No guarantees with the national energy guarantee

Former prime minister Tony Abbott has upped the intensity of the energy debate within the government. He has contrasted Malcolm Turnbull’s national energy guarantee — the compromise electricity and climate measure Environment and Energy Minister Josh Frydenberg is spruiking to the states — to the “axe the carbon tax” campaign that brought the Coalition to power in 2013. “We will lose all our heavy industry if we keep going down this path,” Mr Abbott said on radio 2GB yesterday, “and my worry is my partyroom might be asked to back something which is effectively a carbon tax in disguise — now there is no way that this government can support anything which is a carbon tax in disguise.” This is an inflammatory call on an issue of immense policy difficulty and importance. The test for the Prime Minister and his minister is crucial. The NEG aims for three goals — reducing costs, improving reliability and meeting emissions reduction targets — and the tension lies in how much the climate goal compromises the other two.

Experience has shown that market trading schemes designed to reduce carbon dioxide emissions often look better on paper than they work in practice. This is the danger with the federal government’s NEG, which claims to be a regulatory masterpiece but instead could sow the seeds of economic ruin. Big energy users have every right to feel they have been caught sleepwalking to catastrophe as they wake to find themselves roped into a scheme with big obligations and harsh penalties to help meet the nation’s climate change ambitions.

The stated trilemma of cheaper electricity, lower emissions and greater investment certainty faces plenty of hurdles yet. What is certain is that the federal government’s efforts to bind climate and energy policy through regulation have been unable to calm the political storm that has dogged the nation’s climate change response for more than a decade. Details of the NEG released by the Energy Security Board last Friday have split the conservative forces and inflamed passions across the board. States want greater recognition for their own renewable energy efforts than the NEG allows. The opposition and green groups want a much higher level of ambition for cuts to carbon dioxide emissions than those pledged under the Paris Agreement. Heavy industry is warning a power system based on intermittent sources of renewable energy such as wind and solar will make activities such as aluminium smelting unviable. And into this complex debate has marched Mr Abbott, who has clear policy intentions but also obvious axes to grind.

The line in the sand for him and others within the Coalition is that the only NEG that is acceptable is one that allows construction of a new coal-fired power station. Details released by the ESB do not rule out a coal-fired power station if someone wanted to finance and build it. Instead it has approached its task with a firm belief that heavy regulation and enforcement will bring hitherto unruly market forces to heel. The danger is that, as happened with carbon trading in Europe and gas markets at home, sharp operators will game the system to undermine the bureaucratic intent. A complex market of contracts, hedges and swaps is being married to a yet-to-be-perfected system of demand and supply forecasting to ensure that the system’s security can be maintained.

Recent events demonstrate that forecasting can work much better across a long horizon than in real time. The intermittent nature of wind and solar has shown they can be relied on to guarantee only a small proportion of their capacity at any given time. Breakdowns in the ageing baseload coal fleet can put an unexpected squeeze on supplies. The ESB has put a lot of faith in the prospect that new methods of demand management will produce benefits for market stability and emissions cuts. It is one reason it has been able to pledge it has taken a technology-neutral approach.

Demand management may indeed play a role but it is inevitable that huge investments will be required in storage and replacement generation as coal generation is retired in coming decades. The federal government seems convinced that major public investment in the Snowy Hydro 2.0 pumped hydro scheme can be the backbone of future storage for the National Electricity Market. It will involve investment of up to $10 billion and, on Snowy Hydro’s own reckoning, will provide enough capacity to cover only renewable energy projects already committed under the existing renewable energy target. The ESB believes forcing big energy users to contract for their peak demand or face stiff penalties will stimulate further investment. What is needed is certainty that contracts, hedges and swaps will result in what is intended: new forms of reliable power generation at reasonable cost. The worrying alternative is that the safest swap for industry may be simply to move operations, and jobs, offshore.