NEM FUTURE FORUM 2017 – FIRST IMPRESSIONS OF THE NEG
TUESDAY, 31 OCTOBER 2017
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Thank you very much for that introduction and the invitation to be here today.
This is a really useful opportunity after a pretty tumultuous fortnight in Canberra to outline some initial impressions, at least, about the National Energy Guarantee (the NEG) from the Opposition’s point of view.
I say initial because it is not easy to provide a detailed response to what at the moment is still just an eight page letter, with probably more questions being raised in those eight pages than answers.
The Energy Crisis
This has been a pretty challenging twelve months in energy policy.
The NEG is the third major iteration of energy policy presented at a national level to deal with what I think is now broadly recognised as a deep energy crisis confronting Australia.
Uniquely, this energy crisis is largely self-inflicted. It is not one of those crises that we experienced in decades past which were the result of an external shock.
Instead, this is largely the result of pretty profound policy failure across government levels, but especially at a national level.
The causes of the crisis are pretty familiar to people in this room so I’m not going to go into those. Instead, what I am going to do is respond to the latest attempt by the Federal Government to put in place a framework that will at least provide some investor certainty to a system that is in profound transition.
The Shift to a NEG
The first thing to say about the NEG is that it was an incredibly rushed job.
Over the last week, we’ve had Senate Estimates that have been able to delve into the degree of prep work that was undertaken to give birth to this eight page letter.
It’s revealing to contrast the process leading up to the NEG, or what we have of the NEG so far, with the process that led to the previous two iterations of national energy policy presented; the first being the Emissions Intensity Scheme and, more recently, the Clean Energy Target.
The Emissions Intensity Scheme, as you would recall, was essentially a proposal from the Australian Energy Markets Commission (AEMC) in 2015, which was then subject to a whole range of different pieces of work.
As the Federal Labor Opposition, we picked it up and took it to the 2016 election.
As is well known, there was a lot of work done to model the Emissions Intensity Scheme according to different baselines, including our emissions reduction target of 45 per cent by 2030 and the Abbott/Turnbull emissions reduction of 26 per cent, leading into the COAG meeting that was scheduled for December 2016.
There was also a great deal of political work to try and pull together a consensus across the states and territories, Labor and Liberal alike, and across the private sector.
We had that consensus by and large across the system in December 2016. But it was then junked as a result of internal turmoil within the Coalition Party Room led by Tony Abbott.
As a result of that being rejected as a policy the Government was willing to consider, there was then the Finkel process that pulled together really good work that was already underway in different electricity agencies, at state government levels, and in the private sector itself.
Usefully, Finkel pulled that all together into a series of recommendations, as well as a possible replacement investment framework to the rejected Emissions Intensity Scheme, in the form of a Clean Energy Target.
Again, the Clean Energy Target was able to attract almost the same level of consensus that had built up around the EIS.
The Clean Energy Target was the product of long work, detailed work by the Chief Scientist and his panel, involving hundreds of submissions, public hearings, and consultations by Professor Finkel with overseas jurisdictions that are grappling with many of these issues as well.
The Chief Scientist then produced a report that was able to be chewed over by different levels of government, opposition, the private sector, industry, electricity agencies and other stakeholders.
This understandably created an expectation that the Federal Government, through COAG, would start work to implement a Clean Energy Target.
But again, due to internal turmoil in the Coalition Party Room, the Clean Energy Target was junked.
The NEG has not been the subject of anything like those two processes.
This is an eight page letter which, we discovered in Senate Estimates, was a response delivered within a matter of days to a request from the Federal Energy Minister, Josh Frydenberg, to the Energy Security Board (ESB) to come up with an alternative plan.
It is quite clear from Senate Estimates that the Department of Environment and Energy had done no analysis of the reliability component of the NEG or the emissions reduction component before it was released by the Federal Government as their new policy.
It is quite clear that there had been no consultation with other Departments in the Government. There was no inter-departmental committee process that you would expect when a policy as central to the running of the economy, like this, was being developed.
I’ll talk about why that is particularly important given the assumptions that underpin the NEG around the distribution of the national abatement task between different sectors of the economy.
The fact that there was no consultation with agriculture or with industry about a policy that will have very serious ramifications for the level of abatement task allocated to those sectors is quite extraordinary.
