The NEG clears hurdles: How many more to go?

This week the National Energy Guarantee (NEG) passed another hurdle – the Coalition party room – where it was strongly endorsed (with some notable dissenters). But it still has a long way to go and there are potentially some of the toughest hurdles to come.

The Energy Minister Josh Frydenberg put forward a two-step process to get to this point. This involved having the state and territory ministers indicate their position at COAG on 10 August and giving them the chance to confirm or pull their support after the Coalition party room meeting a few days later. It was a shrewd approach that was instrumental in getting the NEG passed at the COAG Energy Council meeting.

In line with this, on Tuesday following the agreement from Coalition MPs, the COAG Energy Council released an exposure draft of proposed changes to the National Electricity Law (NEL) which need to be passed to implement the NEG.  The draft bill has been prepared by the Energy Security Board (ESB) based on the detailed design considered by COAG on 10 August.

There is now a four week consultation period with submissions on the draft Bill to be lodged by 12 September. There will also be a further two weeks to refine the legislation ahead of a decision on the implementation of the NEG.

The draft Bill sets out:

• Liability for the emissions reduction and reliability
• The compliance and penalty framework
• The extra functions and powers for the Australian Energy Market Commission (AEMC), the Australian Energy Regulator (AER) and Australian Energy Market Operator
• A new emissions objective

The NEG is basically a policy framework which is added to the existing design of the National Electricity Market and is designed to ensure a prescribed level of emissions and a prescribed level of reliability.

Aside from the NEL there will also be separate Commonwealth legislation required for the emissions reduction target.  

More Hurdles

Some of the Coalition MPs have threatened to cross the floor to oppose the NEG when that Federal legislation is presented. The other serious hurdle is the 11^th hour conditions that have been put forward and championed by Victoria.

Victoria says it will need to have its conditions met before it will provide support. The conditions are:

• Emissions reduction targets can only be allowed to increase over time.

• Future targets must be set by regulation.

• Targets are to be set every three years, three years in advance. The AEC is open to earlier reviews of the emissions target, but believes there should be five years’ notice of any change in the emissions trajectory to ensure certainty. The legislative instrument to best achieve this is a matter for government.

• Establishment of a transparent registry, with access by regulators and governments. The AEC believes that the registry as proposed by the ESB is workable.

Victoria’s demand for the federal government to impose changes to the registry at this late stage is particularly frustrating. This is part of the mechanism, and is therefore part of the states’ own legislation. This item has been carefully consulted on by the ESB which has struck a good balance: providing the aggregate information necessary to see the policy succeed, but not revealing individual transactions which could lead to commercially confidential disclosure and distortionary behaviours. 

Victoria has added to that list of requirements that it would like to see Federal emissions reduction legislation passed[i] before the states consider signing on to the NEG. This could mean that it would be months before the NEG could be agreed and potentially would run into the issue of the Victorian Government entering caretaker mode at the end of October and then not being in a position to agree the NEG. The Victorian election is due to be held on 24 November and the caretaker period would begin with the expiry of the Legislative Assembly on Tuesday, 30 October 2018[ii].

It is difficult to assess whether threats to derail the NEG are sabre-rattling, but if the requirement for legislation to be considered by both houses of Federal Parliament ahead of the caretaker period in Victoria is persisted with, it would make it extremely difficult, if not impossible, for the Federal Government. It could push any possible agreement on the NEG out by months and then run into similar election cycle issues in NSW (March) and Federally (May).

NEG Support

The energy industry, as well as energy users, businesses and other stakeholders continue to want to see the NEG agreed and implemented to get both investment certainty and lower electricity prices.

The ESB has fleshed out the details of an eminently sensible model which has the capacity to resolve the investment challenges that have plagued the industry over more than a decade.  At the same time, the NEG also shores up system reliability, and enables the competitive market to operate, which in turn will facilitate the downward pressure on prices Australians so desperately need.

It is appropriate to consider the framework and emissions reduction ambition separately.  Those who claim the government’s proposed emissions target is too weak miss the essential point - the NEG provides a good, stable basis on which to apply a target to which the industry can efficiently respond.  Even if we can’t be certain exactly what the targets will be in future, just knowing how they will be applied is of great assistance, and a huge improvement on the policy vacuum that exists at the moment.  Those who oppose anything that resembles an emissions constraint are similarly doing the Australian economy a disservice. Without a policy like the NEG, the carbon risk of investing in any long-life assets will continue to have a chilling effect on any investment case.

The NEG is also a policy which acknowledges the great strides made by renewables.  Renewable technology is now price competitive with other generation sources (and in many cases, cheaper than the alternatives).  The NEG enables the competitive market to continue to welcome renewables into the generation mix – just not at the cost of system reliability.  And as AEMO has recognised in its recent Integrated System Plan, we need to leverage the value of existing generators until the end of their natural life cycles in order to keep maximum downward pressure on prices. 

Some commentators have complained that the NEG is overly complex.  The reality is that the energy market itself is highly technical, with constantly moving and interdependent parts.  Energy companies, including retailers, are already managing complicated risk portfolios. Adding the NEG mechanism to the mix need not be onerous - the industry considers the NEG to be both as complex and as simple as it needs to be.

To be clear, the electricity industry didn’t get all it wanted on the NEG design.  But we can implement it, and it can deliver.  Overall policy clarity is more critical than winning every technical point. And to contest this policy now on ideological grounds can only result in all sides losing, and the continuation of the damaging policy vacuum we are in today.

The prevailing mood in the industry now is that (to echo the ESB) further delay or failure to get agreement will just prolong the destabilising investment uncertainty with customers ultimately paying the price.

[i] http://radio.abc.net.au/programitem/pgE6gy5pA7?play=true; https://theconversation.com/victoria-suggests-federal-government-should-legislate-on-emissions-while-neg-talks-continue-101280

[ii] https://www.dpc.vic.gov.au/index.php/policies/caretaker-conventions-2018