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NEG rings alarm bells for business power users

NEG rings alarm bells for business power users

Commercial users of energy look set to pay a heavy price under the outlined National Energy Guarantee, the head of business power retailer ERM Power has warned, pointing to likely increased costs for customers from reduced market competition, more expensive supply contracts and less price transparency.

ERM chief executive Jon Stretch said the NEG needed to be designed without adding costs for customers and undermining competition, while still meeting the policy's objectives around reliability, affordability and emissions reductions.

"We're concerned that what's being proposed under the NEG at present looks very expensive for commercial and industrial customers," Mr Stretch said after last week's release by the Energy Security Board of a discussion paper on the mechanism.

From the first airing of the NEG proposal last October, concerns have been raised that the sort of contract-based supply system it envisages would entrench the power of the major integrated generator-retailers, particularly in some states such as South Australia, where AGL Energy is dominant.

The policy places an obligation on electricity retailers to source minimum levels of power from dispatchable sources, with supplies also to be in line with Australia's commitments in the Paris accord to cut carbon emissions.

ESB chair Kerry Schott has openly highlighted the problem of competition and said it needs to be addressed, but in the discussion paper the issue has been parked until further along in the process of designing the mechanism.

"The Energy Security Board considers that further consideration cannot be given to these issues until the design of the Guarantee is further developed," it said, while inviting stakeholders to comment on how the policy may impact on competitive markets.

But Mr Stretch said the NEG needed to deal with competition up-front.

"Any policy that aspires to lowest-cost solutions cannot kick competition down the road as a secondary consideration, particularly when the ESB consultation paper acknowledges that any change in market design has the potential to further entrench existing market power," he said.

"If competition is not dealt with up-front it risks being lost as part of a political compromise at the eleventh hour."

ERM cited a list of issues in the proposed NEG that it says have cost implications and need to be worked through with the ESB.

They include the need for tailored, bundled products to lock in reliable supply from one for example coal plant, as well as low-emissions supply from a solar plant, using physical bilateral contracts, where there would be few sellers and many buyers, meaning higher costs for consumers.

Changes required in how the energy market operates, involving time, technology, new systems and processes, also would have cost implications.

Bruce Mountain, director of Carbon + Energy Markets, says the ESB's discussion paper on the NEG shows the ESB has begun to recognise "the complexity of the beast it has created" but made no progress in resolving it.

The ESB paper posed 79 questions to be resolved before the design of the NEG can be completed, altered some of the key language in the initial discussion paper released four months ago, and breezed lightly over carbon trading and climate change.

One key change is that language suggesting the NEG's reliability obligation could require retailers to buy "fast starting and slow start but longer running resources" has been dropped in favour of a requirement that retailers contract to meet "reliability gaps" forecast by the Australian Energy Market Operator.

Mr Mountain said this change didn't address fundamental flaws in the design of the NEG – placing reliability and carbon emissions reduction obligation on retailers and major energy users that participate directly in the National Electricity Market, and requiring them to acquit their obligations via contracts that can't be physically honoured in the NEM.

Meanwhile, retaining a deep and liquid tradeable wholesale market is crucial to retail competition and supply, ERM said.

Diminishing it would would threaten prices, services and technology innovation by entrenching the vertically integrated players and reducing competition.

The NEG still has broad support across business organisations and the energy industry as a framework to provide certainty for needed investment in new electricity supply.

But it has worried some smaller players in renewable energy and retailing, which fear they will be shut out of the market as the majors gain more power.

Origin Energy chief executive Frank Calabria last week voiced keen support for the NEG but also raised concerns about efficiency, in relation to the possibility that state-based renewable energy targets could lie alongside the new national mechanism.

Financial Review

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