There was also no consultation at all with the agencies that have a statutory mandate to deal with climate and energy policy, like the Climate Change Authority, the Clean Energy Regulator, ARENA and a number of other agencies that testified before Senate Estimates last week.
They testified that the first they heard of the NEG was when they read the paper the morning of the announcement by the Prime Minister.
As far as I can tell, there was also no industry consultation about this proposal either.
But perhaps of most significant political importance, there was no consultation with the states and territories.
Remember that the Energy Security Board is not a creature of the Commonwealth or the Prime Minister. It is a creature of COAG, appointed by COAG, with the Chair and the Deputy Chair having been nominated by state governments.
The States woke up to newspaper headlines, and then a press conference by the Prime Minister and the Board, announcing what the States would be expected to implement – because the NEG would be implemented in South Australian legislation, and reflected throughout the other NEM jurisdictions.
This process has given the states and territories the irrits, I think it’s fair to say.
All this has been directed at the widely recognised need for a stable investment framework that brings climate change and energy policy together, as we see happen in all of those jurisdictions around the world that are dealing with these challenges effectively.
I thought it showed pretty significant chutzpah for the Prime Minister to stand up in Parliament the other week and say the NEG was the first time Australia had ever had a policy that brought these two things together.
I thought that was what Labor’s Carbon Price Mechanism did; no matter your views on the details of that policy.
We all agree, though, that we need a stable mechanism that sends an investment signal to replace our ageing infrastructure in a way that takes account of the question of carbon.
We could even potentially agree that such a mechanism could usefully be embedded in the NEM architecture.
But the dispute that I think really confronts us now is not so much about whether an Emissions Intensity Scheme, or a Clean Energy Target, or even a more developed NEG is the right mechanism to meet the challenge of stability and certainty.
The dispute is more fundamentally about where we want to take this system.
That has not been resolved by the announcement of the NEG.
If anything, what little we know about the NEG - or the assumptions that underpin the NEG -deepens the dispute about where we want to take our energy system.
Where is our electricity system headed?
The electricity system faces two imperatives at the moment.
The first is renewal and the second is carbon.
We have an ageing fleet. There is no question about that, although there are different timeframes depending on about whether you use design life or 50-years as a likely retirement date.
There are also different views about the degree to which some of those retirement dates might be accelerated through changes in the market, such as the fact that increasing levels of renewable energy bidding into the market at $0 or even below $0 might make coal plants uneconomic earlier than perhaps the end of their design life.
But I think we can all agree that over the next decade and a half we are going to lose a whole lot of our existing generation infrastructure and we need to build new kit.
Now, in some quarters within the media and in the Coalition Party Room, there is a view that there are two paths in dealing with that imperative to renew our fleet.
There is the coal path - building new coal-fired generation.
Or there is the renewables path.
Those quarters think that we should be having a debate about which of these paths is better; which is cheaper, which is more reliable, which delivers baseload and so on and so forth.
I don’t think there are two paths.
As a very senior industry leader said to me, there is only one path. The future of investment in new generation infrastructure is renewables.
The critical question is whether we embrace that future or whether we resist it.
At the moment, we are resisting that future which is causing a series of problems in the system; problems around reliability, certainty, affordability and many others.
The Coalition's coal bias
There is a strong lobby within the Coalition and in quarters of the Australian media for new coal.
Josh Frydenberg said as recently as August that he sees a role for new coal. He told Sky News that “new coal does have a role to play in the energy mix in Australia.”
Tony Abbott, in one of his many useful contributions to climate and energy policy, continues to talk about Hazelwood 2.0 being a complement to Snowy 2.0.
And, as you probably know, the Queensland state election will be significantly fought on the question on whether the state government should drive the building of a new coal-fired power station in Far North Queensland - which is the position of the LNP and One Nation - or whether you continue with the Labor state government’s 50% renewable energy target.
One of the few things that we can be clear about, when thinking about the eight page NEG letter, is that the coal bias is driving many of its design assumptions
Strangling Renewable Energy
Crucial to those assumptions is an ambition to strangle renewable energy investment.
This is critically important from a political point of view.
The Prime Minister and Frydenberg were able to take to the Coalition Party Room a document that had a renewables figure by 2030 that had a ‘2’ in front of it.
When the Energy Security Board uses a figure of 28 per cent for renewables penetration by 2030, they assume a couple of things.
The first is that demand in the system will be largely steady between now and 2030.
The second is that they incorporate the SRES, or the small scale rooftop systems into those figures.
