Bruce Mountain in an opinion piece in the AFR (pay-walled) said the NEG was “shambolic” policy which “snatches defeat from the jaws of victory”. Bloomberg New Energy Finance, according to Laura Tingle (also pay-walled) says “the concept is innovative and elegant, and could well prove ingenious”.
They are predicting it could achieve the same level of renewable energy in the system as the proposals set out by the Finkel review.
- “If effective and efficient, it would be a template for policy makers worldwide”, they said.
So let’s have a look at the scheme.
From the Energy Security Board (ESB) advice to Turnbull:
- Specifically you requested advice on the changes needed to the NEM and legislative framework to ensure that the system provides
reliable, secure and affordable electricity, and in particular, ensure that:
• The reliability of the system is maintained;
• The emissions reduction required to meet Australia’s international commitments are achieved;
• The above objectives are met at the lowest overall costs.
You also requested advice on AEMO’s recommendation for the development of a strategic reserve. AEMO advises that it is presently developing a design for a strategic reserve. The ESB recommends that this work continue and that its advice on a strategic reserve proceed after AEMO completes its analysis later this spring. We see the Strategic Reserve as a separate policy issue from the mechanisms outlined below and compatible with what follows.
I can’t help noting that spring had sprung when they sent this missive, and AEMO’s bad read of the weather was a large part of the problem in SA both in September 2016 and this February.
At this point I have my first query. I’d suggest that the strategic reserve should be integral to the system. What is a strategic reserve for if you don’t call on it to meet ‘load management events’? Without some idea of what a strategic reserve is and how it would be used I’d suggest the picture is incomplete.
How the National Electricity Market (NEM) operates to supply electricity
The main way the market operates is through longer term contracts between retailers who buy electricity from generators to supply their customers.
These contracts are usually insufficient to meet fluctuating demand, which is supplied through the spot market, where bids from generators are matched with demand by AEMO in half-hour then five-minute blocks, to keep the voltage constant.
Together they are termed the ‘wholesale market’.
This is where I have to say that up until now I have misunderstood how the market works. I thought all the power was handled in the AEMO half-hour transaction, and the spot market consisted of the five-minute adjustments to that half-hour bid to keep supply and consumption in synch. I’d always wondered about the ‘wholesale market’ and suspected it had to do with supply to business not signed up to longer term contracts.
My bad, we live and learn, as they say.
I’ve excoriated the retailers for doing nothing of substance except send out the bill. Seems they actually do shop around for the bulk of the electricity to meet their customers’ needs. I’m still not convinced they add value greater than the profit they extract. Prices have gone up since they entered the system, and the regional Queensland market still gets along perfectly well without them.
What now changes?
Retailers will now have dual obligations. They will now have to source a proportion of their electricity determined by the regulator from ‘dispatchable’ sources. They will not be able to substitute cheap intermittent power, even if it is available and has nowhere else to go.
At the same time regulators will set individual emissions targets for each retailer. A specified percentage of the electricity each retailer provides must be clean. If the retailer has trouble meeting this standard they can purchase credits domestically or internationally to an as yet unspecified degree.
Failure to meet the regulated standards could result in deregistration.
The new regime has been encapsulated in this infographic at the AFR:
A different standard for each region
The ESB derives its national standard from the government’s specified commitment to the Paris agreement, namely a 26% reduction in emissions to be achieved by 2030. There is a separate argument over how pathetically inadequate this target is, but don’t blame the ESB. They are merely helping the government to reach its goal.
However, the ESB is aware that progress varies between the states, so they are going to strike different levels in each state to progress the transfer to cleaner energy over the whole nation. The existence of Emissions-intensive trade-exposed industries (EITE) will be taken into account, as will commitments undertaken in the RET schemes before 2020, which have a life through to 2030.
This graph, also from the AFR displays the progress to date in each state, though I don’t agree with the heading:
The infrographic also shows the state targets, which the ESB says can still be pursued, provided their regulations are not breached. There is no reason why firmed renewables cannot replace dirty existing electricity, provided their standards of dispatchability, as yet unquantified, are met. However, it is expected that concentrated solar towers (CST) with molten salt or other storage would qualify.
Similarly, intermittent power firmed by a contract with a gas generator could qualify, provided both standards were met.
