three years out from a forecast breach – will AEMO seek to trigger the reliability obligation. But before AEMO can do so, it must get a green light from the Australian Energy Regulator (or the Australian Energy Market Commission's reliability panel).
If they haven't done so after two more years, AEMO may then turn to "last resort" measures to fill the gap, and charge the cost of doing so to retailers and energy users that have not complied with the reliability obligation.
In practice, the reliability obligation will be triggered rarely. How this works when a power station – such as AGL's Liddell – closes will likely be further debated.
Light-handed, lower prices
Both obligations are designed to be "light-handed" so retailers can meet their obligations at the lowest cost possible, which the ESB says will lead to lower NEM prices.
NEM futures prices have eased about 20 per cent from the extreme prices of a year ago. But there's a long way to go, with prices still nearly double long-term averages.
The ESB achieves its light touch by letting retailers and large energy users mostly use familiar contracts to satisfy the emissions and reliability obligations.
Contracts are critical to the NEM, where spot prices can vary wildly. They allow retailers to hedge spot-price risk and offer fixed prices to customers and lower the cost of capital for investments.
Previously the ESB suggested that contracts linking to specific generators might be required.
In the draft design the ESB says both obligations can be met using existing contracts such as "caps" and "swaps" without specifying generators, because they are typically closely related to generators anyway.
To meet the emissions obligation, retailers and large users can use "any contractual arrangement" they wish to allocate emissions from a generator to a retailer via a central registry drawing on existing greenhouse gas reporting.
Thursday, April 19, 2018
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