If you assume that we are going to reach 23.5 per cent by 2020, which everyone does, that leaves growth in a flat system of about 4.5 per cent over the decade from 2020-2030; or less than half a per cent a year.
Now what does that mean?
It means about 250MW of renewables being put into the system every year, including rooftop.
But we put 750MW just on people’s roofs this year!
Are we seriously suggesting that we are going to cut the number of houses accessing rooftop solar by two thirds and not build a single large-scale renewable project over the entire decade?
Because that is the assumption that underpins the core political message out of the NEG letter for the Coalition Party Room, which is that we can hold renewables to just 28 per cent.
Now journalists and others say to me that that is simply not realistic.
Well it might not be realistic; perhaps we won’t see people marching up and down the streets of Australia preventing households from installing rooftop solar panels.
But it is still a clear signal. And if you are looking for certainty and stability, you are not going to get it from a mechanism whose political underpinning is an ambition to strangle renewable energy investment.
Adding to that lack of certainty around investment in new kit is an assumption that is built into the modelling that the AEMC is currently doing that there will be no further emissions reduction beyond 2030.
We had this confirmed by the AEMC last week. Frydenberg has asked the AEMC to do the modelling of the NEG between 2020 and 2030 on the basis that the emissions reduction task of 26 per cent will thereafter be flat. There will be no further emissions reduction after 2030.
Again, people can say ‘well that is completely unrealistic.’
But what signal does it send to the industry about what sort of investment is going to be required over the next decade and a half to deliver affordable and reliable supply - but also to respond to a national imperative to continue to cut our carbon pollution levels?
Shifting the task to other industries
A more fundamental problem that I don’t think has been well understood in this debate yet is the assumption around the abatement task that electricity will be allocated under this system.
Putting aside the inadequacy of the Abbott/Turnbull Paris emissions reduction target of 26 per cent, the orthodox position here in Australia and around the world has long been that the electricity sector should do more than its mathematical share of a national abatement task for a couple of reasons.
Firstly, it can - it has the technology available to it, the lowest cost abatement that the national economy can access. Also, it will drive decarbonisation in other sectors of the economy.
Think transport for example - there is no point Australia moving to a fleet of electric vehicles if we don’t clean up our grid.
Now you can quibble about what that share should be, but the orthodox position has always been that electricity will do more than its mathematical share.
That position has been shifted.
It was shifted in the Finkel Report without much discussion about why electricity should only do its mathematical share, and it is reflected in the eight page letter of the NEG.
Under this new policy, electricity would only be required to reduce its carbon pollution by 26 per cent between 2005 and 2030.
It is clear the Government has done no modelling about what that means for the rest of the economy.
I’ve asked the Government if there has there been any analysis about whether, from a whole-of-economy perspective, the most economically efficient way to meet our national abatement task is to have electricity only do its mathematical share.
And there has been no modelling, no analysis, about why Australia should shift from the orthodox position and adopt the one that is incorporated into the NEG.
It is also clear that other departments and other sectors have not been engaged on the question of what this fundamental change of position will mean for the industrial sector, the agriculture sector, and the transport sector.
The ability of the electricity sector to do more than other sectors has already been clearly demonstrated.
The Government’s data indicates that between 2005 and 2020, when investment in the RET will be finished, the electricity sector will have reduced its carbon levels by 11 per cent, largely because of renewables investment.
Over the same period, in all of the other non-agricultural sectors, emissions will have gone up by 26 per cent.
Electricity will have already come down by 11 per cent, while all of the other non-agricultural sectors will have gone up by 26 per cent.
That means that – over the decade 2020-2030 – electricity will have to reduce its carbon by just 17 per cent while the rest of the non-agricultural economy will have to reduce their emissions by 41 per cent.
If you take the Paris target seriously, this is going to have extraordinary implications for those other sectors of the economy, and I’m not frankly sure that those implications have been thought through. It’s clear they have not been modelled and analysed.
There are also very serious questions to ask about the extent to which the electricity sector should be able to buy cheap offsets to discharge their emissions reduction obligation.
I think there is a very good case for sectors of the economy that aren’t able to abate their carbon pollution easily - for example the steel sector, cement manufacturing and a number of others - to be able to access those offsets instead.
The implications of the electricity sector in the short to medium-term discharging their emissions reduction obligations by buying certificates rather than investing in new clean energy has not been analysed.