Prices to fall?
The ESB say this:
- It is expected that following the guarantee could lead to a reduction in residential bills in the order of $100-115 per annum over the 2020-2030 period. Wholesale prices are expected to decline by 20-25% per annum over the same period.
That’s 8-10% better than Finkel’s CET.
There is extreme doubt over this claim. David Leitch says that NEG will favour the gen-tailers, the retailers who are also generators, will reduce competition and is likely to increase prices. State-run reverse auctions are still the lowest cost, most effective way to procure new supply, as they introduce new players into the market. He links to an article on Building a 1GW dispatchable, largely renewable generator in NSW. But he says forecasting is a mugs game.
The Courier Mail has an article (pay-walled, it opened on Facebook) where Queensland Premier Annastacia Palaszczuk warns electricity retailers to cut bills or she’ll set up a government-owned retailer to steal their customers. There must be fat in the system if Alinta can offer 25% discounts over two years, which it is in Queensland.
The article, from memory now, quotes a ReachTEL survey of three blue-ribbon seats which disbelieved the price fall and were still willing to pay a premium to encourage renewables.
The ACCC in its interim report on the Electricity supply & prices inquiry has this table of retail market share:
Then here is the electricity actually dispatched in the NEM:
Of interest here is that SA produces about the same amount of electricity as Tasmania, although its population is 1,721,000 as against Tasmania’s 520,100. Queensland, production is high. The populations are NSW 7,837,700, Victoria 6,290,700 and Qld 4,907,600.
Clearly the ACCC is already worried about industry consolidation.
My broker says in a report on AGL that retailers such as AGL will now have to work in 18 markets on the NEM. I’d suggest that deep pockets and sophisticated players able to cope with risk and complexity would be required.
I’d have to say I’m with Annastacia. I can’t see the retailers doing anything a government agency could not do, and state government reverse auctions rather than choices made by consumers would produce more competition in generation.
Generally speaking, for the first time the ESB plan will bring climate planning into the operating frame of the NEM. This is good, but Finkel would have done that also. However, there are at least three other implications we should think about.
First, there is a hidden subsidy to coal and gas. Very simply burning coal and gas and dumping the waste gases into the atmosphere will cost future generations dearly – economically, ecologically, in health and will also bring mass people movements, conflict and death. I’m in favour of some price penalty on this as well as direct action by states, municipalities, businesses and consumers for a cleaner planet.
Second, while no-one, myself included, really knows how the NEG would play out, there seems to be an indication that intermittent energy generation will be sidelined to the spot market. AEMO seems a bit paranoiac about the lack of ‘firm’ energy. South Australia has operated many times with more than 50% wind and solar generation, and the power system worked. Audrey Zibelman has complained about AEMO having to intervene more to get the gas turned on. I thought that was their job.
I would like to ask someone with the appropriate technical knowledge whether the lights would have gone out in SA when a dirty big storm blew down 22 transmission pylons, and the Heywood interconnector from Victoria was being run at 95% capacity. When the interconnector tripped and 600 MW fell out of the system, would the lights have stayed on if SA was running on gas and coal rather than renewables?
I suspect the difference would have been measured in seconds at best.
Third, the NEG seems to encourage an aggregated rather than decentralised grid, but I could be wrong.
The question of John Pierce
Finally, serious questions have been raised about the role of John Pierce. At RenewEconomy Giles Parkinson rips in. Pierce, it seems, has a track record of favouring established interest, of disliking the RET, of dragging the chain on necessary rule changes, which is his core job apart from the design of the whole NEM. And he’s suspected of being a friend of coal.
There is no doubt he was the brains behind the NEG.
Nevertheless, bad people can do good things, so we should judge the scheme on its merits. Still, this is a worry:
- A couple of sources have told RenewEconomy of the first meeting between Finkel’s review panel and the AEMC, at which point Finkel asked, ‘is anyone here an electrical engineer’.
Upon being told no – the AEMC is largely made up of lawyers and economists – Finkel then said: ‘Then why are we here’. Finkel and Pierce are said to have had fierce disagreements over the role of markets and market design.
Someone on Insiders today suggested Finkel should get an award for diplomacy. I’m sure he does not want to be sent to Coventry.
See also previous post: Turnbull does energy policy on the back of an envelope.