The Australian energy market has a long history of complexity and volatility as a result of many factors, ranging from market investment to political turmoil. A decade-long failure to effectively integrate energy & climate policy has created uncertainty in the market, affecting investment decisions, and ultimately resulting in increased electricity prices and unreliable energy supply. The graph below shows the average retail electricity price increases over the period and various factors driving these changes.
To manage these changes, the independent Australian Energy Security Board (ESB) has proposed new policy recommendations that will have implications for large energy users in the country.
What is the NEG?
The National Energy Guarantee (NEG) is a recommendation by the ESB to address these long-standing issues with the Australia energy market. The NEG is guided by the three main pillars: Affordability, Emissions, and Reliability. The emissions target of 26% set in the policy is in line with the Paris agreement.
The Reliability Guarantee & Emissions Guarantee together will require energy retailers and some large users across the National Energy Market (NEM) to deliver reliable energy with lower emissions each year.
The guarantee will require retailers to contract with or directly invest in generation, storage or demand response, such that:
- There is a minimum amount of dispatchable energy available to meet consumer and system needs (set by the Reliability Panel and the Australian Energy Market Operator)
- The average emissions level of the electricity they sell to consumers is in line with Australia’s international commitments
In simple terms, the reliability guarantee requires energy retailers and large energy users with a peak load (measured historically over the last 12 months) of more than 5MW to be liable for their load, meaning they need to have appropriate contracts in place with their energy retailers.
The emissions guarantee requires energy retailers and some large energy consumers to buy directly from the NEM to meet their share of 26% emissions reduction target. The NEG includes non-compliance fines of $100 million for the emissions obligation and $1 million-$10 million for breaches of the reliability obligation.
Renewables and Reliability Guarantee Compliance
In a recent interview with Australian Financial Review, Brian Morris (Head of Energy & Sustainability Services Schneider Electric Australia) said plummeting renewable energy costs will ease the burden of complying with the NEG’s carbon emissions reduction obligations. He further added that by the time the emissions guarantee comes into force in 2021, there will be a lot more wind and solar energy in the NEM.
“Renewable energy is getting cheaper and cheaper all the time so I don’t see the burden of complying with the emissions obligation being all that bad, to be honest,” said Mr Morris, who also chairs the Australian Energy Users Association.
Bloomberg New Energy Finance analysts said two weeks ago that they expected solar panel prices to fall another 34 percent this year. Wind power costs have also fallen dramatically.
Mr Morris noted that he was concerned that some customers that come in just above the 5MW threshold for the reliability guarantee would be surprised to find they have these requirements and had some work to do to understand their obligations.
Recommendations for C&I Buyers
From the early observations, the NEG neither explicitly supports renewable energy nor fossil fuels. Both renewable energy sources, such as wind and solar, and fossil fuels are mature technologies and therefore do not justify special treatment. From an energy user perspective, we see this as a positive aspect of the NEG as it seeks to be technology neutral, ensuring all technologies can play to their strengths but also requires them to manage their weaknesses.
Regardless of the outcome, we recommend that all the large users involve themselves in the reliability guarantee process regardless of whether the liability first rests with the end user or the energy retailer. Ultimately, our goal should not be to comply with the reliability guarantee but to ensure it is never triggered in the first place.
ESB will present its finalized technical paper to the Council of Australian Governments (COAG) in August 2018 giving a clear picture of what the policy really means to the energy market and, more importantly, to the energy users. If COAG approves the final design, the ESB expects that the draft legislation will be finalized in time for introduction to the South Australian Parliament by the end of 2018. Meanwhile, start talking to your energy consultant/advisor to get a better understanding of how the NEG will affect you and what precautionary actions need to be taken.
Contact us for more info on what your company can do to prepare.