Time for tough discussions around the National Energy Guarantee

Last month, we heard more detail on Australia’s new National Energy Guarantee (NEG), when the Energy Security Board (ESB) released its Draft Design Consultation Paper on the NEG, which expands upon how the policy aims to help the Federal Government balance our country’s energy trilemma.  

Energy Security Board must take a longer-term view

Writing a piece on the NEG is like commenting on half an issue – something the ESB clearly acknowledges in its consultation paper and appendices. The NEG is the type of policy announcement that Australia’s energy system needs – it’s outcome-focused, market-oriented and careful not to send improper signals to market. The depth and perspective of the ESB’s operational analysis of the NEG is also much needed – the Board members have industry experience, skin in the game and shoulder the burden of implementation of the recommendations they make.  

But the ESB’s paper falls short in both its scope and timeframe. It should be broader, deeper and take a longer-term view. Australia’s energy policy has become fragmented over the last 20 years and the AEMC Rule Change processes are no substitute for a long-term plan. The creation of the ESB allows a careful and considered process to examine energy issues centrally from both a market design and operations perspective. Now, as the NEG ushers in Australia’s energy System 2.0, the ESP has a valuable opportunity to consider who needs to play what role and what functions should be left to the market. 

A vision for energy’s System 2.0

I have previously written about how technology, capital flows and arbitrage opportunities are defining energy’s System 2.0 at a global level. I also put forth one possible view of the future where:

? Wholesale markets remain dominated by coal until brand tarnish warrants plant closure, to be replaced by as much renewable energy as engineering allows - between 40% and 50% of the energy mix based on current technology. New markets, subject to the availability of gas, augmented by open-cycle gas generators and large-scale storage will manage the peak. Slow upward drifts in wholesale pricing will be likely as a consequence of gas pricing and new short term markets for storage, with renewable energy costs continuing to decline as these technologies become part of the mainstream bid stack

? An enhanced role emerges for electricity transmission networks to link the increasing number of renewables sites to market 

? A brave new world emerges for distribution networks, with rates of return and valuation methodologies under pressure from new storage and digital technologies that undermine a funding premise based on arbitraging the 87 peak hours each year for 40%-50% of network capital expenditure 

? The emergence of new, scale, digitally enabled retail companies which are integrated with open cycle, storage or baseload generation assets financially or physically integrated to manage wholesale risk. Retail companies used to competing with small scale, electricity or dual fuel retailers will face new competition from tech enabled, large customer base entrants hungry to deploy scale investments through existing platforms to new users. Margin selling retailing will largely cease and barriers to entry will rise, with new entry retailers facing pressure to lease digital platforms to compete effectively, and to gain customers from a higher relative cost platform.  

Opportunity to lay the groundwork for a better Australian energy system

Nothing in the NEG or the consultation draft hinders this future – in fact, the ESB’s paper provides useful and intelligent next steps for ensuring the execution of the principles set out in the original announcements. The risks initially voiced by industry – increasing dominance of large retailers and high compliance costs for retailers remain relevant. The NEG, put simply, is a tool for ensuring demonstrated reliability in the National Energy Market (NEM) - which will receive around 3,800MW of new renewable capacity in the next three years, together with augmented hydro – while meeting clean energy targets. But the process of implementing the NEG by ESB is an opportunity for Government to go further.   

Now is the time to put the early work into an overall policy framework that will foster and encourage the development of the energy system of the future. This means asking the ESB to consider gas prices and availability and the impacts on potential for gas peak prices. It’s time for the Board to explore transmission contestability and connection arrangements, pricing arrangements and signalling for distribution networks in a world of virtual power plants and electric vehicles. Opportunity too is there to take a closer look at developing settlement arrangements that encourage the efficient pricing of large-scale storage to manage system peaks. 

This is all tough work for the ESB, but extending its scope to consider these critical issues will allow new doors to be opened, discussions to be held and the buy-in of both the AER and AEMO within an environment of general acceptance of the need from both sides of politics. Let’s have these tough discussions now, lay the groundwork for long term investment and put Australia first in deciding the policy, regulatory and market environment to support the new System 2.0. 

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