The National Energy Guarantee (NEG) – why is it so important and what happens next?

Bill McGhie – Energy and Carbon Specialist@Simble

Simble team members attended the discussion on the National Energy Guarantee presented by the Grattan Institute on Wednesday 16^th May. The discussion involved three presenters giving their perspective and outlining some of the issues faced, and how the NEG will work.

The NEG explained …

Put simply, the National Energy Guarantee (NEG) is an energy policy proposed by the Turnbull government in late 2017 to deal with rising energy prices in Australia and lack of clarity for energy companies to invest in energy infrastructure.

First speaker Kerry Schott, Chair of the Energy Security Board (ESB), had the following key points:

• The NEG needs to work as it has the best chance of bi-partisan support and the industry needs the certainty to plan future investment
• Changes to the current system for supplying and dispatching energy is required, and the ESB is taking submissions from a wide range of stakeholders
• Transparency of contractual arrangements between retailers and generators would ensure that the market was operating properly
• The National Electricity Market is in a period of disruption as a generation and transmission system based on large centralised generators transforms into a more distributed model

Next speaker Tim Nelson, Chief economist at AGL spoke about their position and his key points included:

• Australia has an aging “fleet” of coal fired generators and replacing them would not make business sense. 75% of the fleet are beyond their design life.
• We are unlikely to see a return to lower wholesale energy prices. The very low prices ~ $34/MWh seen earlier this century were a result of the large investments the states had made in generation capacity over the previous 40 years. Much of this capacity is being retired or has been privatised. Operators of these are also facing higher fuel costs.
• Demand response will be a better option than investing in peaking plants.

Finally, Tony Wood from the Grattan Institute spoke about the benefit of having a deal on the table that was likely to have bi-partisan support. Most stakeholders agree that even if it’s not ideal, it provides some certainty for future investment. He said that the Paris Climate Change Target for Australia was too weak and the mechanism by which the target would be met was not clear.

What does this mean for energy retailers?

The NEG will place 2 key responsibilities on energy retailers:

1. To ensure that they have adequate contracted access to generation. This mechanism could see the AEMO (Australian Energy Market Operator) enter the market at peak times to make up any shortfall in contracted capacity and the cost of this being recovered from the retailers who failed to meet their customers’ needs.
2. To ensure the energy they sell meets the energy emissions intensity target that will see the electricity sector meet its proportion of the Paris target. The retailers will have to purchase from a mix of high and low intensity generators to meet this limit.

The benefits of the NEG enabling future governments to “turn the dial up” to meet stronger emissions reduction targets was stressed, and that this does not create uncertainty as the current target will be seen as the minimum.

What does this mean for us as consumers?

From a consumers point of view two key points were raised:

1. That demand response would play a key part in providing energy security. The place of existing demand aggregators was acknowledged and the potential for more widespread consumer participation was mentioned. The uptake of IoT devices to control equipment in business and homes will be essential for the widespread uptake of demand response opportunities. The most likely form of this will be rewards to customers from their retailer.
2. Energy efficiency is the cheapest form of generation. There is still a large proportion of the current generation capacity which is wasted through inefficient use. Businesses need to investigate their energy use and plan to improve energy efficiency to assist with energy security and control costs. The potential for a national energy efficiency scheme was not discussed.

In summary …

The final design of the NEG has not been agreed on to date. There are many stakeholders and final approval will need to come from the states and territories involved. Consultation is still in progress, so now it the time to make your views known to the Energy Security Board. The first version is unlikely be the last given the degree of disruption that must come in the next decade, with a move to greater distributed generation and the sixfold increase demand response capacity to meet current world standards.