What it will do is further chill investment in renewable energy and delay the investment in the new kit that we are going to need to replace the ageing coal-fired generators.
The Reliability Obligation
There are just as many questions and issues that arise around the other pillar of the NEG, which is the reliability obligation.
It goes without saying that we all obviously support a strong focus on ensuring that a fast changing power system is reliable and secure.
The work AEMO is doing around dispatchability is starting to alleviate concerns that were building about whether a system in deep transition is going to be secure and reliable.
But I’m very concerned that the Government doesn’t appear to be reflecting the approach to dispatchability that came out of AEMO’s very dynamic September report.
Instead, they’ve added language, to use Frydenberg’s words, about “incentives” to extend the life of ageing coal-fired power stations.
That is a very different question to the one that was addressed in AEMO’s report to the Government about dispatchability, which focused on solutions like pumped hydro, gas peaking plants, demand response, the sort of fast frequency response you get from batteries, and such like.
Again, this is all a reflection of the internal debate within the Coalition about propping up coal.
Not just investing in new coal, but sweating the existing assets for as long as you possibly can.
We saw that debate play out in that curious short episode about what should happen with the Liddell power station in NSW.
We know if a company has to invest hundreds of millions of dollars to get another several years out of an existing coal-fired generator, that investment is going to have to be recouped from consumers over a relatively short period of time; putting upward pressure on prices.
I’m concerned that this focus on coal and “incentives”, as Frydenberg describes them, is not dealing with the challenges of dispatchability that the Market Operator was talking about in September, and has the potential to add significant costs to consumers just to achieve a political objective.
It is impossible to tell really, when you read the eight page letter, which version of dispatchability or reliability is going to emerge from this design process.
Is it the AEMO version that you saw in that September report? If it is, then we are up for that debate.
Or is it the political ‘coal bias’ version that Frydenberg appears to be talking about?
If that is the case, then there are very serious questions about whether that is going to serve the interests of consumers.
Initial conclusions about the NEG
Putting all that together, what we can understand at least of a vague eight page document raises very significant questions - not just about our emissions reduction obligations - but importantly about price and reliability.
There is a very great risk that the underlying assumptions and stated objectives of this NEG is going to simply push down the road the hard work of renewing our ageing infrastructure and transitioning the system to something that is very different to what we built in the 20th century.
The underlying assumptions would not see any substantial renewable energy investment beyond the current burst of investment we are seeing to discharge the 2020 RET.
That is going to be a very significant problem for the system.
It will see a concentration of supply, avoiding the downward pressure on wholesale power prices that we would see with new supply coming into the system. Instead, we may well see very substantial investments to sweat old coal-fired generators, investment that would have to be recouped from consumers over a relatively short payback period.
There is also the possibility, as we are seeing in the Queensland state election, that the Government will be forced by its own Party Room to find a way to push taxpayer money into building new coal-fired power stations, which would require very substantial de-risking around carbon price and regulatory risk over the asset life. That de-risking would likely have to be underwritten again by taxpayers.
There is also an emerging debate about what this design will mean for the transparency and liquidity of contracts in the market.
We’ve seen in the gas market what a system that relies on bilateral contracts that aren’t transparent does for price, and for the concentration of market power exercised by dominant retailers.
I think that emerging debate will continue to develop as people absorb the details of this eight page letter.
That all raises a lot of questions and, frankly, would indicate that we are taking a pretty negative view of at least the underpinnings of the NEG so far.
It doesn’t mean we are opposed to the principle of bringing a stable investment scheme into the NEM architecture combining emissions and dispatchability imperatives.
But what we have before us is not even what some have described as a ‘plan to have a plan.’
It appears to me that what we have instead is a plan to get through the Coalition Party Room, and then a plan to have a plan.
Unfortunately, that means many more months of uncertainty.
We are now into state election season. We have three NEM regions that have state elections over the next five months.
That means that there is not any real likelihood of COAG progress here.
And for industry, there are an enormous number of questions that are posed by this mechanism.
We continue to support a stable investment framework that, as far as possible, is bipartisan.
I think everyone understands that you are not going to get unanimity between the major parties about every element of this policy area.
You need an investment framework that is scalable and that is able to account for the fact that, over time, technology is going to develop and the Paris process is going to lift the ambition around emissions reduction.
Unfortunately, the latest vague announcement appears to have taken us backwards, not forwards.
Thank you very much.