If we can’t have a RAT, a NEG is as good as it gets

Thank god the clean energy target is gone; it was just another version of the renewable energy target that involves massive subsidies for the intermittent renewable energy sector.

I was rather hoping for a RAT — a reliable and affordable target, but instead we have the national energy guarantee. On the face of it, the NEG is much better than the CET.

One of the biggest downsides, however, is that the RET will be allowed to run for another two years for new investment and the certificates will continue to be traded until 2030. This is a hangover that the government should have sought to avoid.

Mind you, imposing reliability requirements on new and existing renewable energy installations will reduce the returns for investors in the renewable energy sector. Expect some loud and unrelenting complaints from them in the coming weeks.

But note that there is an almost perfect correlation between the extent of renewables in electricity generation and prices. Check out the chart. The countries with loads of wind farms and solar panels have the highest electricity prices.

It’s hardly surprising. Because of their intermittent nature, there is a requirement for back-up and back-up costs money. It can take the form of under-utilised synchronous power plants — nuclear (although not in Australia), coal, gas, hydro — or expensive, short-lived batteries.

(Surely, the South Australian government is not serious about the ongoing use of diesel generators.)

Either way, you are inserting into the system higher fixed costs that have to be paid for, one way or another. When you add the problem of intermittency to the challenge of demand peaks you set the scene for a system that is inherently unstable.

Indeed, the chief of the Australian Energy Market Operator alluded yesterday to the problems it is having keeping the South Australian electricity market producing enough power to meet demand. Just last week, one of the operators was ordered to fire up to deal with the stress on the system.

 

The NEG does away with subsidies for renewables and the associated certificates and instead imposes reliability and sustainability requirements on electricity retailers. Every megawatt of intermittent electricity will need to be offset with a megawatt of reliable electricity. Failure to do so will lead to the imposition of fines or, in the worst-case scenario, cancellation of the licence to operate. The retailers will take this seriously. The definition of reliability will be important but this is an important development.

The expectation is that this arrangement will create an incentive for investment in new, reliable supply, in particular, which can drive down prices. This won’t necessarily take the form of new high-efficiency, low-emissions coal plants, although that would be great. But to have our existing coal plants properly maintained and extended would be a useful outcome.

New gas plants would also be welcome. As for meeting the emissions reduction targets, the government is taking the sensible decision to back-load the commitment to reduce emissions by 26 per cent by 2030 above 2005 levels. With technology improving and the costs coming down, it is entirely reasonable to delay the heavy lifting to the years just before 2030.

Note that providing for the purchase of (cheap) overseas carbon credits will also prove a useful role in the package as this option will provide a cap on local abatement costs.

There is still a lot of water to flow under the bridge. The reaction of the states will be important; their policies can distort the workings of the National Electricity Market. It will be necessary to land on a common understanding of what is required of all the participants.

But the fact the key electricity regulators are on board provides a degree of confidence that it can work. Let’s just hope that it’s given a fair chance.