Insights

Australian Government's National Energy Guarantee

On 17 October, amidst much anticipation, the Australian Government released a proposed National Energy Guarantee (NEG) as its preferred means to address concerns around the affordability and reliability of Australia's energy supply while also delivering emission reductions. The NEG was presented as an alternative to the Clean Energy Target recommended by Australia's Chief Scientist Dr Alan Finkel, which had wide endorsement across the energy sector, but was resisted by some within the Liberal-National Coalition.

The NEG was presented with few details on how it would be implemented, but contains two limbs which appear to have gained some cautious support from commentators and market participants:

  • A 'reliability guarantee' which would require retailers to procure a certain percentage of energy from 'dispatchable' sources. This percentage would be determined in relation to the system wide reliability standard by the NEM operator (AEMO) and rule maker (AEMC).
  • An 'emission guarantee', which would require the procurement of all energy to comply with a pre-determined emissions level.

Given much of the energy debate in Australia has been framed acrimoniously around 'coal versus renewables', there has been much speculation around how the NEG would impact on different generating technologies. There have also been questions around compliance, namely whether the NEG gives rise to de facto carbon pricing, particularly as it has arisen because of the Coalition's resistance to previously proposed mechanisms resembling carbon pricing and emissions trading. There are also doubts that the NEG will deliver on the Government's claim that household bills would decline "by an average of $110-$115 per year over the 2020-2030 period."

The Energy Security Board has been instructed to conduct modelling of the NEG, with input on this work sought from state and territory governments. This modelling is expected to identify the winners and losers as well as potential calibration of the two different limbs of the NEG.

From the perspective of CCS, a major redeeming feature of the NEG is that it reflects a clear move away from favouring only renewable generation technologies, and instead sets clear incentives and requirements that relate to explicit policy objectives. This improves the prospects of such objectives being achieved via the least cost mix of generation and thereby lowering costs to consumers. Previous electricity market modelling in Australia suggests that, if CCS is allowed to be deployed, and emissions constraints are consistent with 2 degree pathways, CCS would form some part of this least cost technology mix.

The proposed NEG reflects a reconsideration of the outcomes of the Renewable Energy Target, which has been hugely successful in drawing only limited types of renewable technologies into the system, namely cheap and variable wind and solar PV. While the emissions limb of the NEG appears to be agnostic to technology types, the reliability limb by design recognises that not all technologies are equal. Even the definition of what 'dispatchable' generators are will need careful thought, given many characteristics ultimately determine what can be dispatched when required, including the 'flexibility' of plant to meet very short run needs, their location with respect to transmission constraints, fuel availability etc. The cost and emission intensities of 'dispatchable' plant will no doubt be other important considerations.

On the emissions guarantee, the immediate prospects for CCS look dim. This is primarily because the Government appears wedded to a weak emission reductions target and is only concerned about a 2030 horizon. This affects CCS for two main reasons:

  • As previous modelling exercises have demonstrated, including those for the Finkel Review, the commercial prospects of CCS only improve where systems are substantially decarbonised and have higher rates of renewables penetration. In these forecast scenarios, while low carbon dispatchable plant still have higher levelised costs than zero marginal cost wind and solar PV, they have a much higher value to the overall system.
  • CCS in power generation involves long lead times and large capital outlays. Even if the NEG was fully specified and guaranteed not to change out to 2030, the period post 2030 is more likely to be critical for commercial returns for CCS plant and is most subject to policy risk.

These factors affect most forms of dispatchable plant, and to some extent they might be addressed by the incentives/ contracts arising under the reliability limb of the NEG.

Once a more fulsome consultation on the NEG has commenced, in tandem with completion of the Australian Government's review of climate change policy, we hope the discussion will focus on the necessity of a clear, long-term emission reduction trajectory in line with Australia's contribution towards reaching net zero across all sectors of the economy under the Paris Agreement.