NEG: No such thing as a guarantee on prices, supply

By pointing out that there are no guarantees in relation to electricity prices, former deputy prime minister Barnaby Joyce is really on to something in his critique of the national energy guarantee.

Indeed, the only thing that is really guaranteed under the NEG is the reduction in the emissions — a 26 per cut by 2030 relative to 2005. Retailers that fail to meet the emissions-reduction targets can be fined up to $100 million.

While the government may claim the NEG also guarantees reliability, this is not really the case. The way in which reliability has been defined suits the renewable energy sector.

The definition ignores what are called fat-tail risks — unlikely but consequential events. In any case, the NEG envisages demand management — paying customers to reduce their demand for electricity — as a key way of meeting reliability standards.

Let’s be clear: there is absolutely no guarantee that prices will come down when the NEG comes into operation, notwithstanding the dubious modelling prediction that household annual electricity bills will be cut by $550, with $150 due to the NEG.

Let’s face it, economic modelling really only exists to make astrology look good. You just have to look at some of the underlying assumptions to realise that the modelling is basically bollocks.

To assume, for instance, that coal will churn out almost the same amount of electricity in 2020 as in 2030 — 120 terawatt (trillion watt) hours in 2020 versus 112 TWh in 2030 — is simply bizarre since we know Liddell is closing in 2022 and another coal-fired plant will exit at the end of the decade. Lack of spending on maintenance will also crimp the output of other coal-fired plants.

Then we have the very curious assumption that gas-fired electricity essentially falls away to nothing — it is more than 18 TWh now but will be only 4.6 TWh in 2030.

The really dramatic change is the rise in rooftop solar photovoltaic power assumed to increase from 9.6 TWh in 2020 to 20 TWh in 2030 — more than double.

Given the Australian Competition & Consumer Commission is recommending all subsidies for rooftop solar PV cease in 2021, the very idea that this type of generation would escalate to this extent is unbelievable. The heady days of ridiculously high feed-in tariffs are over for new installations, even if they are being allowed to run on for existing installations.

What Joyce is calling for is demonstrated price reductions on the part of the large gentailers (AGL, Energy Australia, Origin), with failure to do so leading to enforced divestment of assets. They can be retailers or generators, not just both. It’s unlikely the Prime Minister would ever entertain this idea.

But note that the profitability of the gentailers is rocketing — AGL and Energy Australia have both posted massive increases in their annual profits. Their return on equity is well above what you would expect from firms that are essentially utilities producing an essential service.

It’s not just that the NEG modelling is dodgy; it is downright misleading. Coal will not stay in the mix if the market is being increasingly dominated by subsidised renewables. (The emission target ensures that the subsidies continue, among other interventions.)

And the market is sufficiently concentrated that the big players will game the market to ensure prices stay high.

The one hope is the entry of new, dispatchable power plants guaranteed in the out-years by the government, because only truly reliable supply increases can reduce prices — not more turbines or solar panels or massively expensive pumped hydro.